December 16, 2011
Re: Local Finance Board Paving the Way to Faster Refundings
According to our Bond Counsel Ed McManimon at Wednesday’s Local Finance Board meeting, the Board took the first step in establishing a new rule that would allow municipalities and counties to issue refunding bonds and capture debt service savings on an expedited basis. This is a significant development, as timing is everything when it comes to refundings, particularly in this volatile economic market.
The Board has adopted a resolution approving a proposed rule that would allow municipal and county issuers to issue refunding bonds to refund outstanding long-term bonds without the prior approval of the Board, as long as certain conditions are met. Currently, municipalities and counties must appear before the Board for approval after introduction and before final adoption of a refunding bond ordinance. Because the Board accepts applications and meets only once per month, the current procedure can result in a 30 to 45 day delay - plenty of time for interest rates to rise and opportunities to decrease debt service to vanish.
The proposed conditions are as follows:
1. The refunding must produce at least 3.00% net present value savings;
2. No annual debt service payment on the new refunding bonds can exceed the same year's debt service payment on the bonds being refunded;
3. The final maturity of the new refunding bonds cannot exceed the final maturity of the bonds being refunded; and
4. The annual debt service savings must be "level" - taken in relatively equal installments over the remaining maturity of the bonds being refunded.
Upon closing on a refunding bond issue, an issuer will need to file a certification with the Board that details that the above conditions were met, with appropriate back-up and an itemized accounting of the costs of issuance of the refunding bonds.
An overwhelming majority of the refunding transactions completed by municipalities and counties meet the above conditions. Accordingly, most issuers will receive the significant benefit of being able to enter the bond market quickly without any additional burdens. Any issuer that was going through the process of authorizing a refunding bond issue at the end of 2010 knows how quickly interest rates can rise and certainly can appreciate the benefit this proposed rule provides.
The Board's proposed rule is subject to a 60-day comment period and additional action prior to becoming final. During that time period, issuers will still need to make application to the Board for approval to issue refunding bonds.
If you have any questions or need additional information please contact Matt Weng, Staff Attorney, at 609-695-3418 x137 or email@example.com.
Very truly yours,
William G. Dressel, Jr.