Sunday, January 27, 2013

Disaster Bonds Question

Jan 25 2013 The Wall Street Journal ran a remarkable article about disaster bonds written by J. Neumann.

The article discusses a trend in public financing. Public entities - state agencies, county governments, and cities and towns- are issuing bonds on behalf of private companies.

The article illustrates the trend with an example from Iowa: "In December an  Iowa state agency issued $1.2 billion in municipal bonds for an Egyptian company to build a fertilizer factory. The bonds qualified for tax-exempt status under a US program to aid Midwestern states flooded in 2008." p. A1

The government agencies like the bonds because they promote investment in their areas.

Here is an example from Indiana

Here is some background on these bonds in Wisconsin

HOWEVER, what the article does not dwell on is the liability of the public for these bonds if the company is unable or unwilling to repay (e.g., closes shop and returns to Egypt).

I did find evidence that the answer is no from the Public Finance Authority:

[Excerpted] Does the local government agency incur any liability in connection with a project financed through PFA?
No. All bonds issued by PFA are considered conduit debt obligations solely of PFA. No liability for debt repayment is attributed to the local government agency.

Still, I'm not certain about that. If anyone has more information about public liability for disaster bonds issued on behalf of private entities please let me know.

1 comment:

  1. It's a very important article, but I don't have any information about public liability for disaster bonds issued on behalf of private entities.


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