The U.S. Environmental Protection Agency’s (EPA’s) Water Infrastructure Finance and Innovation (WIFIA) program offers several loan features that are very useful for large-scale infrastructure financings, including a U.S. Treasury interest rate, flexible construction drawdown and repayment schedules, and no-penalty prepayment.
All these features are enabled by a statutory framework that WIFIA shares with its predecessor, the Department of Transportation’s TIFIA program, and a recent successor, the Department of Energy’s CIFIA program. But one loan feature is missing from WIFIA’s specific statute: a limited interest rate buydown.
What Is a Limited Buydown?
A limited buydown allows a program to lower, within specified limits, a loan’s execution interest rate to what it would have been on the day the loan’s application was accepted. Even at a well-run program, there will inevitably be a significant amount of time between loan application acceptance and final execution for complex infrastructure financings. Treasury rates can easily rise during this time, especially in the current economic environment, and that introduces a big element of uncertainty into the cost of the project’s long-term financing.
A limited buydown enables the program to help mitigate this pre-execution interest rate risk when it’s a factor that could stall project development and construction. Like other federal infrastructure loan features, the limited buydown is a useful tool for achieving an infrastructure loan program’s core policy objective of enabling and accelerating U.S. public infrastructure renewal.
A limited buydown provision was added to the interest rate section of TIFIA’s statute in the MAP-21 Act of 2012. The provision, with more specific language, was included in the same section of CIFIA’s statute when the program was established in 2021 by the Infrastructure Investment and Jobs Act. For both programs, the maximum interest rate reduction is 1.50 percent, which is quite significant in the context of current Treasury rates.
Not Included in WIFIA
But, despite being closely modeled on TIFIA law, WIFIA’s statute didn’t include a limited buydown provision when the program was established in 2014, nor was it added in subsequent WIFIA-related legislation even though federal loan program proponents and policymakers were clearly aware of the provision’s usefulness.
It’s hard to see why the WIFIA program, which makes extensive and innovative use of all its interest rate provisions, was skipped over in the case of a limited buydown. Perhaps pre-execution interest rate risk was not considered an important factor for WIFIA’s highly rated public water agencies at a time of relatively stable economic conditions and steady interest rates?
If that was the reason, a lot has changed. The economic outlook for 2023 is not positive, with many predicting a recession or even worse. More specifically, inflationary conditions will inevitably make interest rates more volatile and less predictable. The Federal Reserve needs to walk a fine line between controlling inflation and avoiding economic contraction, meaning that policy shifts may be sudden and significant. Perhaps we’re now seeing long-term Treasury rates peaking, but future declines will not necessarily be smooth or long-lasting.
These uncertain economic and financial conditions will likely persist for some time. There will be plenty of room for unpleasant surprises to happen between a WIFIA loan application and its execution. Even for highly rated borrowers, a limited buydown feature might now be an important factor in enabling or accelerating water project development and construction. And not just for large projects — State infrastructure financing authority WIFIA (SWIFIA) loans that included a limited buydown feature could encourage smaller SRFs to use leverage by reducing uncertainty and risk.
An amendment that adds a limited buydown provision to WIFIA’s statute would be very straightforward. The language can basically be copied from TIFIA law or (even better) from CIFIA’s more recent version.
And soon there should be proposed legislation to place it in. The Water Infrastructure Finance and Innovation Act Amendments of 2022 will almost certainly be re-introduced in the next Congress. This bill contains budgeting and other clarifications that are specific to the implementation of the Army Corp’s new loan program, but the proposed amendments will apply to all WIFIA borrowers.
An amendment to extend WIFIA’s maximum loan term to 55 years is already included — a limited buydown amendment would provide a similar incremental enhancement of WIFIA loan features. Why not add it?
About the Author: John Ryan is principal of InRecap LLC. InRecap is focused on debt alternatives for the recapitalization of basic public infrastructure. He has an extensive background in structured and project finance. He recently served as an expert consultant to the U.S. Environmental Protection Agency.
