Hedge Bonds and Refundings

Section 103(a) does not apply to “hedge bonds.” Section 149(g) of the Code discusses hedge bonds. A refunding bond is not a hedge bond if the original bonds met the requirements of Section 149(g) of the Code.

Section 1.149(g)-1 of the Regulations further explains that the refunding bond is a hedge bond unless there is a “significant governmental purpose” for the issuance of the refunding bond.  For example, an advance refunding to realize debt service savings or to relieve the issuer of overly burdensome document provisions would satisfy the significant governmental purpose requirement.

There is a special rule for refunding bonds and the application of Section 149(g) of the code:

  1. A refunding bond meets the requirements of Section 149(g) only if the original bond (i.e., the refunded bond) met the requirements of Section 149(g) (i.e., must have had the reasonable expectation as to when proceeds would be spent, must have reasonably expected that 85% of the spendable proceeds of such issue would be used to carry out the governmental purpose within the 3-year period and not more than 50 percent of the proceeds of the issue were invested in nonpurpose investments having a guaranteed yield for 4 years or more).
  2. A refunding bond is deemed to meet the requirements of Section 149(g) if certain special requirements apply vis-a-vis the refunded bond, as described in Section 149(g).

Section 149(g) of the Code was added by the 1989 Act in order to curtail the issuance of bonds prior to the time the proceeds thereof are actually needed for their governmental purpose in order to “lock in” lower interest rates that may not be available in the future. See 1989 Act House Report at 1377-78.

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