Regulations issued in 2016 treat a putative debt instrument as
equity if, among other things, (1) the instrument is issued to a
person related to the borrower through chains of 80% or greater
ownership and (2) a principal purpose of the issuance is to fund
certain acquisitions or distributions by the borrower. Under a
"per se" rule, the principal purpose test in clause (2)
above is automatically satisfied if the putative debt instrument is
issued within 36 months of the relevant acquisition or
distribution.
The "per se" rule has raised significant concerns,
particularly in the securitization space, because securitization
vehicles frequently make distributions to their equity holders
within 36 months of issuing debt. We discuss these concerns
here.
