Glossary of industrial revenue bonds
76 terms borrowers, issuers and advisers meet in a tax-exempt industrial financing — structure and parties, the tax rules, credit, markets, pricing and documents — defined in plain English with the governing code section where one applies.
Structure and parties
Industrial revenue bond (IRB)
A tax-exempt (or taxable) bond issued by a public authority that lends the proceeds to a private company for a qualifying project. The company’s payments repay the bonds; the issuer’s credit is not pledged.
Industrial development bond (IDB)
Another name for an industrial revenue bond, used in the tax code and by many states.
Private activity bond
A bond whose proceeds are used mainly by a private business and repaid from private payments (IRC §141). Tax-exempt only if it fits a category in §§142–145.
Conduit issuer
The public authority that issues the bonds on the borrower’s behalf — often a development authority, finance authority or industrial development board.
Borrower (obligor)
The company that receives the loan of bond proceeds and is responsible for repayment.
Bond counsel
The law firm that delivers the legal opinion that the bonds are valid and the interest tax-exempt, and drafts the core documents.
Placement agent
The firm that finds buyers for privately placed bonds, for a fee. In a public sale the equivalent is the underwriter.
Underwriter
A dealer that buys the bonds from the issuer and resells them to investors, earning the underwriting spread.
Trustee
A bank that holds bond proceeds and reserves, receives the borrower’s payments and pays bondholders under the indenture.
Municipal advisor
A registered adviser that advises an issuer or borrower on the structure and terms of a financing (MSRB Rule G-42).
Remarketing agent
For variable-rate demand bonds, the dealer that resets the interest rate and resells bonds tendered by holders.
Letter of credit bank
A bank that guarantees payment on the bonds, so buyers rely on the bank’s credit rather than the borrower’s.
Tax rules
Qualified small issue bond
A manufacturing bond of up to $1 million per issue, or $10 million when the issuer makes the capital expenditure election and capital spending at the facility over the six-year test period stays within $20 million (IRC §144(a)(1), (a)(4)).
Capital expenditure election
The issuer’s election that lets a small issue reach $10 million if capital spending at the facility and related sites over the six-year test period stays within $20 million.
Exempt facility bond
A private activity bond for a listed facility type — solid waste disposal, water, sewage, qualified residential rental, local energy, airports, docks and others (IRC §142) — without the $10 million limit.
Qualified 501(c)(3) bond
A tax-exempt bond for a nonprofit organisation’s facilities (IRC §145); not subject to volume cap.
Volume cap
The annual limit on most private activity bonds each state may issue (IRC §146), set per resident with a minimum for small states.
Carryforward
An election to keep unused volume cap for up to three years for a stated carryforward purpose — exempt facilities, housing, student loans or redevelopment (IRC §146(f)). Not available for small-issue manufacturing bonds. Filed on Form 8328 by February 15 of the following year.
TEFRA hearing
The public hearing, after at least seven days’ notice, and approval by an elected official required before private activity bonds are issued (IRC §147(f)).
Inducement resolution
The issuer’s official declaration of intent to issue bonds for a project; it allows costs paid afterwards to be reimbursed from proceeds (Treas. Reg. §1.150-2).
95% test
At least 95% of net proceeds must finance the qualifying facility; the rest may be used for other purposes within limits.
Costs of issuance limit
No more than 2% of proceeds of a private activity bond may pay costs of issuance (IRC §147(g)).
Land limit
No more than 25% of net proceeds may be used to buy land (IRC §147(c)).
Maturity limit
The average maturity of the bonds may not exceed 120% of the average economic life of the financed assets (IRC §147(b)).
$40 million beneficiary limit
A small-issue borrower may not have more than $40 million of tax-exempt bonds outstanding (IRC §144(a)(10)).
Arbitrage
Earning more on invested bond proceeds than the bond yield. Restricted and generally rebated to the Treasury (IRC §148).
Rebate
The payment to the U.S. Treasury of excess investment earnings on bond proceeds, computed at least every five years.
Spending exceptions
Safe harbours that excuse rebate if proceeds are spent on schedule — for example the six-month and 18-month exceptions.
Alternative minimum tax (AMT)
Interest on private activity bonds other than qualified 501(c)(3) and post-2008 housing bonds is an individual AMT preference item (IRC §57(a)(5)). From 2026 lower phase-out thresholds bring more high-income households into the AMT. The larger cost is the buyer base: AMT-free funds and many separately managed accounts cannot own these bonds, which narrows demand and widens the AMT spread. The corporate AMT was repealed in 2017, so banks and insurers are largely unaffected.
Change of use
A sale, lease or other change that puts the facility into a non-qualifying use; it can make interest taxable unless remedied.
Form 8038
The information return filed with the IRS for each issue of private activity bonds.
Credit and security
Debt service coverage ratio (DSCR)
Cash available for debt service divided by annual debt service. Buyers of unrated industrial bonds usually want 1.25× or more.
Debt service reserve fund
Cash set aside, typically up to one year’s debt service, to cover a missed payment.
Mortgage and security interest
Liens on the real estate and equipment financed, granted to the trustee for bondholders.
Guaranty
A promise by a parent company or owner to pay if the borrower does not.
Credit enhancement
Support that improves the bonds’ credit — a bank letter of credit, bond insurance or a guaranty.
Covenant
A promise in the loan agreement — to maintain coverage, limit additional debt, provide financial statements and keep insurance.
Additional bonds test
Conditions the borrower must meet before issuing more debt on a parity basis.
Unrated bond
A bond sold without a credit rating, usually to sophisticated buyers in large denominations.
Investment grade
A rating of BBB-/Baa3 or higher; most small industrial bonds are not rated.
Structures and markets
Private placement
A sale of bonds to a small number of sophisticated investors rather than to the public.
Limited offering
A placement in large denominations (commonly $100,000) to no more than 35 sophisticated investors, exempt from parts of SEC Rule 15c2-12.
Bank direct purchase
A financing in which one bank buys and holds the entire issue, often with a mandatory tender after 7–10 years.
Variable-rate demand bond (VRDB)
A bond whose rate resets periodically (often weekly) and which holders may tender; usually backed by a letter of credit.
Fixed-rate bond
A bond that pays the same coupon to maturity.
Mandatory tender
A date on which holders must sell the bonds back, after which the borrower remarkets or refinances them.
Optional redemption (call)
The borrower’s right to repay bonds before maturity, usually after a non-call period and sometimes at a premium.
Sinking fund
Scheduled redemptions of part of a term bond before its final maturity.
Serial bonds
Bonds maturing in successive years, each with its own coupon.
Term bond
A single maturity repaid through a sinking fund.
Denomination
The minimum unit in which bonds are sold — $5,000 for retail municipal bonds, often $100,000 for limited offerings.
High-yield municipal fund
A mutual fund or ETF that buys lower-rated and unrated municipal bonds, a core buyer of industrial bonds.
Separately managed account (SMA)
An individually owned portfolio run by a manager, often buying in-state municipal bonds.
Single-state fund
A municipal fund that buys bonds of one state, offering investors that state’s tax exemption too.
Money market fund
A fund that buys short-term tax-exempt paper, including LOC-backed variable-rate demand bonds.
Pricing and cost
Yield
The return to the buyer, given the price paid; for a bond bought at par it equals the coupon.
Coupon
The annual interest rate stated on the bond.
Tax-equivalent yield
The taxable yield that would give the same after-tax return as a tax-exempt yield: tax-exempt yield ÷ (1 − tax rate).
Spread
The difference, in basis points, between a bond’s yield and a benchmark yield of the same maturity.
Basis point
One hundredth of a percentage point (0.01%).
Underwriting spread / placement fee
The dealer’s compensation, expressed as a percentage of par or dollars per $1,000 of bonds.
Costs of issuance
The one-time costs of a financing: counsel, issuer and trustee fees, placement or underwriting fee, rating and printing.
All-in cost
The effective annual cost of borrowing including interest and all fees — the fair basis for comparing bonds with a bank loan.
Present value
The value today of future payments, discounted at a chosen rate.
Par
The face amount of the bonds.
Process and documents
Indenture (trust indenture)
The contract between the issuer and the trustee that governs the bonds.
Loan agreement
The contract under which the issuer lends the proceeds to the borrower and the borrower agrees to repay.
Bond purchase agreement
The agreement setting the price and terms on which the underwriter or buyer purchases the bonds.
Offering memorandum / official statement
The disclosure document describing the bonds, the borrower and the risks.
Tax certificate (tax regulatory agreement)
The borrower’s and issuer’s certifications about use of proceeds and compliance with the tax rules, signed at closing.
Closing
The day documents are signed, the bonds delivered and the proceeds paid to the trustee.
Requisition
The borrower’s request to the trustee to release proceeds for project costs.
Continuing disclosure
Annual financial information and notices of material events provided to bondholders after closing (SEC Rule 15c2-12).
Material event notice
A notice of events such as payment defaults, rating changes or draws on reserves, filed within ten business days.
EMMA
The MSRB’s Electronic Municipal Market Access system, where municipal disclosure documents are posted.
Post-issuance compliance
The borrower’s and issuer’s procedures for keeping the bonds tax-exempt after closing — spending, use, records and rebate.
A to Z
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9
A
Additional bonds test · All-in cost · Alternative minimum tax (AMT) · Arbitrage
B
Bank direct purchase · Basis point · Bond counsel · Bond purchase agreement · Borrower (obligor)
C
Capital expenditure election · Carryforward · Change of use · Closing · Conduit issuer · Continuing disclosure · Costs of issuance · Costs of issuance limit · Coupon · Covenant · Credit enhancement
D
Debt service coverage ratio (DSCR) · Debt service reserve fund · Denomination
E
F
G
H
I
Indenture (trust indenture) · Inducement resolution · Industrial development bond (IDB) · Industrial revenue bond (IRB) · Investment grade
L
Land limit · Letter of credit bank · Limited offering · Loan agreement
M
Mandatory tender · Material event notice · Maturity limit · Money market fund · Mortgage and security interest · Municipal advisor
O
Offering memorandum / official statement · Optional redemption (call)
P
Par · Placement agent · Post-issuance compliance · Present value · Private activity bond · Private placement
Q
Qualified 501(c)(3) bond · Qualified small issue bond
R
Rebate · Remarketing agent · Requisition
S
Separately managed account (SMA) · Serial bonds · Single-state fund · Sinking fund · Spending exceptions · Spread
T
Tax certificate (tax regulatory agreement) · Tax-equivalent yield · TEFRA hearing · Term bond · Trustee
U
Underwriter · Underwriting spread / placement fee · Unrated bond
V
Variable-rate demand bond (VRDB) · Volume cap
Y
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Important information. Definitions are simplified for general understanding and are not tax or legal advice; the governing statutes, regulations and bond documents control.