Restructuring Escrows with Pre-Refunded Municipal Securities
By Georgina Walleshauser
As many of you are aware, interest rates on US Treasury securities have recently fallen significantly. Interestingly, at the same time, interest rates on municipal securities, including pre-refunded bonds (which are typically backed by US Treasuries), have risen substantially as shown in the chart below. This has created a unique opportunity for certain issuers to restructure existing escrows and realize a net cash benefit.
The Treasury securities held in escrows that were bid in recent years have likely appreciated substantially in value due changes in interest rates, and we are seeing that dealers are willing and often eager to buy back these securities. If pre-refunded municipal bonds backed by Treasury securities are also eligible investments, the issuer could simultaneously sell the existing securities and purchase a replacement portfolio of municipal securities at a much lower cost to realize a net cash benefit.
Once this simultaneous restructuring transaction closes, there is no risk to the issuer as the refunded bonds will continue to be defeased with eligible securities as defined under the escrow deposit agreement. Settlement risk would be present if either the sale of the existing securities or purchase of the new securities did not close for any reason. However, steps can be taken in the procurement process to eliminate this risk. The net cash benefit would be dependent on the amount and type of existing securities held, dealer interest, supply of replacement securities, and market rates, but could be quite substantial.
If you believe that you or your issuer could benefit from this type of restructuring, we encourage you to reach out to your Blue Rose advisor.
About the Author:
Georgina Walleshauser, Analyst
Georgina Walleshauser joined Blue Rose in April 2017. As an Analyst, 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. She also prepares debt capacity modeling, credit analysis, and market analysis to support the delivery of comprehensive, strategic, and resourceful capital planning tools to our clients.
Georgina can be reached at: firstname.lastname@example.org