3.2.1 Direct Debt Obligation
In a direct debt obligation the issuer is both the recipient of the proceeds and the source of repayment. Direct debt obligations (Figures 3-1 and 3-2) encompass most forms of bonds and notes as well as the more traditional, privately offered and held, direct loan. The bondholder may be an investor in municipal securities, it may be leasing agent, or it may be a bank or non-bank financial institution. The proceeds are transferred to the public agency (debt issuer), who is obligated by a note or loan agreement to repay the debt. In the case of a municipal bond or note, the public agency issuing the debt or taking on the loan makes a debt service payment to a trustee, paying agent, or other independent administrator. The trustee, paying agent or administrator makes principal and interest payments (P&I) to the bondholders, investors, or lenders. The trustee function may be performed by the treasury services of the public agency. With a direct bank loan (Figure 3-2) the debt service payment is made directly to the lender or financing institution holding the debt. There is no third-party trustee involved in direct bank loans.
Figure 3-1
