Hedge Fund Glossary

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Defeasance

a way to escape the Covenants governing Bonds even during a Non-Call Period. Defeasance is a process by which an Issuer may have the Covenants under its Indenture (and even its payment obligations in the case of Legal Defeasance) discharged if the Issuer irrevocably deposits with the trustee enough money (or US Treasury Securities) to cover all Interest and principal payments on the Notes until either maturity or the first date on which the Notes are optionally redeemable. This can be very, very expensive. Defeasance can take the form of Covenant Defeasance or Legal Defeasance. Legal Defeasance is not an available option under current law because no law firm can give the required tax opinion (i.e., “this defeasance will not be a taxable event to Bondholders”). There is no tax problem with Covenant Defeasance under current law because it does not let the Issuer off the hook from its payment obligations.

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