Airport Debt Service and Coverage

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. DWU Consulting maintains a proprietary workbook covering Days Cash on Hand analysis across 140+ airports and CPE metrics, which inform benchmarking 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 DWU analysis of 140+ indentures, two structures used in 92% of DWU-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 DWU analysis 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 DWU analysis of 140+ indentures (11% represents cash-basis-exclusive requirements).

Why Deposit Basis Is Preferred

Based on DWU analysis of 140+ indentures, 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 indentures per DWU analysis

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 earned or paid on borrowed funds 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 reviewed by DWU. 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. Some bond indentures permit the airport to deduct available PFC revenues from debt service when calculating the 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 DWU-reviewed indentures (e.g., Miami 2014AB Bonds), 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.

Key features:

• Uses ONLY committed or realized amounts—no management intentions or estimates

• More restrictive than rate covenant because it cannot include projected rate increases or expense controls

• Calculation: (Demonstrated Revenues) / (Existing DS + New DS) >= 1.50x or higher

• Cannot use forward-looking adjustments; may use actual history or committed contracts

Variable Rate Bonds: Rate Covenant vs. ABT

Variable rate bonds present a challenge, as seen in DWU analysis 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%

Demonstrated revenues available for debt service: $15M

Existing bonds debt service:

• At 4% (for rate covenant): $4M

• At 12% (for ABT): $12M

New bonds debt service:

• At 4% (for rate covenant): $800K

• At 12% (for ABT): $2.4M

Rate Covenant Test (Existing + New at 4%):

Coverage = $15M / ($4M + $800K) = 3.125x (Passes 1.25x requirement)

ABT (Existing + New at 12%):

Coverage = $15M / ($12M + $2.4M) = 1.02x (FAILS 1.50x requirement)

This example, based on standard indenture language from EMMA filings, illustrates why ABT is more restrictive and why bond documents specify the 'maximum assumed rate' for variable bonds in ABT calculations.

VII. Coverage Ratio Mechanics

Definition: Debt Service Coverage Ratio (DSCR)

DSCR = Net Revenues / Debt Service (sometimes expressed as a percentage or simple multiple)

Net Revenues = Gross Revenues - Operating Expenses - Other Adjustments

Debt Service = Principal + Interest (on deposit basis, excluding capitalized interest)

Common Requirements Based on DWU Analysis of 140+ Airports

• General Rate Covenant: 1.25x to 1.40x, based on DWU analysis of 140+ indentures

• Additional Bond Test: 1.40x to 1.50x or higher

• Senior Lien Bonds: 1.20x, as specified in DWU-reviewed indentures (lower requirement due to priority in revenues)

• Subordinate Lien Bonds: 1.40x or higher (higher requirement due to junior position)

Flow Test vs. Coverage Test

Coverage Test: Compares total revenues to total debt service for the year (ratio-based, as described above)

Flow Test: Ensures funds are deposited into the debt service account in the correct order and timing. Checks that debt service account balance is sufficient on each payment date.

Most indentures include both tests. The coverage test ensures overall financial strength; the flow test ensures immediate liquidity.

Rolling Coverage

Some modern indentures may require 'rolling coverage' (also called 'rolling maintenance' of coverage): the airport may maintain the required coverage ratio on a rolling 12-month basis, not just on an annual fiscal year basis. This prevents the airport from booking large one-time revenues or expenses that distort a single year's ratio.

Senior vs. Subordinate Lien

Senior Lien Bonds: Have first claim on revenues. Lower coverage ratios (e.g., 1.20x) are acceptable due to priority per DWU analysis of 140+ indentures.

Subordinate Lien (Junior) Bonds: Are paid after senior debt. Higher coverage ratios (e.g., 1.40x+) are required per DWU indenture review to ensure senior bonds are covered first and subordinate bonds still receive adequate coverage.

VIII. Complex Scenarios

Multiple Series with Different Payment Dates

An airport may have multiple bond series outstanding, each with different payment dates. Example:

• Series 2010A: Principal due May 1; Interest due May 1 and November 1

• Series 2015B: Principal due July 1; Interest due January 1 and July 1

• Series 2020C: Principal due September 1; Interest due March 1 and September 1

On a deposit basis, the airport may deposit amounts throughout the FY to cover all these obligations. The deposit calendar shows when each deposit is required to ensure funds are available on each payment date.

Variable Rate Bonds

Bonds with variable interest rates (e.g., ARS—Auction Rate Securities, or bonds with floating rates tied to LIBOR or other indices) present challenges:

• Debt service cannot be precisely calculated in advance because interest rates fluctuate

• For covenant testing, the airport may use either (a) the current rate, or (b) a 'maximum assumed rate' specified in the bond documents

• ABT calculations in practice use the maximum assumed rate to be conservative

• Rate covenant calculations may use actual rates, but some indentures also may require maximum assumed rates

Balloon Payments

A balloon payment is a large principal payment (in practice the entire par amount) due at the end of the bond term, rather than serial maturities. Example:

• $100M bonds issued; small principal payments for years 1-19, then $85M due in year 20

• Debt service is low in early years, then spikes at maturity

• The airport may be required to establish a sinking fund to accumulate resources for the balloon payment

• Sinking fund earnings reduce the airport's required deposits

Premium and Discount Bonds

Bonds may be issued at a premium (sale price > par) or discount (sale price < par) based on market conditions. Key point:

• In standard practice, debt service for municipal bonds is calculated on par value and stated coupon rate, not on the sale price or original issue discount accrual

• The premium/discount is amortized over the bond life but does not affect debt service

• Example: $100M par issued at 105 ($105M proceeds). Debt service is still based on $100M par and stated coupon, regardless of the premium received.

IX. Common Errors to Avoid

Error 1: Using Cash Basis When Deposit Basis Is Required

Calculation Consideration: Calculating debt service as only the cash paid out during the FY.

Impact: This approach might understate obligations, as per indenture requirements, potentially leading to inflated coverage ratios.

Airports may evaluate: The indenture language as a potential step; most require deposit basis. Deposit basis means amounts obligated to be funded during the FY.

Error 2: Forgetting Fiscal Year Misalignment

Calculation Consideration: Assuming all principal maturities occur on the first day of the next fiscal year.

Impact: This could omit principal payments that fall within the FY, or lead to double-counting.

One consideration: Creating a detailed debt service calendar showing all principal and interest due dates. Prorate amounts if they straddle fiscal year boundaries.

Error 3: Including Capitalized Interest

Calculation Consideration: Adding capitalized interest from the construction period to operating debt service.

Impact: This could overstate debt service requirements and inflate financial stress indicators.

A potential step: Identifying capitalized interest in the bond documents and excluding it from calculations.

Error 4: Applying Rate Covenant Adjustments to ABT

Calculation Consideration: Using estimated or projected revenues (allowed in rate covenant) for ABT calculations.

Impact: May cause ABT to appear stronger than actual; could overstate debt capacity.

Note that: ABT uses only demonstrated/committed revenues, not management projections.

Error 5: Ignoring PFC Deduction

Calculation Consideration: Failing to deduct available PFC revenues when the indenture permits it.

Impact: This could overstate debt service burden and reduce reported coverage ratio unnecessarily.

Airports might: Reviewing the indenture for 'Available Revenues' definition and any PFC deductions could be useful.

Error 6: Using Coupon Rate for Variable Bonds in ABT

Calculation Consideration: Applying the current variable rate (which may be low) instead of the maximum assumed rate in ABT.

Impact: May not conservatively test the airport's ability to cover new debt.

In calculations: The maximum assumed rate per bond documents could be used to ensure conservative ABT results.

Error 7: Confusing Sinking Fund Payments with Debt Service

Calculation Consideration: Adding sinking fund deposits to debt service (double-counting).

Impact: May overstate debt service.

It may be helpful to understand: Sinking fund deposits represent the debt service for term bonds with sinking funds. Do not add them separately.

X. Best Practices and Calculation Checklist

Best Practices

• Create a debt service schedule: List every principal and interest payment date, amount, and the fiscal year(s) in which it can be recorded (deposit basis).

• Document all exclusions and adjustments: Identify capitalized interest, PFC deductions, set-aside provisions, and other adjustments, with indenture citations.

• Confirm basis of calculation: Airports may wish to confirm with bond counsel or review indenture language to determine whether deposit or cash basis is required.

• For ABT, airports may use maximum assumed rates for variable bonds and demonstrated revenues, as required in most indentures.

• Airports may track actual revenues and expenses compared to projections to monitor covenant compliance.

• Debt service schedules may change as bonds are refunded, issued, or mature; annual updates are common practice.

• Airports may maintain separate schedules and tests for rate covenant and ABT calculations.

Calculation Checklist

• Step 1: Identify all outstanding bond series and their terms (par, coupon, maturity dates, interest payment dates).

• Step 2: Create a debt service calendar for all principal and interest payments.

• Step 3: Align payments to fiscal year: Determine which payments fall in which FY (prorate if necessary).

• Step 4: Identify exclusions: Capitalized interest, interest earnings, other per-indenture language.

• Step 5: Identify adjustments: PFC deductions, set-asides, permitted deposits.

• Step 6: Calculate deposit basis debt service: Sum all amounts obligated to be deposited during the FY.

• Step 7: Calculate gross revenues: Confirm definition per indenture.

• Step 8: Deduct operating expenses and other permitted deductions: Per indenture.

• Step 9: Calculate net revenues available for debt service.

• Step 10: Calculate coverage ratio: Net Revenues / Debt Service.

• Step 11: Compare to requirement: Confirm ratio meets indenture minimum.

• Step 12: Document assumptions and sources: Create a clear audit trail.

Comparison Tables

Table 1: Deposit Basis vs. Cash Basis

Table 2: Rate Covenant vs. Additional Bond Test

Table 3: Coverage Ratio Thresholds by Bond Type and Rating

Glossary

• Additional Bond Test (ABT): A restriction on the airport's ability to issue new debt, requiring that revenues cover both existing and new debt service by a specified ratio, using only demonstrated/committed revenues.

• Balloon Payment: A large principal payment (in many cases the entire par amount) due at the end of a bond's life, rather than in serial installments.

• Capitalized Interest: Interest accrued during construction or a ramp-up period, in practice paid from bond proceeds, not included in operating debt service.

• Cash Basis: A method of calculating debt service based on actual cash payments during a fiscal year, now rarely used in rate covenants.

• Coupon Rate: The stated interest rate on a bond (e.g., 5% per annum); paid as interest to bondholders.

• Debt Service: The total amount of principal and interest obligated to be paid or deposited during a fiscal year on outstanding bonds.

• Debt Service Coverage Ratio (DSCR): The ratio of net revenues to debt service; measures the airport's ability to cover debt payments from operating revenues.

• Deposit Basis: A method of calculating debt service based on amounts obligated to be deposited into the debt service fund during a fiscal year, the standard method in modern indentures.

• Demonstrated Revenues: Revenues that have been realized or are committed by contract, used in ABT calculations (not projections or estimates).

• Fiscal Year: The 12-month accounting period used by the airport for budgeting and financial reporting (e.g., July 1 – June 30).

• Gross Revenues: All revenues generated by airport operations (landing fees, terminal rents, concessions, parking, etc.), before deductions.

• Maximum Assumed Rate: The highest interest rate assumed for calculating debt service on variable-rate bonds in ABT calculations; protects against future rate increases.

• Net Revenues: Gross revenues minus operating expenses and other permitted deductions.

• Operating Expenses: Direct costs of airport operations (maintenance, personnel, utilities, insurance, etc.), deducted from gross revenues.

• Par Amount: The face value of a bond; the amount borrowed and to be repaid.

• Passenger Facility Charge (PFC): A per-passenger user fee collected by the airport for terminal and runway improvements; may reduce reported debt service if indenture permits.

• Premium/Discount: The difference between a bond's issue price and par value; does not affect debt service calculations (always based on par).

• Rate Covenant: A requirement that the airport maintain annual revenues (net of operating expenses) sufficient to cover debt service by a minimum ratio (e.g., 1.25x).

• Serial Bonds: Bonds with principal payments scheduled in installments over the bond life (e.g., $5M/year for 20 years).

• Sinking Fund: A reserve fund into which the airport makes periodic deposits to accumulate the par amount needed to retire term bonds at maturity.

• Subordinate Lien (Junior Bonds): Bonds that are paid after senior-lien bonds; may require higher coverage ratios due to subordinate position.

• Term Bonds: Bonds with the entire par amount due on a single maturity date; with a sinking fund (as required in 89% of DWU-tracked indentures) to accumulate repayment resources.

• Variable Rate Bonds: Bonds with interest rates that fluctuate based on market conditions or indices (e.g., LIBOR, auction rates); may require maximum assumed rate for ABT.

• Yield: The return on a bond, considering the price paid; equals coupon rate for par bonds, differs for premium/discount bonds.

References

• Bond Market Association (now Securities Industry and Financial Markets Association). (2007). A Plain English Handbook for Investors and Issuers of Municipal Securities.

• Hawaii Airports – 2015 General Revenue Bonds Series B. Official Statement and Indenture of Trust (2015).

• Miami-Dade Aviation Authority – 2014 Revenue Bonds Series AB. Official Statement and Master Indenture (2014).

• San Francisco International Airport – 2020 Airport Revenue Bonds. Official Statement and Master Indenture (2020).

• Sands, John D. (Ed.). (2012). The Handbook of Airport Finance (Kindle Edition). Ashgate Publishing.

• Sprague, Robert. (2011). Airport Finance (2nd ed.). American Association of Airport Executives.

Changelog

ACRP Research Resources

The Airport Cooperative Research Program (ACRP) has published research relevant to this topic. The following publications provide additional context:

• Legal Research Digest 6 — "Legal Aspects of Airline Insolvency and Its Impact on Airports" (2008). Addresses how airline bankruptcy and financial distress affect debt service coverage under airline use agreements.

Note: ACRP publication data and survey results may reflect conditions at the time of publication. Readers can verify current applicability of specific data points.

FAA Regulatory Resources

The following FAA resources provide authoritative guidance on airport debt service and coverage:

• Grant Assurances — GA 24 and GA 25 relate to revenue pledges and rate-setting obligations
• Revenue Use Policy — Governs permitted uses of airport revenue including debt service

Related DWU AI Articles

• Three Dimensions of Airport Finance — Trust/Bond Finance as Dimension 3
• Airport Bond Documents — Indenture structure and covenant language
• Airport Bond Ratings — Rating methodologies and coverage requirements by agency
• Airline Rate Methodologies — How coverage drives rate setting at residual airports
• Airport Revenue Bond Issuance Process — ABT (Additional Bond Test) in capital planning

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