H.R. 1, signed into law on December 22, 2017, reduces the maximum federal corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017. This change in the corporate income tax rate may result in a change in the interest rate of outstanding tax-exempt bonds privately placed with banks or other financial institutions, pursuant to a corporate tax rate adjustment provision in the lending documents. Changes in the interest rate of a debt instrument resulting in a change in the yield of more than 25 basis points may be treated pursuant to Section 1001 of the Internal Revenue Code of 1986, as amended, as effecting a reissuance of that debt instrument. In addition, a waiver by the bondholder of a rate adjustment provision may trigger a reissuance of the bonds. If a reissuance occurs, federal tax exemption of the interest may be lost unless appropriate steps are taken to meet the tax requirements applicable to a current refunding of the bonds, including the filing of Form 8038 or Form 8038G.

Issuers, conduit borrowers and lenders should work with counsel to examine the terms of any corporate tax rate adjustment provision in their lending documents to determine if a reissuance has been triggered. Corporate tax rate adjustment provisions are complicated and vary from one bond issue to another, and may be automatic, discretionary, formula based or non-formula based, requiring careful review. Lenders, conduit borrowers and issuers should also be aware that any renegotiation of the interest rate outside the terms of the lending documents may result in a reissuance.