Gross Revenue Pledge
What Is a Gross Revenue Pledge?
A gross revenue pledge, otherwise called "pledged revenue", is an expectation in some municipal bond indentures that urges the issuer to utilize the bond's revenue to service the debt first. A gross revenue pledge decreases the risk for bondholders, consequently allowing the bonds to be issued at a higher credit rating and lower interest rate.
Understanding Gross Revenue Pledge
At the point when a bond has a gross revenue pledge, the issuer's most memorable revenues must go towards paying down the bond's interest and principal. Operating and maintenance (O&M) costs are the subsequent priority, however this can be funded from other revenue sources also.
The presence or nonattendance of a gross revenue pledge is a factor in working out a bond's credit rating and the pricing of the issue. Like most restrictive provisions in a bond indenture, a gross revenue pledge makes the debt issue more secure for bondholders by guaranteeing that they will be repaid.
Gross Revenue Pledge versus Net Revenue Pledge
A gross revenue pledge is unique in relation to a net revenue pledge, where the issuer's revenue is utilized to pay off operating and maintenance costs before repaying bondholders. This guarantees that the bond facility has sufficient cash flow to keep operating, despite the fact that it accompanies extra risk to bondholders.
Generally, the additional safety made by the gross revenue pledge is a reason for the bond issue to be offered at a lower interest rate, which gets a good deal on interest expense for the issuer.
Illustration of Gross Revenue Pledge
In March 2018, the University of Connecticut sold $152 million of special obligation student fee revenue bonds to finance a student entertainment center at the university's principal grounds. The bond indenture contains a pledged revenue clause.
The bonds are rated Aa3 by Moody's Investors Service, one bit higher than the ratings of the state of Connecticut's general obligation bonds. Moody's stated that its rating "mirrors the scope of the university's operations as well as its strong outcomes, the strength of pledged revenues and substantial state capital funding bringing about low direct debt obligations."
Features
- A gross revenue pledge is a commitment that municipal bond issuers will utilize revenue to repay bondholders before paying different expenses.
- A gross pledge is not the same as a net pledge, where revenue is utilized to cover operating expenses before repaying bondholders.
- Credit agencies utilize a gross revenue pledge as a factor in computing the rating and pricing of an issue.
- A gross revenue pledge makes a debt issue more secure for bondholders, giving the bond issue a lower interest rate.
- Gross revenue pledges are utilized in revenue bonds, obligations that are repaid from a specific income source as opposed to the issuer's overall revenues.
FAQ
What Happens When a Revenue Bond Defaults?
A default happens when the issuer of a bond can't make repayments as per their debt obligation. Municipal bonds rarely default, and when they do, it is even rarer for the bondholders to lose their whole investment. The almost certain outcome is that the issuer could suspend coupon repayments, making the value and rating of the bonds fall.
What Is a Special Tax Revenue Bond?
A special tax revenue bond is a bond that is repaid from taxes on a specific activity or product. For instance, a few neighborhood legislatures could issue a bond to finance the construction of another school or hospital wing, servicing the bond with a special tax on tobacco or liquor sales.
What Are Revenue Backed Bonds?
Revenue-backed bonds are municipal bonds that are backed by a specific revenue source, for example, bridge tolls, transport fares, or income from public utilities. This is not the same as broad obligation bonds, which are upheld by the overall revenue of the issuer. Interest payments from these bonds are exempt from federal income taxes, going with them an appealing decision for income-chasing investors.
What Item Is Paid First in a Net Revenue Pledge?
At the point when bonds are issued with a net revenue pledge, revenues from the bond facility are spent on operations and maintenance expenses first. Solely after these expenses are met, the excess ("net") revenues can be spent on paying the bond's interest and principal.
