Consolidated bonds are bond issues that are designed to take the place of two or more earlier bond issues. The idea behind a consolidated bond is to combine the previous bonds in a manner that makes the bond issue easier for the sponsoring entity to manage, and also take advantage of a better rate of interest. When the consolidated bond is structured properly, the action is usually considered to be desirable by both the sponsor of the bond and the investors who currently hold the previous bonds.
When considering the creation of a consolidation bond issue, it is possible to include as many existing bond issues as the sponsor desires. In many cases, the consolidated bond assumes the function of only two bonds. However, it is not unusual for municipalities and other entities that issue bonds to create a consolidated bond option that makes it possible to withdraw three, five, or even ten existing bonds.
There are several good reasons to consider the creation of a consolidated bond. For the sponsor, there is the obvious advantage of streamlining the administrative efforts necessary to service the bond issue. Managing one bond is usually easier than juggling multiple active bonds. Depending on the number of bonds current in circulation, combining the existing bonds into one consolidated bond can save a great deal of time and labor.
Sponsors may also see the consolidated bond as an ideal way to take advantage of current interest rates. If the prevailing interest rate is currently at a level that is more favorable than at the time one or more of the bonds were issued, combining the bonds under one single bond simply makes sense. The savings to the sponsor over the long term may be significant, and worth the time and effort needed to consolidate the bonds.
The ability to create a consolidated bond issue depends on the type of bonds involved, and the terms of issue associated with the original bonds. In some cases, the sponsor may consider the option of a consolidated bond, but determine that the action will not yield enough advantages to merit going through the process.
