Municipal Bond Refundings

This chapter describes the various types of municipal bond refunding 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. Refunding represents a very important debt management tool for municipal issuers. The relationship between taxable and tax-exempt interest rates creates a unique opportunity for these issuers to efficiently refund their bonds well in advance of the first redemption date. Meanwhile, tax law restrictions can complicate an issuer's ability to refinance much of its debt more than ninety days before that first call date. Interest rate swaps can provide an effective work-around for locking in rates when an issue cannot be legally advance refunded. Whenever an issuer is refunding prior bonds for savings, that issuer should be cautious, especially when bonds to be refunded are not yet callable.