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Crossover Refunding Utilizing Investment Agreement Escrows

Due to the current relatively low U.S. Treasury rates versus municipal bond rates, and relatively high investment agreement rates versus Treasury rates, it is now possible to utilize a crossover refunding to complete advance refundings that are not economically feasible with traditional open market escrows.

In a traditional advance refunding, refunding bonds are sold and the proceeds are used to purchase an open market escrow, or defeasance escrow, consisting of direct U.S. Government obligations. The principal and interest from the escrow is used to make the debt service payments on the refunded bonds until the call date and to call the bonds on the call date. In a crossover refunding, the proceeds from the new bond issue are used to purchase an investment agreement. This investment agreement, which has a higher yield than an open market escrow, will make the debt service payments on the new bonds until the call date. On the call date, the investment agreement matures and the proceeds from the investment agreement are used to retire the old, or refunded bonds. At that point, the revenues that previously supported the debt service payments on the old bonds "crossover" to support the new bonds.

The investment agreements used in crossover refundings are generally provided by entities rated "A" or are collateralized. In order to comply with U.S. Treasury arbitrage regulations requiring that investments be purchased at fair market value in an arms length transaction, the crossover refunding investment agreement is generally purchased through a bid process.

Obtaining the rate for a crossover refunding investment agreement can be done very quickly. In order to provide indicative rates we need only a schedule showing the escrow requirements and the permitted investment definition. A bid to obtain the investment agreement can be completed in as little as two days and closing generally takes place within two weeks.

 

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