Public Charter Schools Borrowing With Tax-Exempt Bonds, Second ...

increased requests for information and some very serious enforcement actions.
As with IRS inquiries, good legal advice is needed before responding to even an
informal inquiry from the SEC.
C. Bond Document Responsibilities
The bond documents themselves (not only the indenture and loan agreement, but
any credit provider agreement, investment agreement or swap agreement) contain
a number of responsibilities of the school in addition to timely payment of debt
service. These will vary widely depending on the type of bonds, source of security
and payment, credit enhancement and the like. Typical examples include:
1. Providing audited financial statements by a certain date.
2. Providing other specified information periodically or upon the occurrence of
certain events to bond holders, rating agencies, credit enhancement or liquidity
providers, and swap providers.
3. Compliance with a debt service coverage test.
4. Compliance with other financial tests (including a cash-on-hand test).
5. In case of general fund pledges by conduit borrowers of their non-trustee
held general funds, making sure all general funds are deposited in the
pledged account.
6. Periodically renewing of UCC or other filings.
7. Maintenance and periodic certification of casualty and other insurance.
What Are the Consequences of Failure to Perform Post-Issuance Responsibilities?
A. Tax Responsibilities
Failure to perform these responsibilities could lead to the bonds being declared
taxable or to substantial payment to the IRS to close its audit without declaring
the bonds taxable, following a painful, time consuming and expensive audit process.
Either result could lead to SEC investigation and enforcement actions based
on the premise that the official statement for the bonds had failed to properly
disclose the tax risk. A declaration of taxability would also likely lead to lawsuits
from bondholders.
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