Refunding Methods
Chapters in this video
- 0:00 The Great Bond Escape: refinancing expensive municipal debt
- 1:20 Current refunding versus advance refunding and the 90-day bright line
- 3:01 The escrow vault: AAA ratings and Treasury backing
- 4:04 The 2017 Tax Cuts and Jobs Act ends tax-exempt advance refunding
- 4:58 Escrowed to maturity (ETM): defeased bonds ride to final maturity
- 6:17 Crossover refunding: the escrow pays new bonds first
- 7:22 Direct exchange versus sale of new issue
- 7:48 Rapid-fire exam recap
What this video covers
- Why the 90-day window is the bright line that separates current refunding (within 90 days of call date) from advance refunding (more than 90 days out)
- How advance refunding uses an escrow account invested in United States government securities to pay debt service on the old bonds until the call date arrives
- Why pre-refunded bonds receive a AAA credit rating: the escrowed Treasuries back the bonds, not the issuer's own credit
- What the Tax Cuts and Jobs Act of 2017 changed: tax-exempt advance refunding of tax-exempt bonds is eliminated, so issuers must use taxable bonds for advance refundings
- How escrowed to maturity (ETM) differs from standard advance refunding: ETM bonds ride to final maturity and are defeased, not called early
- Why crossover refunding initially pays debt service on the new bonds (not the old bonds), then switches at the crossover date to retire the old bonds
- The exam distinction between direct exchange (rare) and sale of new issue (standard practice) as ways to place the new refunding bonds
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