General Analytical Framework for Assessing the Credit Worthiness of Revenue Bonds
Sylvan G. Feldstein, Ph.D. Director, Investment Department Guardian Life Insurance Company of America
Revenue bonds are issued for project or enterprise financings that are secured by the revenues generated by the completed projects themselves, or for general public purpose financings in which the issuers pledge to the bondholders tax and revenue resources that were previously part of the general fund. This latter type of revenue bond, sometimes known as a dedicated tax bond, is usually created to allow issuers to raise debt outside general obligation debt limits and without voter approvals.
The trust indenture and legal opinion for both types of revenue bonds should provide the investor with legal comfort in six bond security areas:
• The limits of the basic security
• The flow-of-funds structure
• The rate, user charge, or dedicated revenue and tax covenants
• The priority of pledged revenue claims
• The additional bonds test
• Other relevant covenants and issues
This chapter provides the general analytical framework for determining the credit worthiness of revenue bonds by looking at these six areas. The chapters to follow in this book provide the specific characteristics and features of revenue bonds secured by the different economic and dedicated funding sources such as toll road fees, tobacco taxes, airport charges, student loan repayments, mortgage repayments, and the like.