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The Handbook of Municipal Bonds by FRANK J. FABOZZI, SYLVAN G. FELDSTEIN

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CHAPTER 12
Municipal Bond Refundings
William H. Wood Senior Technical Analyst Frasca & Associates, LLC
 
 
 
This chapter describes the various types of municipal bond refundings that are sold, the typical reasons that a governmental issuer will sell refunding bonds, and the different ways in which refunding bond issues can be structured. Broad recommendations are also provided regarding how to determine the best time to refund outstanding bond issues as well as whether the use of derivative instruments should be included as part of the refunding structure.

REFUNDING OVERVIEW

An outstanding municipal bond is said to be refunded when a new bond is sold and the proceeds of that new bond are used to pay all of the remaining principal and interest (and, in some cases, early redemption premium) on such outstanding bond. In a refunding, all or some of the maturities from one or more prior issues are discharged with the proceeds of a refunding issue.
Mechanically, an issuer will sell a new issue of bonds and use the proceeds to buy investment securities (described as nonpurpose obligations by the tax code) which will fund the payments due on the refunded bonds. These investment securities are typically held by an independent trustee and the portfolio that holds them is called an escrow. The tax law requires that this portfolio of escrow securities not earn a yield in excess of the yield on the refunding issue which purchased them.
The most common form of investment securities used in ...

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