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Definition: Airport Revenue Bond
A revenue bond is a type of municipal bond issued by local Governments or agencies. It is a special case of Municipal bond where the repayment is guaranteed by the revenues of the issuing agency. In the case of an Airport Revenue Bond (ABR), the revenues of the airports are used to back the bond.
Airports are said to be major users of municipal bonds to finance their capital projects. The different types are:
a. General bonds with obligation of tax to the issuing authority
b. General ABRs which are secured by airport revenues and any other as mentioned in the bonds
c. Bonds backed by Private First Class (PFC) or by PFC and airport revenues
d. Facility bonds which are secured by the revenues of the airport for which the bonds are issued
Based on the type of project the bonds are issued for, ARBs are called Private Activity Bonds (PABs). Usually, the PABs have Alternative Minimum Tax associated with them.The amount of tax is dependent on the airport’s use of capital for public and private purposes. The more the airport uses it for private purposes, the lesser the tax exemption. The rating of ABR depends on traffic at the airport, its financial performance and the future usage of the airport facility.
Airports usually use capital markets to raise capital for their long- term projects. The reasons of an ABR are as follows:
1. To expand or construct an airport
2. Pay for any up gradation of the airport’s resources
3. Tax is exempted for an ABR
Example of an ABR issued by the State of Hawaii
Advantages of Airport Revenue Bonds:
• Lower costs: Airports usually take care of their operating and financing expenses in order to have good credit rating. Hence, this reduces their borrowing costs
• Better services
• Airport facilities usually monitor the financial markets and respond to changes in market conditions
ABRs pose greater risk to the investors because if a company defaults, then there is no way to recover their investments. Also, airports have no authority to tax and hence, a fall in revenue might also result in the default of company.