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CFA Level I Exam · Credit Analysis for Government Issuers

Credit Analysis of Non-Sovereign Government Bonds

Updated 7 October 2026 · Fact-checked

Non-sovereign (sub-sovereign) bonds are issued by states, cities, agencies and other government bodies below the national level. Analyse them by the source of repayment. General obligation bonds rely on the issuer's taxing power and overall finances. Revenue bonds rely only on the income of the financed project. Then check the debt, economy and governance.

Understand Credit Analysis of Non-Sovereign Government Issuers

A non-sovereign government bond is issued by a government body that is not the national government. Examples are US states and cities (municipal bonds), provinces, regional authorities, and agencies such as a toll road or water authority. Some are backed by the issuer's general powers. Others are backed by one project.

The key split is the source of repayment. General obligation (GO) bonds are backed by the full faith and credit of the issuer, including its power to tax. They fund general public needs. Revenue bonds are backed by the revenue of a specific project, such as a toll road, airport, hospital or utility. Lenders have no claim on general tax revenue unless the bond says so.

For GO bonds, you assess the issuer's overall ability and willingness to pay. Look at the tax base and its diversity, the local economy, income levels and employment, and the trend in population. Look at the debt burden, such as debt per capita and debt to taxable property value or to income. Look at budget health, including reserves, pension and other post-employment obligations, and legal limits on taxing or borrowing. Governance and management quality matter as well, and so do the issuer's past budget discipline.

For revenue bonds, you assess the project. Is demand for the service stable? Can the authority set rates (tolls, fees, tariffs) to cover costs? Is the project monopoly-like or does it face competition? Check the debt service coverage ratio (net revenue ÷ debt service), the rate covenant, and whether a debt service reserve fund exists. Also check the flow of funds, which sets the order in which revenue is used: operating costs first, then debt service, then reserves.

Some sub-sovereign issuers get support from higher levels of government, such as grants or implied guarantees. This can lift credit quality, but support is not always legally binding. Ratings of sub-sovereign issuers are often linked to the sovereign, which usually acts as a ceiling in practice. Always judge whether support is explicit, implicit or only assumed.

Key formulas to remember

Debt service coverage ratio (revenue bonds)
DSCR = Net revenue available for debt service ÷ Debt service
Higher is safer. A DSCR below 1.0 means revenue does not cover debt payments. Rate covenants often require a minimum above 1.0.
Debt burden measures (GO bonds)
Net debt per capita = Net debt ÷ Population; Debt ratio = Net debt ÷ Taxable property value (or income)
Used to compare issuers. Lower is generally stronger. Include pensions and other long-term obligations when told to.
GO versus revenue backing
GO = taxing power of issuer; Revenue = cash flow of the specific project
This is the core rule for classifying and ranking the risk of the bond.

How to solve Credit Analysis of Non-Sovereign Government Issuers questions

Use this order for any question on sub-sovereign credit. It works for both calculation and concept items.

  1. 1Identify the bond type from the wording: backed by taxes and general powers (GO) or by a named project's revenue (revenue bond).
  2. 2Name the source of repayment, since this decides which credit factors matter.
  3. 3For GO bonds, list the tax base, economy, debt burden, budget reserves, pensions and legal limits.
  4. 4For revenue bonds, list demand stability, pricing power, DSCR, rate covenant, reserve fund and flow of funds.
  5. 5Check for support from a higher government, and decide whether it is explicit, implicit or only assumed.
  6. 6Do any calculation (DSCR or debt ratio) and compare it with the benchmark in the question.
  7. 7Eliminate the two options that confuse the backing, ignore the stated data, or overstate certainty. Pick the remaining one.

Quickest way: Backing first, then one metric

When to use it: Use this when you have about 90 seconds and the stem describes an issuer and asks which bond is riskier or which factor matters most.

  1. Underline who pays: taxpayers (GO) or project users (revenue).
  2. Match the factor to the backing: tax base and debt burden for GO; DSCR and demand for revenue.
  3. If numbers are given, compute DSCR = net revenue ÷ debt service or the debt ratio, and compare.
  4. Reject any option that applies a GO factor to a revenue bond, or the other way round.
  5. Pick the option that follows from the data given, not outside assumptions.

Common mistakes in Credit Analysis of Non-Sovereign Government Issuers

  • Treating revenue bonds as backed by the issuer's taxing power.

    Both are issued by government bodies, so they seem to carry the same backing.

    Fix: Revenue bonds look only to the project's revenue unless the terms say otherwise. Always ask who pays.

  • Assuming GO bonds are always safer than revenue bonds.

    GO sounds stronger because of the taxing power.

    Fix: Compare the actual credit factors. A strong essential-service revenue bond can be safer than a GO bond from a heavily indebted issuer.

  • Using the wrong credit factors, such as tax base for a toll road bond.

    Students memorise one list for all sub-sovereign bonds.

    Fix: Keep two lists: GO (economy, tax base, debt, reserves, pensions) and revenue (demand, rates, DSCR, covenants, reserves).

  • Reading DSCR upside down.

    Both numbers look like cash amounts, so students divide the wrong way.

    Fix: Put net revenue on top and debt service below. Above 1.0 means revenue covers the payments.

  • Assuming a higher government will always bail out a sub-sovereign issuer.

    Students treat implied support as a legal guarantee.

    Fix: Only explicit guarantees are binding. Implicit support is a judgement and can fail.

Worked examples

Example 1

A toll road authority has net revenue of $48 million and annual debt service of $32 million. The bond has a rate covenant requiring a DSCR of at least 1.3. Which statement is correct? A) The DSCR is 0.67 and the covenant is met. B) The DSCR is 1.50 and the covenant is met. C) The DSCR is 1.50 and the covenant is breached.

Show the solution
  1. DSCR = net revenue ÷ debt service = 48 ÷ 32.
  2. 48 ÷ 32 = 1.50.
  3. Compare with the covenant minimum: 1.50 ≥ 1.3, so the covenant is met.
  4. Option A inverts the ratio (32 ÷ 48 = 0.67). Option C reaches the wrong conclusion on the covenant.

Answer: B) The DSCR is 1.50 and the covenant is met.

Example 2

An analyst compares two bonds from the same region: a general obligation bond of a city with a diverse tax base, and a revenue bond for a single stadium that depends on ticket sales. Which is the most appropriate credit conclusion? A) The stadium bond relies on the city's taxing power, so risk is the same. B) The GO bond depends on stadium ticket sales, so it is weaker. C) The stadium bond depends on one project's revenue, so it is more exposed to a single source of risk.

Show the solution
  1. Identify backing: the GO bond is backed by the city's taxing power and a diverse tax base.
  2. The stadium revenue bond is backed only by the stadium's own revenue, mainly ticket sales.
  3. Revenue depends on demand for one facility, so it is concentrated in a single risk source.
  4. Option A wrongly gives the revenue bond the taxing power. Option B wrongly links the GO bond to the stadium.

Answer: C) The stadium bond depends on one project's revenue, so it is more exposed to a single source of risk.

Exam tips

  • The first task is always to classify the bond by source of repayment. Most wrong options fail on this point.
  • Expect the DSCR to be given as a simple division. Check which number is the numerator before computing.
  • Match the factor to the bond type. Tax base and pensions point to GO; demand, tariffs and covenants point to revenue.
  • Watch for absolute words like always or guaranteed in options. Support from higher governments is often implicit, not certain.
  • With three options and no penalty, always answer. Remove the option that mixes up the backing, then choose between the other two.

Practice questions from Credit Analysis for Government Issuers

Credit Analysis of Non-Sovereign Government Issuers in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Credit Analysis of Non-Sovereign Government Issuers: frequently asked questions

What is the main difference between general obligation and revenue bonds?

A GO bond is backed by the issuer's general taxing power and overall finances. A revenue bond is paid only from the income of a specific project, such as a toll road or utility. This changes which credit factors you analyse.

How do I analyse municipal bond credit risk for CFA Level I?

First identify whether the bond is GO or revenue. For GO, review the tax base, economy, debt burden, reserves and pensions. For revenue, review demand, rate-setting ability, DSCR and covenants.

Are sub-sovereign bonds safer than the sovereign's bonds?

Usually not. Sub-sovereign issuers often depend on the national government for funding or economic conditions, so the sovereign's credit quality commonly acts as a practical ceiling. Explicit guarantees can help, but they must be stated.

What does a debt service coverage ratio below 1.0 mean?

It means net revenue is smaller than the debt service due. The project cannot fully pay its debt from its own income. That signals weak credit quality unless reserves or outside support fill the gap.