SECTION 2. BACKGROUND

.01 Corporations frequently obtain financing commitments (“Financing Commitments”) from potential lenders (“Lenders”) in advance of borrowing money. These Financing Commitments ensure that the corporation will have sufficient debt financing at a future date, within certain parameters (for example, the total amount to be borrowed, an interest rate not to exceed a certain level, and the term of the loan).

.02 In some cases, the Financing Commitments are not ultimately called upon by

the corporation, and the corporation obtains debt financing from other sources (or doesn’t borrow at all).

.03 In other cases, the Financing Commitments are called upon by the corporation, and the Lender extends credit pursuant to terms negotiated earlier, as part of the Financing Commitment. In some of these situations, the corporation will borrow on terms that were generally established in the Financing Commitment, and which generally remain fixed (or “permanent”) over the term of the resulting debt instrument. (The “permanent” nature of the terms frequently allows the debt to be quickly sold by the Lender to other holders.) Alternatively, the corporation will borrow on terms that are temporary (for example, in effect for a year or less) but that change to different, more “permanent” terms (that is, terms that will last for the remaining term of the financing arrangement) after this temporary period. (The corporation may attempt to refinance the loan during the temporary, or “bridge,” period on terms that are more favorable than the “permanent” terms embedded in the loan extended pursuant to the Financing Commitment.)

.04 As recent events have demonstrated, market conditions can worsen, in an unanticipated fashion, between the time a binding Financing Commitment is obtained by the corporation and the time the corporation calls upon the Lender to perform pursuant to the Financing Commitment. This can have a number of collateral economic consequences, which can potentially result in situations in which the issue price of a debt instrument is significantly less than the amount of money actually received by the corporation, viewing the transactions as a whole. For example:

(1) In situations in which a corporation issues debt with “permanent” terms previously established in the Financing Com

2008–35 I.R.B. 562 September 2, 2008

the net cash proceeds actually received by the corporation for Old Debt Instrument A (regardless of whether a different issue price is determined under § 1.1273–2 or § 1.1274–2, whichever is applicable);

(4) The maturity date of the debt instrument is not more than one year later than the maturity date of Old Debt Instrument A; and

(5) The stated redemption price at maturity of the debt instrument is not greater than the stated redemption price at maturity of Old Debt Instrument A (see § 1.1273–1(b) to determine the stated redemption price at maturity of a debt instrument).

.03 Debt Instrument Indirectly Ex- changed for a Debt Instrument Issued Pursuant to a Financing Commitment . The debt instrument is issued by a corporation and—

(1) The debt instrument is issued in exchange (including a deemed exchange under § 1.1001–3) for a debt instrument (“Old Debt Instrument B”) issued by the corporation and described in section 4.02 of this revenue procedure;

(2) The debt instrument is issued within 15 months following the issuance of Old Debt Instrument A;

(3) The debt instrument would not be an AHYDO within the meaning of § 163(i), if, solely for purposes of making a determination under this section 4.03(3), the issue price of the debt instrument were the net cash proceeds actually received by the corporation for Old Debt Instrument A (regardless of whether a different issue price is determined under § 1.1273–2 or § 1.1274–2, whichever is applicable);

(4) The maturity date of the debt instrument is not more than one year later than the maturity date of Old Debt Instrument A; and

(5) The stated redemption price at maturity of the debt instrument is not greater than the stated redemption price at maturity of Old Debt Instrument A (see § 1.1273–1(b) to determine the stated redemption price at maturity of a debt instrument).