Municipal Bond Forum
Revenue stream usually covers enterprise bonds
Q
In your article, “Most Stockton Bondholders Unaffected by Bankruptcy”, you referred to “enterprise bonds.” If there’s a shortfall in the dedicated revenue stream of these bonds, who covers it?
A
James A. Klotz responds:
Enterprise fund securities, which are popularly referred to as “revenue bonds,” are expected to be self supporting from the stream of income generated by the use or sale of the “product” of the enterprise. In the case of Stockton, enterprise bonds were issued by the water and wastewater systems, so revenues from either water sales or wastewater treatment are used to pay the bonds. Typically, there is ample coverage of debt service by the revenue stream in this sector to meet debt service without the need for a backup security pledge, so these bonds are not expected to need further support.
Stockton’s enterprise bonds were, for the most part, sold with bond insurance (or a bank Letter of Credit), which provided an extra degree of comfort for bondholders. In the event of a shortfall, the bond insurer would cover it. For uninsured bonds, there is no further recourse.
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