LOS ANGELES — The duo named to head the California Infrastructure and Economic Development Bank this summer will ask its board to implement a long list of changes aimed at restoring the I-Bank's role as an active lender.
The I-Bank, which has financed more than $32 billion in infrastructure and economic development projects since its inception in 1994, only financed a $7.5 million loan to a water district in San Bernardino County last year, according to I-Bank officials.
Teveia Barnes, executive director, and Ruben Rojas, deputy executive director, named to I-Banks' two top slots on July 12 by California Gov. Jerry Brown, want to change that.
I-Bank plans to issue $100 million to $150 million in new bonds in January 2014 to increase its lending capacity, currently at $48 million, officials said.
Governed by a five-member board, the I-Bank became part of the governor's Office of Business and Economic Development on July 3 as part of a governmental restructuring process spearheaded by Brown.
It was created in 1994 to finance public infrastructure and private development in California and has the authority to issue tax-exempt and taxable revenue bonds, make loans, provide credit enhancements and leverage state and federal funds.
Officials said they will also refund close to $80 million in bonds on three different series from 2004 and 2005, hoping to achieve savings to further their plans.
They are currently underway on a $191.8 million refunding for the California Independent System Operator Corp. slated to price on Nov. 1, according to bond documents.
RBC Capital Markets and Citi are the underwriters on those bonds.
The electricity provider's bonds originally sold in 2009 as fixed-rate bonds primarily to pay for construction of a new facility in Folsom, Calif. for the corporation, which operates the states' high voltage power lines that deliver electricity throughout most of the state.
Since 2004, the I-Bank program has been leveraged using an initial infusion of cash from the legislature, said Marilyn Munoz, I-Bank's general counsel. When the program was created, most of that infusion of cash went to fund infrastructure. After the initial infusion there were no appropriations, so I-Bank has gone to the bond markets and issued program bonds, which generated economies of scale resulting in interest rate subsidies for borrowers.
But now, I-Bank officials are planning a series of refundings to take out two or three existing series and create a modern structure, Munoz said.
"What we are moving to is a pool structure or open indenture where we put all of our assets in a common pool that will support all of the bonds," she said. "It allows us to better use our assets."
Each series will no longer be in a silo, the assets will be combined, and coverage will be based on the whole, Munoz said.
"It also gives better protection to bondholders," Barnes said. "It's a bigger collateral pool to the bondholders."
Barnes and Rojas also have been working closely with Munoz to modify I-Bank's lending criteria.
The underwriting standards won't change, but the selection criteria that has unnecessarily limited the pool of applicants and slowed the process will disappear if the board approves the changes at its Oct. 28 meeting, officials said.
For instance, borrowers that already have rated debt are currently excluded from the program, Munoz said.
Eliminating that criteria will improve the quality of borrowers I-Bank can lend to, she said.
Typically, the primary task of the I-Bank has been to act as a conduit issuer by pooling loans from municipalities and others who might not otherwise have access to the municipal bond market, because the amount they need to borrow isn't enough to justify the expense of issuing bonds.
The maximum loan amount I-Bank can currently lend is $10 million to any municipality, Barnes said.
"That worked in 1997 and 1999, and works for some of our municipalities today, but many are looking at projects that require $12 million, $25 million and up to $100 million," Barnes said.
The growth in cost combined with the fact that municipalities have not had access to the amounts they need helps to explain the state's estimated $65 billion in infrastructure needs reported in an American Society of Civil Engineers report released in March, Barnes said.
That's why, she said, the changes proposed to the I-Bank board include amending the minimum and maximum loan amounts to provide access to financing for a greater range of projects.
The new criteria also would alter the process for determining the minimum debt service coverage ratio requirement to allow for greater flexibility in tailoring the financing to the repayment abilities and creditworthiness of individual borrowers. The point system for the selection and prioritization of projects would be eliminated dramatically reducing the number of restrictions and requirements for financing eligibility.
In addition to modifications to the process, I-Bank officials just want to make the standards clearer.
"The existing criteria don't give the applicant a true sense of what I-Bank was looking at in making its decisions," Barnes said. "The proposed criteria add more transparency to the credit underwriting process."
The I-Bank's leaders are also proposing eliminating a duplicative pre-application process and a rarely used distinction between Tier 1 and Tier 2 borrowers.
Economic expansion projects such as cultural, recreational, research, educational, utility, industrial and commercial projects undertaken in conjunction with a public entity would also be eligible for I-Bank financing.
Projects involving business relocation would no longer be excluded, nor would loans to refinance existing indebtedness.
Barnes and Rojas have been talking to municipalities all over the state about what their needs are to establish goals and determine where change is warranted.
"Most of the municipalities that Ruben and I have been talking to don't have the back-office or technical assistance to issue bonds," Barnes said.
"The need is evident by the categories of people with whom we have spoken," Rojas said. "It has ranged from city managers, up and down the state, to port and airport officials, schools, energy developers, and to private manufacturers currently in the state or looking to relocate here."
The categories of bonds that I-Bank can issue are broad. The only bonds I-Bank doesn't issue are housing bonds.
I-Bank has been responsible for issuing the state's tobacco securitization bonds and worker's compensation bonds, things that serve the state when there wasn't another entity authorized to do it, Munoz said.
In addition to the traditional I-Bank activities, the governor signed legislation on Oct. 7 placing California's Small Business Loan Guarantee Program under the auspices of the I-Bank.
The action was part of a restructuring of the state's economic development activities that began when the Governor's Office of Business and Economic Development was created in July 2012.
"California had not had an economic development agency since 2003," said Brook Taylor, a spokesman with the governor's office of business and economic development. "Gov. Brown established a leading economic development entity and then reorganized to align all the most important economic development departments under GO-Biz."
I-Bank, the California Film Commission and California Travel Association were all placed under GO-Biz, the acronym for the governor's economic development arm.