I. Highlights

On September 13, 2012, the U.S. Treasury Department and the Internal Revenue Service (the “IRS”) published final regulations that will affect the U.S. federal income tax treatment of debt restructurings, amend-and-extend agreements, debt exchange offers, 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 – in tax parlance, “reopenings” – of outstanding debt, particularly debt trading below par.
• The new rules apply to both U.S. and foreign issuers and to U.S. investors, including U.S. investors in funds that invest in debt instruments such as hedge funds.

These rules will have different effects in different markets, in part because of the different economic characteristics of those markets and in part because of historic tax positions taken in different markets. We summarize those effects below, and then discuss the effect of the regulations on loans, structured finance and whole loan transactions, and bonds in more detail.

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