Basis Points - Advantages to Reinvestment Structures in the Current Market
Updated: Sep 21
Minneapolis, MN | June 6, 2022 | Georgina Walleshauser, Assistant Vice President
Interest rates have risen dramatically over the last six months, especially at the short-end of the yield curve. Even though we’ve seen slight tapering in rates over the past several weeks, the yield curve continues to provide significant reinvestment opportunities for issuers.
Issuers that are coming to market with bond issues in which the proceeds raised won’t be immediately spent after closing should consider all of their reinvestment options in order to take full advantage of current market rates. Additionally, issuers who have unspent bond proceeds sitting in money market funds, bank accounts, or state investment pools could be losing out on significant interest earnings. These types of investments are likely yielding between 50-90 basis points currently. State pooled investments and money market funds are comprised of various securities that offer safety and liquidity. However, the majority of the securities mature in less than two months.
Alternatively, reinvestment structures such as laddered portfolios, repurchase agreements, and guaranteed investment contracts can offer higher interest rates to issuers. These investment products take advantage of the significantly upward slope of current yield curve and utilizing the 6– to 36-month tenor rates. During 2021, there was only marginal benefit to utilizing these investment products. As you can see in the chart below, the benefit of duration within a 36-month time horizon has increased tremendously. For funds that have an average life longer than 6 months, the benefit to using alternative reinvestment structures could potentially be as much as 80-150 basis points.
Of course, the yield offered on these reinvestment structures will vary depending on the type of fund invested (project fund, reserve funds, etc.), the estimated draw schedule, and size of the investment, among other considerations. Below we show generic current reinvestment rate indications.
*Indicative rates as of June 2nd, 2022 and based on a $50 million investment and estimated corresponding transaction expenses.
We encourage you, as always, to reach out to your Blue Rose advisor for a tailored reinvestment indication to your specific fund(s) and discuss the risks and benefits to each type of reinvestment structure.
Meet our Author:
Georgina Walleshauser, Assistant Vice President | 952-746-6036
Georgina Walleshauser joined Blue Rose in 2017 as an Analyst, providing modeling, analytics, market data, and research in support of the delivery of capital planning, debt and derivatives advisory, and reinvestment services to our clients. In the role of Associate, she utilized her experience as an Analyst in a more client-facing role, while still performing much of the analysis utilized in this capacity. In her role of Assistant Vice President, she will be tasked with growing client management responsibilities, in particular ensuring that our clients’ transactions run smoothly through closing.
Megan Roth, Marketing Manager
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