Financial Reporting - Debt Refunding

  1. Why do we refund debt and what are the two types of refunding?
    • Why done
    • –Lower market interest rate available
    • –Eliminate onerous bond covenants
    • –Free up current pledged revenues

    • Types of refunding
    • –Advance Refunding
    • –Current Refunding
  2. What is Advance 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”
  3. What is current refunding?
    –Old issue is callable & retired with proceeds of new debt

    –New debt proceeds = “other financing sources”

    –Payment of old debt = “debt service expenditure”
  4. What are the two types of debt defeasance - advanced refunding only?
    • –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
  5. What is arbritrage?
    Practice of investing low-yielding tax-exempt bond proceeds in higher-yielding taxable instruments
Card Set
Financial Reporting - Debt Refunding
Debt Refunding