Forward Refunding

An Alternative Strategy to Taxable Advance Refunding Plans

by Kyle Pantino

The Tax Cuts and Jobs Act[1] (“the Act”) prohibits advance refunding of tax-exempt bonds with tax-exempt debt, effective January 1, 2018. Many borrowers have historically taken advantage of advance refunding opportunities in low interest rate environments to create present value (PV) savings. While the Act limits a borrower’s advance refunding capabilities to taxable financing, other opportunities to monetize savings may be realized using a forward refunding. This structure does have a different risk profile than a traditional cash market taxable advance refunding, and such risks should be discussed and considered prior to any execution.


Issuers considering a traditional taxable advance refunding of outstanding fixed rate bonds may be able to enhance the refunding opportunity through a forward refunding. A forward refunding combines a forward bank commitment and forward starting interest rate swap to lock in savings based on current rates.

  • The Issuer’s existing bonds remain outstanding until they are currently callable.
  • The forward bank facility and swap are executed simultaneously and provide a committed funding source at a pre-determined loan spread and rate lock.
  • The client can draw on the bank facility when the bonds are currently callable to refund the existing bonds on the call date.
  • Swap cash flows begin on the forward start date, scheduled to coincide with the draw on the bank facility.
  • The bank commitment typically includes a commitment fee.
  • In many instances, the client maintains potential flexibility at the call date:
    • Draw on the bank loan to realize expected PV value.
    • Fund with an alternative bank loan that may have a lower credit spread and realize an increase in expected PV value.
    • Fund with variable rate capital markets product (LOC, SBPA, FRNs).
    • Terminate the swap at fair market value and issue tax-exempt fixed rate bonds.

This solution may eliminate the potential for negative arbitrage associated with a taxable advance refunding escrow while providing the borrower an opportunity to “lock in” interest rates currently available.

Funding Timeline Comparison

Forward Refunding Cash Flow Example

PNC’s Derivative Products Group

PNC’s Derivative Products Group is focused on providing clients with general market knowledge and structuring expertise when developing comprehensive risk management strategies to meet specific objectives.

PNC Bank, National Association (A S&P / A+ Fitch / A2 Moody’s, as of March 31, 2018) would be the counterparty to any interest rate swap. PNC Bank is an active counterparty for interest rate derivatives, managing a book in excess of $222 billion as of March 2018. 

Ready to Help

At PNC, we combine a wide range of financial resources with a deep understanding of your business to help you achieve your goals. To learn more about how we can bring ideas, insight and solutions to you, please contact PNC’s Derivative Products Group at

Kyle Patino
CAIA, Managing Director and Senior Vice President
Derivative Products Group, PNC Bank, N.A.

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