Financial Reporting - Debt Refunding

• Why done
• –Lower market interest rate available
• –Eliminate onerous bond covenants
• –Free up current pledged revenues

• Types of refunding
• –Advance Refunding
• –Current Refunding

• –Old debt not yet callable
• –New debt issued, proceeds placed in irrevocable trust/escrow to meet debt service payments of old debt
• Old debt technically outstanding until call date or maturity

• –New debt proceeds = “other financing sources”
• –Trust/escrow payments = “other financing uses”

–Old issue is callable & retired with proceeds of new debt

–New debt proceeds = “other financing sources”

–Payment of old debt = “debt service expenditure”

• –In-substance defeasance
• Proceeds placed in irrevocable trust
• Liability removed (issuer contingently liable)

• Legal defeasance
• Proceeds placed in irrevocable trust
• Debt legally satisfied even though not repaid
• Matter of law

Practice of investing low-yielding tax-exempt bond proceeds in higher-yielding taxable instruments