What is a pr bond?

A PR bond, short for Performance Revenue Bond, is a type of municipal bond issued to finance a specific project, typically a public-private partnership (P3) project. Unlike traditional municipal bonds where repayment relies solely on tax revenue, a PR bond's repayment is tied to the revenue generated by the project itself. This means the bondholders' return depends on the success of the project.

Here's a breakdown of key features:

• Revenue-backed: The principal and interest payments on the bond are paid from the revenue generated by the project. This could be tolls, user fees, lease payments, or other project-specific income streams.

• Reduced risk for municipalities: Since the municipality isn't directly responsible for repayment, it reduces their financial burden and risk. If the project fails to generate sufficient revenue, the bondholders bear the loss, not the municipality. However, the municipality may still have some indirect risk, such as reputational damage.

• Higher risk for investors: The risk for investors is higher than with traditional municipal bonds, as the repayment depends entirely on the project's financial performance. Failure of the project can lead to partial or complete loss of principal. Therefore, PR bonds typically offer higher interest rates to compensate for this increased risk.

• Public-private partnerships: PR bonds are frequently used in P3 projects where a private entity designs, builds, and operates a public infrastructure project (e.g., a toll road, stadium, or airport). The private entity often issues the bonds to finance its portion of the project.

• Creditworthiness assessment: While the municipality's creditworthiness is less directly involved in repayment, investors still carefully assess the creditworthiness of the project and its projected revenue stream. Feasibility studies and detailed financial projections are crucial for attracting investors.

• Complexity: PR bonds are generally more complex than traditional municipal bonds, requiring a deeper understanding of the project's financials and potential risks.

In summary, PR bonds offer a financing mechanism that shifts some of the financial risk from the municipality to private investors, making it an attractive option for certain public projects. However, the increased risk requires careful evaluation by investors.