2.4.10 Discharge and Defeasance

2.4.10 Discharge and Defeasance

Discharge provisions spell out the requirements for the release of the security granted by the bond documents and the termination of the public agency’s obligation to pay debt service, which generally include a requirement that all debt obligations issued under the bond documents have been paid or defeased. Defeasance provisions allow for the public agency’s payment obligation with respect to particular debt securities to be discharged through an irrevocable deposit with the bond trustee of cash or securities of a permitted type (defeasance securities) that, together with the interest to be earned thereon, will be sufficient to pay principal and any redemption premium on the defeased securities at maturity or upon prior redemption and to pay interest on the defeased securities through that date. Upon defeasance, the securities are payable solely from amounts held for that purpose by the bond trustee.

Defeasance securities must be non callable and of sufficient credit quality to provide debt holders reasonable assurance of payment notwithstanding the discharge of the public agency’s payment obligation. Direct, “full faith and credit” obligations of the United States of America (U.S. Treasury securities) are always permitted. Beyond that, bond documents vary.