Legal Corner: The Rules of the Game

By Ryan Callender & J. Wes Kerns

On Dec. 22, 2017, H.R. 1 (the “Tax Cuts and Jobs Act”) was signed into law. The Tax Cuts and Jobs Act, among other things, reduced corporate tax rates, modified individual tax rates, eliminated many deductions, repealed the corporate alternative minimum tax, and, notably, eliminated the tax-exempt advance refunding of tax-exempt bonds. Most bonds financing water and wastewater have a “lock out” period of around 10 years before you can refinance them. An advance refunding was a mechanism used to refinance such bonds well in advance of such lock out period. The elimination of this type of refunding has greatly reduced the ability of water and wastewater systems to refinance existing debt.

As a result, it is likely you have been, or soon will be, approached by numerous lending institutions presenting various unconventional options for refinancing outstanding debt. There are several considerations to be made when evaluating these options over and above the obvious financial considerations that are most immediate. One key consideration that should ideally be reviewed before any refinancing is undertaken, is whether the particular refinancing follows your system’s unique rulebook, being the Trust Agreement.

In most cases, the Trust Agreement (or Indenture as they are sometimes called) is the basic document securing the debt of an individual water or wastewater system; governing how debt is paid, how it may be refinanced and how additional debt may be issued. It contains all the rules of the game so to speak. The Trust Agreement establishes the pledge of revenues that secures the debt of the particular system. It creates the funds, accounts and subaccounts into which such revenues, along with proceeds from any debt issuances, are to flow. It will describe that cash flow, the “waterfall” as it is often called, which determines how and where moneys are to be deposited and held, and where such moneys are ultimately to go. The Trust Agreement will establish any and all events of default and the related remedies. Most important to the discussion at hand, the Trust Agreement will lay out the rules for the refinancing of debt. Any potential plan of refinancing must follow these rules, no matter how out-of-the-box the potential plan may be.

While all of the rules are important and must be followed in the context of a refinancing, there are a few notable ones that should be reviewed as a matter of course.

First, for any piece of debt, the Trust Agreement will set out the dates on or after which a it may be refunded. This is particularly important in this new advance refundingless world. Additionally, the Trust Agreement will set forth any specific notice requirements that must be followed in connection with refinancing a piece of debt; the timing requirements, delivery requirements, and what information must be included in any notice.

Second, if it is necessary or preferred to defease a particular piece of debt prior to its refunding, the Trust Agreement will set forth the guidelines for doing so.

Third, the Trust Agreement will describe the process pursuant to which additional debt may be issued. Any refinancing will necessarily entail the issuance of additional debt to refund the debt being refinanced, and therefore any and all rules governing the issuance of additional debt must be adhered to. This will often include certain certifications and opinions that must be delivered prior to issuing the additional debt, along with particular financial tests that must be satisfied.

Losing the ability to advance refund tax-exempt debt on a tax-exempt basis has given rise to an increase in the presentation of non-conventional debt refinancing opportunities. When reviewing a water or wastewater system’s ability to move ahead with any of these opportunities, in addition to any economic considerations, the issuing authority must also consider their own unique set of rules for the issuance and refinancing of debt. These rules are contained in the Trust Agreement which should be considered and reviewed every step of the way.

Ryan K. Callender is a partner at Squire Patton Boggs (U.S.) LLP in Cleveland, Ohio. His experience includes serving as bond counsel, counsel to credit enhancers, underwriters, trustees and public issuers in a variety of conventional and capital market public debt financings.

J. Wes Kerns is an associate at Squire Patton Boggs (U.S.) LLP in Cleveland, Ohio. He focuses his practice on public finance matters. Prior to joining SPB, Kerns was a law clerk at a Cleveland-based law firm assisting primarily in the business and litigation practice groups.

This year, Water Finance & Management is looking for environmental law and policy issues to be discussed in this new Legal Corner column. We are looking to cover legal issues that impact both drinking and clean water authorities, such as financing, debt, taxes and fees, water rights, etc. We’re also looking to examine and analyze case summaries. If you are interested in reading about a particular topic or have an idea for consideration, please email Andrew Farr, managing editor, at

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