conduit financing

Conduit financing is a means for private companies, nonprofit organizations (NPO), and public entities to raise capital via tax-exempt municipal bonds to fund large-scale projects that typically benefit the general public. Such projects can include hospitals, airports, industrial and housing projects, public facilities, and schools.

In conduit financing, the bonds are limited obligations of the Issuer secured only by a loan, which the Issuer assigns to the bondholders or to a bond trustee to secure payment of the Bonds. The Issuer, therefore, takes no credit risk with respect to the project: if project revenues do not support repayment of the loan, the bondholders (or a third-party credit enhancer) will suffer the loss. Conduit financings are almost always done on a project-by-project basis, with a single bond issue funding a single loan for a particular project.Because the Issuer does not take credit risk or provide credit support in a conduit financing, the Borrower is effectively the obligor on the bond issue and takes the lead role, with assistance from bankers or other professionals in structuring the bond issue.

Sources: Investopedia, Orrick