Decrease in Corporate Tax Rate Means More Expensive Bank Debt

According to a newsletter article by LeadingAge NY Associate Member Herbert J. Sims, the recently enacted reduction in the corporate tax rate could translate to higher interest rates on commercial bank financings.

Since 2011, commercial banks have increasingly purchased tax-exempt municipal bonds directly from “conduit” issuers as an alternative to letter of credit issuance. To compete with the municipal tax-exempt capital market, banks would give their tax savings to the borrower by applying a “tax equivalent yield factor” to the taxable interest rate it charges. This factor generally resulted in a 20 to 35 percent discount on the taxable interest rate, depending on a bank’s effective tax rate, with the median discount being about 30 percent.

With the corporate tax rate now a flat 21 percent, the tax equivalent yield factor is likely to increase, which will translate to a lesser discount. Not only does this impact future financings for 501(c)(3) not-for-profit organizations, it also potentially impacts the current “all-in” interest rate on outstanding bank bonds, depending on how the bond documents were written to consider future changes in corporate tax rates.

The HJ Sims newsletter, Tax Reform Solutions for Your Next Financings, provides further information on this issue as well as other tax reform effects on financings, and how existing/potential borrowers can respond.

Contact: Dan Heim, dheim@leadingageny.org, 518-867-8383 ext. 128