Corporate & Financial Weekly Digest : Corporate Finance Lawyers & Attorneys for Legal Developments in Business & Financial Services

Co-authored by Brandon D. Hadley

On January 6, the Internal Revenue Service issued final regulations (T.D. 9513) under U.S. Treasury Department Regulation Section 1.1001-3 clarifying that a change in the issuer’s credit quality between the issue date and the modification date of a debt instrument is not considered in determining the nature of the instrument or property that results from modification of the debt instrument. For example, a decrease in the fair market value of a debt instrument between the issue date and modification date is not taken into account if it is attributable to the deterioration of the obligor’s financial condition and not to a modification of the instrument’s terms. This rule does not apply if the modification includes the substitution of a new obligor or the addition or deletion of a co-obligor.

On January 5, the IRS released Revenue Procedure 2011-16 with respect to modifications of mortgage loans held by a real estate investment trust (REIT). If a mortgage loan modification qualifies for the safe harbor described below, then (1) the REIT is not required to treat it as a new commitment to make or purchase a loan for purposes of ascertaining the loan value of the real property; (2) the modification is not a prohibited transaction; and (3) the IRS will not challenge the REIT’s treatment of a loan as a real estate asset if the REIT computes the loan value using one of the acceptable methods provided by Revenue Procedure 2011-16.

The new safe harbor applies to a mortgage loan modification which (or an interest in which) is held by a REIT if either (1) the modification was occasioned by default, or (2) the modification satisfies both of the following conditions based on all of the facts and circumstances: (A) the REIT or servicer of the pre-modified loan, after a diligent contemporaneous determination of the risk, reasonably believes that there is a significant risk of default of the pre-modified loan upon maturity of the loan or at an earlier date; and (B) the REIT or servicer reasonably believes that the modified loan presents a substantially reduced risk of default, as compared with the pre-modified loan.

Click here for a copy of the final regulations, and here for a copy of the REIT guidance.

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Co-authored by Brandon D. Hadley

On January 6, the Internal Revenue Service released proposed rules (REG-131947-10) under U.S. Treasury Department regulation 1.1273-2 that simplify and clarify when property is considered to be “publicly traded” for purposes of determining the issue price of a publicly traded debt instrument and the fair market value of publicly traded property received in exchange for a debt instrument.

The proposed rules would provide that if information about the sales price of a debt instrument (or information sufficient to calculate the sales price) appears in a medium (e.g., the Financial Industry Regulatory Authority’s Trade Reporting and Compliance Engine database) that is made available to persons who regularly purchase or sell debt instruments, such debt instruments would be considered publicly traded. The proposed rules also would provide that property is considered to be publicly traded if a firm price quote to buy or sell the property is available or an indicative price quote is provided by a dealer, a broker or a pricing service.

Property listed on an exchange would continue to be “publicly traded,” but the current list of foreign exchanges would be replaced and expanded to include any securities exchange that is officially recognized, sanctioned, regulated or supervised by a governmental authority of the foreign country.

The proposed rules would presume that the fair market value of property is its trading price, sales price or quoted price, whichever is applicable.

Click here for a copy of the proposed rules.

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On July 15, the U.S. Senate voted to pass the Dodd-Frank Wall Street Reform and Consumer Protection Act (H.R. 4173), which contains, among other things, provisions addressing risk retention, conflict of interest issues, and the treatment of Nationally Recognized Statistical Rating Organizations (NRSROs) under existing securities laws. The bill will now go to President Obama for his signature. The bill contains a 5% risk retention requirement for issuers of “asset-backed securities”, including collateralized debt obligations, but exempts “qualified residential mortgages.” For commercial mortgaged-backed securities, specified alternative forms of retention for commercial mortgages “may” be accepted as alternatives to retention, at the discretion of federal regulators. Additionally, portions of the bill will remove exemptions for NRSROs under Rule 436(g) of the Securities Act of 1933, which currently excludes NRSROs from being treated as “experts” when their ratings are used for a registered offering, and under Regulation FD. The legislation also amends the Securities Act of 1933 to prohibit any sponsor, underwriter, or placement agent of an asset-backed security, or any affiliate of any such entity, from engaging “in any transaction that would involve or result in any material conflict of interest…”

Please click here for the unofficial conference report of H.R. 4173.

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