Anticipation Note

What Is an Anticipation Note?

An anticipation note is a short-term obligation issued to meet transitory financing needs with the expectation that future cash flows will repay the note.

Understanding Anticipation Notes

Ordinarily, an anticipation note is a short-term obligation that is issued for transitory financing needs by a district. The term is derived from the idea that funds to pay off the note are "expected" to be received soon. The repayment of principal might be covered by a future longer-term bond issue, taxes, government grant, or other form of revenue. These notes typically have maturities of one year or less and interest is payable at maturity instead of semiannually. The notes are rated by credit agencies (S&P and Moody's) to furnish investors with indications of repayment risk.

Anticipation notes are utilized to meet the short-term cash flow necessities of urban communities or states and give a method for dealing with the timing mismatch between their revenues and expenses. There are four unique types of anticipation notes:

1. Tax anticipation notes (TANs), utilized in anticipation of future tax assortments;
2. Revenue anticipation notes (RANs), issued with the expectation that nontax revenue, (for example, federal or state aid) will pay the obligation;
3. Tax and revenue anticipation notes (TRANs), which are paid off with a combination of taxes and revenue; and
4. Bond anticipation notes (BANs), what function as bridge loans and are issued when the district expects a future longer-term bond issuance to pay off the anticipation note at maturity.

Anticipation Note Example

Storm Sandy caused phenomenal damage in seaside towns in New Jersey and New York in 2012. One especially hard-hit town, Long Beach, New York, which endured $200 million in damage, issued a $33 million revenue anticipation note shortly after the tempest to fund restoration work to the promenade area and a $10.4 million revenue anticipation note several years after the fact to finance extra repair work around the town. The two notes were repaid with Federal Emergency Management Agency (FEMA) disaster relief funds that the town had applied for and been guaranteed.

Features

• An anticipation note is a short-term obligation for transitory financing with the expectation of repayment through future cash flows.
• The four unique types of anticipation notes are TANs, RANs, BANs, and TRANs.
• Anticipation notes typically have maturities of one year or less, are rated by credit agencies, and incorporate interest that is payable at maturity instead of semiannually.