Illinois Finance Authority teeing up state revolving fund deal

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CHICAGO – The Illinois Finance Authority is readying a $560 million sale of triple-A rated state revolving fund bonds for the week of Aug. 28 as the agency ramps up its SRF issuance to an annual basis to meet demand.

The IFA board approved the deal at a meeting Thursday. Authority executive director Christopher Meister said Fitch Ratings and S&P Global Ratings were expected to complete ratings reviews and an investor presentation would be released the week of Aug. 21. The program is currently rated AAA.

The sale marks the agency’s third – one came in 2013 and another in 2016 -- since the state bolstered its revolving fund program. Previous issues were done by the IFA’s predecessor authority in 2002 and 2004.

Proceeds will fund loans to finance eligible wastewater treatment and sanitary sewerage facilities and drinking water facilities.

“The sizing and timing of the series 2017 bonds are aimed at meeting strong demand by Illinois local governments for low-cost water infrastructure financing through direct loans from Illinois Environmental Protection Agency,” Meister told board members.

From September 1, 2016 through June 30, the IEPA had funded approximately $713 million in loans by leveraging approximately $592 million in bond proceeds generated by the state’s 2016 sale.

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 the current base interest rate at 1.76% for the clean water and drinking water programs.

The loan origination rate for the proceeds of the 2016 bonds has far exceeded both the federal one-year minimum spend-down requirement of 30% and the federal three-year minimum spend-down requirement of 95%.

“Working with IEPA, the authority expects future SRF Program bond issues to occur on an annual basis,” Meister said.

Bank of America Merrill Lynch is the bookrunning senior manager and Citi is co-senior manager with another five firms rounding out the underwriting syndicate. Acacia Financial Group and Sycamore Advisors LLC are advising the IFA and Katten Muchin Rosenman LLP is bond counsel.

The deal includes an amendment to the memorandum of understanding between the IFA and IEPA implementing rules that allows IEPA to restructure existing loans under certain circumstances.

Rating reports on the 2016 deal said 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. 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 had been no pledged loan defaults in any of the IEPA state revolving fund programs.

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Primary bond market Sell side Illinois Finance Authority Metropolitan Water Reclamation District of Greater Chicago Illinois