Lesson 6 of 6 · 14 min
Regional governments: general obligation and revenue bonds
A general obligation bond is backed by a regional government's whole taxing power and is analysed somewhat like a sovereign, while a revenue bond depends on one project's cash flows and is analysed like a corporate bond, with debt service coverage at the centre.
In short
- Regional governments (states, provinces, cities) issue municipal or local authority bonds. Some countries fund them through a central institution or tax sharing; others, like the US, rate each one individually.
- Regional governments have limited jurisdiction and no control over monetary policy, so their ratings are typically at or below the sovereign's.
- General obligation (GO) bonds: unsecured, backed by the issuer's general revenues and taxing authority. Analysis: tax base, local economy and employers, budget management, implicit national support.
- Revenue bonds: finance a specific project and are repaid from its revenue. A single source of revenue makes them riskier than GO bonds.
- Key revenue-bond measure: debt service coverage ratio (DSCR) = (revenue − operating expenses) / (principal + interest). Higher is stronger; minimum DSCR covenants are common.
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