Revised Internal Revenue Service regulations are expected to cause a decrease in arbitrage profits for municipal issuers of tax and revenue anticipation notes in fiscal 1995, according to Standard & Poor's Corp.

Changes in IRS arbitrage rebate regulations resulted in smaller Trans sizings for California issuers in fiscal 1995 when compared with the previous two fiscal years, the rating agency said in an article published yesterday in CreditWeek Municipal.

Most municipal issuers sold Trans in June and July to finance cash-flow needs for the fiscal year that began July 1.

The size of Trans issued by California counties, cities, and school districts for fiscal 1995 fell by about 25% compared with fiscal years 1993 and 1994, the rating agency said.

"As a result," the article said, "California governments' arbitrage profits, earned from the reinvestment of tax-exempt Trans proceeds, are expected to decline [during fiscal 1995] relative to the previous two fiscal years."

On May 6, the IRS clarified arbitrage rebate rules that had been revised on June 18, 1993. The latest clarification is more restrictive than the previous regulations for so-called large Trans issuers -- entities that issue more than $5 million of tax-exempt obligations in a calendar year.

Despite the latest IRS regulations, fundamental credit factors remained virtually unchanged for high-quality issuers. Standard & Poor's assigned its highest note rating of SP-1-plus to the vast majority of California Trans in fiscal 1995, the agency said.

-- Brad Altman, Los Angeles

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.