2.4.6.3 Additional Debt Test Calculations

Additional debt tests may be based entirely on historical results but are generally expressed in terms of projected future performance (e.g., an ability to meet the issuer’s rate covenant over the following 5 fiscal years). For example, an issuer may consider an additional debt test calculation based on net revenues over a 12 consecutive month period, current enacted rates, and the new project and related costs. A key element in any forward looking test is the scope allowed to the public agency in making assumptions, as follows:

May planned but not adopted rate increases be included?
Must collection expectations with respect to highly variable revenue sources (such as revenues derived from new development) be “discounted”?
What interest costs must be assumed with respect to variable rate debt?
May bullet principal maturities be assumed to be refunded?
Must calculations reflect the terms of credit and liquidity support facilities that are not expected to, but may, be drawn upon?
Must the reasonableness of assumptions be supported by a report from an independent consultant?

As is the case with redemption provisions and covenants, the optimal approach with respect to additional debt test provisions will vary from public agency to public agency and must be carefully considered.