What Is an Anticipation Note?
- An anticipation note is a short-term obligation for temporary financing with the expectation of repayment via future cash flows.
- Anticipation notes normally have maturities of one year or less, are rated by credit agencies, and include interest that is payable at maturity rather than semiannually.
- The four different types of anticipation notes are TANs, RANs, BANs, and TRANs.
Understanding Anticipation Notes
Typically, an anticipation note is a short-term obligation that is issued for temporary financing needs by a municipality. The term is derived from the notion that funds to pay off the note are "anticipated" to be received in the near future. The repayment of principal may be covered by a future longer-term bond issue, taxes, government grant, or other form of revenue. These notes normally have maturities of one year or less and interest is payable at maturity rather than semiannually. The notes are rated by credit agencies (S&P and Moody's) to provide investors with indications of repayment risk.
Anticipation notes are used to meet the short-term cash flow needs of cities or states and provide a way to manage the timing mismatch between their revenues and expenses. There are four different types of anticipation notes:
- Tax anticipation notes (TANs), used in anticipation of future tax collections;
- Revenue anticipation notes (RANs), issued with the expectation that nontax revenue (such as federal or state aid) will pay the debt;
- Tax and revenue anticipation notes (TRANs), which are paid off with a combination of taxes and revenue; and
- Bond anticipation notes (BANs), which function as bridge loans and are issued when the municipality expects a future longer-term bond issuance to pay off the anticipation note at maturity.
Anticipation Note Example
Hurricane Sandy caused unprecedented damage in coastal towns in New Jersey and New York in 2012. One particularly hard-hit town, Long Beach, New York, which suffered $200 million in damage, issued a $33 million revenue anticipation note shortly after the storm to fund restoration work to the boardwalk area and a $10.4 million revenue anticipation note a couple of years later to finance additional repair work around the town. Both notes were repaid with Federal Emergency Management Agency (FEMA) disaster relief funds that the town had applied for and been promised.