CHICAGO -- The Illinois Finance Authority heads into the market Tuesday with $500 million of top-rated state revolving fund bonds to pave the way more low cost loans for local clean water and drinking water projects.
The revolving fund is promoted as an affordable means for local governments and utilities across the state to overhaul aging clean water and wastewater infrastructure with rates at roughly 1.75% for clean water and 1.86% for drinking water loans.
In addition to the last deal for $134 million, the IFA issued $130 million in 2004. Its predecessor agency, the Illinois Development Finance Authority, launched the first borrowing to fund SRF loans in 2002 with a $150 million sale. After the new sale, the program will have $587 million of outstanding debt. The bigger borrowing will allow the state to grant more low-cost loans.
Once the financing closes "the state's clean water initiative will be positioned to borrow on a predictable, annual basis going forward," IFA executive director Christopher Meister told board members at their August meeting ahead of a board vote on the deal. "Such predictability opens the door for IEPA to pursue a variety of SRF Program innovations successfully piloted in other states such as non-revenue/non-point source infrastructure projects and further reductions in the cost of borrowing for local governments."
The IFA manages the program's financing while the Illinois Environmental Protection Agency administers the loan program.
The sale funds the drinking water state match for federal fiscal 2015, 2016, and 2017 years and the clean water state match for fiscal 2016 and 2017. It also funds loans to local governments for qualified wastewater, sanitary sewerage facilities and drinking water projects.
Initial loan agreements pledged to repayment include 851 loans with outstanding principal of $2.2 billion.
Bank of America Merrill Lynch is the senior manager with Citi serving as co-senior. Another five firms round out the syndicate. Sycamore Advisors LLC and Acacia Financial Group are advising the authority on the sale. Katten Muchin Rosenman LLP is bond counsel. The IFA will hold the institutional pricing on Tuesday after taking retail orders on Monday.
Ahead of the sale, Fitch Ratings and S&P Global Ratings affirmed the program's AAA ratings. The IFA and its finance team highlight those marks and the program's structural protections in an investor presentation as they work to tamp down yield penalties assigned to paper from Illinois-based borrowers –
especially debt with the state's tarnished name attached.
The deal follows Illinois' sale on Thursday of AA-plus/AAA rated sales-tax backed bonds. A 10-year tax-exempt maturity in the deal landed at a spread of 48 basis points to the Municipal Market Data's AAA benchmark.
About 73% of the loan portfolio is backed by a local government's water or wastewater pledge while a GO pledge backs the remaining 27%.
The 10 borrowers with the largest outstanding loans account for 49% of the total outstanding balances of pledged loans. "This is lower than Fitch's median level of 55%, which is indicative of better-than-average pool diversity," the rating agency wrote.
The loan pool has a lower level of investment grade borrowers then Fitch's median for a AAA credit. The combined clean and drinking water programs are projected to include 487 individual obligors after the sale.
The Metropolitan Water Reclamation District of Greater Chicago is the largest participant, accounting for about 26% of the pool. "While significant, MWRD's high rating mitigates the single-obligor concentration risk it would otherwise present," Fitch wrote. MWRD carries double-A to triple-A ratings.
To date, there have been no pledged loan defaults in any of the IEPA state revolving fund programs. Loan reserves may be required for subordinate revenue liens and the IEPA can require borrowers to raise rates to meet coverage requirements.
When combining the cash flows for both programs, loan repayments cover state match and leveraged semiannual debt service by at least 1.6 times on the drinking water side and 2.4 times on the clean water. "These cash flow characteristics lead to an extremely strong loss credit score under our default tolerance tests," S&P wrote.
Under a cash-flow SRF model, bond enhancement is provided primarily by loan repayments in excess of bond debt service. The credit benefits from a cross-collateralization feature in which excess funds from the clean water state revolving fund are available to cover deficiencies in the drinking water SRF and vice-versa.
