What is the gross income promise?
Gross income pledging, also known as âpledged income,â is a stipulation in some municipal bond contracts that requires the issuer to use the income from the bond to service the debt first. .
Key points to remember
- Gross income pledging, also known as âpledged income,â is a stipulation in a municipal bond contract that requires the issuer to use the income from the bond to service the debt first. .
- The pledge of gross income, or lack thereof, is a factor in the rating of a debt instrument by a credit agency and in the price of the issue.
- The pledging of gross income makes debt issuance safer for bondholders, which typically results in the issuance of bonds at a lower interest rate.
Understanding the gross revenue commitment
In other words, the first income must be used to repay the interest and principal of the bond. Operation and maintenance (O&M) costs are the second priority, although they can also be financed from other sources of revenue. The collateralization of gross income, or lack thereof, is a factor in the rating of a debt security by a credit agency and in the price of the issue.
Like most restrictive provisions of a bond contract, a gross income pledge makes issuing debt safer for bondholders. Bondholders are assured that income is first applied to principal and interest payments before operating and maintenance expenses. This contrasts with a net income promise where O&M expenses are met before debt service charges. Typically, the extra security created by pledging gross income is a cause for issuing bonds at a lower interest rate, which allows the issuer to save money on fees. ‘interest.
Example of gross income pledge
In March 2018, the University of Connecticut sold $ 152 million in student tuition special bonds to fund a student recreation center on the university’s main campus. The surety bond contains an income pledge clause. The bonds are rated Aa3 by Moody’s Investors Service, a cut above the general government bond ratings of Connecticut. Moody’s said its rating “reflects the scope of the university’s operations as well as its strong results, the strength of promised revenues and substantial state capital funding resulting in low direct debt obligations.”