To aggregate or optimize?
By: Sridhar Maruvada
The choice between aggregating escrow requirements to solve for a universal escrow or optimizing individual portfolios per refunded issue can determine the amount of wasted “rounding” in a project financing. When, for instance, issuer A sells tax-exempt refunding bonds to refund three different previously issued outstanding series of bonds, the new bond proceeds are usually spent on a portfolio of securities in an escrow that generates P&I to cover the outstanding bond payments until call or maturity.
Depending on the type of securities purchased for a tax-free portfolio, the excess in bond proceeds issued for escrow cost is optimal when it is less than a security denomination (up to $5,000 for open market securities). If an escrow is solved and purchased per refunded series, the excess can be up to three times the denominations. If a single universal escrow is purchased to fund the aggregate bond payments for all three series, contingency can be minimized to <1 denominations.
DBC Finance has a Project Finance module that can easily handle both options. Arbitrage requirements and regulations are strictly met according to yield limits and transferred proceeds and funds. In DBC, a universal escrow can be turned on/off for analyses.
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