What happens if a conduit borrower fails to make a payment on bonds?

When dealing with conduit bonds, the structure is such that the issuer acts primarily as an intermediary. Conduit borrowers are typically special purpose entities that borrow money through the issuance of bonds to fund specific projects. The responsibility for payments on the bonds predominantly lies with the conduit borrower itself.

If a conduit borrower fails to make a payment on the bonds, it is the borrower who is generally held accountable for that payment, not the issuer. The issuer’s role does not typically extend to covering the payment obligations of the conduit borrower. This means that the risk associated with default on the bonds lies mainly with the conduit borrower and, consequently, the bondholders could face the possibility of losing their investment if the borrower remains unable to fulfill payment obligations.

Understanding this structure is crucial for investors. It emphasizes the importance of evaluating the creditworthiness of the conduit borrower rather than solely relying on the issuer’s standing. The bonds’ security is tied to the underlying project and the ability of the conduit borrower to generate sufficient revenue or cash flow to make interest and principal payments.