How Should Conduit Issuers Invest Their Bond Proceeds?

A conduit issuer invests bond proceeds through the same fund, product and arbitrage decisions a direct issuer makes, with the conduit borrower's project and payment obligation standing in for the issuer's own.

In a conduit financing, the MSRB's glossary describes a governmental issuer that issues bonds to finance a project used mainly by a third party, the conduit borrower, and the conduit borrower is liable for making the debt service payments on the bonds.

This page is mGIC's sector guide for conduit issuers; the sector hub covers the other issuer types, one page each.

What financing structures do conduit issuers use?

The MSRB's glossary lists industrial development bonds, multifamily housing revenue bonds and qualified 501(c)(3) bonds among the common conduit financing types.

Each is a conduit financing as the glossary describes it: a governmental issuer issues the bonds, the financed project is used mainly by the borrower, and the borrower carries the debt service obligation.

The definitions the federal rules use reach both parties, and which definition applies decides how a rule treats a given participant.

For the SLGS program, issuer refers to the government body or other entity that issues tax-advantaged bonds, or to a conduit borrower, so the borrower is inside the program's definition on its own terms (31 CFR 344.1).

Tax-advantaged bond takes its meaning from Treasury Regulation §1.150-1(b), which includes tax-exempt bonds and certain tax-credit and direct-pay bonds, with qualified tax credit bonds and Build America Bonds given as examples.

The municipal advisor definitions split the parties differently: a municipal entity includes any state, political subdivision or municipal corporate instrumentality, its agencies, authorities, plans, programs or pools, and any other issuer of municipal securities (17 CFR 240.15Ba1-1(g)).

An obligated person is a person committed by contract to support payment on the securities (17 CFR 240.15Ba1-1(k)), and the definition excludes bond insurers and letter-of-credit or liquidity providers, persons whose financial information is not material, and the federal government.

Which label attaches to the borrower decides what an advisor owes it, which the compliance section below takes up.

Which funds hold conduit proceeds, and what are their draw profiles?

Conduit issues use the same fund types the guide covers, and the draw profile of each follows the borrower's project schedule rather than the issuer's own calendar.

GFOA's guidance on investing bond proceeds lists typical investment horizons by fund.

GFOA presents these as typical ranges rather than rules and points issuers to their advisory team and investment policy.

What translates them into a conduit financing is a spending curve the issuer does not set directly, because the financed project sits on the borrower's side of the structure.

The arbitrage rules measure that spending against gross proceeds, which Treasury Regulation §1.148-1(b) defines as any proceeds and replacement proceeds of an issue.

Sale proceeds are amounts actually or constructively received from selling the issue, including amounts used to pay underwriters' discount and accrued interest other than pre-issuance accrued interest (§1.148-1(b)).

Investment proceeds are amounts received from investing proceeds, net sale proceeds subtract amounts invested in a reasonably required reserve or replacement fund and the minor portion, and transferred proceeds are proceeds of a refunded issue that become proceeds of the refunding issue under §1.148-9.

Each spending exception uses a special modified definition of gross proceeds, not the general one.

On the debt service side, the conduit borrower is liable for making the debt service payments on the bonds, and the arbitrage regulations define which debt service funds count as bona fide.

A bona fide debt service fund under Treasury Regulation §1.148-1(b) is used mainly to match revenues with principal and interest within each bond year, and is depleted at least once each bond year except for a reasonable carryover amount not to exceed the greater of the prior year's earnings on the fund or one-twelfth of the prior year's principal and interest payments.

Which reinvestment products fit conduit proceeds?

The candidates are guaranteed investment contracts, full-flex repurchase agreements and structured Treasury portfolios, the three structures mGIC evaluates and competitively bids while selling none of them; the reinvestment products guide maps the wider field, from SLGS to pools.

What changes for a conduit issuer is not the list but who feeds the schedule: the draws that drive withdrawal terms and maturities come from the borrower's project, which puts the draw schedule in the borrower's hands.

SLGS carry an eligibility gate of their own, because 31 CFR 344.1 allows their purchase only with an eligible source of funds.

That term is defined in five categories.

• gross proceeds of tax-advantaged bonds, or amounts reasonably expected to become gross proceeds;
• amounts released from gross-proceeds status by the universal cap in Treasury Regulation §1.148-6(b)(2);
• amounts held with gross proceeds in a refunding escrow, defeasance escrow, parity debt service reserve fund or commingled fund;
• proceeds of a non-tax-advantaged issue that refunds, or is refunded by, a tax-advantaged issue;
• other amounts subject to yield limits.

The sector hook is the program's definition of issuer, which includes a conduit borrower alongside the government body issuing tax-advantaged bonds; the eligible source of funds list still controls, and whether a particular fund qualifies is a question for bond counsel.

Availability is a planning risk of its own: the regulation reserves Treasury's right to change or suspend the offering during a debt limit contingency, when unredeemed Demand Deposits may be moved into special 90-day certificates of indebtedness (31 CFR 344.2(l), 344.7(b)), a mechanism the SLGS guide covers in full.

mGIC's stated order of priorities runs safety first, then liquidity, then yield, and the choice among structures belongs to the issuer and its financing team.

What compliance issues are specific to conduit financings?

The sector's compliance questions start with private use, because the financed project is used mainly by a third party, and run through the loan's yield, the spending records and the duties owed to each party.

The private activity bond tests that can follow from private use are covered in the private activity bonds guide and applied sector by sector in the P3 and private activity bond guide, and which tests apply to a given issue is a determination for bond counsel.

On the loan itself, IRS Publication 5005 notes that conduit issuer fees can raise the effective yield on the conduit loan, which is a purpose investment, and section 148 generally limits purpose-investment yield to the bond yield plus a permitted spread.

Who the client is decides what an advisor owes: the Exchange Act deems a municipal advisor and its associated persons to have a fiduciary duty to any municipal entity they advise (15 U.S.C. 78o-4(c)(1)), while an obligated person client is owed a duty of care under the MSRB's standards of conduct rule for advisors, which the guide to that rule details.

On the spending side, GFOA recommends making certain that the drawdown of proceeds is planned and recorded and that the investment duration is no longer than the expected drawdown schedule, and in a conduit financing the draws come from the borrower's project.

Final determinations about an issue's tax status, its spending exceptions and its filings belong to bond counsel and tax counsel.

What are mGIC's representative transactions?

mGIC is an independent, SEC-registered municipal advisor that sells no proprietary investment product and acts as no principal in the investments it evaluates, and its record spans more than $60 billion in bond proceeds invested and swap notional executed across more than 1,000 transactions for issuers in more than 40 states.

Its representative transactions span transportation, public power, aviation, higher education and water, and the list is not sorted by financing structure; it includes Pocahontas Parkway in Virginia, the Grand River Dam Authority in Oklahoma, Prairie State Energy Campus, Cardinal Stadium in Louisville, the DHL air cargo hub at CVG, Miami Air Cargo at MIA, the JFK International Air Cargo Center, Delta Cargo at JFK, aircraft FBOs at Westchester County Airport and Hobby Airport, Birmingham Water Works and OSU Village F student housing.

The case studies carry each engagement's description.

When mGIC serves as reinvestment Bidding Agent, the work runs from bid specifications through soliciting qualified investment providers, managing questions and comparing bids on rate and non-rate terms, and the documentation service delivers Bidding Agent and provider certifications to bond counsel.

The fee for that work is paid by the winning provider rather than the issuer, at or below the safe-harbor maximum in the Treasury arbitrage regulations, and it is disclosed.

If you are weighing the reinvestment for a conduit issue, you can talk to mGIC about a free, no-obligation reinvestment review.

Last updated 2026-10-06.

This page is general educational information about municipal finance and federal and state rules as of the date shown. It is not legal, tax or investment advice, and it is not a recommendation about any particular investment. Product availability, legality and suitability depend on the issuer, jurisdiction, governing documents and transaction-specific facts. Final legal and tax determinations remain with the issuer's bond counsel, tax counsel and other advisors.