Revenue Municipal Bonds

Revenue bonds are often issued to finance a municipal project such as a Department of Water and Power that has a specific dedicated revenue stream. Some projects of revenue municipal bonds include usage charges for public utility facilities, toll concessions, and fees from the operations of turnpikes, bridges, airports and rental payments under lease-rental agreements between an issuing authority and either a state or a political subdivision. Unlike General Obligation bonds, revenue bonds are not subject to voter approval because there is no statutory limit on the debt outstanding. However, before additional bonds are issued for a particular project, additional bond’s test is performed in order to ensure timely payment of all existing and new debt outstanding. Prior to breaking ground on a new municipal facility, a feasibility survey is performed. A feasibility study estimates the economic conditions, viability, and funding of a project in order to determine the likelihood of its success. Revenue bonds, are self-supported because bondholders receive payments from a revenue-generating facility. The facility, is not backed by the full faith and credit of a municipality. Also, most revenue bonds contain a trust indenture which empowers a trustee to act on behalf of bondholders. The trustee insures an issuer is compliant with the indenture. In turn, the municipality agrees to abide by the protective covenants written in the trust indenture. Protective covenants are promises that are designed to protect bondholders by setting standards for the municipality to comply. A rate covenant, is a promise to keep rates at a sufficient level in order to meet expenses and debt service payments. A maintenance covenant requires a municipality to keep its equipment and facility in proper order. An Insurance covenant requires a facility to be insured; thereby, making sure bondholders are paid when a facility is either damaged or destroyed. Lastly, a catastrophe clause is a promise by the issuer to use insurance proceeds to call bonds and repay bondholders if a facility is no longer operational.

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