2.3.2.4 Lines of Credit and Standby Bond Purchase Agreements

For public agencies with a strong credit, an alternative is a line of credit or standby bond purchase agreement, for which a liquidity provider advances funds to purchase bonds tendered but not remarketed but does not provide funds to cover payment defaults. Lines of credit are typically provided by commercial banks, while standby bond purchase agreements are offered by other financial institutions. The circumstances under which the liquidity provider can suspend or terminate its obligation to purchase or advance funds (i.e., the provisions distinguishing liquidity support from credit support) are key provisions in liquidity agreements and are given close scrutiny by investors and rating agencies as well as by issuers. With a line of credit, the bonds are purchased or paid with proceeds loaned to the issuer. The liquidity provider is repaid in a manner similar to the reimbursement for a draw under a letter of credit. With a standby bond purchase agreement, the bonds are purchased by the liquidity provider. The liquidity provider is paid as a bondholder, but bonds held by the liquidity provider pay interest at a higher “bank” interest rate and principal may be required to be paid more quickly. Credit agreements and standby bond purchase agreements contain representations, warranties, covenants, and default provisions similar to those in reimbursement agreements.