Use of proceeds vs general obligation bonds — how do they differ?

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AcadiFi · Accepted Answer

The distinction is about source of repayment and legal recourse:

**General obligation (GO) bonds**: Backed by the full faith and credit (and typically taxing power) of the issuer. Repayment does NOT depend on any specific project or revenue stream. For sovereigns and municipalities, this is the broadest taxing authority. For corporates, analogous concept is a senior unsecured bond backed by the company's overall cash flow and assets.

**Use-of-proceeds (UoP) bonds**: Proceeds earmarked for specific projects. In munis, these are 'revenue bonds' backed by revenues from the funded project (toll roads, utility, airport). In corporate ESG context, green/social/blue bonds are UoP structures — proceeds allocated to qualifying projects. Importantly, in corporate ESG UoP bonds, the creditor recourse is still to the full issuer balance sheet — only the use of funds is restricted, NOT repayment source.

Example (muni):
- Fernmoor County GO bond (property tax backed): AA rating, yield benchmark + 55 bps.
- Fernmoor Water Authority revenue bond (water utility revenue backed): A+ rating, yield benchmark + 95 bps. Higher yield reflects narrower revenue pledge.

Example (corporate):
- Aquafor Utilities senior unsecured (GO equivalent): BBB+, yield + 145 bps.
- Aquafor Utilities green bond (UoP for solar projects): also BBB+, yield + 142 bps. Same credit risk, proceeds restriction, slight 'greenium'.

Key takeaway: corporate ESG UoP bonds have same credit risk as plain-vanilla bonds of same rank; muni revenue vs GO bonds have DIFFERENT credit risk based on revenue stream quality.

Use of proceeds vs general obligation bonds — how do they differ?

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