Project Completion Restriction

What Is Project Completion Restriction?

A project completion restriction is a clause frequently found in municipal bond indentures that requires the responsible party to sell extra debt securities (regularly revenue bonds) to finance the full completion of a project.

As a rule, a municipal bond issuer repays a lender by utilizing revenue that outcomes from a completed project. Should a project experience impediments that prevent it from arriving at the revenue-generating stage — for instance, due to construction costs that are higher than expected — a project completion restriction would require the issuer to assume extra debt to own the project.

Figuring out Project Completion Restriction

A project completion restriction is a clause intended to safeguard bondholder interests. If a revenue-generating project is abandoned or generally hindered before completion — for instance, due to cost overwhelms — the clause would force the issuer to secure extra debt financing. This guarantees the project is done and starts generating the revenue expected to meet its bond payment obligations.

For the motivations behind municipal bonds, an indenture guarantees the legal and binding contract determinations that detail the key highlights of the bond. This incorporates maturity date, when interest payments are due, and the real interest to be collected, alongside any terms and conditions. A project completion restriction is an illustration of a term that can be remembered for a bond indenture to safeguard bondholders and assist with guaranteeing they recuperate their investment.

Illustration of a Project Completion Restriction

Here is an illustration of how a project completion restriction could function. Envision a town that is building another toll road. To finance the project, which will cost $5 million, the town issues an equivalent amount in bonds to pay for construction.

Notwithstanding, part of the way through the project the town experiences a major snag that raises the price of construction to $10 million. Since the indenture in the original bond sale contained a project completion restriction, the town is required to think of the extra $5 million to complete the toll road project. On account of the project completion restriction, the bond holders are protected from losing their investment.

Features

• A project completion restriction is a clause that requires the responsible party to sell debt securities to finance the full completion of a project.
• The restriction safeguards bondholders, as issuers are forced to secure the financing expected to complete a project and create revenue to pay back investors.
• Project completion restrictions are many times found in municipal bond indentures.