Appendix A: Motivations and Uses for Tender Refunding

The motivations for issuers to undertake a tender refunding can vary. Sometimes this strategy is used to modify and/or remove problematic bond terms. More often today, a tender is pursued to achieve debt service savings, which means the purchase price of the tender needs to be set high enough to be attractive to investors to voluntarily sell their bonds, while low enough to offer savings to the issuer upon the issuer issuing refunding bonds. Often this will involve refunding taxable bonds that were issued for projects that were eligible for tax exempt financing – for example a refunding of outstanding taxable advance refunding that refunded prior tax-exempt bonds. A tender refunding of these taxable bonds might refund these back to tax exempt bonds.

The uses for tender refunding have evolved a great deal. Historically, they were used to solve problematic transactions or address legal obstacles. More recently they have been used to convert waves of post-TCJA taxable advance refunding bonds back to tax exempt bonds with more call optionality. They are also being used to simply monetize sharp pricing changes in outstanding taxable and tax-exempt bonds. As tender refunding is highly market dependent, many current debt officers have not worked in prior markets where tender refunding made sense for their agencies and have not developed best practices around tender refunding.

Unlike traditional tax-exempt current and advance refunding, a tender refunding requires an issuer to oversee and manage a team working on two very different, but interdependent transactions. The first is a highly regulated and careful process of offering investors the option to tender (i.e. sell) their bonds at carefully calculated prices determined through a public communication to the entire market (through the EMMA system) and designed to be attractive enough to investors, while still offering viable savings to the issuer. The second transaction is the actual issuance of refunding bonds to new investors and carefully orchestrating these two transactions to minimize the risks to the issuer of buying bonds that no longer produce the requisite savings due to subsequent market movements.

As the choices about which bonds are ultimately purchased are determined solely by the investor, this creates levels of unpredictability to the process. Additional risks include market movements as investors evaluate their options during the multistep tender process. When the tender process unfolds, certain maturities of bonds may then fail to provide adequate savings as the market rates move prior to the issuance of the refunding bonds. This may make the refunding of some or all tendered bonds less attractive or inefficient. This dynamic can be made even more complex by issuer specific requirements, like the need to generate savings in every year, which may cause an issuer to have to anticipate that possibility and authorize sufficient potential current or advance refunding bonds to meet those requirements.

Properly crafted tender refunding processes, with the guidance of expert legal and financial advisors, provide issuers with multiple exit ramps that mitigate or eliminate such risks.