This is a case where “if some is good, more is better” might actually be true.

As frequently noted here, very long-term loans are a federal strength. Very long-lived infrastructure assets are often best financed with debt of a similar term, especially when cash flow for debt service is relatively certain (e.g. water rates, taxes) but not particularly abundant due to slow demographic and economic growth. Or say, when long-lasting effects of a major pandemic-related shutdown are expected. Like now.

But it’s never a good idea make the repayment of a financing too back-ended or exclude the discipline of the private-sector markets. A roughly 50/50 mix of shorter-term, faster amortizing market-sourced debt and a long-term federal loan with slower payoff combines a lot of positive elements in an optimal (or at least improved) financing of a long-lived asset.

And of course that’s how a 51%/49% muni bond/WIFIA loan combination works. Right now, an optimized muni/WIFIA financing for a highly rated public water agency could save almost 10% present value on debt service compared to bonds alone. Great — but that’s effectively limited by WIFIA’s current 35-year maximum post-construction term. For the right assets and credit quality, a federal loan could extend much longer with little increase in risk or FCRA cost. And the muni bond component could be pushed within its now-recovered market too. Extend the max WIFIA term to 55 years, and the PV benefit is almost 18%. It’s not for every asset, credit or fiscal condition, but since both lenders working together are fundamentally capable of providing this kind of financing, why not amend WIFIA’s max term and offer it?

Below is a summary of the numbers comparing the current 35-year max term with an equivalent 55-year extended case. Click on the picture to expand. For an even deeper look, the macro-less Excel models are here: 35-year and 55-year cases. A related analysis from late last year has some additional context: WIFIA Extended Term BCA.

Not surprisingly, since the extension makes intuitive sense, the idea is surfacing in the real-world, which is what prompted this post. The WIFIA Improvement Act (H.R.8217) was introduced a few days ago. The first part of this short bill proposes an extension of max term to 55 years for projects with a useful life at least that long — “as determined by the Secretary or the Administrator, as applicable”. And the usual rigorous credit review still applies. So no games. The project has to be the real deal life-wise and the borrower has to show they’re absolutely good for repaying 55-year post-construction money. As noted, it’s not for everybody. But since a lot of basic water infrastructure is extremely long-lived (that’s what needs replacing), and a lot of public water agencies are highly rated (AA- median per Fitch), there’s likely to be quite a large qualifying pool of potential borrowers. All of whom are certainly thinking about the challenges of a post-Covid-19 future. Like everyone else in the state & local public sector.

The second part of HR 8217 is a proposed modification of the FCRA treatment (or lack thereof) for projects that are nominally federally owned but otherwise demonstrably not federal in the things that really matter in FCRA — who borrows the cash and where the repayment comes from. Unlike the 55-year term part of the bill, this proposal applies to only a very small subset of water projects, mostly related to Bureau of Reclamation legacy assets.

Sounds uber-technical and uncontroversial, no? Unfortunately the modification is related to the recent unpleasantness about federal ownership criteria that got WIFIA punished in House Appropriations with a (hopefully soon-to-be-reconsidered) defunding. That’ll keep things interesting, but when the smoke clears at least there’ll be additional clarity on this issue. So notwithstanding the limited applicability to a few water projects, this proposed modification might surface some important things about WIFIA’s future direction — definitely a topic for another post or two.