Double-barreled pledges are used in revenue bonds to reduce the credit risk of the bond, thus improving its creditworthiness and lowering the expected yield on the bond by the investor. Instead of a single source of revenue to pay the principal and interest on a bond, there is a backup second source of revenue.
If one of these pledges exists, both the bond indenture and the official statement will contain descriptions of it. Additionally, the bond itself may be called a double-barreled bond.
Example:
A borrower pledges the seat ticket revenues to back the bonds used to finance a stadium. However, if and only if the seat ticket revenue does not cover the cost of repaying the bonds, a portion of the general fund of the municipality where the stadium is located can be used to pay off the bonds.
What’s important here?
Generally, issuers anticipate project revenues will be sufficient to cover a double-barreled bond’s debt service when they sell that bond. However, the investor risks that anticipated project revenues will fall short of expectations, leaving the issuer unable to make the debt service payments.
To help protect the investor, a governmental entity can also commit to back the bonds with other funds should project revenues be insufficient. This reduces the risk of default, and increases the bond’s creditworthiness. As a result, the issuer can offer a lower yield on the bond, reducing its financing costs.
