SVB’s collapse probably marks the beginning of an extended roller coaster ride for interest rates. Much more on that topic in connection with federal infrastructure loan programs in future posts.

For now, some quick numbers on the value of three enhancements to CWIFP loans for dam finance — a 75-year term, 10-year deferral and a limited buydown — when long-term rates are rising.

Assume that yields on long-term Treasuries rise (1) by 25 basis points between the date a CWIFP loan application is accepted and loan execution, and then (2) by 1.00% between loan execution and project completion. In the context of recent (and likely future) rate volatility, those assumptions are by no means unrealistic or extreme in the time frames of program transaction processing and infrastructure construction periods. Probably on the conservative side, actually.

At project completion, the NPV value of a fixed-rate financing executed when rates were lower can be estimated relative to then-current rates. We look at four alternatives — naturally they all look good in a rising rate environment, but the point here is their difference.

• Baseline Tax-exempt 30-year bond: A tax-exempt muni bond will have close to a Treasury yield and that market is highly correlated to the Treasury curve in the long end. But it’ll need to be issued at construction commencement to lock in the rate by funding an escrow [1]. Assuming a 5-year construction period, the effective term is about 25 years. Obviously, no debt service deferrals, but there’s a long interest-only period. The NPV value is about 14% — that is, at construction completion the bond will trade at 86% of face principal. Bad news for the bondholders, but a benefit to the project.

• Current WIFIA: Because of the rate lock, the project gets the full post-completion statutory 35-year term. The standard 5-year debt service deferral effectively extends the weighted average life of that tenor. The NPV is about 18%, materially better than a bond alternative. Of course, a WIFIA loan will have other costs and benefits relative to a bond, but here we’re only looking at the impact of rising rates [2].

• Amended 55-year Term WIFIA: As proposed in HR 8127, an amended WIFIA would offer a 55-year loan term for long-lived assets. With the same 5-year deferral, the NPV benefit is about 23% — significantly better than the bond and even current WIFIA.

• CWIFP Dam Finance Enhancements: As outlined in previous posts, for dam projects a 75-year term is justified. A proportional 10-year deferral ought to be added to that, especially due to the slow & low revenue profile of such projects. Those two enhancements add up to about a 27% NPV benefit. A Limited Buydown (which really should be offered for all WIFIA loans but we’re just looking at CWIFP dams for now) increases that to 34% — more than double the bond alternative and significantly better than current and proposed WIFIA. That’s the point of this illustration — dam projects are hard enough in an uncertain environment. Since CWIFP enhancements for their financing could help with the interest rate aspects of that uncertainty, special consideration is warranted.

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Notes

[1] For simplicity, the analysis doesn’t include the negative arbitrage cost of escrow funding. That’s usually about 2% on an NPV basis when the yield curve is normally sloped.

[2] It’s worth noting that if rates fall after execution, the WIFIA loan might have some flexibility relative to a bond financing — the program is willing to reset the rate downward if the loan commitment is undrawn.