DEFINITION of Double Barreled
A double barreled bond is a municipal bond in which the interest and principal payments are pledged by two distinct entities - revenue from a defined project and the issuer and its taxing power. In the event that the project cash flows fall short, the issuer covers the payments promised to the muni bond's lenders and investors.
Double-barreled bonds are sometimes referred to as combination bonds.
BREAKING DOWN Double Barreled
Municipal bonds are bonds issued by a state, municipality, or county to raise money for capital projects, such as infrastructure development. Investors expect a timely and periodic stream of interest income on these bonds and, upon maturity, a repayment of their principal investment. Interest payments and principal repayments may be made from the issuing entity (General obligation bond) or from a single revenue source (Revenue bond).
A revenue bond is a muni bond that is backed by the revenues generated from a specific project or source. When municipalities issue debt on behalf of private or non-profit organizations through bonds such as private activity bonds (PAB) or conduit bonds, the underlying borrowers agree to repay the issuer, who pays the interest and principal on the securities solely from the revenue stream of the projects undertaken by the borrowers.
A general obligation bond has its debt obligations made from the general funds of the municipal issuer. These bonds are backed by the full faith and credit of the issuer, and may have the full authority to increase taxes in order to meet its payment obligations.
When interest and principal payments are made from a combination of revenue and general obligation, the bond is referred to as a double barreled bond. A double barreled bond, as specified in the trust indenture, is a municipal bond secured by both a defined source of revenue and the full faith and credit or taxing power of the governmental body. In effect, this type of bond carries both a revenue and general obligation pledge. If the project does not generate enough revenue to fulfill the interest payments to investors, the municipality will make the payments instead from its general funds.
For example, assume a local city issues a double-barreled muni bond to raise funds for a new toll road bypass. In the event that the cash flows from the tolls are unable to cover the interest and/or principal payments (debt service), the shortage would be covered by the issuing city from its general fund. These bonds are, thus, payable with the toll revenue stream, which is the first level of security, and guaranteed by the full faith and credit of the issuing city, which is the second level of security .
A double barreled bond reduces the default risk that bondholders may be exposed to, due to the fact that the bond payments are backed by a revenue source and guaranteed by the municipal government. By guaranteeing payment using two sources, the municipal issuer is able to reduce its cost of borrowing by offering lower interest rates on double barreled bonds. Since there is a reduced risk of holding these bonds, investors will be willing to accept a lower yield on these bonds than bonds secured by only one source.