Glossary of Municipal Securities Terms


For purposes of certain tax and securities laws and regulations, a refunding in which the refunded issue remains outstanding for a period of more than 90 days after the issuance of the refunding issue. Typically, such refunded bonds are secured solely by an escrow funded with the proceeds of the refunding bonds. The proceeds of the refunding issue are generally invested in Treasury securities or federal agency securities (although other instruments are sometimes used), with principal and interest from these investments being used (with limited exceptions) to pay principal and interest on the refunded issue. Bonds are “escrowed to maturity” when the proceeds of the refunding issue are deposited in an escrow account for investment in an amount sufficient to pay the principal of and interest on the issue being refunded on the original interest payment and maturity dates, although in some cases an issuer may expressly reserve its right (pursuant to certain procedures delineated by the SEC) to exercise an early call of bonds that have been escrowed to maturity. Bonds are considered “prerefunded” when the refunding issue’s proceeds are escrowed only until a call date or dates on the refunded issue, with the refunded issue redeemed at that time. The Internal Revenue Code and regulations thereunder restrict the yield that may be earned on investment of the proceeds of an advance refunding issue.

Refundings in which the refunded bonds are outstanding for less than 90 days are not advance refundings for federal tax purposes, but they may be advance refundings under state law or the provisions of bond contracts requiring specified comfort that the escrow securing payment of the refunded bonds is adequate. There are several methods of advance refunding or achieving the same practical effect as an advance refunding:

Crossover Refunding – A method of advance refunding in which the revenue stream originally pledged to secure the refunded bonds continues to be used to pay debt service on the refunded bonds until they mature or are called. At that time the pledged revenues “crossover” to pay debt service on the refunding bonds and escrowed securities are used to pay the refunded bonds. During the period when both the refunded and the refunding bonds are outstanding, debt service on the refunding bonds is paid from interest earnings on the invested proceeds of the refunding bonds.

Forward Refunding – An agreement, usually between an issuer and the underwriter, whereby the issuer agrees to issue bonds on a specified future date and an underwriter agrees to purchase such bonds on such date. The proceeds of such bonds, when issued, will be used to refund the issuer’s outstanding bonds. Typically, a forward refunding is used where the bonds to be refunded are not permitted to be advance refunded on a tax-exempt basis under the Internal Revenue Code. In such a case, the issuer agrees to issue, and the underwriter agrees to purchase, the new issue of bonds on a future date that would effect a current refunding. See: EXTENDED SETTLEMENT.

Synthetic Refunding – An arrangement that allows an issuer to generate debt service savings that it would realize if it were permitted to advance refund the outstanding bonds. This agreement is generally used by issuers that either choose not to or are not permitted under the Internal Revenue Code to advance refund outstanding bonds on a tax-exempt basis. Such arrangements generally require an issuer to enter into an agreement with a counter-party and receive an upfront payment from the counter-party in return for a specified action of the issuer or a right to take a specified action by the counter-party at a future date, typically a date on which the issuer can call the outstanding bonds and effect a current refunding. For example, on the future call date, the counter-party may have the right to require the issuer to issue refunding bonds with certain specified terms for purchase by the counter-party. Alternatively, the issuer may issue variable rate refunding bonds and have the right to require the counter-party to enter into an interest rate swap on specified terms.


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