Jefferies

Actionable Ideas for Companies and Sponsors

Using Customized Defeasance Refundings to Refinance High Coupon Build America Bonds (BABs)

BABs are taxable municipal bonds with a federal subsidy of 32.7% of the coupon payment. More than $181 billion of BABs were issued in 2009 and 2010. Many of these BABs included a standard muni 10-year par call, and therefore, high coupon BABs with par calls in 2019 and 2020 may be able to be advance-refunded for savings at today’s low rates. However, issuer’s contemplating refunding BABs should be aware that the current interpretation of the tax regulations indicates that legally defeased BABs will be treated as reissued for tax purposes, resulting in the termination of the federal subsidy. Issuers therefore should consider using advance refundings that do not result in the legal defeasance of their BABs, such as crossover or economic defeasance refundings.