Here’s a quick picture about where all this focus on the WIFIA Loan Program is going:

Why? Because delayed investment in US basic infrastructure is actually a gigantic state & local liability, on top of all the others. It’s a type of expensive and dangerous off-balance sheet debt that needs to be refinanced on-balance sheet as quickly, cheaply and efficiently as possible. Covid-19 just makes everything worse — the kicked can is hitting the wall.

Solutions? Not P3s or private equity. Not project financing. Not magic unicorn technology. Probably not giant federal grant transfers either, but if that happens it will come with its own set of serious economic and jurisdictional problems — there’s no free lunch.

Instead, the Fed’s MLF shows a realistic path. Washington recognizes the problem and although big-scale infrastructure funding is mostly talk, they are in fact willing to deliver big-scale financing. The WIFIA program is effectively a prototype that shows how this is efficiently done for long-term infrastructure loans, basically as an extender to muni bonds. Putting parts of the two together in scale and for a broad range of municipal infrastructure is the basis of something that’s big, simple and cheap enough to actually work. That’s the point.

The WIFIA Loan Program is not like TIFIA. But could it end up like US ExIm?

Federal infrastructure loan programs are meant to improve US infrastructure.  Obvious, right?  That’s probably the outcome when the program makes project finance loans.  But the story is more complicated when a program actually makes highly rated balance sheet loans.

Does this techy financial distinction matter?  Yes – a lot.  If you want federal infrastructure loan programs to accomplish very specific goals (e.g. build more new toll roads), then subsidized and customized financing for a specific project is the way to go.  But if the goal is to more broadly improve US infrastructure in a particular sector (e.g. better water systems), and there are plenty of established and credit-worthy local public agencies in that sector already responsible for this, it’s more straightforward to make balance sheet loans to these agencies on terms that encourage (but don’t dictate) better infrastructure outcomes.

This difference is playing out now in two federal infrastructure programs that are very similar in legislative design but headed in radically different directions – TIFIA and WIFIA.

Here’s a new white paper about the WIFIA Loan Program. The first three parts are about what’s actually going in this apparently successful infrastructure loan program. The reality? It’s complicated. But despite that — or because of it — WIFIA might be well-positioned to play a role in helping local communities meet the challenges of post-Covid-19 economic recovery, as discussed in the paper’s fourth part.

Click here for the pdf — you can cut to the chase for the post-pandemic response ideas starting on page 19.

WIFIA loans to refinance existing debt would do a lot of good.

Can a WIFIA loan be used to refinance existing debt as part of a new financing for major capital expenditure on a water system?

It’s easy to see why that would make sense for borrowers, even highly rated public water agencies.  Major capital expenditure on a failing or obsolete part of an integrated system will presumably extend the system’s overall useful life.  A big capex project provides the basis – and, more pointedly, the need – to stretch out the maturity schedule and lower debt service payments not only on the new capex financing but existing system debt as well.  The long tenor features of a WIFIA loan would be especially useful for this purpose in the context of a broader recapitalization .

WIFIA loans may also lower the overall cost of capital in a broader recap.  As frequently pointed out in this blog,  WIFIA’s Treasuries-flat interest rate in itself isn’t very compelling for highly rated public water agencies who normally can issue tax-exempt revenue bonds at about the same rate or less all along the 30-year Treasury yield curve.  This looks like it’ll continue to be true in the post-Covid crisis market – highly rated water issues specifically are at the forefront of a return to normal conditions.  But for maturities longer than 30 years, WIFIA’s Treasuries flat-forward rate is distinctly attractive, and possibly more so now.  A larger system recapitalization will obviously utilize more of this benefit in absolute terms than a smaller capex financing.

The WIFIA Loan Program has had a successful start. How that happened is surprising — and raises two questions

Most public infrastructure projects in the US are undertaken by state & local authorities or agencies that have investment-grade credit ratings and efficient access to the tax-exempt municipal bond market.  Over the past few years, this market has been characterized by a growing supply of investor capital and historically low interest rates.  For the most highly rated issuers, rates on infrastructure-related financing are typically below or near those of US Treasuries all along the 30-year curve.  In particular, revenue bonds for essential ratepayer-funded water systems can be placed with a substantial investor base that forms a significant segment of this market.  Recently, sudden liquidity issues resulting from the Covid-19 crisis caused muni rates to spike far above recent trends, but the market seems to be normalizing quickly, especially for highly rated issuers.

In light of the attractive features of the muni bond market for highly rated water agencies, it may have seemed safe to predict that when the US EPA’s Water Infrastructure Finance and Innovation Act (WIFIA) Loan Program became operational in 2017, these agencies would not be among the Program’s applicants.  A WIFIA loan does offer a rate equal to Treasuries, but it also requires a customized investment-grade rating, compliance with Federal environmental and economic policies, and a multi-step application, approval, and execution process.  For highly rated public water agencies that could do an off-the-shelf tax-exempt bond issue at pretty much the same rates with far less hassle, what would be the net benefit of a WIFIA loan?  And since these agencies have plenty of access to a large, fully functioning debt capital market that is already federally subsidized by a tax-exemption, what would be the policy purpose of that anyway?