U.S. EPA Headquarters Library
                  Mail Code 3404T
               iu-
               Wfeshiftgto
                   202-566-0556
         STATE ACTIVITY
         UPDATE
 To date, New Jersey

     is the only

 program to receive

    approval for a

cross-collateralization

 structure and issue

    bonds with the

  structure in effect
    Cross-coHateralization between the
    Clean Water State Revolving Fund
(CWSRF) and Drinking Water State
Revolving Fund (DWSRF) programs was
authorized by the Departments of
Veteran Affairs and Housing and Urban
Development, and Independent
Agencies Appropriations Act, 1999
(Public Law 105-276). The act allows
funds from one SRF program to be used
to secure the other SRF program against
default.  For states that leverage their
SRF programs, the DWSRF will benefit
from existing CWSRF credit quality,
diversification and coverage levels. To
date, New Jersey is the only program to
both receive approval for a cross-
collateralization structure and issue
bonds with the structure in effect.

     Under a cross-collateralization
     structure, states may combine
assets of the CWSRF and DWSRF
programs as security for bond issues
"	provided that revenues from the
bonds are allocated ... in the same
portion as the funds are used as security
for the bonds	" (Public Law 105-  .
276). EPA has released two examples
that illustrate how proportionality may
be maintained in the draft
Transfer/Cross-Collateralization Policy.

    First, a state can achieve
    proportionality at the debt service
reserve level. For example, if the debt
service reserve is the primary security
and 65 percent of the funds in the
reserve are CWSRF funds and 35 percent
are DWSRF funds, then 65 percent of the
bond proceeds must be allocated to
CWSRF purposes and 35.percent must be
allocated to DWSRF purposes.

    Second, a state may also achieve
    proportionality by requiring that loan
repayments on loans made from the
CWSRF are pledged, as the primary
security, only to the CWSRF bonds (or
portion of a joint bond issue) and loan
repayments on loans made from the
DWSRF are pledged, as the primary
security, only to the DWSRF bonds (or
portion of a joint bond issue). For
example, if $50 million in bonds are
issued for CWSRF project loans and $25
million in bonds  are issued for DWSRF
project loans, then $50 million of
repayments must be pledged as security
from CWSRF project loans and $25 million
in repayments must be pledged as
security for DWSRF project loans.  The
second option may not be used if the
state provides principal forgiveness
subsidies for disadvantaged communities
funded with bond proceeds  from the
DWSRF program because the DWSRF
security would be disproportionate to the
security provided by the CWSRF program.

    Cross-collateralization provides
    additional security to bondholders,
thereby improving the bond ratings and
reducing the cost of borrowing to the
CWSRF/DWSRF programs. New Jersey's
DWSRF program is now able to benefit
from the CWSRF programs Aaa/AAA/AAA
ratings, reserves  and security structure.
This update describes the New Jersey
cross-collateralization structure.

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^ 1995-1997 ' :
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                         U S EPA Hea3quafle7l
                               Mail Code 3404T
                         1200 Pennsylvania Avenue, NW
                          «»Washington DC..2P460   ^
                                 202-566-0556
                                          STATE  ACTIVITY
                                          UPDATE

     New Jersey uses cash-flow leveraging in
     its program. The program structure
provides outstanding level of debt service
coverage for the Program's revenue bonds.
Fitch IBCA reports that annual cash flow
coverage ranges between a ratio of 1.5 and
3.2. The leverage structure is designed to
maintain proportionality for cross-
collateralization by pledging loan
repayments as the first level of security for
bonds in the same proportion reflected in
the joint DWSRF and CWSRF bond issue.

     New Jersey funds projects with one-half
     Trust revenue bond proceeds and
one-half SRF capitalization funds. The
Trust and NJDEP devised a three-tiered
system for the repayment of its bonds.
The primary level calls for repayment of
               both the Trust and SRF loan to the Loan
               Servicer Bank which immediately
               transfers funds required for repayments
               to bondholders (Exhibit 2).  The second
               level of security is created when the Loan
               Servicer transfers all the remaining funds
               to a Master Program Trustee.  The Master
               Program Trustee holds these funds for up
               to one year, during which they are made
               available to make up any deficiency in
               bonds issued 1995 and after. The debt
               service coverage associated with this
               security is also very strong, ranging-
               between a ratio of 3 and 6 times annual
               debt service.  The final level of security is
               the debt service reserve fund which is
               capitalized at the lesser of: 125 percent
               of average annual debt service, the
               maximum annual debt service or 10
               percent of bond proceeds.
          en
           en
                                  „  ,  , '   ,     -~
                                  r il-u-* t' •'
                                 Exhibit 2,  <-,~

                    ^Security Structure pf New Jersey's > __  ;,,
                  '  ™'£ross-c6llateralizationProgram'    „'
                 , *  >, ""'>*%      ,'  ,       *   .  \,f •>  *  l'  ••   '„'-!*
                *  1st Level

Repayments of loans made from both Trust
 Revenue Bond proceeds and SRF Equity
       (capitalization, etc.)
                     '. f.H
                             Available loan repayments of loans made
                                  from previous bond issues
                                                         •r - «• -'r,
                             Debt Service Reserve Fund is the lesser of.
                              125% of Average Annual Debt Service,
                                Maximum Annual Debt Service or
                                    10% of Bond Proceeds
                      £:^'Vg!7^^
 Fitch IBCA reports

 that annual cash

  flow coverage

 ranges between a

ratio of 1,5 and 3.2

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                    U.S. EPA Headquarters Library
                          Mail Code 3404T
               o   1«gOO P®nnsy*vania»Avemje, NW
                        Washington DC 20460
                            202-566-0556
             STATE ACTIVITY
             UPDATE
     New Jersey's structure is designed to
     be appealing to bond rating agencies
and investors.  The State's approach
enhances the security structure of New
Jersey's combined CWSRF and DWSRF
bonds while complying with federal
CWSRF and DWSRF program requirements.
The following are key features of New
Jersey's cross-collateralization structure:

•      The Attorney General's certification
       will document the State's authority
       to cross-collateralize the SRF
       program

•      The debt service for the DWSRF and
       CWSRF will be accounted for
       separately

•      Repayments on CWSRF program
       loans will be paid to the CWSRF

•      Repayments on DWSRF program
       loans will be paid to the DWSRF

•      Separate records and financial
       statements are kept for each
       program

•      Because New Jersey is pledging
       repayments in order to meet the
       proportionality requirements for
       cross-collateralization, NJDEP will
       not implement the SDWA 1452(d)
       disadvantaged community
       "principle forgiveness" provision
       Interest earnings within the Debt
       Service Reserve Fund will be
       distributed to the appropriate
       borrower

       A borrower is only eligible to draw
       on their allocable share of the Debt
       Service Reserve Fund

       Both DWSRF and CWSRF programs
       will  maintain a 50/50 relationship
       between Fund and Trust Loans
    States interested in further information
    on cross-collateralization should
contact their EPA Regional Office SRF
Coordinator. For information on the New
Jersey program contact the state
representative below.

State Contact:
Dirk Hofman
New Jersey Environmental
Infrastructure Trust
P.O. Box 440
Trenton, NJ 08625
Tel: (609) 219-8600
                                                This update was prepared by
                                                     EPA Headquarters


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