Special thanks to the
2013 TMA Partner
Sponsors for their
of TMA programs.
Pia Thompson is a partner with Gould & Ratner LLP.
She helps corporate clients with complex commercial
litigation and provides advice, counsel, and planning
services related to revenue management. Thompson
holds a bachelor’s degree in economics and political
science from Wellesley College and a law degree
from the University of Michigan Law School.
entity. Conduit bonds may be issued
to fund such projects as non-profit
hospitals, housing developments,
transportation hubs, student loan
programs, and public works projects.
The important distinction for these types
of bonds is that the third-party conduit
borrower—not the issuing municipality—
is responsible for interest payments
and repayment of the principal. The
issuing municipality generally is not
obligated to use any other revenue
source to repay the bonds if the conduit
borrower fails to make loan payments.
bond issue depends for repayment stops,
bondholders are left holding the bag.
Recent Chapter 9 filings may have
given GO municipal bond investors
cause for concern. However, of the
55,000 government entities that can
issue debt, only 262 defaulted on those
obligations between 1980 and 2011,
which is less than 0.5 percent. 1 Of
the 262 that defaulted, only 49 were
cities, villages, or counties that went
through the Chapter 9 bankruptcy
process. Therefore, any reluctance by
investors to put money into municipal
bonds is probably attributable more
to psychological fears rather than
for any true financial concern.
Unless the official statements indicate
otherwise, investors in conduit bonds
should not view the issuing municipality
or government agency as a guarantor of
the conduit bonds. In other words, even
though the conduit debt obligations
bear the name of the government
issuer, the issuer has no obligation for
the debt beyond the resources provided
by a lease or loan with the third party
on whose behalf they are issued.
Indeed, the bond market has been
virtually unaffected by recent defaults.
While no one likes even the threat
of an issuer filing for bankruptcy,
municipal bond investors appear to
have concluded that default rates will
remain low. Municipal bond investors
understand that this is now a credit
market and that the days are long gone
when they had choices among many
AAA offerings backed by insurers.
It’s a good idea to keep this type of
bond in mind when reading articles
about municipal bond defaults. Because
such articles sometimes suggest that a
default on conduit bonds threatens the
financial integrity or even the solvency
of a municipal government, some
journalists clearly do not understand
how these bonds are issued and who
bears responsibility for their repayment.
In addition, savvy investors may
be able to seize on opportunities to
capture significant upside caused by
uninformed investors’ discomfort with
these products in the wake of recent
Chapter 9 filings. The lesson from recent
events in the market for investors and
their advisors is that these investments
now may require more careful analysis
before purchase than they have in the
past. Those with good analytic tools
and strong stomachs have a good
chance to sail through this crisis and
enjoy the fruits of their investments
when they reach the other side. J
Defaults Remain Rare
When only a specific source of funds
is pledged to pay bonds, the issuer
generally is not obligated to use any
other revenue source to repay the
instruments if the pledged source of
repayment proves to be inadequate. As a
result, if the income stream on which a
1 The Muni Opinion, September 2012.