IRS Regulations Affecting Debt Restructurings, Debt-for-Debt Exchanges, Reopenings and Other Liability Management Transactions

September 28, 2012

The IRS recently released final regulations that will affect the U.S. federal income tax treatment of debt restructurings, amend-and-extend agreements, debt exchange offers, some consent solicitations, further issuances of outstanding debt, and other liability management transactions. These “publicly traded” regulations will increase the tax cost to some U.S. issuers of restructuring or amending the terms of distressed debt, particularly syndicated loans, and may increase the tax cost of such transactions for U.S. investors in illiquid distressed debt, particularly middle-market loans, whole loans, credit card and other receivables and ABS, MBS and CDO tranches with outstanding amounts of $100 million or less. For issuers of bonds, however, the regulations provide increased flexibility for further issuances of outstanding debt, particularly debt trading below par. The new rules apply to issuers and investors both within and without the United States.