Definition of Conduit Debt

by Craig Berman; Updated September 26, 2017
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To fund major projects, large entities -- generally governments or government agencies -- often market bonds designed to help finance a project that's controlled by someone else and benefits the community. That’s known as conduit debt, and it’s usually found when a government wants to fund major projects without taking on excessive risk. If this debt takes the form of a municipal bond, voters generally have to approve the measure.

Mutually Attractive

Conduit debts can benefit both the issuing agency and the recipient. If a municipal agency issues the bond, it may qualify for a tax-exempt status that the outside investor ordinarily could not get on its own. This makes the issue more attractive to investors who want to minimize their tax burden, and it can be a cheaper way for the borrower to secure financing when compared to seeking private dollars. For the issuing agency, this helps bring a project to fruition without leaving it liable for repaying the funds; the recipient of the bond takes on that obligation. On the other hand, the issuer doesn't own the asset once it's built. If conduit debt is used to build a new baseball stadium and the team sells the naming rights, the government has no claim on those funds.

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