Net Revenue Pledge

What Is Net Revenue Pledge?

A net revenue pledge requires the issuer of a municipal bond to utilize produced revenues to service debt costs (interest and principal payments) following fulfilling maintenance and operational expenses.

Understanding Net Revenue Pledge

The "net" portion of a net revenue pledge alludes to the amount of revenue left after all fundamental expenses have been fulfilled (revenues minus expenses). Whenever this is finished, the issuer must utilize the excess revenue to respect the municipal bond's periodic interest payment and principal before involving it for some other purpose.

Net revenue pledges are remembered for the agreements of municipal bonds to make the issues safer to expected bondholders. The intent is that the issuer must utilize the revenue from the financed project to pay debt services first, subsequently bringing down the risk of default. Therefore, bonds with net revenue pledges frequently have higher credit ratings than those that don't.

Special Considerations

Types of Municipal Bonds

There are two essential types of municipal bonds.

1. General obligation bonds (GO) gain security from the credit and taxing authority of the jurisdiction. They have a basis in the conviction that the responsible municipality will actually want to repay its obligations exclusively through taxes.
2. Revenue bonds have security in the profits derived from tolls, charges, or leases from the facility worked with the bond's issue. A net revenue pledge is an approach to overseeing the repayment priority of revenue bonds, and they affect the flow of funds for the bond issuer.

The schedule of expenses and interested parties focuses on the utilization of payments from the funds raised by a public-works, bond-financed project.

Net Revenue Pledge versus Gross Revenue Pledge

In a gross revenue pledge, the payment of debt service is made before the payment of operating and maintenance expenses. This payment priority raises debt service higher than that of a net revenue pledge. Be that as it may, this isn't really preferred by bondholders. Bondholders might need the financed facility kept up with in decent shape so individuals keep on utilizing it (and it keeps on generating revenue). In this case, a net revenue pledge might be the best system.

Pledged revenue — the money committed for the payment of debt service and for the creation of different deposits required by the bond contract — and the flow of funds are both of critical significance while breaking down revenue bonds. Municipal bond analysts consider these factors while thinking about the financial suitability of projects.

Illustration of Net Revenue Pledge

Public projects financed by revenue bonds that might incorporate net revenue pledges incorporate air terminals, universities, extensions, water and sewage facilities, emergency clinics, and sponsored housing.

For instance, assume that a bond issue for the construction of another public toll road raises $10 million. Nonetheless, the construction of the new public toll road costs just $8 million. In this model, the issuer would be required to utilize the excess $2 million to pay back the debt from the bond.

Features

• Net revenue pledges bring down the risk of default of a municipal bond. This outcomes in the bond having a higher credit rating.
• Net revenue pledges are much of the time found in revenue bonds for public projects like air terminals, universities, scaffolds, water and sewage facilities, medical clinics, and financed housing.
• A net revenue pledge requires the issuer of a municipal bond to utilize created revenues to service debt costs (interest and principal payments) following fulfilling maintenance and operational expenses.