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Enhancing municipal credit

In: State and Local Financial Instruments

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Abstract

Often, issuers purchase private, third-party credit enhancement or participate in credit 'pooling' programs for their bonds. For certain types of borrowing, such as variable rate securities or short-term notes, issuers may also secure a line of credit through a letter from a commercial or investment bank. Individual investors may also purchase separately credit enhancement (usually, bond insurance) from private firms to protect their investments. In private credit enhancement contracts, a bond becomes 'wrapped' by the financial guarantee of a bond insurance firm or a bank. When this happens, the issuers are said to 'lease' the creditworthiness of the credit guarantor or liquidity support provider. Existing evidence suggests that credit enhancements lower issuer borrowing costs, provide additional repayment security to investors, and send an important credit quality signal to financial markets, all of which improve liquidity and pricing in secondary market trades.

Suggested Citation

  • ., 2021. "Enhancing municipal credit," Chapters, in: State and Local Financial Instruments, chapter 12, pages 186-204, Edward Elgar Publishing.
    • Handle: RePEc:elg:eechap:19966_12
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    Cited by:

    1. Mrabti, Nassim & Hamani, Nadia & Boulaksil, Youssef & Amine Gargouri, Mohamed & Delahoche, Laurent, 2022. "A multi-objective optimization model for the problems of sustainable collaborative hub location and cost sharing," Transportation Research Part E: Logistics and Transportation Review, Elsevier, vol. 164(C).

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