CHICAGO - The biggest impact on municipal bond law this year has been the explosion in the volume of bond issues rather than any new regulations or court cases, Richard Chirls, a partner with Orrick, Herrington & Sutcliffe, told bond lawyers in a meeting yesterday.
Municipal bond volume for the year is likely to exceed $200 billion and to surpass the record that was set in 1985, Mr. Chirls told those attending the bond attorneys' workshop sponsored by the National Association of Bond Lawyers.
But unlike 1985, when much of the surge was driven by the need to beat new tax law deadlines and included some of the industry's "darker volume boosters" such as the so-called bad check deals. and blind pools, he said, this year's volume is being spurred mostly by low interest rates, issuer needs, and plain-vanilla deals.
Today's lower interest rates, Mr. Chirls said, which create an environment where it is virtually impossible to earn arbitrage, mean that "investment bankers don't need to develop new gimmicks to beat the tax laws. " With issuers coming to the market in droves to take advantage of the lower rates, he added, broker-dealers do not need to spend time creating new products, either.
However, he noted, some tax law developments have contributed to the jump in bond volume. One of these was the failure of Congress, he said, to extend tax law provisions allowing tax exemption for mortgage revenue bonds and small-issue industrial development bonds, which led to a push in such deals before those provisions expired in June.
Another was the effective dates of final Internal Revenue Service rules on refundings and reimbursements, he said, "which provided the incentive for a relatively small number of somewhat gimmicky deals to be closed before they were shut down. "
In addition, he said, the IRS' easing of refunding restrictions in new rules made it economically attractive for some issuers to do deals that had been considered marginal before.
Mr. Chirls praised IRS' and Treasury officials for issuing during the year several new regulations that were more simple and workable, taking into account the comments of market participants. These were "a vast improvement" over previous rules, he said.
Remarking on potential problems, he said that while the allocation and accounting rules on working capital provide bond lawyers with much-needed guidance, they still need refinement. The rules on guaranteed investment contracts, he added, are still untried because GICs generally are not being used in the current market, where low interest rates prevail.
Mr. Chirls joked that one of the new IRS rules affecting refundings, a rule that requires open-market Treasuries purchased for escrows to be valued at the mean between the bid and ask price, is so unworkable that most bond lawyers agreed to just "excise it from the regulations" on their own.
He also noted that IRS officials are having "after arising thoughts" about the workability of an "after arising amounts" concept in the refunding rules that was supposed to put a halt to window refundings.
Complaining that the two-year rebate relief law is almost useless to issuers, he said, "A good deal of the blame goes to the congressional tax committee staffer who took an idea that was intended as pure tax law simplification and made a total mess of it."
Turning to the area of litigation, Mr. Chirls said there are "important lessons for all of us" in recent federal court dismissals of lawsuits to stop the IRS from taking enforcement action over black box and collapsible escrow deals.
One of these lessons, he said, is that the government has more resources and holds more cards in these cases than either the issuers or the bondholders. The cases, brought by issuers in California, also show the difficulty of getting past procedural, court-related questions to the substantive issues involved in these deals, he said.
Also, Mr. Chirls warned the lawyers that the IRS appears to be preparing to go after abuses in the 501(c)(3) area with the same zeal that it has been going after abusive black box and bad check deals.
Meanwhile, Clayton Gillette, a professor at the University of Virginia School of Law, told the lawyers that state courts appear to be issuing more rulings upholding the constitutionality of a variety of financing arrangements based on a "formalistic reading of the concept of debt."
Most of these. rulings are based on the view that debt exists if the risk of project failure falls on the taxpayers or residents of a municipality her than on the bondholders, he said. The, courts are finding that leasing arrangements with so-called non-appropriation clauses are not debt, he said, because if money for lease payments is not appropriated, the debt holder can walk away from the arrangement.
At the association's annual meeting Tuesday night, M. Jane Dickey, a lawyer with the Rose Law Firm and the association's new president, talked about the need for bond lawyers to practice in accordance with the highest ethical standards. She said the association will soon "take a new look" at its 1983 report on the functions and professional responsibilities of lawyers in municipal finance.
She added that she would like to see more discussion and cooperation and "less rancor and suspicion" in the area of primary and secondary market disclosure.
"We need to be more open to the possibility of benefits as well as perils" of disclosure activities, she said, adding, "If we do not pursue with enthusiasm overtures of dialogue, we will miss an opportunity to develop a working relationship with parties who affect our practices and the affairs of our clients in every direct and indirect way."