What is Utility Revenue Bond?

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A utility revenue bond, also known as an essential service bond, is a type of municipal bond issued to finance a public utility that repays bondholders directly from project revenues rather than a general tax fund.

Definition

Utility Revenue Bonds, also known as essential service bonds, are bonds issued by municipal governments to finance utility projects. Bondholders are repaid directly from the revenue generated by the project, rather than from general tax funds. These bonds are typically used to fund infrastructure projects such as water, electricity, and natural gas.

Origin

The concept of utility revenue bonds originated in the early 20th century when municipal governments began seeking alternative financing methods to support large infrastructure projects. As urbanization accelerated, municipalities needed substantial funds to build and maintain utility facilities, leading to the popularity of this bond form.

Categories and Features

Utility revenue bonds can be categorized based on the type of project they fund, such as water bonds, electric bonds, and gas bonds. Their features include: 1. Repayment relies on project revenue, reducing dependence on taxes; 2. They usually have long maturities to match the lifecycle of infrastructure projects; 3. The risk to investors is directly related to the project's revenue-generating capacity.

Case Studies

A typical case is the City of Los Angeles issuing water revenue bonds to fund upgrades to its water treatment facilities. Through these bonds, Los Angeles was able to raise necessary funds without increasing taxes, repaying bondholders through water fee revenues. Another example is New York City's subway system expansion project, which raised funds by issuing transportation revenue bonds, with bondholders repaid through subway fare revenues.

Common Issues

Common issues for investors considering utility revenue bonds include the stability of project revenues and the credit risk of the bonds. Since repayment depends on project revenue, investors need to assess the project's profitability and market demand. Additionally, utility revenue bonds typically do not enjoy full government credit support, so their credit risk may be higher than general obligation bonds.

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