The end of 2017 came with a short-lived, but sweet surprise for law firms with public finance practices.
Those practice groups saw business explode in the fourth quarter, particularly in the last two months of the year, as legislators in Washington, D.C., debated a tax bill that had big implications for the tax-exempt market. The last such boom was more than 30 years ago, public finance lawyers said.
“It all was in a very compact period of time,” said Emilie Ninan, who chairs Ballard Spahr‘s public finance department. “There was this concern that as of the first of the year, we’re not going to be able to do these deals anymore.”
The tax bill put an end to advance refunds for tax-exempt bonds, which was a way for public finance clients to take advantage of lower interest rates and save money. Marc Feller, chair of Dilworth Paxson’s public finance group, said clients were “finding every conceivable bond that could generate savings” at the end of 2017, in anticipation of the tax bill prohibiting that activity in 2018.
Clients were also concerned that the new tax legislation would eliminate private activity bonds—a major source of financing for higher education, hospitals and other public institutions, Ninan said. That change was ultimately taken out of the final bill, but without knowing that would happen, nonprofit entities rushed to the market at the end of last year.
Mark Stewart, chair of Ballard Spahr, said the effect of last year’s fourth-quarter public finance boom on the firm’s revenue was “in the millions.”
Feller said his practice at Dilworth Paxson handled about $700 million in transactions in the last couple months of 2017, about double what it would normally do. As for the number of transactions completed in that time period, that was about three times the normal amount.
George Magnatta, Saul Ewing Arnstein & Lehr‘s public finance chair, said his practice group was about 60 percent busier at the end of last year than in a typical fourth quarter.
Magnatta and Feller said the last time they saw such a rush to market was in the mid-1980s, and that was also due to expected changes from the Tax Reform Act of 1986.
“People were working to the last minute of 1985 to get those deals done,” Feller said.
Burst of Activity
But the public finance boom of 2017 stopped as quickly as it started for many lawyers. Once the 2018 laws were in effect, there was no longer any reason to accelerate the financing schedule.
“That was extraordinary,” Ninan said. “I’m not expecting that to happen again.”
The lawyers said their practices experienced a slower than normal start in 2018, but things are picking back up a few months into the year.
“Of course we stole some volume from the first quarter of this year, so it was a little quieter in January, but things certainly picked back up thereafter,” Magnatta said. “Things are back to the regular pace for the first quarter.”
Deal volume will steady out, Ninan said. And that may not have been the case if private activity bonds had actually been eliminated.
“Given what was proposed to be on the chopping block and what ended up being chopped, we made it through pretty much unscathed,” Magnatta said.
The elimination of advance refunding will have some lasting effects. Feller said his firm saw a major uptick in advance refundings after the recession, and that activity will go away.
“That was a major part of our practice really probably over the last eight to nine years,” Feller said. “There’s going to be a significant reduction in the volume of work that many of us see.”
Advance refundings have accounted for about 20 percent of all tax-exempt refunding activity, Ninan and Magnatta said. But they don’t expect their practices to shrink by that amount.
“I think we’ll make up that loss of 20 percent in some other ways of restructuring,” Ninan said. “There’s always people thinking of new ways of structuring deals that are workable under the Tax Code.”
Feller said there are still a lot of construction and infrastructure projects that need to be completed, so there will still be transactions to do. And there has been an increase in municipalities looking to monetize their municipal assets, he said.
“We have other work that will fill the gap that is going to exist as a result of the decrease in bond transactions,” Feller said.