To date, New Jersey
is the only
program to receive
approval for a
cross-collateralization
structure and issue
bonds with the
structure in effect
&EPA
Office of Water (4101)
STATE ACTIVITY
UPDATE
EPA816-N-00-003A
January 2000
New Jersey's
Cross-Collateralization Structure
Cross-collateralization 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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Overview of New Jersey's Cross-Collateralization Structure
The New Jersey Environmental
Infrastructure Trust manages
the financial functions of both the
CWSRF and DWSRF programs. The
Trust has focused on making
programmatic improvements that
build on the principle of pooling
loan financings to strengthen the
rating of its bonds beyond that of
the individual credit ratings of
borrowers. In 1998 New Jersey
jointly issued $56.6 million in bonds
to leverage both the CWSRF and the
DWSRF.
Exhibit 1 displays the flow of
funds for New Jersey's cross-
collateralization of the Clean Water
and Drinking Water Financing
Program.
A borrower receives half of its
financing in the form of an
interest bearing loan from the Trust
Bond Fund, which is financed with
revenue bond proceeds. The second
half of a borrower's financing is in
the form of a zero interest loan from
the State CWSRF or DWSRF Fund that
is financed by capitalization grants,
state match funds and loan
repayments. The borrowers make
repayments through a bank, which
acts as the Loan Servicer that directs
the repayments to first cover debt
service payments on Trust Revenue
Bonds, then directs the remaining
portion of the payment to the Master
Program Trustee account. This
account acts as another level of
security to cover defaults in debt
service payments on other bonds
issued from 1995 to the present.
Funds can be held by the Master
Program Trustee for up to one year.
Once the funds are released, the
New Jersey Department of
Environmental Protection separates
the Clean Water and Drinking Water
repayments and earnings and
recycles them back into the
appropriate fund for any authorized
purpose of the CWSRF/ DWSRF.
Each CWSRF/DWSRF
project loan is funded
with 50% revenue
bond proceeds and
50% interest free
equity funds.
Exhibit 7
New Jersey Cross-collateralization
Clean Water & Drinking Water Financing Program
SRFTustBond Fund
Reserve Fund
50% of Project Cost
50% of Project Cost
50% of Project Cost
NJDEP
r
m
P
> r 1
Loan Serv
^1
>
f
cer
f
Tru ste e
>
r
1995-1997
Trustees
w Revenue Bond
Holders
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STATE ACTIVITY
UPDATE
Levels of Security for New Jersey's Cross-Collateralization Program
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.
Fitch IBCA reports
Exhibit 2
Security Structure of New Jersey's
Cross-collateralization Program
that annual cash
flow coverage
ranges between a
1st Level
2nd Level
3rd Level
Repayments of loans made from both Trust
Revenue Bond proceeds and SRF Equity
(capitalization, etc.)
•^
r
Available loan repayments of loans madej
from previous bond issues
Debt Service Reserve Fund is the lesser of:
125% of Average Annual Debt Service,
Maximum Annual Debt Service or
10% of Bond Proceeds
ratio of 1.5 and 3.2
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STATE ACTIVITY
UPDATE
Summary of Key Features
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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