4.4 Municipal Bond Analysis
Credit evaluation of municipal debt differs fundamentally between GO bonds (demographic and tax analysis) and Revenue bonds (cash flow coverage ratios).
Key FINRA Exam Takeaways
- Analyzing GO Bonds: Tax base diversity, population growth, debt per capita, collection ratios, and overlapping/coterminous debt.
- Overlapping Debt: Debt shared by multiple jurisdictions overlapping the same geographic tax base (e.g., school districts, park districts, county). State debt NEVER overlaps with city debt.
- Analyzing Revenue Bonds: Debt Service Coverage Ratio (DSCR) = Net Revenues ÷ Annual Debt Service.
- A higher DSCR indicates a safer bond and stronger credit rating.
Debt Service Coverage Ratio (DSCR)
DSCR is the primary health metric for revenue bonds. DSCR = Net Revenue ÷ Debt Service Requirement. If a toll bridge generates $30M gross revenue and incurs $10M operating costs, Net Revenue is $20M. With annual debt service of $10M, DSCR is 2.0x.
Coterminous (Overlapping) Debt
Overlapping debt occurs when two municipal entities share geographical boundaries and tax the same property owners. Examples: a city and a consolidated school district. Note: State debt NEVER overlaps with local municipalities.
A municipal toll bridge authority generates $45 million in gross revenues and incurs $15 million in operating expenses. Annual debt service on its outstanding revenue bonds is $15 million. What is the Debt Service Coverage Ratio (DSCR)?