What is the preferred Minimum Coverage Ratio for bond viability?

The preferred Minimum Coverage Ratio for bond viability is typically set at 1.25. This ratio is essential in evaluating the ability of a municipality or organization to meet its debt obligations. A coverage ratio of 1.25 means that for every dollar of debt service (interest and principal payments), there are $1.25 of available revenue. This provides a cushion that helps to ensure that the debt can be serviced even if revenue fluctuates.

A ratio of 1.25 indicates a proactive approach to risk management, as it accounts for potential variations in revenue or unexpected expenses. Credit rating agencies and investors often look favorably upon this level of coverage as it implies that the entity is taking adequate measures to maintain financial stability and mitigate the risk of default, thereby promoting bond viability.

In contrast, lower ratios could suggest a tighter financial situation, leading to increased risk for investors and potentially higher borrowing costs. A coverage ratio significantly higher than 1.25, while also indicative of strong financial health, may not be necessary or preferred, as it could imply that the entity is underutilizing its resources.