An additional bonds test is the provision in a bond ordinance that says when the utility may issue more bonds secured by the same net revenues. It protects existing holders from having their security diluted.
How it differs from the rate covenant
They are frequently confused and they test different things.
The rate covenant is a continuing annual obligation, measured against the debt service actually falling due in that year. The additional bonds test is a one-time gate at issuance, and it is usually measured against maximum annual debt service on the existing and proposed debt combined, sometimes with a historical test, a projected test, or both.
A utility can therefore be comfortably inside its rate covenant every year and still be unable to issue the next series, because the test looks at the peak year of the combined schedule rather than at the current one.
What varies between documents
The required multiple, whether the test is historical or projected, whether an independent consultant’s certificate can substitute for a historical test, and which revenues count. Each of these is set in the ordinance, and none of them can be assumed from what is common. Reading the actual document is the work.
Sources
Municipal Securities Rulemaking Board glossary of municipal securities terms, entry for additional bonds test. California Debt and Investment Advisory Commission, Glossary of Municipal Debt Financing Terms. The governing text for any single issuer is its own bond ordinance or trust indenture.