What Is Net Revenue Pledge?

A net revenue pledge requires the issuer of a municipal bond to use generated revenues to service debt costs (interest and 澳洲幸运5官方开奖结果体彩网:principal payments) immediately after satisf🎃ying ꦛmaintenance and operational expenses.

Understanding Net Revenue Pledge

The "net" portion of a net revenue pledge refers to the amount of revenue left after all necessary expenses have been satisfied (revenues minus expenses). Once this is done, the issuer must use the remaining revenue to honor the municipal bond's periodi꧂c interest payment and principal before using it for any other purpose.

Net revenue pledges are included in the covenants of municipal bonds to make the issues less risky to potential bondholders. The intent is that the issuer must use the revenue from the financed project to pay debt services first, thereby lowering the risk of default. As a result, bonds with net revenue pledges often have higher 澳洲幸运5官方开奖结果体彩网:credit ratings than those that do not.

Special Considerations

Types of Municipal Bonds

There are two basic types of municipal bonds.

1. 澳洲幸运5官方开奖结果体彩网:General obligation bonds (GO) gain security from the credit and taxing authority of the jurisdiction. They have a basis in the belief that the issuing municipality will be able to repay its obligations solely through taxes.
2. 澳洲幸运5官方开奖结果体彩网:Revenue bonds have security in the profits derived from tolls, charges, or rents from the facility built with the bond's issue. A net revenue pledge is a way of governing the repayment priority of revenue bonds, and they have an impact on the flow of funds for the bond issuer.

The schedule of expenses and interested parties prior൩itizes the usᩚᩚᩚᩚᩚᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ⁤⁤⁤⁤ᩚ𒀱ᩚᩚᩚe of payments from the funds raised by a public-works, bond-financed project. 

Net Revenue Pledge vs. Gross Revenue Pledge

In a 澳洲幸运5官方开奖结果体彩网:gross revenue pledge, the payment of debt service is made before the payment of operating an🔴d maintenance expenses. This payment priority elevates debt service higher than that of a net revenue pledge. However, this isn't necessarily preferred by bondhold📖ers. Bondholders may want the financed facility maintained in good repair so people continue to use it (and it continues to generate revenue). In this case, a net revenue pledge may be the best system.

Pledged revenue—the money obligated for the payment of debt service and for the making of other deposits required by the bon💫d contract—and the flow of funds are both of critical importance when analyzing revenue bonds. Municipal bond analysts take these factors into account when considering the financial viability 🌊of projects.

Example of Net Revenue Pledge

Public projects financed by revenue bonds that may include🤪 net revenue pledges include airports, universities, bridges, water and sewage facilities, hospitals, and subsid🧸ized housing. 

For example, su𒁏ppose that a bond issue for the construction of a new public toll road raises $10 millio꧋n. However, the construction of the new public toll road costs just $8 million. In this example, the issuer would be required to use the remaining $2 million to pay back the debt from the bond.