The Corps’ section of the WIFIA loan program, CWIFP, has just published its first Notice of Funding Availability. It’s always great to see progress at federal infrastructure loan programs, for this one in particular.
As discussed in a prior post about CWIFP’s potential borrowers, large non-federal dams will likely be the majority of initial applicants, which is a good way to start things off because successful WIFIA precedents will smooth the way:
Direct loans to large dam projects should obviously be an important part of CWIFP’s development and policy outcomes, especially in the Program’s early phases. A lot of WIFIA experience will neatly translate to large dam loan origination and execution at CWIFP, jump-starting operations and the first closings.
But if you’re benefitting from WIFIA precedents, you’ll also get WIFIA’s challenges, including competition. Like large water agency projects, large non-federal dam projects are likely to be undertaken by substantial and highly creditworthy public-sector utilities that have plenty of cost-effective financing alternatives, especially in the tax-exempt bond market. Rates there are currently significantly below the UST curve that CWIFP lends at. Worse, the UST curve stubbornly remains very inverted, which means the usual primary benefit of a WIFIA-type loan, the avoidance of negative arbitrage during the construction phase, is pretty much negligible [1].
These conditions are reflected in the NPV of the difference between a CWIFP loan with a 35-year post-completion tenor relative to a 30-year high-grade muni bond. I’d estimate about a 1% benefit. That’s not as bad as a negative result, but you have to deduct the extra transaction costs and federal crosscutters, plus the possible execution friction with any new program, as compared to just doing another off-the-shelf muni issue with your friendly local bond underwriter.
Back in 2017, when WIFIA was getting started, things were very different, with a loan NPV benefit under the same methodology of about 9%, which is the level it more-or-less remained at until recently. Timing is everything, eh?
Things change, of course. The inverted UST yield curve should (must?) go back to normal sometime relatively soon, which will reestablish the negative arbitrage benefit. High long-term rates are likely to persist for a while, and they do improve the benefit of tax-exemption relative to low rates [2], which leads to sub-UST yields, other things being equal. But in this economic and geopolitical environment, who knows? Uncertainty is more likely to increase than not, and that increases the value of unique non-rate CWIFP loan features like flexibility and optionality. Most of all, the need for US essential infrastructure renewal and financing for it will certainly go only in one direction — up.
Even if CWIFP might have a harder row to hoe at the start than WIFIA did, the program’s longer-term prospects are of course good. Still, a successful launch is important. Given the likelihood of an initial large-dam project applicant base with serious market competition for the same deals, it makes sense to consider how CWIFP’s competitive position might be improved in the near-term.
Where that involves amending the statutes that CWIFP shares with WIFIA, I’d suggest prioritizing two that might have a chance to be included in this fall’s legislation. Both have been frequently discussed on this site:
A 55-year term — As you can see from the first column in the above chart, the NPV benefit of an extended loan term is around 6% even in the current adverse rate environment. That’s getting closer to levels that prevailed during WIFIA’s successful start. There’s no rational reason that legislators should object to something they gave to the TIFIA program in 2021, or for CBO to punitively score the change. OMB objects behind the scenes? Who knows, but maybe they can be kept busy enough with their FCRA issue.
But there’s still the competition, aka the tax-exempt bond lobby. It never surfaces publicly, but I cannot believe that they would be indifferent to the change if it applied to all WIFIA deals. Perhaps many municipal water projects have a useful life within 30 years, but not all of them. And for those projects with a long useful life, a 55-year post-completion term is a slam dunk relative to a 30-year maximum term bond. You think they’ll just watch as a 49% slice is taken away from a big part of their pie? I don’t think so — their response will be a very quiet but very firm veto expressed to the decision makers that matter most.
However, it is just possible that the lobby will be calmer about dam projects than they are about a mainstay source of water revenue bonds. Maybe they’ll listen long enough to see that a 55-year CWIFP loan in some cases will be the enabling component of a dam project’s capitalization, and they’ll get a shot at a 51% slice that wouldn’t have been there otherwise. So perhaps the near-term objective of an extended term amendment should be limited. Maybe propose that the amendment apply only those dam safety projects for which credit subsidy funding is already in place from the IIJA and last year’s appropriation bill? That’s limited enough, in size and time, but could serve the primary purpose of jumpstarting CWIFP’s applications.
Something like this, which slightly modifies amendment language that’s already been proposed:
‘‘(B) DAM SAFETY PROJECTS WITH A USEFUL LIFE OF MORE THAN 35 YEARS.
“Notwithstanding subparagraph (A), for a dam safety project with a useful life of more than 35 years (as determined by the Secretary or the Administrator, as applicable), and which is eligible for the financial assistance provided by the Consolidated Appropriations Act of 2021 and the Consolidated Appropriations Act of 2022, the final maturity date of a secured loan under this section shall be not later than the earlier of….”
The Limited Buydown — Despite its sure-fire appeal to applicants in these uncertain times and being an established precedent in other infrastructure loan programs, this one is a long shot as it hasn’t yet been included in any WIFIA amendment bill I’m aware of. But it’s worth a try, perhaps with the same limited scope described above for the 55-year amendment. Cost is a potential issue for this loan feature but actualizing it in a loan execution rate is always completely subject to program’s discretion (i.e., only if the money is available at the time). And cost doesn’t arise or is even measurable until loan executions start to happen, which is likely a year or so away in any case. The important point is that it shouldn’t cost anything in this Congress. In the meantime, applicants will see that locking in a contingent interest-rate benefit of this kind is better than not having it all, which may help build traffic.
Two potential amendments I haven’t mentioned here — a fix for the FCRA Criteria issue and a clarification and expansion of the rules for bundled projects — are of course also important for CWIFP, arguably even more than the other two for long-term growth prospects. Work on these will continue, but the priority should be on CWIFP’s near-term potential applicants. A successful launch will immensely improve the prospects for everything else.
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Notes
[1] I’m not familiar enough with tax arbitrage rules to be certain that the negative arbitrage cost actually amounts to zero, despite the numbers based on current rates. There are tricky things about the limit like ‘lower of YTM and yield-to-first-call’. But I’m pretty sure it’s negligible, given how high UST rates within five years are.
[2] As noted in a recent post, higher absolute levels of interest rates also erode a WIFIA loan’s value relative to a tax-exempt bond with a comparable term because the tax exemption is applied to a larger amount of income. An older post describes the numbers: Subsidized Debt and Term, Interest Rates. Beyond the 30-year term in the muni market, however, uncertainty about the tax code and income will likely outweigh this advantage — hence another reason for a 55-year WIFIA term.