Public Borrowing for Private Organizations: Costs and Structure of Tax‐Exempt Debt Through Conduit Issuers

Abstract

Conduits are public organizations that issue debt on behalf of third‐party borrowers, both government and private. Additional transaction costs from using conduits offset lower interest costs. We find debt issuance costs 25 percent higher for private organizations than the broader municipal debt market, primarily from fees charged by conduits. Further, existing issuance cost reporting focuses on upfront costs, which fail to capture the significance of annual conduit fees. Also, private borrowers have debt structures that keep more principal outstanding over longer periods of time. Despite additional costs, conduits still provide these private borrowers with substantial interest cost savings.