DEFINITION of 'Refunding'
The process of retiring or redeeming an outstanding bond issue at maturity by using the proceeds from a new debt issue. The new issue is almost always issued at a lower rate of interest than the refunded issue, ensuring significant reduction in interest expense for the issuer.
BREAKING DOWN 'Refunding'
In order to retain the attraction of its debt issues to bond buyers, the issuer will generally ensure that the new issue has at least the same - if not a higher - degree of credit protection as the refunded bonds. Refunding is likely to be more common in a low interest-rate environment, as issuers with significant debt loads have an incentive to replace their maturing higher-cost bonds with cheaper debt.
For example, an issuer that refunds a $100 million bond issue with a 10% coupon at maturity, and replaces it with a new $100 million issue with a 6% coupon, will have savings of $4 million in interest expense per annum.