What Is Variable Rate Debt in Airport Finance?
Variable rate debt refers to bond instruments whose interest rates reset periodically â€" daily, weekly, monthly, or at other intervals â€" rather than remaining fixed for the life of the bond. The most common form in airport finance is the Variable Rate Demand Obligation (VRDO), a long-term bond with a 20â€"30 year maturity and a short-term interest rate that resets weekly based on market conditions. The rate is set by a remarketing agent who seeks to clear the market â€" the rate at which supply of the VRDO meets investor demand.
VRDOs include a "put" or "demand" feature that allows the bondholder to tender the bond back to the issuer at par plus accrued interest on any reset date. Because the issuer cannot guarantee it will have cash on hand to purchase tendered bonds, VRDOs require a liquidity facility â€" either a Letter of Credit (LOC) or a Standby Bond Purchase Agreement (SBPA) â€" provided by a commercial bank. The bank agrees to purchase any bonds tendered and not successfully remarketed.
Other variable rate structures used by airports include:
- Commercial Paper (CP) Notes: Short-term instruments (1â€"270 days) issued on a rolling basis. Dallas Fort Worth International Airport (DFW), for example, refunded approximately $650 million of commercial paper as part of its $1.967 billion revenue bond offering in September 2025.
- Floating Rate Notes (FRNs): Longer-duration instruments with interest rates that reset periodically based on a formula (e.g., SIFMA + spread). FRNs may include "soft put" provisions where a failed remarketing triggers a rate step-up to a maximum rate (9%â€"15% per annum), rather than a mandatory bank purchase.
- Mandatory Tender (Put) Bonds: Fixed-rate bonds with a mandatory tender at a future date, creating a hybrid structure. DFW's September 2025 offering included $300 million of put bonds with mandatory tender dates in 2029 and 2032, producing an estimated $56 million of present value savings over the bond life compared to traditional fixed-rate bonds maturing in 2050.
The SIFMA Municipal Swap Index
The benchmark rate for most tax-exempt variable rate transactions is the SIFMA Municipal Swap Index (formerly the Bond Market Association or "BMA" Index). SIFMA is a 7-day high-grade market index composed of tax-exempt VRDOs meeting specific criteria. The index is calculated and published weekly by Bloomberg and overseen by SIFMA's Municipal Swap Index Committee.
SIFMA serves two functions: (1) as a benchmark against which actual VRDO reset rates are compared, and (2) as the floating-rate leg in most tax-exempt interest rate swap agreements.
Recent SIFMA rate history shows the SIFMA Index range over key periods:
| Date | SIFMA Rate | Context |
|---|---|---|
| January 1, 2022 | 0.06% | Near-zero rate environment |
| December 14, 2022 | 3.73% | Highest weekly reset of 2022; higher than 30-year AAA fixed muni rate |
| January 17, 2025 | 2.54% | Elevated amid Fed tightening cycle |
| January 7, 2026 | 1.37% | Post-rate-cut normalization |
| January 14, 2026 | 1.28% | Year-to-date low |
| January 21, 2026 | 1.31% | YTD average: 1.32% |
| February 12, 2026 | 2.52% | Up 35 bps from prior week |
Between January 1, 2022 and December 14, 2022, the SIFMA Index rose from 0.06% to 3.73% â€" a 367 basis point increase within a single calendar year. For an airport with $200 million of unhedged variable rate bonds, that move equates to approximately $7.3 million of additional annual interest cost â€" a line item that would flow directly through to airline rates and charges under a residual rate-setting methodology.
As of January 21, 2026, the SIFMA Index stood at 1.31%, with taxable SOFR at 3.64%, producing a tax-exempt-to-taxable ratio of 36% â€" compared to 59% on the same date in 2025.
Why Airports Use Variable Rate Debt
Based on FAA data, 75% of large-hub airports (23 of 31 large-hub airports as of 2025) maintain some level of variable rate debt for reasons including:
Lower short-term borrowing costs. Short-term tax-exempt rates were lower in January 2026, with daily-mode tax-exempt VRDNs averaging 0.20% compared to fixed-rate coupons of 5.00%–5.75% for bonds issued in the same period than long-term fixed rates. In January 2026, daily-mode tax-exempt VRDNs averaged 0.20%, representing a 5% ratio to SOFR. Fixed-rate airport revenue bonds issued in the same period carried coupons of 5.00%â€"5.75%.
Asset-liability matching. Airports hold cash reserves to support variable rate debt positions and investment portfolios whose returns correlate with short-term rates. Maintaining a portion of debt at variable rates can create a natural hedge where investment income rises in tandem with debt service costs during periods of rising rates.
Call flexibility. VRDOs are callable at par on any interest payment date, providing airports with the option to refinance or restructure without paying the call premium (typically 100â€"102% of par) required for fixed-rate bonds with a future optional redemption date.
Interim financing. Commercial paper programs allow airports to fund capital projects on an interim basis while awaiting favorable conditions for long-term fixed-rate bond issuance.
Bond sizing benefits. Variable rate instruments can reduce bond sizing costs when used for interim financing: commercial paper programs fund construction draws at short-term rates during the capitalized interest period, avoiding the spread between short-term and long-term fixed rates until the project is complete and permanent financing is issued.
Interest Rate Swap Mechanics
An interest rate swap is a contractual agreement between two parties â€" the airport issuer and a bank counterparty â€" to exchange periodic interest payments based on a notional principal amount. In the most common structure for airports:
- The airport pays the counterparty a fixed rate (negotiated at inception).
- The counterparty pays the airport a floating rate, indexed to SIFMA or a percentage of SOFR.
- Payments are netted: in any given period, only the difference between the two rates is paid.
The combination of variable rate bonds and a pay-fixed/receive-floating swap creates a synthetic fixed rate: the airport pays a fixed swap rate to the counterparty, receives a floating rate from the counterparty indexed to SIFMA, and the two legs offset to produce a net fixed cost.
Example:
An airport issues $100 million of weekly-mode VRDOs and simultaneously enters a SIFMA-based interest rate swap with a bank:
- Airport pays bondholders: variable rate (resets weekly, indexed to SIFMA)
- Airport pays swap counterparty: fixed 3.50%
- Airport receives from swap counterparty: SIFMA
If SIFMA resets at 1.31%, the net position is:
- Bond interest paid: 1.31%
- Swap: pays 3.50%, receives 1.31%; net swap payment = 2.19%
- All-in cost: 1.31% + 2.19% = 3.50% (the fixed swap rate)
This works as intended when the actual VRDO rate tracks SIFMA. The risk emerges when it does not â€" a condition known as basis risk.
Risks of Variable Rate Debt
Interest Rate Risk
The most direct risk is that short-term rates rise, increasing debt service costs. Between the start and end of 2022, the SIFMA Index moved from 0.06% to approximately 3.73%. For unhedged variable rate debt, this movement translates directly to higher interest expense.
For airports operating under residual airline use agreements, increased variable rate interest costs pass through to airlines via higher rates and charges. Under compensatory agreements, increased costs reduce net revenue available for debt service coverage.
Basis Risk
Basis risk arises when the floating rate on the airport's bonds does not move in lockstep with the floating rate on its swap. This is particularly relevant for airports that hedged SIFMA-based variable rate bonds with swaps indexed to a percentage of LIBOR (or now SOFR).
The historical SIFMA-to-1-month-LIBOR ratio averaged approximately 70.4% from January 2007 through early 2020. During the March 2020 market disruption, the ratio spiked 390 basis points in a single week â€" the SIFMA Index spiked 390 basis points in a single week (March 18, 2020). During such dislocations, an airport paying its bondholders at the actual VRDO rate while receiving only a percentage-of-LIBOR floating leg from its swap counterparty absorbs the gap as unhedged cost.
The transition from LIBOR to SOFR (completed July 1, 2023, per GASB Statement No. 99) introduced an additional dimension of basis risk, as the historical correlation between SIFMA and SOFR differs from the SIFMA-to-LIBOR relationship that most legacy swap structures were calibrated against.