Refunding Valuation Analysis (ReVal)

An Issuer’s Decision Tool

by Kerry Rudy

Issuers looking to advance refund tax-exempt fixed rate bonds for savings may benefit from a new tool developed by PNC Capital Markets LLC (PNCCM). Refunding valuation analysis (ReVal) can be useful to a wide range of issuers, including governmental entities and their agencies and 501(c)3 not-for-profit corporations that issue fixed rate tax-exempt bonds in the public markets.

Fixed rate tax-exempt bonds are typically issued with 10-year no call protection for investors. Advance refundings involve investing tax-exempt bond proceeds in U.S. Treasury securities to be held in escrow until the tax-exempt bonds to be refunded can be redeemed on their call date. In cases where tax-exempt proceeds cannot be invested at a yield at least equal to the yield on the refunding bonds, negative arbitrage is generated resulting in a less than 100% efficient refunding.

ReVal enables issuers to evaluate the efficiency of advance refunding opportunities utilizing market based yield curves for both tax-exempt bonds and U.S. Treasury securities that are invested in the escrow. ReVal computes present value savings against Peak Present Value Savings (“PPVS”), essential information to assist with with a “go/no-go” refunding decision.

How ReVal Works

Calculates “Peak Value.” The ReVal analysis defines Peak Present Value Savings (“PPVS”) as the highest savings of any possible future refunding period (stated in today’s dollars).

It takes into account the “efficiency” of refunding savings generated today versus the risks of waiting.

The analysis also defines the time period for PPVS, so risk is better understood (i.e., an increase in interest rates, tax law changes, market access or increased credit spreads).

Issuer-based. Savings are calculated and assessed using  issuer-based methodologies. Issuer-specific refunding criteria and thresholds can be incorporated.

Complements Qualitative Decision Making. ReVal results can act as a companion to other decision factors. The analysis helps quantify the relative impact of negative arbitrage for advance refundings.

Grounded in Fact. ReVal employs historical interest rate movements to project future tax-exempt and taxable escrow (SLGS) yield curves along forecasted interest rate paths. Default settings are calibrated to gravitate towards historical averages.


This graph illustrates the historical evolution of the full US Treasury yield curve – historical rate movements for all tenors in the yield curve are sampled to project future rate environments. ReVal uses actual data from 1977 to present for yield curve simulations and 1964 to present for model calibration.[1]

What Makes ReVal A More Practical Tool

ReVal was designed and built from the ground up to reflect the option value to an issuer. No liquid market exists for issuers to detach and sell their option, leading to a lack of “transparency” in value.

Simulating a series of refunding transactions is a way to assess and capture the option value from an issuer’s perspective. This is what ReVal was built to do.

ReVal inputs are not based upon derivatives markets (i.e., forward curves, implied volatility).


ReVal relies on repeated sampling of actual historical rate movements over long periods to derive the most unbiased expectation of future rates.

In PNCCM’s view, standard option valuation models rely on theoretical “risk-neutral” or “arbitrage-free” relative pricing approaches which can create unrealistic projections of future rate environments and can yield distorted results in the tax-exempt market.

Many borrowers prefer historically-based approaches for projecting future interest rate environments.

ReVal projects tax-exempt and U.S. Treasury (escrow yield) interest rate paths together using corresponding historical data from both markets, a key driver of savings for advance refunding scenarios.

ReVal delivers customized solutions by allowing its inputs to include an issuer’s unique refunding savings criteria.

Simulated future refundings failing to meet a given issuer’s criteria for savings are assigned a zero value, reflecting the issuer’s decision to wait for a better refunding result.

Calculating Refunding Savings Across Future Interest Rate Paths

ReVal utilizes its forecasting engine to evolve today’s SLGS and tax-exempt yield curves to each future “calculation date” (quarterly intervals until bond maturity); this is repeated at least 10,000 times resulting in as many potential future interest rate paths.

For every individual path, a matched-maturity refunding analysis of the bond is simulated using the forecasted yield curves along that path at each calculation date.

This results in at least 10,000 unique potential PV savings at each calculation date (subject to an issuer’s given refunding criteria). These are then averaged across all simulated interest rate paths to yield an “expected” PV savings from refunding, every quarter over the bond’s life.

Lastly, PPVS is determined by identifying the quarter with the highest expected savings (in today’s dollars); this is our theoretical option value– the discounted expected payoff from optimally exercising a refunding option.



For Each Valuation Date, Present Value Savings are Calculated for at Least 10,000 Interest Rate Simulations.


Example: 5% Coupon Bond With March 2026 Maturity - Callable Sept. 2021 at Par

While current PV savings in this example are approximately 6.6%, potential savings (PPVS) exceed 10%.

Exercising the refunding option today may be viewed as “inefficient” since it only captures 60% of the potential value of the refunding option.

Peak savings occur just prior to the first call date in 2021.

Consequently, an issuer must choose between certain savings today and the risk of waiting up to 5 years before the peak savings are projected to occur.

Time Value

Time value is an important measure of risk, as much can change with tax law, credit ratings, market access and an issuer’s outlook.

An issuer must balance the known benefit of refunding savings today versus the potential for future risks to increase or decrease refunding savings in making the "go vs. no-go decision.”

Ready to Help

Using ReVal, issuers will be able to utilize a realistic methodology of  present value savings today versus peak present value savings.  Please feel free to call Kerry Rudy at 312-338-5270 if you would like PNC Capital Markets LLC to evaluate the efficiency of advance refunding fixed rate tax-exempt bonds.

Kerry Rudy
Managing Director, Group Head
Not-For-Profit (NFP) Healthcare, PNC
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