What is an advanced refunding?

An advanced refunding refers to a process in which an entity, such as a government, uses the proceeds from issuing new bonds to purchase securities that are then placed into an escrow account. This escrow account is set up to pay off the existing debt obligations at a future date. This strategy allows the issuer to take advantage of current interest rates and potentially save on overall interest costs.

When an advanced refunding occurs, it generally means that the issuer anticipates that the existing debt can be effectively managed or excluded from the balance sheet ahead of when it is due. By securing the necessary funds through the new debt and investing them in safe securities, the entity can ensure that it can meet its future payment obligations while also potentially freeing up resources for current or future projects.

This method is particularly useful when interest rates are lower than those of the existing debt. By executing an advanced refunding, the government or organization can lock in these lower rates, which can lead to significant savings over time.