Municipal Bond Forum
ERP call feature
Q
I understand that certain bonds, particularly facility revenue bonds (i.e., hospital or housing bonds), often will carry an ERP (Extraordinary Redemption Put) call feature to cover a cataclysmic event to the facility whereby the bonds could be called, typically at par. In the case of an escrowed bond whose underlying facility has such an event and their bonds are called, would the escrowed bonds also be called? Assume that the bond has been properly defeased and now has Treasuries supporting the payments and redemption. Could, or why would, the bond be called? It is no longer dependent on the revenue stream of the facility.
A
James A. Klotz responds:
You are correct that the indenture for virtually all revenue bonds includes an extraordinary redemption feature in the case of a catastrophic event. Generally speaking, if the calls are defeased as you state, the escrowed bonds would not be subject to call for any reason.
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