The typical optional call for a tax-exempt bond is generally no more than 10 years from the date of issue, and the GFOA recommends that bonds include an appeal date of at least 10 years. Earlier call dates may be available, but they are likely to result in slightly higher yields to maturity at the time of issuance and other financial implications, depending on the market. The benefits of a previous call function should be weighed against the potential negative impacts, and the GFCM recommends that issuers request an analysis of the benefits of alternative calling structures from their city councillor. For taxable bonds, call provisions may vary and the current and potential future costs of the various call provisions should be measured. The LOCAL Law (p. 479) was repealed on 25 September. Introduced in February 2021 by Senators Wicker and Stabenow, it would restore the ability of state and local governments to issue tax-exempt prepayment bonds. Congressmen Ruppersberger (D-MD) and Stivers (R-OH) reintroduced the Community Investment Act, which would also reinstate initial repayments. Issuers of taxable or tax-credited bonds (including Build America bonds or “BAB”) will in most cases be able to issue tax-exempt prepayment bonds to refinance these bonds.
However, withdrawal of BABs through repayment will result in the loss of federal interest rate subsidies, which should be taken into account in the calculation of repayment savings. The analysis of the reimbursement of BIB could be further complicated by the existence of provisions providing for a full appeal. Issuers of tax credits and other taxable debt securities should consult with the bond advisor and his or her municipal councillor to determine whether their bonds are eligible for an initial repayment and to review the call and saving parameters of a prepayment transaction. The repayment of bonds is called either a continuous repayment or an early repayment. A continuous redemption is a redemption in which outstanding (repaid) bonds are redeemed within 90 days of the date of issue of the redemption bonds. In the case of early repayment, the repaid bonds will be repaid for more than 90 days from the date of issue of the repayment bonds. Amendments to the Federal Tax Act at the end of 2017 eliminated the ability of governments to issue tax-exempt prepayment bonds. Taxable early repayments of exempt or taxable bonds are still permitted. Early repayment refers to the practice of withdrawing funds received from a new bond issue to repay the debts of a previous issue. This can only happen after 90 days.
The new bond is usually issued at a lower interest rate than the old unpaid bond. Municipalities usually use the upfront payment to reduce borrowing costs and benefit from lower interest rates. A repaid bond is originally issued by a municipal, state, or local agency, either as a general debenture or as an income bond. The inverse relationship between bond prices and interest rates means that when the interest rates in the economy fall, the prices of outstanding bonds will rise. It also means that an issuer of an existing bond must pay a higher interest rate than issuers of new bonds pay to their investors. Since bond issuers try to raise funds with the lowest possible interest rates, they will usually repay an existing bond before maturity and refinance the bond at a lower interest rate that reflects lower interest rates in the market. The proceeds from the issuance of the new interest-rate bonds will in fact be used to repay the higher-interest-rate bonds. Pre-return should not be confused with pre-return, which involves the issuance of a payable bond. The House and Senate bills are supported by both parties and have the support of several local and regional organizations. While the impact of tax-exempt prepayments on the federal budget is still a theoretical rather than a practical issue, it may no longer be of concern to the majority of Congress.
This is especially true in the post-COVID landscape, with greater political appetite and a greater urgency for the federal government to provide tools to promote economic recovery. .