SIE: Analyzing Revenue Bonds

Analyzing Revenue Bonds

The overall health of the municipality is less critical, though still important, to revenue bond investors. Because the bonds are not backed by taxes, their credit rating depends more on the financial viability of the projects being funded and the projects’ ability to generate sufficient revenue to pay off the bonds. Three important sources of information can help determine the strength of a revenue bond.

1. 1. Feasibility studies determine whether or not there is sufficient demand for the project that the issuer has proposed. These studies also help to determine if expected revenue can actually sustain and repay the debt that the municipal entity is issuing.
2. 2. Protective covenants are limitations agreed to by the issuer of revenue bonds to provide protection for the bondholder from a deterioration of value and default. They are included as part of the official statement. Stronger protective covenants reduce the risks of revenue bonds.
3. 3. Debt service coverage ratio is one important measure of the success of a revenue bond. This is the ratio of a project’s net operating income to its annual principal and interest payments. It tells the investor whether the project’s operating income is able to