3.7.3 Bond Anticipation Notes and Grant Anticipation Notes

Bond anticipation notes (BANs) are notes issued in advance, generally several years in advance, of the expected date of long term financing for a project. All principal is payable at maturity and, although the notes may be payable from the issuer’s general funds or from enterprise revenues, they are sold with the understanding that the issuer is unlikely to have funds sufficient to repay note principal on the stated maturity date; the expected source of payment is long term debt issued to refund the notes. To avoid causing concern for other debt, bond anticipation notes are generally structured as obligations subordinate to the issuer’s long term debt. Grant anticipation notes (GANs) are similar to bond anticipation notes, with the source of payment being a grant (e.g., a federal or state grant funded only upon the project’s completion) rather than the proceeds of long term debt.

BANs and GANs need not be in the form of notes. They can be bonds or installment payment obligations, although fair rental value constraints generally preclude the use of lease financing. BANs and GANs may also be longer term obligations subject to mandatory tender for purchase.

BANs and GANs are useful interim financing vehicles if investors can be given a high level of certainty that funds will be available for payment at maturity. For BANs, the key is issuer market access. The issuer must have solid credit and there can be no significant procedural obstacles, such as voter or third party approval, to the issuance of the long term debt. For GANs, the key is near certainty of the receipt of grant funding: grant amounts must have been (or are expected to be) budgeted, and funding conditions must be within the issuer’s control.