Junior Refunding

Junior refunding refers to a refinancing of government or corporate debt. In a junior refunding the holders of bonds that are maturing in less than five years exchange those bonds for longer-term bonds. By exchanging short-term bonds for longer-term bonds, a junior refunding allows the government or corporation to postpone making principal payments on the bond debt. If a sufficient number of bond holders are amenable to a junior refunding, the payment of bond principal can, in theory, be deferred indefinitely. While it is possible to secure junior refunding when interest rates are dropping, corporations may be required to match the interest rates on their longer-term bonds in order to encourage more bond holders to participate in a junior refunding.