Fundamentals of Municipal Bonds What is a Municipal Bond? A - - PowerPoint PPT Presentation

Fundamentals of Municipal Bonds

SUB-NATIONAL TECHNICAL ASSISTANCE PROGRAM

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”.
• The credit rating of a municipal bond determines the local government’s

cost of financing its projects.

• Municipal bond ratings rank risk in comparison to national government bonds.

PPIAF/SNTA assistance is available to local governments to prepare for and obtain credit ratings.

Credit Ratings and Municipal Bonds

Investment Grade Ratings: Non-Investment Grade Ratings (“Junk Bonds”):

BB Inadequate Safety B High Risk C Substantial Risk D Default AAA Highest Safety – Risk Free AA High Safety A Adequate Safety BBB Moderate Safety

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

Local Government Bond Investors

Bonds Funds Infrastructure Projects Residents: Service Users, & Taxpayers Partial Credit Risk Guarantee Bond/Debt Service Reserve Escrow Revenue Intercept Escrow Funding for Projects Revenues Services Bond/Debt Service Redirected Revenues

SUB-NATIONAL TECHNICAL ASSISTANCE PROGRAM

Thank you.