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By: Sam Gruer, Managing Director | Minneapolis, MN | September 2, 2021
The recent closure of the SLGS window combined with the extremely low interest rates on the front end of the yield curve has created a situation for small issuers in which it may be more cost effective, after fees, to cash fund an escrow rather than purchase a portfolio of open market Treasury securities (OMS).
Blue Rose has recently advised on several refunding transactions in which the market yield for an escrow with an approximately one-year average life is five basis points (0.05%) or lower. For smaller par refundings, the total earnings can be less than the associated fees (bidding agent, verification agent, etc..) with establishing an open market portfolio.
In these situations, we’ve advised our clients to not invest and instead to cash fund the escrow to ensure defeasance sufficiency and size the refunding bonds accordingly. While there is no immediate cash benefit to the client with this approach, there still exists a potential opportunity for capitalizing on market movements in the future. In these circumstances, we’ve assisted with preserving such opportunities by continuing to monitor the markets so that if there is a sell-off and yields rise at the front end of the curve, we are positioned to take bids for a defeasance portfolio between bond pricing and closing. Further, we’ve worked with counsel to ensure that the escrow deposit agreement is structured in such a way that even if the sell-off occurs after the bond closing, our client is still able to take bids on an OMS portfolio, use the cash in the escrow fund to purchase the securities, and have the escrow agent return any remaining funds to our client. For smaller bond issues, this is a relatively costless way to benefit from rising rates during the life of the escrow.
For more details or to see if this approach might be suitable for you, please contact Sam Gruer or your Blue Rose advisor.
About the Author:
Sam Gruer, Managing Director
Sam Gruer, a 30-year municipal market veteran, joined Blue Rose in 2017 as a Managing Director and leader of the firm’s reinvestment business unit. Mr. Gruer guides his clients through the debt/swap/reinvestment transaction process by making strategic recommendations based on sound, thoughtful, and sophisticated analysis. He also offers expert advice on determining the optimal structure for reinvestment of bond proceeds by evaluating risk tolerance, identifying legal restrictions and estimating cash flow needs for his clients. He serves clients from our Roseland, New Jersey office. Mr. Gruer can be reached at: sgruer@blueroseadvisors.com
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