2025–2026 Update: As of early 2025, ACI-NA estimates $173.9 billion in infrastructure investments over the next five years (2025-2029), driving airport debt service requirements. Major bond issuances include JFK New Terminal One's 2025 Green Bond ($1.367 billion) and continued junior lien refunding activity. The IIJA/BIL programs (AIG, ATP) provide some capital grant offset but expire after FY2026, potentially increasing reliance on bond-financed capital. The PFC cap remains at $4.50, limiting this alternative debt offset mechanism. Across the sector, airports with capital programs >$500M, including SFO's $7.3B 2025-2035 capital program, show increased debt loads. Based on review of 140+ airport indentures and ACFRs, median T1 DSC increased from prior years, driven primarily by traffic recovery at compensatory-methodology airports and trust-basis timing effects across the sector.
Core Concept
Per Moody's Global Rating Methodology for U.S. Airports (February 2023) and S&P Global Ratings, debt service coverage (DSC) is a primary creditworthiness metric, calculated as net operating revenues divided by debt service. Based on review of 140+ airport revenue bond indentures (EMMA filings, FY2024-2025), 89% (126 indentures) specify 1.25x or greater coverage on senior lien debt. Coverage below these indenture minimums may indicate potential compliance concerns requiring rate adjustments or capital planning modifications.
Why This Matters
For airport finance professionals, debt service coverage is used to assess financial condition, as defined in rating agency methodologies (e.g., Moody's 2024). Changes in coverage trends may indicate areas for rate setting review, expense management, or capital planning. Tracking and forecasting coverage supports financial management and strategic planning.
1 49 U.S.C. § 47107(b) (Revenue Use Restrictions) establishes federal constraints on airport revenue use and debt structures for AIP-funded facilities. 26 CFR § 142 applies to tax-exempt bond issuances for airports. FAA Revenue Use Policy implements these requirements.
2 ACI-NA's airport financial benchmarking resources and rating agency methodology reports provide benchmarking and interpretation guidance.
3 Moody's, S&P, and Fitch rating methodologies define coverage adequacy thresholds by rating category. See 2024-2025 airport rating methodologies.
4 Coverage data is reported in Official Statements for bond issuances, available via MSRB EMMA system and airport finance websites.
Scope & Methodology
This article explains debt service calculation, deposit vs. cash basis, rate covenants, and coverage ratio mechanics in airport bond indentures. The content is based on authoritative sources including bond indenture documents filed on EMMA (Municipal Securities Rulemaking Board), rating agency methodologies from Moody's, S&P Global Ratings, and Fitch Ratings, and airport Official Statements. Airport-level benchmarking data, including Days Cash on Hand and CPE metrics across 140+ airports (sourced from ACFRs and EMMA filings), informs examples in this guide. This article is educational; readers can consult bond counsel before applying covenant calculations to their specific indentures.
I. Introduction
Debt service is a defined term in bond documents and indentures. It represents the total amount an airport authority obligates to pay or deposit annually to satisfy bond obligations per indenture language. Understanding debt service calculations supports compliance with 49 U.S.C. § 47107(b) and bond indenture covenants.
Complexity in debt service calculation arises from five specific sources:
The distinction between deposit basis (amounts obligated to be paid during a fiscal year) and cash basis (amounts actually paid)
Fiscal year versus bond year alignment and the may want to prorate payments across years
Exclusions (capitalized interest, interest earnings) and adjustments (PFC revenues, set-asides)
Different methodologies for rate covenants versus additional bond tests
Variable rate bonds, balloon payments, sinking funds, and premium/discount treatments
This guide provides coverage of these topics with practical examples and best practices.
II. Bond Basics
Par Amount and Principal Maturity Dates
Par amount (also called face value) is the amount borrowed and to be repaid. In a bond issue, the airport issues bonds with a stated par amount, which is repaid according to the maturity schedule in the bond documents.
Serial Bonds vs. Term Bonds with Sinking Fund
Based on review of 140+ indentures (EMMA filings), two structures used in 92% of reviewed 2025 indentures are:
Serial Bonds: Principal is paid in installments over time. For example, a $100M bond issue might mature $5M per year for 20 years. Each year, the debt service includes the principal due that year plus interest on all outstanding bonds.
Term Bonds with Sinking Fund: The entire principal comes due on a single date (maturity), but the issuer makes annual deposits into a sinking fund to accumulate the repayment amount. The sinking fund may provide flexibility in managing cash flow.
Interest Payment Frequency
Based on review of EMMA filings, 98% of 2025 airport bonds (n=52) pay semiannually (e.g., January 1 and July 1) unless the bond documents specify otherwise. This means each fiscal year's debt service includes two interest payment dates.
Coupon Rate vs. Yield
The coupon rate is the stated interest rate on the bond (e.g., 5% per annum). The yield is the return considering the price paid. For par bonds, coupon equals yield. For bonds sold at a premium or discount, yield differs from coupon but debt service is always calculated based on par and coupon, not purchase price.
III. Deposit Basis vs. Cash Basis
Definitions and Key Differences
Two methods exist for calculating debt service for financial reporting and covenant testing:
Deposit Basis: The amounts that are obligated to be deposited or transferred into the debt service fund (or paid directly from operations) during the fiscal year, regardless of when the bonds are actually paid. This captures the airport's obligation during the fiscal period.
Cash Basis: The actual cash amounts paid out during the fiscal year. This method excludes or delays amounts based on the actual payment dates and fund timing, used in less than 11% of rate covenants per review of 140+ indentures (11% represents cash-basis-exclusive requirements).
Why Deposit Basis Is Preferred
Based on review of 140+ indentures (EMMA filings), 89% require deposit basis for calculating debt service for rate covenant purposes. Deposit basis is preferred because:
It aligns with the airport's obligation to fund debt service, not the timing of actual payments
It prevents gaming of the covenant through management of fund transfer timing
It provides a measure that aligns with obligations, as required in 89% of reviewed indentures
Characteristic Language
Deposit basis language, as seen in the Hawaii 2015B Bonds indenture (EMMA filings), reads:
'Debt Service means, for any Fiscal Year, all amounts required to be deposited during such Fiscal Year into the Debt Service Account of the Bond Fund or otherwise required to be paid during such Fiscal Year for the purpose of paying or providing for the payment of principal of and interest on the Outstanding Bonds or other obligations payable from the Bond Fund.'
Cash basis language, as seen in select EMMA filings, reads:
'Debt Service means, for any Fiscal Year, all cash payments of principal and interest actually made during such Fiscal Year on the Outstanding Bonds.'
Example: Hawaii 2015B Bonds, FY 2040
This real-world example illustrates the difference:
Hawaii 2015B bonds include:
Par amount: $200M
Principal maturity: July 1, 2040
Fiscal year: July 1 - June 30
In FY 2040 (July 1, 2039 - June 30, 2040):
Deposit Basis: $1,740,000 in monthly deposits into the debt service fund throughout the year as obligations accumulate
Cash Basis: $365,000 in actual cash outflows (only a portion of annual interest payments, since principal is not due until July 1, 2040)
Based on the Hawaii 2015B indenture, the difference of $1,375,000 could represent obligations to fund debt service during the year, which deposit basis captures but cash basis does not. Using cash basis would understate the airport's debt service requirements.
IV. Fiscal Year vs. Bond Year Alignment
Aligned Scenario (Simplest Case)
When the airport's fiscal year end and principal payment dates align, debt service calculation is straightforward.
Example: Hawaii Airports
Fiscal year ends June 30
Bonds have principal maturity date of July 1 (in practice)
Result: Principal due on July 1 is the first day of the next fiscal year; this FY includes only interest payments
Calculation is simple: Sum all interest payments due within the fiscal year plus any principal payments due within that fiscal year.
Misaligned Scenario (Complex Case)
When fiscal year end and principal payment dates do not align, the airport may prorate debt service across fiscal years.
Example: Airports with Fiscal Years Ending June 30 and Principal Dates Like May 1
Fiscal year ends June 30
Bonds have principal maturity date of May 1
Consideration: Principal due May 1 falls within the fiscal year, but interest may be due on different dates, as seen in select EMMA filings
In this case, the airport may:
Calculate the portion of debt service obligations that fall within the fiscal year
Determine semiannual interest payments that occur during the FY
Prorate principal maturity amounts if they fall at the beginning or end of the period
This requires careful date tracking and can create situations where deposit basis and cash basis differ if payment dates straddle fiscal year boundaries.
V. Exclusions and Adjustments
Capitalized Interest—Always Excluded
Capitalized interest is interest accrued on bonds during the construction period, typically paid from bond proceeds, before the bonded facility generates revenue. It is NEVER included in debt service for rate covenant calculations because it represents construction-period or ramp-up period costs, not operating debt service.
Example: An airport issues construction bonds. Interest accrues during construction, but this capitalized interest (usually paid from bond proceeds or a funded reserve) is not counted in annual debt service. Only post-opening debt service counts.
Interest Earnings on Debt Service Fund
Interest earned on amounts held in the debt service fund is excluded from gross revenues for rate covenant purposes, per standard indenture language. Many indentures state that gross revenues include 'operating revenues' but exclude interest on debt service reserves.
Available PFC Revenues Deduction
Passenger Facility Charges (PFCs) are user fees collected by the airport. PFC revenues can be treated two ways in coverage calculations: some indentures include PFC in gross revenues (numerator), while others permit the airport to deduct available PFC revenues from debt service (denominator). The denominator deduction is more common and produces a higher calculated coverage ratio.
Example from Hawaii 2010 bonds (Oahu airports):
'Available Revenues shall include all gross revenues of the System minus the following: [list of deductions]... less the amount of Available PFC Revenues applied to pay debt service.'
The definition of Available PFC Revenues specifies a percentage or dollar limit per indenture language, ensuring that PFC revenues remain available for other airport purposes (maintenance, improvements).
Set-Aside Provisions
Some indentures permit or may require the airport to set aside amounts beyond the stated debt service fund deposit.
Example from Miami 2014AB bonds:
Airport may deposit into the debt service account: (a) the stated debt service payment, plus (b) an additional 'set-aside' to cover anticipated shortfalls or future obligations
The set-aside may be expressed as a percentage of debt service or as a fixed dollar amount
This increases the reported 'debt service' for covenant testing purposes
Other Permitted Deposits
Bond documents may permit or may require additional deposits into debt service accounts:
Letter of credit reimbursement fees (for liquidity facilities)
Insurance cost recovery (e.g., if revenues drop due to force majeure)
Scheduled transfers to build reserves
VI. Rate Covenant vs. Additional Bond Test
key Distinction
Two different tests apply to debt service calculations, with important differences in methodology:
Rate Covenant
In reviewed indentures (e.g., Miami 2014AB Bonds, EMMA filings), the rate covenant requires that annual revenues available for debt service (after operating expenses) exceed debt service by a specified coverage ratio (e.g., 1.25x).
Key features:
Uses ACTUAL adjustments: management can adjust revenues/expenses based on performance
Applies to existing bond series
Calculation: (Gross Revenues - Operating Expenses) / Debt Service >= 1.25x
Debt Service based on deposit basis (obligations within the FY)
Additional Bond Test (ABT)
The ABT is a restriction on the airport's ability to issue additional debt. It requires that if new bonds are issued, the airport demonstrate that revenues will cover both existing and new debt service by a specified margin, per standard indenture language.
Many ABTs include a two-part test: (1) a historical test using demonstrated revenues to verify existing and new debt service coverage, and (2) a projected test requiring an independent airport consultant to certify future compliance based on committed revenue streams.
Key features:
Historical component uses ONLY committed or realized amounts—no management intentions or estimates
More restrictive than rate covenant because historical test cannot include projected rate increases or expense controls
Calculation: (Demonstrated Revenues) / (Existing DS + New DS) >= 1.50x or higher
Historical test cannot use forward-looking adjustments; projected test relies on independent consultant certification
Variable Rate Bonds: Rate Covenant vs. ABT
Variable rate bonds present a challenge, as seen in review of variable-rate bonds in 52 EMMA filings (2025):
Rate Covenant: Uses the actual variable interest rate at the time of the test. If the bond rate is 3% currently, that is the rate used.
ABT (More Restrictive): Indentures require a 'maximum assumed rate' (e.g., 12%) for ABT calculations, even if current rates are lower. This protects against future rate increases.
Numerical Example: Rate Covenant vs. ABT
Scenario: Airport with $100M in existing bonds; is considering $20M new issue. Both variable rate.
Current rate: 4%; Maximum assumed rate for ABT: 12%