Some 10 percent of the municipal bond market has consisted of advance refunding, but this is no longer permitted under the new law. The upside of the elimination is that it could lead to innovative bond structures.
“Issuers may start to issue 30-year bonds with shorter calls or maturities, like five-year calls or 10-year bonds with five-year calls or just five-year bonds, because they want the option to refinance at some point,” Weigold said.
Advance refunding is a tool issuers have been using to refinance their debt before the bonds are callable or before they mature, which allows them to refinance before the 10-year call on a bond.
“The disallowance of advance refunding is going to reduce supply in the market because issuers will no longer be permitted to refinance old bonds and issue new bonds,” said Weigold.