Thinking of Refunding or Refinancing Prior Bonds? SLGS Window May Close Soon
As part of the process of issuing advance refunding bonds, State and Local Government Securities (known by the acronym “SLGS”) are often the investment of choice to use in the escrow account established as part of the transaction. SLGS are bonds that are issued by the federal government through the United States Treasury Department (the “Treasury”). As the SLGS mature in the escrow account, those dollars are used to refund the prior bonds (to “refund” is analogous to “prepaying” a traditional loan).
The federal debt limit, which has been suspended for more than a year, will be reinstated on Sunday, March 15. The limit will be set at the amount of federal debt outstanding, which means that the federal government will be immediately at the limit. Unless Congress acts to raise or suspend the debt limit before March 15, the federal government will begin the “extraordinary measures” necessary to avoid default.
The first extraordinary measure typically undertaken is suspending SLGS subscriptions. If the Treasury follows its recent practice, it is likely to announce sometime in the week of March 9 that it will not accept SLGS subscriptions after noon ET, Friday, March 13. In the past, the Treasury has fulfilled all requests for SLGS filed before the deadline.
It is unclear how long the SLGS window will remain closed, but it could be several months. The window will not reopen until the debt limit is raised or suspended again, which would require the Congress and President first negotiating and agreeing to the terms of suspending or raising the debt limit.
If the SLGS window remains closed, issuers of bonds that require a conservative investment for escrow account purposes will need to find an alternative investment security. Most issuers have specific types of legally authorized investments that are permitted to be used in this context – as typically authorized by state statute, issuer policy, or a combination of the two sources. The “Permitted Investment” language section (or similarly applicable section) in the bond documents should be reviewed carefully to ensure the type of alternative security is in fact “permitted.”
For more information, please see the following:
SLGS Information: https://www.treasurydirect.gov/govt/apps/slgs/about/about.htm
Debt Limit Information: http://www.treasury.gov/initiatives/pages/debtlimit.aspx