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The Power of Parity
When funding a substantial improvement project or even when you are refinancing outstanding bonds, often times the single largest recurring expense is the interest on the bonds. As financial advisors, one of our main jobs is to help clients obtain the lowest interest rates possible. One powerful way to reduce interest expense is to ensure that you can issue debt on a parity basis with currently outstanding bonds.
When you have outstanding debt payable from a revenue stream (such as water utility or sewage works revenues, TIF, or a local option income tax) new debt can be issued either; 1) junior to the outstanding debt; or 2) on par with the outstanding debt. Bonds issued on a parity basis means that both the new and existing bondholders have a first lien on the revenue stream supporting the bonds. Parity bonds are therefore deemed to be less risky, and thus often offer lower interest rates.
The bond ordinance for the outstanding bonds will spell out the parity provisions. Generally, below are ways to demonstrate parity compliance:
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Make sure the bonds are paid on time, every time;
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Faithfully make required monthly transfers to the Bond and Interest and Debt Service Reserve accounts;
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Ensure that the current revenue stream provides sufficient debt service coverage; and,
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Interest and principal on the proposed bonds generally must be payable on the same dates as the currently outstanding debt.
Meeting parity can be a powerful method for you to lower interest rates when borrowing. It is important to understand what the parity requirements are when contemplating new debt. Also, it is equally important when issuing new debt that careful consideration be given to what the parity requirements will be on any future debt. If you have any questions on parity requirements and how they may impact you, please contact us at footnotes@umbaugh.com.
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CIRCULAR 230 DISCLOSURE:
To ensure compliance with U.S. Treasury Department Regulations, we are required to advise you that, unless otherwise expressly indicated, any federal tax advice contained in this communication, including any attachments, is not intended or written by us to be used, and cannot be used, by anyone for the purpose of avoiding federal tax penalties. |
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