9.2.5 Refunding Escrow Funds
Refunding escrow funds are designed to pay debt service on prior obligations that cannot be redeemed immediately. Refunding escrows must satisfy the requirements of the bond documents for the bonds to be considered “defeased” and the issuer’s payment obligation discharged. Refunding escrows are usually the only source of repayment available for the holders of prior bonds and therefore almost always comprise a carefully selected portfolio of U.S. Treasury securities that generate cash flow sufficient to pay debt service on the refinanced bonds. Refunding escrows also are subject to especially complex and restrictive federal tax law limitations. See Section 3.7.6, Refunding Bonds.