Recapturing Inefficiencies in Escrows
By: Georgina Walleshauser
Every month, U.S. Treasury securities are auctioned to determine their appropriate yield. New shorter-term Treasuries with maturity dates of 6 years or less are auctioned monthly or bi-monthly, so that there will be a Treasury security maturing at least monthly for those shorter tenors. Longer-term Treasuries with maturity dates of 7 years or greater are auctioned on a quarterly cycle so that securities are only available with a maturity date on the 15th of February, May, August and November of each year.
Because of this auction cycle, for longer-dated escrows with requirement dates greater than 6 years, it is often more difficult to find treasury securities that are as efficient as the ones available for shorter-dated escrows. For example, as of February 7, 2014, the most efficient Treasury available for an escrow requirement date of May 1, 2022 would have been a Treasury note with a maturity date of February 15, 2022. If this escrow were structured in 2014, the proceeds needed for this the escrow requirement would have been invested only until February 15, 2022 when the Treasury note matures, and then an assumed zero interest rate would be earned for two and a half months until disbursement.
Because shorter-term Treasury securities are auctioned more frequently, since 2014 additional Treasury notes have been auctioned with more efficient maturity dates. By replacing an inefficient longer-term security with a newer shorter-term security with a maturity date closer to disbursement, the inefficiency caused by the zero-interest period can be eliminated. Depending on the size of the escrow, and the number of inefficient securities used, escrow restructurings may provide substantial benefit to an issuer.
If you or one of your clients still have legacy escrows in place that were structured in the past and may have incorporated zero-interest periods, we encourage you to consider evaluating the benefit of an escrow restructuring to eliminate those zero-interest periods and improve the escrow’s performance.
About the Author:
Georgina Walleshauser, Analyst
Georgina joined Blue Rose in April 2017. She is responsible for providing analytical, research, and transactional support to senior managers serving higher education, non-profit, and government clients with debt advisory, derivatives advisory, and reinvestment services. Georgina can be reached at firstname.lastname@example.org.
Team Member Update:
Blue Rose Capital Advisors is pleased to announce the promotion of Georgina Walleshauser to Analyst.“Since joining Blue Rose, Georgina has played a key role in supporting our advisory team and advancing the Blue Rose mission,” said Scott Talcott, Vice President. “She has, and continues to provide our team and clients with exceptional analyses that are instrumental to their success.”Please join us in congratulating Georgina!