Dividend Investing Ideas Center
Have you ever wished for the safety of bonds, but the return potential...
In a well diversified portfolio, municipal debt plays a key role in adding to its stability and creating a steady stream of payments.
It’s also true that, when compared to all other asset classes, municipal bonds are a relatively safe investment option. Municipal debt is typically backed by some form of tax revenues. Given the size and complexity of the transaction, credit rating agencies often vette and analyze the issuance prior to the issuance, which determines the level of known risks reflected by its credit rating assessment for any particular debt issuance. Although municipal defaults are rare, municipal debt investments aren’t completely risk-free ventures and there is a level of risk associated; these risks are often related to natural disasters, recessions/economic downturns, and issues like pension obligations.
In this article, we will take a closer look at how bond insurance can help enhance the prospects of municipal debt for both issuers and investors.
Be sure to check our Municipal Bonds Channel to stay up to date with the latest trends in municipal financing.
When reviewing the levels of risk associated with any municipal debt, credit rating agencies often take a comprehensive look at the financial health of the municipality, type of debt, and revenue streams. In general obligation debt (GO), this includes things like:
These two components are then divided into subsections in the risk assessment:
The aforementioned risk assessments are also applicable for municipal debt backed by certain revenue streams, also known as revenue bonds. However, you’d often see the risk assessment focusing on the project being funded and how the revenue streams, pledged for this debt, can/will be impacted in an economic downturn.
Don’t forget to check our Muni Bond Screener.
Bond insurance is typically taken by the issuer of municipal debt during the debt issuance for many reasons. Some of these reasons include:
Now, let’s take a look at how bond insurance will protect investors:
Check out this article to see you can evaluate bond insurers.
For both investors and issuers, municipal debt insurance can lower the portfolio risk and help to mitigate the economic uncertainties to an extent. It’s important to note that every debt issuance is unique and can have a level of insurance through a bond insurer. Therefore, it’s important for investors to review the official statement and credit rating analysis on any debt instrument before deciding on the investments.
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