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?
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