Tax-exempt muni bond yields are hitting historic lows relative to US Treasuries. In the short term, this reflects supply and demand dynamics that may reverse once state & local governments start issuing more debt. But there are longer term factors – the prospect of higher tax rates and the ‘put’ precedent set by the Fed’s MLF last year – that may cause sub-Treasury rates to be persistent.

This has implications for the WIFIA Loan Program. The Program’s borrowers are almost universally highly rated public water systems that can issue tax-exempt bonds. WIFIA offers US Treasury rates flat, which in almost all other situations is a real benefit – but not in this one. A typical 40-year (5-year construction and 35-year term) WIFIA loan to a Aa3/AA- borrower priced today will only deliver about 2%-3% PV benefit compared to just issuing bond – and all of that net benefit comes the value of the rate-lock during construction and deferral. A quick look at the yield curve shows why:

The Aa3/AA- muni curve is lower that UST until about year 35, when the extrapolated muni rates are above flat-forward UST rates. Note that an extrapolation is just that when to comes to markets – a informed guess, in effect. But it’s well known that muni liquidity drops quickly outside the 30-year quoted market (for good reasons too, given the retail nature of the investor base and the uncertainty of tax benefits) whereas UST is actually flat forward past year 30, by convention but also in the actuality of UST SLG rates.

A WIFIA loan with a 60-year (5-years construction, 55-year term) final maturity would capture a lot more of the value of a UST flat forward rate relative to escalating extrapolated muni yields. Changing the post-construction term from 35 years to 55 years (see chart at the top) increases the PV benefit of a typical WIFIA loan in current market conditions, from the 2%-3% noted above to over 9% of project cost. The FCRA numbers from WIFIA’s perspective of course also increase – but not by very much and the ‘bang for the federal buck’ (benefit per dollar of appropriation) about triples. All in the right direction too, in terms of a real-world policy outcome of encouraging long-lived infrastructure planning and construction.

A 60-year financing isn’t for every project, of course – a lot of machinery-intensive facilities will have useful lives well within that. But many water infrastructure assets have very long useful lives – stormwater canals, pipe systems, reservoir-related etc. The whole project doesn’t need to have a 60-year useful life – the financing will inevitably be amortizing. The WIFIA loan amortizes over the back end of the financing, so as long as about 50% of project capex has useful lives of between about 40 and 60 years, the maximum benefit can be utilized. And the 60-year term is just the maximum – can always be less.

It seems a straightforward case to let WIFIA loan offer as much of an intrinsic federal strength (the UST flat forward) as possible under any market conditions. In current conditions, the case looks compelling. Why not?