This is a belated update of The Economic Cost of WIFIA’s Portfolio at FYE 2022. The discussion and the methodology outlined in that post and prior ones on the topic remain the same, so I’ll just sketch out the basic numbers for FYE 2023.
WIFIA executed 19 loan commitments over the fiscal year, totaling about $2.6 billion in volume. The comparable numbers for FY 22 were 29 commitments with $3.8 billion in new volume. That significant drop doubtless reflects many factors unrelated to the program itself, not the least of which is the likely delay of infrastructure project development due to uncertain economic conditions.
The average execution interest rate for the new loans was about 4%, so the weighted average interest rate (WAIR) of the overall $18.6 billion portfolio at FYE 23 increased to about 2.15%, up from about 1.86% at FYE 22.
There seems to be a rough negative correlation between loan closings and the UST 20Y rate, as you’d expect since larger applicants can vary the timing of execution to some extent. The timing of closings for small commitments didn’t seem as sensitive to this — also as you’d expect, since small borrowers have fewer financing alternatives, and the timing of loan closing will primarily reflect project construction draws.
As before, there’s no hard data on drawn vs. undrawn loan commitments. Given the persistent inversion of the yield curve, the drawdown rate could have been much higher than when the yield is normal and it’s advantageous to use the WIFIA commitment as an option for permanent financing.
Now for the dismal part. Like all other fixed-income portfolios based on UST rates, WIFIA’s FYE 23 portfolio is underwater. Since the program is the quintessence of a hold-to-maturity lender, the mark-to-market is perhaps not really relevant. But as described in prior posts, the potential interest rate re-estimate losses do reflect an economic cost to taxpayers which is unlikely to be mitigated by above-market loans forming a significant part of the portfolio over time [1].
Reflecting uncertainty about the drawdown percentage at this point, I did the future loss sensitivity analysis with a wide range of drawdown numbers. Correspondingly, actual losses for the fully drawn portfolio could range from about $1 billion to nearly $3.5 billion if interest rates stay around 4%.
Overall, the main story stays the same — WIFIA’s portfolio has interest rate re-estimate costs which far exceed Congressional appropriations. But no one seems to care — yet. If and when this becomes an issue, the first line of defense will be to shift the narrative to the portfolio’s 10-year cash cost (better) and then include the tax revenue savings from the displacement of muni bonds (even better). But the real and sustainable defense is to improve WIFIA’s and other infrastructure loan programs’ capabilities to provide financial benefits to borrowers which don’t rely on off-budget interest rate options. They’ll get there one way or another.
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Notes
[1] I call it the ‘FCRA ratchet’ — the cost of below-UST market loans is off-budget through the mechanics of FCRA re-estimates (and hence not a portfolio management parameter), but above-UST market loans will probably be refinanced with tax-exempt debt because there are no pre-payment or make-whole penalties. Over time, the portfolio remains concentrated with low-yielding loans, regardless of interest rate cycles.