What Is Conduit Financing?

Conduit financing is a means for private companies, nonprofit organizations (NPO), and public entities to raise capital via tax-exempt 澳洲幸运5官方开奖结果体彩网:municipal bonds to fund large-scale projects that typically benefit the general public. Such projects can include hospitals, airports, industrial and housing projects, public f♊acilitiesᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚ, and schools.

Municipal bonds are a form of 澳洲幸运5官方开奖结果体彩网:revenue bonds known as conduit bonds and represent a 澳洲幸运5官方开奖结果体彩网:public-private partnership.

How Conduit Financing Works

When a conduit bond is issued, the entities that receive the funds from the issue are known as the conduit borrowers and are responsible for the interest and 澳洲幸运5官方开奖结果体彩网:principal payments to the bondholders. In most cases, the conduit issuer is not responsible for repayment.

The debt of the bond is secured by the revenues from the project that the debt finances and the cash flow from the revenue-generating project is used to pay the bondholders. Revenues that secure these bonds are collected by the 澳洲幸运5官方开奖结果体彩网:conduit issuer from the borrower and then paid ꦬto the bondholders.

The borrowing organization must repay interest and principal on the bonds, unless stipulated otherwise in a written agreement. For instance, if a local non-profit hospital wants to build a new maternity center and uses conduit financing to fund the project, it is the hospital, not the conduit issuer, that is responsible for debt repayment.

Common types of conduit financing include 澳洲幸运5官方开奖结果体彩꧟网:industrial development revenue bonds (IDRBs), 澳洲幸运5官方开奖结果体彩网:private activity bonds (PABs), and housing revenue bonds—both for single-family and multifamily projects. Most conduit-issued securities are for projects that benefit either the public at large, such as airports, docks, sewage facilities, or specific population segments, including students, low-income homebuyers, and veterans.

Risks of Conduit Financing

The risks of conduit financing are higher as the bond is not backed by the full faith of the issuer. For a municipal bond, this means that it is not backed by municipal assets or taxes.

The investors of the bonds are actually investing in the project, as opposed to the 澳洲幸运5官方开奖结果体彩网:credit standing of the bond issuer. As such, they are exposed to the risks that come with the development of a new project.

It is essential, therefore, that investors are clear on all details of the project being financed. That includes costs, time of completion, 澳洲幸运5官方开奖结果体彩网:default risk♏, and future revenue gen𓂃eration, all of which can typically be found in the project's prospectus.

Benefits of Conduit Financing

Because the risk of a conduit bond is higher, the yield on the bond is usually higher as well, particularly when compared to traditional municipal bonds. Furthermore, as with other municipal bonds, it is simpler for an investor to transfer ownership and offload the inherent risk in conduit financing, compared to the 澳洲幸运5官方开奖结果体彩网:corporate bond market.

Another advantage that conduit bonds hold over corporate bonds is that they are usually not taxed at the federal level on interest income. Investors might also be exempt from state taxation on interest payments if they live in the state in which the bond is issued or the bond is issued by a U.S. territory.

There is, however, no special treatment on 澳洲幸运5官方开奖结果体彩网:capital gains. Conduit bond investors are still liable to pay taxes on the growth in value of their investments when they sell up like everybody else.