What is Gross Revenue Pledge?
- Gross revenue pledge, also known as "pledged revenue", is a stipulation in a municipal bond indenture that compels the issuer to use the bond's revenue to service the debt first.
- Gross revenue pledge, or lack thereof, is a factor in the rating of a debt obligation by a credit agency and in the pricing of the issue.
- Gross revenue pledge makes the debt issue safer for bondholders which, usually, results in the bond issue being offered at a lower interest rate.
Understanding Gross Revenue Pledge
In other words, the first revenues must go towards paying down the bond's interest and principal. Operating and maintenance (O&M) costs are the second priority, though this can be funded from other revenue sources as well. The gross revenue pledge, or lack thereof, is a factor in the rating of a debt obligation by a credit agency and in the pricing of the issue.
Like most restrictive provisions in a bond indenture, a gross revenue pledge makes the debt issue safer for bondholders. The bondholders receive assurance that revenues are first applied to principal and interest payments before O&M expenses. This is in contrast to a net revenue pledge where the O&M expenses are taken care of before debt servicing costs. Generally, the added safety created by the gross revenue pledge is a cause for the bond issue to be offered at a lower interest rate, which saves money on interest expense for the issuer.
Gross Revenue Pledge Example
In March 2018, the University of Connecticut sold $152 million of special obligation student fee revenue bonds to finance a student recreation center at the university's main campus. The bonds are structured to provide level debt service over the next 29 years with semiannual interest. The bond indenture contains a pledged revenue clause. The bonds are rated Aa3 by Moody's Investors Service and AA- by S&P Global Ratings, respectively, one notch higher than the ratings of the state of Connecticut's general obligation bonds. Moody's stated that its rating "reflects the scope of the university's operations as well as its solid results, the strength of pledged revenues and substantial state capital funding resulting in low direct debt obligations."