What does "covenant violation" indicate regarding bond debt?

A covenant violation refers to a failure to adhere to the specific conditions or agreements set forth in a bond indenture or contract. These covenants are typically included to protect the interests of bondholders and ensure that the issuer maintains certain financial practices. When a covenant violation occurs, it often indicates that the issuing municipality is not in compliance with key financial metrics, which may include debt service coverage ratios, unrestricted cash levels, or other financial performance standards.

Option B accurately reflects this concept, as insufficient revenues to repay bond debt directly signifies that the municipality is unable to meet its debt obligations as specified in the bond covenant. This situation can stem from various factors, such as lower-than-expected tax revenues or unexpected financial burdens. Such a violation can raise concerns regarding the municipality's financial health and could lead to downgrades in credit ratings or increased scrutiny from investors and regulatory bodies.

In contrast, other options relate to positive interpretations of financial health, such as compliance with regulations, effective fund management, and increased bond ratings, all of which would not be consistent with the implications of a covenant violation.