Advances in Advance Refunding

May 9, 2017

by Andy Kalotay

In case you missed it, today’s (May 9, 2017) edition of The Bond Buyer carries my commentary Advances in Advanced Refunding. Municipal issues can be advance-refunded only once in a funding’s lifecycle; the replacement is not eligible. However, calling (current refunding) keeps the potentially valuable advance refunding option (ARO) alive. In Don’t Waste a Free Lunch: Managing the Advance Refunding Option, Lori Raineri and I discuss the ramifications of this constraint. Our key point is that advance refunding near the call date wastes a free lunch, namely the ARO of the replacement issue.

To avoid such waste, municipal finance professionals need to be aware of the true value of the ARO, and take it into account in their funding and refunding decisions. For example, under current market conditions, the estimated value of the ARO in a new 5% 20-year non-call 10 issue is roughly 1% of the face amount, or $1 million per $100 million issued. So refunding close to the call date would squander this value, and severely reduce the efficiency of the transaction.

Incorporating these considerations into the refunding decision requires sophisticated option-based analytics. If your current software is not up to the task, take a look at our Refunding+ Calculator. For more information and a free trial, contact us at