Tax Considerations for Financing and Refinancing Transactions in Turbulent Times

摘要

Cash management, preservation of liquidity, and execution of committed financings are of paramount importance during periods of market uncertainty, but volatile market conditions also present a unique opportunity for borrowers or private equity funds with available cash to purchase debt at a discount. This article discusses key U.S. federal income tax considerations that arise in connection with the modification, purchase, and repurchase of debt, and offers practical takeaways. Volatile trading markets and economic instability may prompt taxpayers to modify, purchase, or repurchase debt. Before acting, participants should consider the tax consequences: 1.Issuers may incur immediate income in the form of cancellation of indebtedness income (CODI) upon an amendment or exchange of debt if the debt is trading at a discount. 2.Debt repurchases, or purchases by related parties, may result in similar CODI concerns. 3.Borrowers can explore various ways to expand credit support and/or increase liquidity, including by pledging tax refunds, foreign guarantees, and foreign cash, and potentially by issuing incremental debt fungible with existing debt.