Actionable Ideas for Companies and Sponsors

Using Forward Delivery Bonds to Lock-in Refunding Savings

The Tax Cuts and Jobs Act of 2017 eliminated a municipal issuer’s ability to issue tax-exempt advance refunding bonds more than 90 days before the call date of outstanding high coupon debt. As an alternative, municipal issuers can use forward delivery bonds to lock-in refunding savings in advance of the call date. Tax-exempt forward delivery bonds are priced in the current market but not issued until a date in the future.

Compared to bonds with a standard (up to 30 days) delivery time period, forward delivery bonds are priced with a yield premium to compensate investors for the illiquidity of their investment during the forward period and for committing funds to be used to purchase the bonds on the future delivery date. However, given current market conditions with low rates and a flat yield curve, the yield premiums for forward delivery bonds are modest—in the range of 3-6 basis points per month—and investors have been willing to accept a forward period of up to 24 months. Documentation for forward delivery transactions follows standard market formats, including an initial Official Statement for pricing and an updated Official Statement when the bonds are issued. Jefferies has recently acted as bookrunner on a number of successful tax-exempt forward delivery transactions, including for San Francisco Airport and the New York City Housing Development Corporation.