What is a Project Completion Restriction
A project completion restriction is a type of clause, seen most often in municipal bond indentures, which requires the issuing party to sell debt securities, often in the form of revenue bonds, to finance the full completion of a particular project. In general, the issuer of a bond repays a lender by using revenue that results from the completed project, but a project completion restriction requires that the issuer take on extraneous debt to see the project through to completion.
BREAKING DOWN Project Completion Restriction
A project completion restriction protects the interests of bondholders, as it forces the issuer to secure the debt financing needed to complete the project, which should produce the revenues needed to meet bond payment obligations in the event that the revenue-generating project is abandoned or otherwise interrupted before it is completed. Project cash flow projections are rarely certain, and if construction costs exceed estimates or the project encounters a significant financial obstacle, the debt issuer may reconsider the completion or the final structure of the project.
For the purpose of municipal bonds, an indenture ensures the legal and binding contract specifications that detail all of the key features of the bond, including maturity date, when the interest payments should be collected, the actual interest collection and any additional features of the bond, such as term and conditions to its issue. A project completion restriction is an example of one such detail that could be included in the indenture in order to protect the bondholders and remove the risk of debt financing from their responsibility.
Example of a Project Completion Restriction
As an example of how a project completion restriction might work, consider a town that is building a new toll road that will pass through the main part of the town. In order to finance the project of actually constructing the toll roads, which will cost $5 million, the town sells bonds, generating a total of $5 million to be used for construction costs. Halfway through the project, however, the town encounters a major obstacle that raises the price of the project to 10 million dollars. Because the bonds contained a project completion restriction, the issuers of the bonds are required to come up with the additional $5 million in order to complete the project. Thanks to the project completion restriction, the bond holders are protected from losing their investment.