For government entities and non-profit organizations, access to capital is critical to maintaining infrastructure and creating the facilities that help advance their missions. Bonds that give them such access, especially tax-exempt bonds, follow a very specific set of rules and requirements. Hinckley Allen partner Kris A. Moussette has spent her career helping organizations secure the funds needed to flourish.

Read on to learn more about Kris’s experience in public finance law and how the market outlook is shifting as LIBOR (London Inter-Bank Offered Rate) sunsets and interest rates rise.

What excites you about this area of law?

I’ve been working in public finance almost my entire career, and it is really exciting to see how bonds can transform the landscape of a community or institution. For example, one college in western Massachusetts restructured their debt and they are now building a fantastic health and wellness center, extending their offerings to the community and beyond.

Public finance touches so many areas of the law. My job is not something that should be done or something that I want to do in a silo. I think what makes me so good at my job is my team and the people that I work with that I support and who support me. Nobody can be an expert in absolutely everything, but if you have colleagues that you can depend on and go to, it makes your job much easier and much more enjoyable.

What transactions do you focus on?

I spend most of my time on the revenue bonds side, working primarily with healthcare, higher education, and the nonprofit sector. Our borrowers are non-profit, federally identified 501(c)(3) organizations, including hospitals, healthcare centers, ambulatory centers, private high schools, private K-12 schools, colleges and universities. Even places like art museums or human service providers would fall under this umbrella.

I also work on infrastructure type bonds, such as bonds for airports or water and sewer. We serve as underwriters counsel in connection with bonds issued for the benefit of Waste Management, a public corporation.

Mainly, I work as bond counsel or borrower counsel. We are working on a transaction for a college right now and we are representing them as bond counsel and borrower counsel. In this situation, we will give the opinion that the college has done everything it’s supposed to do to qualify for the bond. We will also render the bond opinion, which is the opinion that says the interest is exempt from income for federal income tax purposes.

When an organization is considering a bond, it has to be big enough to justify the cost of pursuing it. A tax-exempt bond is expensive, so smaller organizations may choose to take on a taxable commercial bank loan instead. I have worked with some issuers on pool programs, popular in the 2000s and 2010s, where an issuer would issue a pool of bonds and then lend it out to any number of borrowers as kind of an assembly line to issue and make loans to a number of different borrowers.

What are some of the trends that you’re watching in the market right now?

We have been watching the sunset of LIBOR. LIBOR is a variable rate that’s embedded in many documents, whether it’s a tax exempt bond or just a corporate loan. Loans that are based on LIBOR are sunsetting. In fact, at the end of 2021, it was advised that no new loans based on LIBOR actually be executed. Because of this, we have been working with borrowers and banks to amend LIBOR-based transactions to an alternative rate setting methodology. The alternative rate settings could be SOFR (Secured Overnight Financing Rate) or SIFMA (The Securities Industry and Financial Markets Association Municipal Swap Index) or something else.

What is taking the place of LIBOR?

The market has been promoting SOFR as the new rate setting methodology. New York recently adopted a law that said whatever LIBOR transaction you have, will be automatically converted to SOFR if the contract is governed by New York law, but, until there is a full transition away from LIBOR, there is still some debate about whether or not that is enforceable.

What trends do you see in the bond market?

In the second and third quarters of 2021, people started to rush to the market to get everything in before the end of the year, anticipating that rates would rise. Whether or not rates go up, I don’t think they will change drastically. Borrowers do need these capital improvements. Cities and towns continue to have infrastructure that they need to fix and fund, regardless of rising interest rates.

Last year, we saw a lot of higher education institutions issuing taxable bonds because the differential between the taxable and the tax exempt interest rates was not substantial and borrowers could issue taxable bonds at similar rates to tax exempt bonds, but with greater ease. Tax exempt projects usually have to be a capital physical asset, but a taxable bond does not necessarily have that restriction. Taxable bonds do not have a lot of the covenants and compliance issues that come with the tax exempt bonds, such as use of proceeds and investment of their project funds.

There is still a restriction on a certain type of refinancing that was put in place in the 2017 tax code amendments, so that we cannot refund bonds secured by an escrow of longer than 90 days, meaning we cannot have an advance refunding. Advance refunding refers to the practice of taking funds from a new bond to pay off a prior bond more than 90 days following the issuance of the new bond.

Borrowers have been getting around advance refundings or the inability to do an advance refunding by issuing taxable bonds. We’ve also seen a lot of forward bond purchase agreements, where an investor agrees to buy bonds and signs a contract stating that they will purchase them at a particular interest rate, but they do not get the bond until a day out in the future. We just did one that was 45 days out. I recently did one that was 18 months out and I have heard them going up three to five years, depending on who the purchaser is. Forward deliveries have become a vehicle for people to finance in order to get around the restrictions of not being able to have an advance refunding.

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