DEFINITION of Gross Revenue Pledge

Gross revenue pledge is a stipulation in a bond indenture of a municipality or other public sector entity that requires the issuer to first use revenues for debt service, delegating operating and maintenance (O&M) costs as a second priority and likely funding them from other revenue sources. The 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.

Also known as "pledged revenue."

BREAKING DOWN Gross Revenue Pledge

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. In a net revenue pledge, 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.

Example of Gross Revenue Pledge

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 and AA- by Moody's Investors Service and 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."