Taxable Advance Refunding Transactions
Updated: Sep 4, 2019
By Samuel Gruer
No doubt many of you are contemplating or exploring the feasibility of a taxable advance refunding for your borrower clients. Given the elimination of tax-exempt advance refundings as a result of the 2017 tax reform act and the precipitous decline in interest rates over the past few months, many borrowers are finding that a taxable advance refunding achieves (The Shield – Monthly Newsletter) their savings goals and may even be preferable by potentially eliminating tax compliance concerns. These facts coupled with the inversion at the front end of the yield curve has reduced some of the traditional barriers to taxable advance refundings.
As with any advance refunding, you will face the decision of whether to invest the defeasance escrow in SLGS or in open market securities. Depending upon market conditions and the required cashflows, open market securities may or may not provide an economic benefit when compared with SLGS. Further, in our experience, the bond counsel community has mixed views on the use of open market securities for these types of transactions. Some counsels insist that SLGS are permissible and should be used if they provide a benefit, while others insist that SLGS are not permissible and open market securities must be used even if they prove to be more costly. As such, we encourage you to have a discussion with bond counsel early on in the process of an advanced refunding transaction. It is best to know where they stand so that if the utilization of open market securities is either required or desired, there is sufficient time to set up a bid. We encourage you to reach out to your Blue Rose advisor for indicative escrow cash flows to determine if an open market escrow could provide value for your transactions.
About the Author
Sam Gruer, Managing Director
Sam is a 30-year municipal market veteran, joined Blue Rose in June 2017 as a Managing Director and leader of the firm’s reinvestment business unit. During his career, Mr. Gruer has advised on and/or executed bond and derivative transactions totaling more than $30 billion. Serving in a fiduciary role, 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.Sam can be reached at email@example.com