Public Finance

Arkansas Development Finance Authority

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Date: June 27, 2017
Client: Arkansas Development Finance Authority
Par Amount: $10,800,000
Transaction: Refunding Tax-Exempt Bonds, Series 2017
Role: Sole Manager

At Stephens, we are committed to establishing and maintaining long-term relationships delivering long-term results based on deep research and expert thinking.  Here’s an example of how that approach yields creative solutions, benefiting our clients.

The Build America Bond program was part of the American Recovery and Reinvestment Act of 2009, whereby taxable municipal bonds could be issued with a 35% interest subsidy from the U.S. Treasury.  This subsidy has been reduced the last few years through the federal budget sequestration, which essentially increases the issuer’s interest cost.

The Arkansas Development Finance Authority (“ADFA”) issued Build America Bonds (“BABs”) in 2010 to acquire and renovate an office building to lease to various state agencies.  Given the reduced benefit of the subsidy, Stephens proposed a crossover refunding structure enabling ADFA to benefit from low tax-exempt interest rates so that, upon optional redemption of the Series 2010 bonds, ADFA would no longer be dependent upon federal subsidy payments. 

In a traditional advance refunding, issuers have experienced the cost of negative arbitrage in the refunding escrow.  There is also a legal defeasance – which for BABs would result in the immediate loss of the federal subsidy payments.  These two costs did not make a traditional advance refunding an option for ADFA.

By utilizing a  crossover refunding, ADFA avoided a legal defeasance. The proceeds from the Series 2017 refunding  bonds were used to establish an escrow, which will provide for interest payments on the Series 2017 bonds until the crossover date of April 1, 2020, as well as for the full redemption of the Series 2010 bonds on the optional redemption date.  This structure avoids a legal defeasance of the Series 2010 bonds and therefore the elimination of the federal subsidy until the crossover date.

The security for the Series 2010 bonds continues to be the lease revenues from the state agencies occupying the building.  At the crossover date, when the Series 2010 bonds are redeemed, the security for the Series 2017 bonds crosses over – from the escrow to the lease revenues.

On June 27, 2017, Stephens successfully priced a $10.8 million financing of tax-exempt bonds to refund ADFA’s Build America Bonds.  

The crossover bonds resulted in ADFA achieving the following objectives:

1) Successfully advance refunding the Build America Bonds at a net present value benefit of 3.4%;

2) Locked in the State’s office lease payments at better than 2010 levels; and

3) Eliminated the risk of declining federal subsidy after the crossover date.

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