SUB-NATIONAL TECHNICAL ASSISTANCE PROGRAM Fundamentals of Municipal Bonds
What is a Municipal Bond? A security issued by a local government to debt finance infrastructure. Repays bondholders the face value plus interest over a specific time. Broken down into multiple securities disbursed among different investors. Most often issued at a fixed interest rate. Long term debt with payments due quarterly, semiannually or annually. In some countries interest earned on municipal bonds is tax free. PPIAF/SNTA assistance is available to local governments that want to explore the use of municipal bond financing.
Types of Municipal Bonds General obligation bond (GO) Pledges all sources of revenue, and sometimes all assets, to repayment. Revenue bond Pledges only project revenues, and sometimes project assets, to repayment. Structured bond (SDO) Pledges only specific revenue sources to repayment as specified in the bond. PPIAF/SNTA assistance is available to help determine the appropriate type of municipal bond to use in a specific context.
Credit Ratings and Municipal Bonds Credit ratings quantify the risk that a local government will be unable or unwilling to repay its debt. There are “institutional ratings” and specific “bond ratings”. Municipal bond ratings rank risk in comparison to national government bonds. The credit rating of a municipal bond determines the local government’s cost of financing its projects. PPIAF/SNTA assistance is available to local governments to prepare for and obtain credit ratings.
Credit Ratings and Municipal Bonds Investment Grade Ratings: AAA Highest Safety – Risk Free AA High Safety A Adequate Safety BBB Moderate Safety Non-Investment Grade Ratings (“Junk Bonds”): BB Inadequate Safety B High Risk C Substantial Risk D Default
Credit Enhancements Types of credit enhancements: Debt Service Reserve (Collateralization) Escrow Account Revenue Intercept Partial Credit Risk Guarantee PPIAF/SNTA assistance is available to local governments to enable them to structure credit enhancements for their municipal bonds including obtaining partial credit risk guarantees.
Credit Enhancements Bonds Bond Local Government Funds Investors Bond/Debt Service Funding for Projects Redirected Revenues Revenue Intercept Escrow Infrastructure Projects Partial Credit Risk Bond/Debt Service Guarantee Reserve Escrow Revenues Services Residents: Service Users, & Taxpayers
SUB-NATIONAL TECHNICAL ASSISTANCE PROGRAM Thank you.
Recommend
More recommend
