2.3.2.2 Debt Service Reserve Fund Surety Bonds

In place of a reserve account funded from bond proceeds and invested in permitted securities, an issuer may obtain a debt service reserve fund surety bond to provide additional security for one or more series of debt obligations. A debt service reserve fund surety bond, generally issued by a bond insurance company and usually available only if the bond insurance company is insuring at least a substantial portion of the related debt, provides funds to pay debt service if the bond trustee would otherwise use amounts on deposit in a reserve fund. The total amount available under the surety bond is equal to the amount that otherwise would be deposited in the reserve fund (e.g., maximum annual debt service). See Section 2.4.4, Debt Service Reserve Fund.

Any draws on a debt service reserve fund surety bond must be repaid with interest and the issuer must enter into a reimbursement agreement providing for the repayment. Reimbursements are generally required to be made from the same source of funds and with the same payment priority as an obligation to provide funds to restore a cash funded debt service reserve fund following a draw (i.e., from funds available after making ongoing debt service payments).

An issuer’s decision whether or not to use a surety bond in place of a cash funded reserve fund will depend on several factors:

The cost of incurring additional debt to fund a reserve fund and the impact of the additional debt on debt service coverage or debt capacity.
The reinvestment environment (can cash in the debt service reserve fund be invested at a yield equal to or even exceeding the interest cost of the debt?).
The surety bond premium (including the fact that surety bond premiums, like bond insurance premiums, are not refundable even if the debt is refunded).
The risk that the surety will have a reduced value or be of no value if the surety provider’s credit standing falls.