Making Sense Out of Refunding Bonds

Part II: Current Refunding

Submitted by: Michael Givler, Principal

A current refunding is one where your outstanding bonds are currently callable within the next 90 days. As opposed to an advance refunding (discussed in Part I), with a current refunding you are calling the outstanding bonds within the next 90 days and therefore need to ensure that funds to pay the principal, interest and call premium (if applicable) are available on the call date.

A bond issue can only be advance refunded once, so any subsequent refunding must be done as a "current refunding." This creates an opportunity to move bonds that have been outstanding for about 10 years (this varies with the refunded bond specifications) down the interest rate curve, thus saving a fair amount of interest.

The escrow period is from the date of closing on the refunding (new) bonds until the first available call date. For example, you may issue the current refunding bonds on September 15 for a call date of November 1. When contemplating a current refunding, you want to make sure that the present value savings justify the cost of the refunding and provide a fair savings for the taxpayer. This will be discussed more in Part III.

Factors to consider regarding a current refunding:

• Debt service payments on the "Refunded Bonds" are paid directly from the escrow account and are no longer included in your debt service requirements. The "Refunding Bonds" take the place of the "Refunded Bonds" when determining the amount of debt service to be paid.

• Proceeds of "Refunding Bonds" are used to immediately redeem the called bonds (within 90 days of closing the refunding bonds).

• As your independent financial advisor we can help you determine what is in your district's best interest when deciding how much of the outstanding bond issue should be called at a time. In part, this decision may be based on the impact of issuing the refunding bonds on a bank-qualified basis (i.e., keeping total borrowing for the calendar year below $10 million), which will generally carry lower interest rates. This would be evaluated based on savings, possible cost of a second refunding issue and other structuring factors.

• Industry standards suggest that the difference in debt service between the refunding and refunded bonds should generate a present value savings of at least 2%. Again, discuss this with your financial advisor to weigh current market conditions. While no one knows what the market is going to do tomorrow, next week, next month or next year, you should understand and be comfortable with the pro's and con's of acting versus waiting. Again, we can assist in evaluating current market conditions and other factors particular to your district.

Good direction and good stewardship make for good decision making.

In Part III we will discuss measuring savings. If you would like further information or an evaluation of your outstanding bonds, please contact us at footnotes@umbaugh.com.