Series 52: 2.7.2.2. Transitioning Between Issues

2.7.2.2. Transitioning Between Issues

There are several ways to manage the transition from the refunded bonds to the refunding bonds. One method is a full cash refunding (also called a gross refunding), in which the issuer simply immediately begins using the proceeds from the refunding bonds (supplemented by other funds if needed) to pay the debt service on the refunded bonds, until the refunded bonds either mature or are able to be called. At the same time, the funding stream that was paying the refunded bonds will begin repaying the refunding bonds instead. A net cash refunding works like full cash refunding, except that the funds dedicated to servicing the refunded bonds are invested in safe investments such as Treasury securities, the interest from which assists in servicing the refunded bonds.

In a crossover refunding, the refunding bonds are at first used only to make whatever interest and principal payments come due on the refunding bonds themselves. Meanwhile, the refunded bonds continue to be paid as normal from their original source of funding. When the refunded bonds mature or are called, proceeds from the refunding bond escrow account “cross over” and pay the principal and any call premium for the refunded bonds. At the same time, the revenue stream that was paying the debt service on the refunded bonds also “crosses over” and begins paying the debt service on the refunding bonds.

Sometimes, a bond indenture gives the issuer the right to make a direct exchange with the investor: the existing issue for the refunding bonds. Like a call, a direct exchange can only be compelled during date ranges specified in the indenture. Unlike with a call, bondholders’ principal is in effect automatically reinvested in the refunding bonds.