The current focus here is of course on federal infrastructure loan programs, not tax-oriented investments. But I do see an important and innovative role for specialized capital tranches in large loan program financings when they can unlock additional value from basic public infrastructure. As described in prior posts, P3 private equity and impact investment appear to be especially well-suited for this role.

New or complex tax benefits that a public authority can’t directly utilize could also benefit from a specialized tranche. For example, when a major water system’s service area includes an Opportunity Zone, as frequently occurs, there may be a pretty good case to consider adding a tax-oriented investment tranche into a Wifia loan program financing.

A Washington think tank known for mixing structured finance and public policy (and whose underlying objectives in that area are no better than they should be) recently called out for ideas about resilient infrastructure and Opportunity Zones. Responding seemed like an opportunity to crystallize some ideas, although the two-page format does concentrate the mind wonderfully:

The Wifia Program’s one-page benefit summary makes the point that a Wifia loan can include a ‘customized repayment schedule’. That may not sound like much of a benefit to highly-rated public water systems with efficient access to the tax-exempt bond market (the vast majority of Wifia borrowers) since they can structure bond series with almost infinite flexibility.

But what the Program is really getting at is something that’s actually quite valuable: non-pro-rata amortization (the Program informally calls it ‘sculpting’) that allows the 51% bond tranche of a Wifia financing to amortize first and faster. This does two things. First, it means that over its term the average Wifia share of the financing is higher than the initial statutory 49% — closer to about 60%. Second, sculpting allows more utilization of a Wifia loan’s sweet spot, the US Treasury curve’s generally less positive slope (relative to munis, especially after 10 years) and specifically flat-forward rate beyond the 30-year market.

Here’s a one-page summary of a refinement to the basic leveraged impact story (outlined in prior post). The idea is that the impact investment tranche in a large infrastructure financing would specifically support development of social programs associated with the project (e.g. workforce training or affordability reserves) and receive a return contingent on the programs’ success or lack thereof. More subtly, once fully developed the programs would be explicitly eligible to be included in the capitalized cost of the project for long-term federal infrastructure loan financing (e.g. Wifia). In effect, the development impact loan would be a kind of construction financing taken out by subsidized term financing and amortized over, well, a really long time. So popular social programs can help sell the boring-but-necessary project and it all gets paid for in the long-term capital budget. The impact investor is critical to help ensure that the programs really work (which is their stated mission) but also to amplify the buzz (which they’re also really good at).