What Is Project Completion Restriction?
A project completion restriction is a clause often found in municipal bond indentures that requires the issuing party to sell additional debt securities (typically revenue bonds) to finance the full completion of a project.
In general, a municipal bond issuer repays a lender by using revenue that results from a completed project. Should a project encounter obstacles that prevent it from reaching the revenue-generating phase—for example, due to construction costs that are higher than anticipated—a project completion restriction would require the issuer to take on additional debt to see the project through.
- A project completion restriction is a clause that requires the issuing party to sell debt securities to finance the full completion of a project.
- Project completion restrictions are often found in municipal bond indentures.
- The restriction protects bondholders, as issuers are forced to secure the financing needed to complete a project and generate revenue to pay back investors.
Understanding Project Completion Restriction
A project completion restriction is a clause designed to protect bondholder interests. In the event that a revenue-generating project is abandoned or otherwise interrupted before completion—for example, due to cost overruns—the clause would force the issuer to secure additional debt financing. This ensures the project is finished and begins generating the revenue needed to meet its bond payment obligations.
For the purposes of municipal bonds, an indenture ensures the legal and binding contract specifications that detail the key features of the bond. This includes maturity date, when interest payments are due, and the actual interest to be collected, along with any terms and conditions. A project completion restriction is an example of a term that can be included in a bond indenture in order to protect bondholders and help ensure they recover their investment.
Example of a Project Completion Restriction
Here is an example of how a project completion restriction might work. Imagine a town that is building a new toll road. In order to finance the project, which will cost $5 million, the town issues an equivalent amount in bonds to pay for construction.
However, halfway through the project the town encounters a major obstacle that raises the price of construction to $10 million. Because the indenture in the original bond sale contained a project completion restriction, the town is required to come up with the additional $5 million to complete the toll road project. Thanks to the project completion restriction, the bond holders are protected from losing their investment.