Funding Your Water Project with The WIFIA Loan

The Water Infrastructure Finance and Innovation Act (“WIFIA”) loan program offered by the United States Environmental Protection Agency, could be a valuable component of a water project financing mix. The key advantages of the WIFIA loan program include:

• Low interest rates
• Significant repayment flexibility
• Construction financing

WIFIA Program Purpose

The WIFIA program was introduced in 2017 with the goal of accelerating the development of water infrastructure projects in the United States. The following project types can be funded through the program:

• Water
• Wastewater
• Recycled water
• Water storage
• Storm water

 WIFIA can finance only new projects and cannot be used for existing debt refinancing.

Through June 2022, the program has funded 88 loans totaling $15.3 billion in proceeds.47 (53%) of these loans exceeded $100 million in proceeds. 45% of the WIFIA funding was used for wastewater projects. The most up-to-date information about WIFIA loan issuance can be found here.

‍Who Can Apply?

WIFIA is open to:

• Local, state, tribal, and federal government entities;
• Joint powers authorities and state infrastructure financing authorities;
• Partnerships and joint ventures; and
• Corporations and trusts.

The minimum project sizes are:

• $20,000,000 for large communities (over 25,000 people); or
• $5,000,000 for small communities (25,000 people or less).

The program staff has been making an active effort to accommodate smaller communities.

Multiple projects can be funded under one WIFIA loan, as long as the repayment source is the same. This is a feature that can help reduce loan fees.

‍WIFIA Construction Financing

A major advantage of WIFIA is its ability to fund project construction. Unlike the USDA, which often requires borrowers to obtain separate construction financing, WIFIA can be set up to fund as a series of construction draws. This allows for lower overall interest cost, since interest is accrued only on the outstanding loan balance.

WIFIA can fund capitalized interest during the construction and deferred repayment periods.

Construction draws can be submitted monthly.

‍WIFIA Repayment Flexibility

Another advantage of WIFIA is the ability to defer the commencement of the loan payments and to shift a large portion of the principal repayment towards the later years of the loan.

The loan repayment can be deferred for up to 5 years after the substantial completion of the project, which means that the term of the WIFIA loan can be for up to 42 years (two years for project construction, five years of deferred repayment, and then 35 years of amortization). The interest rate would remain fixed throughout the term of the loan.

The repayment schedule can be structured to back-load the principal repayment towards the later years, if necessary. While such back-loading results in the higher interest cost over the term of the loan, it may be beneficial when viewed in the overall project or system debt repayment context. The delayed principal repayment of the WIFIA loan can be valuable under the following scenarios:

• When other funding sources have higher interest rates, focusing on paying off this other debt before WIFIA can result in lower overall interest costs.
• When other funding sources have shorter maturity, delaying WIFIA principal repayment may allow the borrower to avoid debt service spikes and keep its water or wastewater rates lower for the customers.

WIFIA can fund capitalized interest during the construction and deferred repayment periods.

‍WIFIA Project Funding Limitations

The WIFIA funding is limited to 49% of eligible project costs (plus capitalized interest).

The program also falls under the 80% federal funding limitation rule, which can come into play if the USDA financing and federal grants are also used to fund the project.

Since the State Revolving Fund (“SRF”) programs are only partially dependent on federal funds, they generally do not count towards the 80% federal funding limitation.

While WIFIA will not fund an entire project, it could be a very valuable and powerful addition to the funding mix, supplementing other State Revolving Fund, USDA, grant, and bond funding and allowing for proactive debt service structuring.

‍WIFIA Interest Rate

The interest rate on the WIFIA loans is fixed at the time of approval at the US Treasury (SLGS) rates for the weighted average life of the loan plus 0.01%. This method usually results in a lower interest rate than if the interest rate were to be based on the final loan maturity date.

The interest rate is not impacted by the borrower’s credit rating, which makes the program especially attractive for borrowers that are rated lower than AAA. However, the interest rate should be compared against the tax-exempt interest rates available in the bond and private placement markets.

If the interest rates go down, the borrower can request a rate reduction, as long as no loan draws have been made. The rates adjustment process can take several weeks, requires additional paperwork, and comes with additional fees.

‍WIFIA Loan Term and Prepayment Flexibility

The loan term and repayment commencement are tied to the substantial completion of the project:

• The loan term cannot extend more than 35 years from the substantial completion date.
• The loan repayment can be deferred for up to 5 years after the substantial completion date.

If the repayment is deferred, the interest on the loan still accrues and continues to be added to the principal amount of the loan.

There are no prepayment premiums or limitations on WIFIA. The loan can be paid off or refinanced at any time.

‍WIFIA Application, Approval, and Covenants

To apply for the WIFIA loan, you first must submit the letter of interest after the Notice of Funding Availability is published. If your project is selected, then you will receive an invitation to apply and will have up to 1 year to finalize your application. Once the application is complete, the EPA will take 4-7 months to approve the financing.

WIFIA requires borrowers who do not have a credit rating to go through the rating process with at least one of the four major rating agencies (Moody’s, S&P, Fitch, or KBRA). This is a one-time rating requirement. The borrowers are not obligated to maintain the rating during the term of the loan.

The WIFIA program requires the same environmental review process as the SRF. Incases where the WIFIA and SRF funding is combined, the environmental review process can be coordinated between the two agencies.

WIFIA generates its own loan documents, which can be integrated with other financing documents and the master indenture.

The financial loan covenants are the typical 1.20x rate covenant and additional debt limitation.

WIFIA Loan Fees

The major drawback of the WIFIA program is that it comes with somewhat high fees, which can be an issue with smaller projects.

As of June 2022, the following fees are in place:

• Application Fee (due after approval of the letter of interest):
• ~$25,000 for small communities
• ~$100,000 for large communities

The Application Fee is used to offset a portion of the third-party costs incurred by WIFIA (primarily legal, but also other consultants, as applicable).

• The balance of the third-party costs is collected through the Credit Processing Fee, which can run in the $100,000-$300,000 range. To make the program more attractive for smaller projects, WIFIA has started requiring fewer outside consultants for certain smaller transactions.

While no fees are required to submit the Letter of Interest (“LOI”), it is important to keep in mind that once the LOI is approved, the Application and Credit Processing Fees are due regardless of the final loan approval or the borrower’s decision to decline an approved loan.

Once the loan is in place, the borrower is responsible for the one-time loan Set-Up Fee and annual loan Servicing Fees:

• Set-Up Fee (one-time at closing, equal to the Servicing Fee – see below)
• ‍Servicing Fee (annual):
• ~Prior to substantial completion: From $10,000 for loans under $100 million to $25,000 for loans greater than $400 million.
• ~After substantial completion: $7,500 regardless of the loan amount

These fees are subject to adjustment by WIFIA.

WIFIA Program Summary

As you can see, there are plenty of reasons to consider WIFIA as a part of your water project financing strategy if you can live with the program’s limitations.

‍WIFIA Program Benefits:

• Favorable Interest Rate:
• ~Locked at closing
• ~Accrues only on the outstanding principal amount
• ~Ability to adjust to lower rate on approved but undrawn loans
• Flexible Structure:
• ~Construction draws
• ~No prepayment penalty
• ~Debt service structuring flexibility
• ~Subordinate lien option
• ~Flexible documentation and reporting requirements

‍WIFIA Program Limitations:

• Funding cannot exceed 49% of eligible project costs, so other funding sources are required
• Long application and approval process comparing to bond issuance
• High loan fees

If you would like to discuss the funding strategy for your water project or need assistance with the WIFIA application process, do not hesitate to contact Ridgeline.