Arbitrage rebate and yield restrictions aren’t things that most issuers have been concerned about over the past several years – very low investment earnings rates essentially eliminated concern about exceeding any limits on earnings from debt proceeds. Many NC issuers receive advantageous lower bond yields, and interest earnings rates recently have risen where an issuer may be receiving returns approaching or in excess of the related debt yield. It might be a good time to review the requirements for post-issuance compliance for both arbitrage rebate and yield restrictions. Issuers are limited to the amount of positive net yield they can earn on tax-exempt debt proceeds; anything over that limit must be paid back or “rebated” to the IRS. For NC issuers, this debt includes not only bonds, but also notes, installment financing agreements, leases, and other forms of debt that require a Form 8038G as part of the closing documents. Rebate requirements are effective at the date of issuance of the debt. Yield restriction rules also limit the amount of net investment income recognized but these rules don’t kick in until a later date, usually three years after the initial debt issuance. Arbitrage rebate and yield restriction calculations are two separate processes and cannot be combined. Issuers, please work with your bond counsel and other professionals to determine the specific requirements and timing of those requirements for each of your tax-exempt issuances. Regular reviews of your circumstances are essential to staying in compliance with federal law in this area.
