In a recent EPA webinar on funding availability at the WIFIA Program, several questions came up about combining SRF and WIFIA loans for specific projects. This is of course allowed and frequently done. The WIFIA team noted several differences between a Program loan and what might typically be offered by SRFs. SRF loans vary by state, but in general they’re shorter in term – about 20 years maximum, versus WIFIA’s 35-year post-completion term. Within that term, WIFIA can be very flexible about amortization schedules that effectively accommodate the SRF loan’s shorter and usually more strict schedules – a point that the team especially emphasized.
WIFIA’s five-year debt service deferral option after project completion was also highlighted as an example of the Program’s unique flexibility in loan structuring.
Other differences were discussed — loan forgiveness is sometimes offered by SRFs but not by WIFIA, SRF pricing varies a lot compared to WIFIA’s US Treasury flat rate, etc. But WIFIA’s longer term and the deferral option appear to be primary synergistic benefits of SRF/WIFIA loan combinations at the project level.
I’ve written about the benefits of large-scale WIFIA loans to the SRFs themselves in prior posts and articles. Fund capitalization from a ‘wholesale’ lender (WIFIA) to ‘retail’ lenders (SRFs) will play to their respective strengths, maximizing overall economic benefits and efficiency. In theory, WIFIA should specialize in the wholesale role exclusively. But reality is never quite so simple, and if an SRF/WIFIA combination works at the project level – and gets stuff built – that’s also a good outcome. As such, it’s worth a quick look at some hypothetical numbers showing why the combination works.
Assume a $100 million project in a large community that can qualify for both a WIFIA and a local SRF loan. The interest rate on both is 3.0%, (about the current 30-year US Treasury yield), significantly less than the borrower’s market alternatives. The project is very long-lived, but the SRF loan’s maximum term is 20 years with required level-payment amortization. The loans are compared below at the time of project completion.
The borrower’s first option is to simply to borrow $100 million from the local SRF, which has available capacity. The blue bars are the SRF loan balance – the red line is the annual post-completion debt service:
The SRF-only loan will work, but the borrower would prefer to minimize debt service in the early years of the project. A longer term WIFIA loan for the full $100 million is not possible of course — for a large community, the statutory maximum amount is 49% of project cost. But the two loans can be combined, with the SRF loan providing the 51% balance. The yellow bars show the WIFIA loan balance, and the blue line is the annual debt service of the combined loans (the red line from the prior chart is included for comparison):
This combination gets closer to the borrower’s preferences — debt service is essentially halved for the first five years with the WIFIA deferral option. For years 6 through 20, the WIFIA loan is in interest-only mode, reducing debt service by about 25%. Starting in year 21, level payment amortization of the WIFIA loan continues for the next 15 years at about the same level.
If the borrower was looking for even lower debt service in the very long term, a combination with a 55-year WIFIA loan would be even better, were that available — as it might (and should) be in the future. The green line shows debt service for this case:
The above charts provide a quick visual demonstration of the fundamental benefit of the combination — lower debt service in the early years. But a real comparison should reflect how much the borrower values the near-term cash savings versus paying debt service for a longer period. In specific situations, there are usually plenty of real-world reasons that such a comparison doesn’t need much (if any) quantification beyond the dollars saved, a five-year planning horizon, for example. However, to do it correctly — if only in order to defend the decision — a classic Value for Money (VfM) analysis is required. This essentially involves a present value (PV) comparison of the cases over their full terms, using a discount rate that ideally reflects all the preferential and goal-oriented aspects of the situation.
That’s often difficult in the real-world, but it’s easy enough in this simplified, hypothetical analysis. The valuation baseline is the SRF-only case. The chart below shows the cost of financing of the two combination cases (WIFIA 35-year and 55-year loans, respectively) compared to that baseline using different discount rates:
Note that if the borrower’s discount rate was 3.0% (the interest rate on both loans) the net benefit would be zero — the cost of financing is exactly the same for all cases, regardless of WIFIA’s term and deferral options. But that’s certainly not realistic — the reason the borrower was considering SRF and WIFIA loans in the first place was because their rates are subsidized in comparison to market alternatives. Let’s say those market alternatives average about 4% at a minimum — already the borrower can save about $4 million PV with the WIFIA 35-year combination case (and even more in the 55-year case). As the borrower includes risk factors (a local recession, for example) in the discount rate, the benefit of a longer term rises further. I’d guess that the typical discount rate for tax or rate-funded public infrastructure projects for long-term cash flow is at least 200 bps. higher than the risk-free, US Treasury rate — so about 5% here, for an $8 million saving (8% of project cost) in the 35-year WIFIA loan combination. In a word – plenty.
Interestingly, one ‘risk’ that usually needs to be considered in a VfM analysis is that interest rates might fall dramatically in the future but a make-whole pre-payment penalty effectively prevents project debt refinancing. It’s possible that SRF loans sometime require such penalties, but WIFIA certainly does not — prepayment is fully optional and penalty-less — and in a long-term timeframe that matters much more.