What the market is
The US municipal market funds the majority of domestic public infrastructure. Its defining feature is that interest on most of its bonds is exempt from federal income tax, which lowers the yield issuers pay and defines the buyer base: US taxpayers for whom the exemption has value, held directly, through funds, or by insurance companies and banks.
A foreign investor who pays no US federal income tax gains nothing from the exemption and will not pay the price. The market is domestic for structural reasons.
Access routes for projects
Governmental bonds. Issued by a state, city, authority, or district for its own facilities. The project must be publicly owned and used.
Private activity bonds. A defined set of categories — airports, ports, certain surface transportation, solid waste, water, some housing — where a private party may use bond-financed facilities while the bonds remain tax-exempt. Most categories are subject to a volume cap allocated by state, and the allocation process is its own timetable.
Taxable municipal bonds. Where the exemption is unavailable, issuers still access the market taxably. This opens the buyer base to non-US investors and to pension funds indifferent to the exemption.
What the buyer requires
- Continuing disclosure: audited financials and operating data, filed and timely. The buyer base assumes it
- Credit ratings, usually two. The market is rating-driven to a greater degree than most
- Security structure clarity: whether the bond is a general obligation, a revenue bond, or something narrower, and precisely what revenue secures it
- Legal opinions, particularly bond counsel's opinion on tax exemption, which the entire structure depends on
- Reserve funds and coverage covenants at levels the market expects for the sector
Common misunderstandings
Sponsors often assume a public authority issuing bonds carries the state's credit. Most revenue bonds do not; they are secured by a project's revenue and nothing else. They also assume the tax exemption is a matter of intention. It is a matter of the statutory category, the volume cap allocation, and continuing compliance for the life of the bonds — a change of use can retroactively affect the exemption, which is why the covenants on use are as tight as they are.
