Jefferies

Actionable Ideas for Companies and Sponsors

Municipal Borrowers Must Evaluate Refinancing Existing Bank Direct Placements As A Result of Tax Reform

Over the past few years, municipal borrowers have funded an increasing amount of their tax-exempt capital needs thru direct placements to commercial banks. These Bank Direct Placements often include provisions whereby the municipal borrower shares certain risks with the Bank lender, which can result in the borrowing rate increasing. One such risk is the reduced after tax benefits to the Banking lender holding tax-exempt bonds due to a reduction in corporate tax rates. Municipal issuers should review their Bank Direct Placement documents to determine the cost/benefit of refinancing their bank debt using lower cost market based products including tax-exempt fixed rate or variable rate bonds. Market-based products will likely offer lower interest rates, because the broader investor base will include investors who are less sensitive to corporate tax rates.