What are "revenue bond covenants" designed to ensure?

Revenue bond covenants are designed to ensure conditions that require specific financial guarantees for the bonds they govern. These covenants are critical for maintaining the financial integrity and security of the bond issue, as they often outline the issuer's obligations regarding the revenue generated by the projects funded by the bonds.

For example, these covenants might stipulate how the revenue generated from a particular project, such as a toll road or utility service, must be allocated. They can require that a certain percentage of revenue be set aside for debt service, operational maintenance, and reserve funds, which in turn provides assurance to bondholders that there will be sufficient funds available to meet the required debt payments.

By enforcing these financial guarantees, revenue bond covenants create a structured framework that helps instill confidence in investors, ensuring that the projects will remain fiscally viable and capable of fulfilling their financial commitments. This makes the bonds a lower-risk investment, as the covenants mitigate potential financial mismanagement or revenue shortfalls.