Duration: 4:48
Transcript: Understand the underlying asset and what’s being, generated payment, what payment is being generated from that underlying asset.
So we’ve been we’ve been asked a lot about the difference between revenue bonds and general obligation bonds. Experienced bond buyers might already know the difference of that but perhaps maybe it’s always good to do a refresher course on really the pros and cons about revenue versus general obligation.
Revenue obviously is exactly what it sounds like. Let’s just use a football stadium as a good example or an airport.
Bonds are used to finance those types of what’s called project financings, we’ll use an airport. And airports have revenue from gates and terminals and concessions and so on and so forth. During COVID, obviously, airports from a revenue port perspective, they traded down in value. Do, it’s pretty evident the reason why because nobody was traveling. So you have risks on revenue bonds that you were looking at to say, okay, what is the revenue source of this bond? General obligation bonds are typically ad valorem tax back bonds. You live in, say, a city, say Houston, for example, you’re paying taxes, both property and school taxes and usually county taxes and municipal utility district taxes.
So those taxes are used to pay those bonds. A good example of a general obligation bond would be a water and sewer bond. City of Houston needs to, let’s just say either build new water and sewer or improve the ones that they already have. They typically issue a bond in order to finance that transaction.
That bond is then in turn paid for by property taxes that you and I typically pay. Let’s talk about the the differences in the credit qualities between the two. You would think revenue bonds would maybe be a little bit, let’s just say more riskier than general obligation bonds.
Maybe, maybe not. Let’s look at the last California wildfires as a perspective, which we discussed on our webinar.
If the property burns down or if the let’s just say the shopping mall or parking garage or whatever the revenue source would be, then it’d be very difficult to let’s say derive revenue from that particular asset.
That’s where insurance comes in and that’s where if you own a good quality insurance company underneath, in other words, insuring that bond, you would still be paid. If the revenue was gone away because of fire in this example, then obviously you would have trouble with that revenue coming in from a muni bond perspective.
General obligation bonds on the other hand, from a tax back in Houston, let’s just use that as an example, as Houston’s gone through the oil boom and bust, there’s been a lot of general obligation bonds that have run into issues because the developer was developing the property, was banking on selling lots or selling homes and those homes that are never sold or the lots were never sold. So the developer was unable to make those tax payments. So it really is important to understand the difference between the two, which I think we’ve cleared up. And number two, understand the underlying asset and what’s being, generated payment, what payment is being generated from that underlying asset in order to get your payment to your bond, so you can enjoy, you know, obviously receiving that tax exempt income.
This is why we’re doing what we’re doing. We’re in a very approachable team. We have a multitude of different people with different talents that have been in the business for an extremely long period of time that have seen these cycles.
So if you want to talk to us about understanding and learning through these cycles, whether it was COVID or nine eleven or two thousand and eight or any of these cycles, nineteen ninety four, speaking of, large municipalities when Orange County filed bankruptcy or Detroit filed bankruptcy.
These are the things that we’ve traded through and understand which we can help you with and help you understand not only the difference between revenue and geo, maybe what’s better for you and your investment experience and perhaps what’s maybe not better for you in your investing experience. We would welcome that opportunity to discuss.
