What is a Double-Barreled Pledge?

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Written By SmarterrMoney.org

The latest in personal finance to help you make smarter money choices. 

A double-barreled pledge stipulates that a bond issuer can use two separate sources of funds to service debt — a project’s revenue streams, and the issuer’s taxation and borrowing power.

Double-Barreled Pledges in Municipal Bonds

Double-barrel pledges are often a part of revenue bonds, but not all revenue bonds have a double-barrel pledge. 

If one of these pledges exists, the bond indenture and the official statement will both contain descriptions of it. Additionally, the bond itself may be called a double-barreled bond.

A local city issues a double-barreled muni bond to raise funds for a new project. If cash flows from the project fail to cover the interest and principal payments, the issuer covers the shortage with its general fund. Therefore, this bond is payable from two separate sources. The first level of security is project revenue, while the second is the issuing city’s full faith and credit, meaning its ability to tax and borrow.

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 fall short of expectations, leaving the issuer unable to make the debt service payments. To help protect the investor, a municipality can also commit to back the bonds with other funds should project revenues be insufficient. 

This reduces the risk of non-payment (default), and increases the bond’s credit rating. As a result, the municipality can offer a lower rate on the bond, reducing its financing costs.