ENVIRONMENTAL FINANCIAL ADVISORY BOARD
Members
Karen Massey,Chair
Helen Akparanta
Gavin Clarkson
William Cobb
Edwin Crooks
Lisa Daniel
Eric Draper
Donna Ducharme
James Gebhardt
Rick Giardina
Ann Grodnik
Scott Haskins
Philip Johnson
Suzanne Kim
Thomas Liu
Mathilde McLean
Lindene Patton
Sharon Dixon Peay
Tobias Rittner
Wayne Seaton
Blanca Surgeon
Steve Thompson
Leanne Tobias
ChiaraTrabucchi
Eustace Uku
Cynthia Williams
-JAN -2 2014
Honorable Gina McCarthy
Administrator
United States Environmental Protection Agency
1200 Pennsylvania Avenue, NW
Washington, DC 20460
Dear Ms. McCarthy:
The enclosed report, "Utilizing SRF Funding for Green Infrastructure Projects"
was prepared after considering the historic agreement between EPA and the City
of Philadelphia to meet clean water goals with state-of-the-art green infrastructure
project solutions and the limited involvement of the Clean Water State Revolving
Funds (the "CWSRFs") in such projects. The purpose of the report is to analyze
the potential of the CWSRFs to provide credit guarantees to green infrastructure
projects within current program eligibilities and resources. This opportunity could
be especially attractive for the larger state CWSRF programs and/or for states that
leverage their CWSRF programs.
The federally sponsored CWSRFs have been providing financial assistance for
clean water projects nationwide since 1990. Through the reporting year ended
June 30, 2012, the CWSRFs had funded more than $89 billion in such projects.
Despite these achievements, the nation continues to need additional capital to meet
water quality needs. The findings in the enclosed report indicate that some
CWSRFs have reached a point where they may have the capacity to expand
funding for green infrastructure projects by offering credit guarantees at the same
triple-A ratings enjoyed by most CWSRF loan programs. Based on the rating
criteliaof the credit rating agencies and using some conservative assumptions, we
found that for each dollar of recycled CWSRF program equity, $3 to $14 of
CWSRF guarantee capacity could be provided to fund green infrastructure
projects in addition to current project funding levels. This translates into $6
billion to $28 billion in potential green infrastructurefunding capacity
natinwide. The report also discusses other program strengths that could more
than double these capacity estimates. Finally, the report makes recommendations
on the process needed to realize these potential program benefits.
Although the report specifically focuses on the use of the untapped financial
capacity of the CWSRFs to support green infrastructure projects, this same
untapped capacity could be used to support any clean water eligible project, based
on each state's priorities or preferences. This would be in line with EPA State
Providing Advice on "How to Pay" for Environmental Protection
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Revolving Fund Program Implementation Regulations that state unequivocally
that as matter of policy and purpose that "the Agency intends to implement ... the
program in a manner that preserves for states a high degree of flexibility for
operating their revolving funds in accordance with each state's unique needs and
circumstances."
The EPA-Philadelphia Green Cities/Clean Water Partnership was ground
breaking and green infrastructure has now been institutionalized as an important
Agency priority. Going forward, EPA has an opportunity to encourage the
funding of similar green infrastructure projects across the nation within the highly
successful CWSRF program and to do so with existing resources. U.S. EPA
should inform states about this and other state-of-the-art solutions and help those
with the requisite legal, persOlmel and financial resources to more fully use
CWSRF financial assistance to address the vast unmet needs impacting water
quality.
Finally, EFAB would be remiss if we did not recognize the contributions of a now
former EFAB member, Jim Gebhardt, Chief Risk Officer with the Bond Factor
Company in New York City. Jim was the driving force behind the identification
of this financing opportunity and the development of this report in concert with
other dedicated members of the Board and its Green Infrastructure Project
Workgroup.
We hope this report is helpful to you and the U.S. EPA staff and would be pleased
to discuss our analysis and summary in further detail.
Sincerely,
Karen Massey, Chair
Environmental Financial Advisory Board
Enclosure
cc: Robert Perciasepe., Deputy Administrator
Nancy Stoner, Acting Assistant Administrator, Office of Water
Mary Ann Froelich, Acting Chief Financial Officer
Michael Shapiro, EFAB Designated Federal Official
Andrew Sawyers, Director, Office of Wastewater Management
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Environmental Financial Advisory Board
EFAB
Mike Shapiro
Designated Federal
Officer
Members
Karen Massey, Chair
Gavin Clarkson
William Cobb
Edwin Crooks
Lisa Daniel
Eric Draper
Donna Ducharme
James Gebhardt
Rick Giardina
Ann Grodnik
Scott Haskins
Philip Johnson
Suzanne Kim
Tom Liu
Mathilde McLean
Linden Patton
Sharon Dixon-Peay
Toby Partner
Wayne Seaton
Blanca Surgeon
Steve Thompson
Leanne Tobias
Chiara Trabucchi
Eustace Uku
Cynthia Williams
Utilizing SRF Funding for Green
Infrastructure Projects
This report has not been reviewed for approval by the U.S. Environmental
Protection Agency; and hence, the report's contents and recommendations do not
represent the views and policies of EPA or other agencies in the Executive Branch of
the Federal Government. Further, the content of this report does not represent
information approved or disseminated by EPA.
January 2014
Printed on Recycled Paper
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U.S. EPA Environmental Financial
Advisory Board
Utilizing SRF Funding for Green Infrastructure Projects
Tapping the SRF Programs' Financial Strength and Existing Federal Authority to Deliver
Efficient Low Cost Funding for Section 212, 319 and 320 Designated Stormwater
Mitigation Projects
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Table of Contents
I. Executive Summary 3
II. Background - Purpose and Scope of Report 5
III. SRF Project Funding Authority 8
GI Project Eligibility for CWSRF Financial Assistance 8
Eligibility Issues and Remedies 9
IV. SRF Financial Assistance Authority 9
V. Available SRF Gl Funding Mechanisms Given Federal Authority 11
State Level Gl Funding Mechanisms 12
Sub-state Level Gl Funding Mechanisms 13
Lending Standards 15
Loss Reserves 18
Non-recourse Obligations 19
Non-SRF Eligible Projects and Non-conforming Loan Remedies 19
Loan Warehousing 19
VI. SRF Rating Agency Criteria and Rating Targets 21
VII. Estimating Excess SRF Funding Capacity in the Context of NRSRO Rating Criteria 22
SRF Program Free Cashflow 22
Rating Objectives and Excess Financing Capacity Limits 23
Results 25
Results Provide a Baseline for Estimating the SRF's Gl Funding Capacity 28
VIII. Conclusions and Recommendations 28
Figures 1-6 32
Appendix A - Rating Agency SRF Criteria
Moody's Investors Service 38
Standard & Poor's 41
Fitch Ratings 43
Appendix B- Excel Model and Instructions 46
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I. Executive Summary
This report highlights the opportunity that the United States Environmental Protection Agency
("U.S. EPA") and its state partners have to expand the benefits provided by the existing State
Revolving Funds ("SRFs"). Specifically, this report presented by the U.S. EPA Financial Advisory
Board (the "Board") evaluates the prospects for tapping the federal authority granted by Title
VI, Section 603(d) of the Clean Water Act ("the Act") to provide financial assistance in the form
of credit guarantees for Green Infrastructure ("Gl") projects. We believe that this opportunity is
especially attractive for the larger state SRF programs and/or for states that leverage their SRF
programs.
The premise of the report is that, although SRF dollars (federal and state equity contributions as
well as retained earnings) are dedicated to supporting direct financings and bonds issued to
increase funds available for lending activity, the periodic repayment of such SRF dollars and the
release of equity funded reserves from the pledge of SRF program liens, if applicable, are
sufficiently robust to also support a top-rated SRF guarantee program.
There are two traditional models for leveraged SRF programs: (i) reserve fund leveraged
programs that have reserves funded from program equity and (ii) cashflow leveraged programs
that pledge SRF loan repayments. Since the early years of the Clean Water SRF Program
("CWSRF"), state level bonding agencies have benefited from top credit ratings with most SRF
programs achieving triple-A ratings from the three major rating services. These top ratings
depend on the pledge of SRF resources to cover scheduled bond payments in the absence of
scheduled SRF loan repayments. This report proposes a guarantee structure that not only
preserves the resources underlying the existing SRF programs and ratings but also enables SRF
programs to implement Gl credit support programs.
Currently, across the country, the CWSRF generates more than $2 billion in annual cashflow,
which is comprised of equity dollars that are released from the SRF program liens and earnings
that are retained net of interest subsidies paid out to eligible funding recipients. Given these
sizeable cashflows and the growing size and strength of SRF balance sheets, this report contends
that the SRFs may now be in a position to support additional SRF projects with the same
resource base. This additional financial assistance is based on existing federal authority under
Title VI, Section 603(d)(3), (4) and (5) to provide security to or guarantee loans for SRF eligible
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projects or financing entities that fund SRF eligible projects. The report specifically focuses on
the opportunity to use the Title VI, Section 603(d) authority to support market-based Gl funding
solutions that incorporate private sector project ownership and repayment responsibility. The
analysis contained in this report includes a conservative assumption that the Gl loans supported
through such a guarantee program would be below investment grade, and thus, the results are
a conservative estimate of the funding capacity that SRF Administrators could make available.
Nevertheless, the analysis provided in the report demonstrates that after allocating SRF
resources needed to assure the integrity of the existing SRF bonding and/or lending program,
sufficient resources remain to support additional projects backed by an SRF financial guarantee.
The analysis further demonstrates that for each dollar of annual SRF cashflows $3 to $14 dollars
of triple-A rated funding capacity could be created for such projects. Based on $2 billion in
annual cashflow, this translates into $6 to $28 billion in potential untapped funding capacity
nationwide. Furthermore, additional tools that are available to SRF Administrators, such as
access to secured letters of credit and the legal authority to cross-pledge resources between the
Drinking Water SRF ("DWSRF") and CWSRFs, could more than double this estimate. The report
also addresses concerns that providing financial assistance to below investment grade
borrowers could undermine funding capacity for traditional forms of SRF financial assistance.
These concerns could be mitigated through the use of loss reserves funded from non-SRF
sources as well as the establishment of loan underwriting standards to protect SRF resources.
Partnering the guarantee authority provided by the Act with state-of-the art Gl project and
funding designs offers two collateral benefits. First, it offers a form of SRF financial assistance
that would allow states to provide cost saving benefits to urban communities, and second, it can
extend the reach of the CWSRF in support of a segment of the infrastructure marketplace that is
more labor intensive, thereby supporting not only sustainable project designs but also
sustainable employment opportunities.
We recognize that despite the opportunity to better utilize existing SRF resources, not all state
laws governing SRF administration mimic the federal authority. Consequently, certain states
may need to amend current enabling statutes before they can take advantage of this untapped
program capacity. In addition, other institutional constraints may exist, including existing SRF
guidance and policy as well as manpower and the necessary expertise needed for successful
implementation and administration. However the report recommends that U.S. EPA take an
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inventory of existing state legal authority, evaluate current guidance and policy with respect to
project eligibility review and approvals and streamline regulatory requirements, as appropriate,
to promote effective SRF use of the financial guarantee authority. The report also recommends
that U.S. EPA take an active leadership role in facilitating states' use of the federal authority
found in Section 603(d)(3), (4) and (5). Finally, we want to note that green infrastructure
projects may be implemented using traditional means of SRF funding. The use of traditional
funding for green infrastructure and guarantee opportunities are not mutually exclusive.
II. Background - Purpose and Scope of Report
Nationally, as cities attempt to meet U.S. EPA requirements for the management of stormwater,
they are evaluating opportunities to implement Gl as an alternative to traditional gray
infrastructure. Gl is being adopted as a lower-cost alternative that can also help create more
livable communities. One specific example of a city that is implementing a substantial Gl plan is
Philadelphia, Pennsylvania. In April 2011, U.S. EPA and the City of Philadelphia signed the Green
City, Clean Waters Partnership Agreement that established a plan to remediate stormwater
runoff with the launch of a $2.4 billion capital investment program to retrofit approximately
10,000 impervious acres of public and private property over a 25-year period.^he plan calls for
$1.67 billion in public funds to be invested directly in Gl solutions while also leveraging private
sector investment. The plan establishes a baseline for owners to remediate non-residential
properties and manage an inch of runoff onsite. The economics of the plan required that the
City's wastewater pricing mechanism be modified to account for the City's true cost of servicing
stormwater flows for non-residential owners. In July 2010, the City began a phased
implementation of the new pricing mechanism that set a price for stormwater removal services
on the basis of impervious surface as a percentage of a property's total size; the smaller the
impervious surface footprint, the lower the overall price for stormwater services. The intent was
twofold: to better align stormwater mitigation service charges with the properties responsible
for stormwater flows and to establish a price incentive for property owners to undertake
stormwater Gl investment that could cost less than the net present value of the impervious
surface stormwater servicing charge.
i
See U.S. EPA/City of Philadelphia Green City, Clean Waters Partnership Agreement, April 2012 and Administrative Order for Consent on Compliance entered into
by the City of Philadelphia, the Philadelphia Department of Water and U.S. EPA Region III.
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The Philadelphia Water Department has estimated that the Gl remediation plan will save $8
billion in traditional point source investment, most of which would have required public funds to
be raised in the capital markets. With these estimated savings and the creation of price
incentives for private funding of Gl, the plan has the immediate effect of: (i) reducing the City's
capital expenditure projections and (ii) producing a financial benefit by shoring up existing bond
credit ratings and budget estimates of future debt service costs. As such, these benefits are
critically important to long-run prospects for sustaining system performance and keeping pace
with state and national clean water goals. Given the estimated capital savings, the positive
implications for broader implementation of this strategy as a national wastewater infrastructure
gap closing measure are profound.
Financing mechanisms available to non-residential property owners for Gl are variants of those
in use in the energy retrofit sector. These include the following options: (i) direct owner funding
from cash or from financing made available by traditional creditors where project and
performance risk resides with the owner; (ii) third-party off-balance sheet financing whereby a
project developer takes the project, performance and operating risks in exchange for annual
payments representing a portion of the estimated fee savings; (iii) application of the Property
Assessed Clean Energy ("PACE") financing model that involves non-recourse debt financing by a
sponsoring municipality that is secured and repaid by an assessment on each property's Gl
improvement; and (iv) on-bill financing sponsored by water and sewer utility and/or third-party
investors where on-bill collections are used to repay the sponsor's project financings.
The availability of these financing mechanisms provides a sound foundation for testing and
scaling Gl project development to meet the terms of U.S. EPA Gl Partnership agreements with
America's cities. The nation's CWSRF programs can be used to provide SRF financial assistance
to Gl projects. To date, SRF Administrators have delivered almost all funding assistance in the
form of below market rate loans and the purchase of below market rate debt obligations funded
from program equity and bond proceeds. Currently, the idea that SRF resources can
simultaneously support below market rate direct financing and triple-A bond financing, as well
as deliver triple-A rated credit enhancement to support market rate funding for additional SRF-
eligible projects may not be well understood. For eligible SRF projects that cannot be supported
by below market rate financing due to funding constraints, SRF financial assistance that can
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meaningfully improve financing terms could be made accessible to eligible projects in the form
of SRF credit enhancement. If this can be achieved, the economics should provide benefits to
property owners in in the form of lower financing costs and to project developers in the form of
higher returns on equity investment. The critical value of an SRF guarantee would be the
improvement in project economics and the resulting increase in the number of projects that are
successfully developed in the Gl marketplace.
As of April 2013, market interest rates suggested that Gl project owners and sponsors could
realize meaningful cost savings from the assistance of a top rated triple-A SRF credit
enhancement mechanism. Assuming a portfolio of 20-year Gl project financings of minimum
investment grade quality (triple-B), annual interest costs would approximate 5.75%. With the
benefit of SRF financial assistance, interest costs would approximate 3.50%. This represents a
savings of 225 basis points or 2.25%. On a percentage basis, the annual interest savings is 39%. A
portfolio rated less than investment grade (below triple-B) would realize even greater savings.
Although the value of credit enhancement as a means of delivering interest cost savings to
borrowers is well established, SRFs have used this authority sparingly. Through reporting year
end June 30, 2012, U.S. EPA's Clean Water Benefits Reporting System reported cumulative SRF
financial assistance of $52.6 billion. Of this amount only $5.5 million was categorized as SRF
guarantee assistance for local debt obligations and another $15.2 million was categorized as
guarantees for sub-SRF loans.2
The Act specifically identifies Section 212, 319 and 320 projects as eligible for SRF financial
assistance. These include Section 319 and 320 non-point source projects which are privately
owned. In areas where National Pollutant Discharge Elimination System ("NPDES") permits have
been issued, such projects become subject to Section 212 provisions, which under the Act are
eligible for SRF financial assistance if they are publicly owned.3
In this report, we will review Gl project eligibility for SRF financial assistance under the Act, the
forms of financial assistance permitted under the Act, and those forms of financial assistance
that can be integrated into existing SRF programs to support Gl development in ways that do
U.S. EPA Clean Water Benefits Reporting System, June 30, 2012, www.water.epa.gov/grants_funding/cwsrf/cwnims_index.
3 Where such permits exist we can expect such projects to score and rank high enough to benefit from below market rate financial
assistance from SRF programs. However, certain state programs limit SRF below market rate lending assistance to smaller
communities thereby leaving larger jurisdictions, including those with negotiated NPDES permits beyond the reach of the program.
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not undermine current state priorities. The report will also explain how states can apply annual
SRF free cashflows to design and implement top-rated credit structures and credit enhancement
mechanisms that can: (i) minimize Gl project costs, (ii) promote Gl project value to third-party
investors and (iii) support Gl project funding aggregation at the local level and on a statewide
basis. The report will also estimate the potential reach of the SRFs nationally to support Gl
funding at significantly lower cost.
III. SRF Project Funding Authority4
The Act establishes project eligibility for SRF financial assistance. Public and privately owned
projects that fall under Sections 212, 319 and 320 are eligible for SRF financial assistance.
Gl Project Eligibility for CWSRF Financial Assistance
Gl projects that qualify for SRF financial assistance may be publicly or privately owned, as
provided under Section 212, 319 and 320. Gl projects that can receive assistance include green
roofs, infiltration basins, curb cuts, bioswales, wetland protection and restoration and the
promotion of low impact development practices that reduce stormwater discharge, including
the removal of impervious pavement in favor of pervious surfaces. Below is a summary of these
pertinent sections.
Section 212 - Publicly owned projects are SRF eligible. Under Section 212, the cost of land is only
eligible if it is integral to the treatment process. U.S. EPA has stated that the acquisition cost of
land integral to implementing stormwater best management practices qualifies as an eligible
project cost under Section 212.
Section 319 - Publicly or privately owned projects, included in a 319 Non-Point Source
Management Plan, are SRF eligible. These can include projects that are not specifically required
by a draft or final NPDES permit. In areas subject to NPDES permits, U.S. EPA characterizes
projects that fall into Section 319 as projects that go beyond the requirements of the NPDES
permit.5
4 Other than the Act, the source for most information and analysis provided in this section of the report can be found in "The Clean
Water State Revolving Fund Program: Tapping Its Untapped Potential," U.S. EPA DRAFT, October 15, 2007.
5 On March 22, 2013, U.S. EPA approved a New York State Environmental Facilities Corporation ("EFC") request to include the New
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Section 320 - Projects that reside in a nationally designated estuary, as prescribed by Section
320(a), and are included in a Comprehensive Conservation Management Plan are eligible for SRF
financial assistance. Under Section 320, privately owned and regulated stormwater projects are
eligible, including Gl.
Eligibility Issues and Remedies
Although Section 212 projects can be either publicly or privately owned, Section 603(c)(l) of
Title VI, stipulates that only publicly owned Section 212 projects are eligible for SRF financial
assistance. Another factor that drives eligibility is the NPDES Stormwater Permit Program.
Stormwater projects that are specifically required by a draft or final NPDES permit become
subject to the Act's Section 212 authority and, therefore, must be publicly owned to be eligible
for SRF financial assistance. Projects that go beyond the minimum federal regulatory
requirements defined in NPDES permits may be fundable as Section 319 non-point source
projects even if they are privately owned. Section 320 projects, which fall under the CWSRF's
authority to develop and implement Section 320 Comprehensive Conservation Management
Plans, include privately owned projects that require NPDES permits. In this regard, Section 320
overrides the Section 603 public ownership requirement for NPDES permitted projects that
would otherwise fall under Section 212.
IV. SRF Financial Assistance Authority
The Act identifies six distinct forms of financial assistance authority that SRF Administrators can
rely upon. This authority is provided in Title VI, Section 603(d)(l) through (6), restated as
follows:
York State Energy Research and Development Authority's ("NYSERDA") portfolio of Residential Energy Conservation Projects
("RECPs") as eligible 319 projects qualified for financial assistance by the CWSRF under Section 603 (c) (2) of the Act. This approval is
conditioned on EFCandthe NYSERDA explicitly mentioning in their operating agreement that the projects are intended to assist with
the implementation of the State's program established under Section 319 of the Act. In July 2013, NYSERDA sold its Residential
Energy Efficiency Financing Revenue Bonds, Series 2013A which were guaranteed by the NYS CWSRF pursuant to the terms of EFC's
SRF 2010 Master Financing Indenture. The NY Nonpoint Source Management Program identifies atmospheric deposition from fossil
fuel combustion as a significant source of water quality impairment and calls for additional controls over, and reductions in
atmospheric deposition of such pollutants in NY's waters. RECPs are expected to reduce dependency on fossil fuel use within the
State. Providing such assistance to projects that reduce fossil fuel reliance is consistent with U.S. EPA's eligible project policy
guidance (seefootnote 4 above).
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Except as otherwise limited by State law, a water pollution control revolving fund of a
State under this section may be used only
(1) to make loans, on the condition that
(A) such loans are made at or below market interest rates, including interest free
loans, at terms not to exceed 20 years;
(B) annual principal and interest payments will commence not later than 1 year
after completion of any project and all loans will be fully amortized not later
than 20 years after project completion;
(C) the recipient of a loan will establish a dedicated source of revenue for repayment
of loans; and
(D) the fund will be credited with all payments of principal and interest on all loans;
(2) to buy or refinance the debt obligation of municipalities and intermunicipal and
interstate agencies within the State at or below market rates, where such debt
obligations were incurred after March 7, 1985;
(3) to guarantee, or purchase insurance for, local obligations where such action would
improve credit market access or reduce interest rates;
(4) as a source of revenue or security for the payment of principal and interest on
revenue or general obligation bonds issued by the State if the proceeds of the sale of
such bonds will be deposited in the fund;
(5) to provide loan guarantees for similar revolving funds established by municipalities or
intermunicipal agencies;
(6) to earn interest on fund accounts.
SRF Administrators have largely relied on Section 603 (d)(l), (2) and (4) - the loan provisions, the
municipal debt obligation purchase authority and the bond security provisions - to deliver
financial assistance in the form of loans to, or to fund the purchase of municipal debt obligations
from, eligible assistance recipients. In such programs, most states have delivered financial
assistance from fund equity or from the proceeds of revenue bonds that are secured by fund
equity.
Projects funded have been drawn from the annual Intended Use Plans for each state in
accordance with project priority score and project readiness. The funding capacity for projects
has simply been a function of the sum total of projected SRF financing available, based on the
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total of:
1. The state's allocation of the annual federal appropriation,
2. State match dollars,
3. Earned interest on fund accounts,
4. Loan repayments and releases from bond reserves funded from federal and state
contributions, if any, and
5. Bond proceeds deposited in the fund;
Less:
1. Bond principal and interest payments, and
2. Administrative costs.
These available dollars are matched against project dollars to determine the extent of project
funding that can be supported during the year. States that do not leverage their SRF federal
appropriations and state contributions with bond proceeds have relatively fewer dollars to
support projects in a given year. However, this may have minimal or no impact on the relative
amount of SRF recycled dollars that can be made available to support a credit guarantee
program. SRF cashflows, net of any bond debt service obligations, are available to support
additional projects that can be funded pursuant to the authority granted in Section 603(d)(3), (4)
and (5): the local obligation guarantee, bond security provisions and loan guarantees that can be
made available to sub-SRFs established by municipalities or intermunicipal agencies. Nationally,
CWSRF annual cashflows exceed $2 billion. To date, the additional financial assistance that these
cashflows could support, relying on Section 603(d)(3), (4) and (5) authority, remains largely
untapped. These financial assistance options and their potential role in supporting publicly and
privately owned Gl projects, which are not currently fundable based solely on the financial
assistance authority found in Section 603(d)(l), (2) and (4), will be reviewed in the next section
of the report.
V. Available SRF Gl Funding Mechanisms Given Federal Authority
As granted in the Section 603(d), the federal assistance authority can be tapped to support
public-private partnership initiatives in the Gl space. What follows is a discussion of the
multifaceted SRF financial assistance options that states and municipalities can tap in
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partnership.
State Level Gl Funding Mechanisms
Basic Structure - The SRF Administrator can develop a statewide funding mechanism to lend SRF
credit support by relying on the authority provided in Section 603(d)(4) and obtaining and/or
utilizing state legal authorization. In the case of non-leveraging states, this approach would
require the creation of a financing indenture, and in the case of leveraging states, it would
require an amended or new indenture that establishes a new security lien subordinated to any
outstanding bond issues that would:
1. Fund eligible projects from the proceeds of bonds issued under the indenture;
2. Be secured, in the following priority order, by:
a. Principal and interest payments on loans funded by and pledged to each bond
financing;
b. Loan loss reserve balances, funded by one or more third parties (see Loss Reserves,
below);
c. All or a portion of the available program cashflows provided from:
i. Principal and interest payments on loans and purchased obligations funded
from SRF equity;
ii. Principal and interest payments on loans and purchased obligations pledged
to bonds that are senior to the new subordinated indenture, net of bond
debt service payments;
iii. The release of any reserves, net of any bond principal paid on bond funded
reserves; and
d. Unencumbered balances, including earned interest on non-program investments.
Figures 1 and 2 provide generic flow of funds graphics for a state that currently leverages and a
state that does not. As the graphics demonstrate, state legal authority notwithstanding, there is
no inherent structural impediment in the current design of state level SRF financing programs
that would preclude the development of a Gl guarantee program. Projects funded from bond
proceeds issued under a new indenture would be subject to prior listing or group categorization
on the state's annual Intended Use Plan and approval by the SRF Administrator as SRF eligible
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pursuant to the Act, Sections 212, 319 or 320. 6
Benefits - A state level funding mechanism can aggregate financing for eligible projects from all
jurisdictions within the state. A statewide universe of potential projects also promotes
economies of scale. This should allow such a program to: (i) tap a higher percentage of its
theoretical credit capacity (i.e., the level of project lending that could be supported under the
indenture at given credit rating level) and (ii) leverage the credit diversity of the statewide
portfolio to further extend credit capacity limits for any given credit rating target.
Constraints - At the state level, the work to determine project eligibility is handled by the
resource or environmental regulatory body or is delegated to qualified staff employed by the
SRF financing entity. How additional Gl projects are processed for eligibility may have an impact
on the success of a state level program. Manpower constraints imposed by budget limitations
could undermine review processes with negative consequences for program effectiveness. SRF
Administrators will need to address this issue by securing more resources, streamlining
processes (where inefficiencies exist) or designing sub-state level processes that would allow
local administrators to review and attest to project eligibility for projects in their jurisdictions.
Implementing the third option may require U.S. EPA approval and/or general guidance on this
subject that would standardize sub-state project eligibility review processes.
States that do not currently leverage may not have adopted SRF enabling legislation that
included bonding authority or may, as a matter of policy or resource limitations, be averse to
relying on debt issuance to leverage program equity. Those states without bonding and/or
guarantee authority will need to amend their enabling legislation before a state level funding
mechanism can be implemented. States may also need to hire internal staff with the expertise
to manage the underwriting and credit risks inherent in a guarantee program.
Sub-state Level Gl Funding Mechanisms
Basic Structure - SRF Administrators can utilize the guarantee authority granted in Section
603(d)(3) and (5) to support sub-state level programs undertaken by local municipalities and
intermunicipal agencies. Whereas the Section 603(d)(4) authority is limited to state level bond
issues where proceeds are deposited in the fund, the guarantee authority specifies that SRF
> See Federal Register 40 CFR Part 35, Section 35.3150.
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Administrators can "guarantee, or purchase insurance for, local debt obligations...." (Section
603(d)(3)) and "... provide loan guarantees for similar revolving funds established by
municipalities or intermunicipal agencies" (Section 603(d)(5)).
By relying on the guarantee authority, a state SRF could support local bonding efforts where
proceeds are deposited in dedicated loan accounts for SRF projects. The basic elements of
security would consist of:
1. Principal and interest payments on loans funded from proceeds of the local debt
obligation;
2. Loan loss reserves funded from a portion of bond proceeds or equity contributions from
the sponsor or third parties; and
3. SRF program cashflows, net of prior liens, and unencumbered SRF balances.
The SRFs could rely on the same resources - in the same order of priority - that would be used
to secure a state level program, as discussed in the prior section.
Figure 3 provides generic flow of funds graphic depicting an SRF leveraged program in its
capacity as guarantor of a local debt obligation and Figure 4 an SRF direct loan program as
guarantor of loans of a similar revolving fund established by a municipality or intermunicipal
agency. While the figures depict either a leveraged or a direct loan program, either structure
could support both guarantee mechanisms. In each case, the established municipal or non-
governmental organization would secure financing through the issuance of bonds, or be the
recipient of bond proceeds issued on its behalf, and lend the proceeds to fund either public or
private projects. 7
Benefits - For states that delegate administrative authority to sub-SRF sponsors offering
guarantee support could allow such sponsors to operate without being subject to the competing
priorities of the state SRFs. Such delegation would entail vetting projects for SRF eligibility and
qualifying recipients as both viable credit risks and SRF-eligible in accordance with Sections 212,
7 An example of an entity established by a municipality that could qualify under Section 603(d)(5) is the Chicago Infrastructure Trust.
The Trust was created by the Chicago City Council to act as an administrative body for the management of infrastructure projects
and contracts. The Trust is an Illinois not-for-profit designed to attract private capital to assist in rebuilding the City's infrastructure.
As a City of Chicago established and governed entity, it could be an eligible recipient of SRF support as a project developer or as a
sub-state SRF Administrator.
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319 and 320, as applicable. SRF implementation regulations recognize delegation of
environmental reviews for all Section 212 projects receiving SRF assistance, subject to
established legal foundation in state law and supporting administrative documents that specify
the extent to which environmental review responsibilities will be delegated to local recipients
and subject to state oversight.8 Other than project listing on the state Intended Use Plan there is
no specific guidance governing the screening of Section 319 and 320 projects for funding
approval. With respect to credit reviews, SRFs would manage exposure to losses by setting
baseline credit parameters, including loan underwriting standards and non-SRF funded loss
reserve requirements. For any given rating objective, standards set tighter than the baseline
could be beneficial where they would allow for the calibration of SRF supported credit capacity
in line with the needs of the sponsor. The key item, however, would be local administration over
project approvals. Local administration would address any state level resource issues that could
negatively impact the effectiveness of locally directed programs.
Constraints - The extent to which states did not include the financial assistance language of
Section 603(d)(3) and (5) in their SRF statutory provisions will preclude the use of this financing
mechanism to promote Gl solutions. For such states, statutory amendment will be a necessary
prerequisite to implementation. Another issue involves the determination of SRF project
eligibility by local revolving fund administrators. There is a risk that loans or bonds guaranteed
by the SRF may later be determined to have funded projects out of compliance with SRF
requirements and therefore ineligible, in whole or in part. SRF and sub-state level program
Administrators will need to provide contingencies for removing loans for non-compliant projects
from the SRF guaranteed sub-SRF portfolio if the violation(s) in question cannot be remedied.
(See Non-conforming Loans below.)
Lending Standards
For an SRF guarantee supported program to succeed at the state or sub-state level, adherence
to lending standards that establish a credible minimum credit for publicly issued debt
obligations is critical. What loan standards are adopted must be guided by context. For SRF
Administrators, the quality of lending standards are critical to protecting the unencumbered
balances and SRF "free" cashflows pledged, first, to a guarantee program and, second, to new
See Federal Register 40 CFR Part 35, Section 35.3140.
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loans, debt purchases or new reserves (the "traditional uses") all in support of higher priority
projects. This is less important in terms of protecting the financial strength of the SRF credit
than it is in protecting SRF lending capacity (i.e., the capacity to lend to SRF projects given
available resources). The use of SRF resources to cover loan defaults incurred by the guarantee
program will not impair ratings for bond financings. However, to the extent that default
payments are not recovered, such losses will reduce SRF resources and future SRF funding
capacity.
The overriding factors in setting these standards are the baseline loan security provisions, which
depend in part on the funding model(s) adopted. At a minimum, lending standards must be
compliant with the terms of Section 603(d)(l), which requires that loans be secured by a
dedicated source of revenue. Introduced in Section I of this report, the models identified as
suitable for funding and securing Gl financing include:
Direct owner funding sourced from owner equity or in combination with debt;
Third-party off-balance sheet funding sourced from equity or in combination with debt;
Application of the PACE financing model; and
On-bill financing.
Each approach presents its own standard setting issues.
Direct owners, as borrowers - Direct owner funding exposes the SRF, as purchaser or guarantor,
to the credit of the commercial property owner. This immediately presents managerial capacity
issues for state level and sub-SRF Administrators that may not have the credit expertise
necessary to evaluate the credit quality of commercial property owners. Developing the in-
house expertise to handle this task will impose costs without certainty that adequate loan
portfolio credit quality will be established to protect SRF objectives. It will require threshold
credit standards to be set that rely on market proxies such as a minimum investment grade
rating for the owner, a parent co-obligor or irrevocable letter of credit support. As most
commercial property owners would not have a rating, an alternative threshold credit standard is
needed. This could be provided by a letter of credit wrap from a bank that is acceptable to the
SRF Administrator. SRF Administrators could also offer a list of approved third-party project
owners that can satisfy the threshold credit standard (see following paragraph). Additional
requirements in support of loan accreditation would include credit checks, including credit
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scores, and documentation of any loan repayment histories.
Third-party project owners/operators, as borrowers-Third-party project ownership arises
where a property owner assigns ownership rights to the developer of the Gl remediation project
who invests in and develops the project in exchange for a percentage of the savings realizable
on the project investment. Third-party project ownership exposes the SRF, as purchaser or
guarantor, to the credit of the third-party project owner. Although this also presents the same
managerial capacity issues for state level and sub-SRF Administrators, third-party project
owners, as a class, may be more likely to meet credit thresholds. Though lending underwriting
standards would be the same, the attributes of third-party project owners, which benefit from
operating with an established business model supported by an investment grade balance sheet,
investor equity dedicated to the project(s) and/or bank credit lines that satisfy lending
standards, can substitute, as applicable, for the commercial property owner's generally weaker
credit.
Direct owner funding relying on the PACE model - The PACE model offers another option for Gl
project funding. The foundation of the model is a property assessment that is levied by the
sponsoring municipality that provides funding to property owners that undertake Gl to achieve
stormwater mitigation. In relation to distributed Gl projects, the levy would be set at the annual
rate necessary to cover, as applicable, the debt service payments, returns on equity to third-
party developers and related administrative costs on the project debt issued by the municipality
to fund project costs. Under this model the municipality, including stormwater districts with
taxing power, would qualify the project vendors that would implement Gl for property owners.
The property assessment would remain on each property with Gl development until the
municipality's project-related debt is retired. Twenty-seven states and the District of Columbia
have adopted PACE legislation to promote energy retrofits on residential and commercial
property. 9Afew of these statutes incorporate water related projects as PACE eligible. In most
cases, however, legislation will be needed to apply the PACE Model to stormwater mitigation.
On-bill financing - The on-bill financing model is similar to the PACE model in that the
sponsoring municipality structures an additional charge to participating utility ratepayers to
service the cost of the ratepayer's project, including debt service on debt issued by the SRF or
Legal challenges by the Federal National Mortgage Association and Federal Home Mortgage Loan Corporation have been limited to
residential property liens.
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sub-state sponsors, return on equity to third-party developers and administrative costs.
Loss Reserves
For each of the owner funding options, discussed above, it will be highly beneficial to state and
sub-state level programs to fund a loss reserve that would be drawn on before the SRF
guarantee is utilized. A loss reserve would be funded at a level necessary to establish: (i) an
underlying credit quality standard by which the rating agencies will measure the exposure of the
SRF, as guarantor, of non-recourse bonds or as purchaser of project owner loans and (ii) a
margin of safety that minimizes risk to the SRF that funding capacity for "traditional" forms of
financial assistance will be adversely impacted. In order for the program to achieve a rating
benefit, the loss reserve will need to be funded from contributions and not bond proceeds.
Potential sources of contributions include:
Sub-SRF sponsors;
The SRFs from available non-program income; and/or
Third parties interested in supporting funding mechanisms for distributed Gl.
Contributions from sponsoring municipalities would notably represent a claim on all system
users within the jurisdiction and not just the beneficiaries of Gl project funding. Nevertheless,
the appropriation of unencumbered balances to fund a loss reserve can be justified given the
implied "Gl versus gray infrastructure" cost savings to each participating municipality that would
benefit all users. SRFs, which have accumulated non-program income from the generation of
administrative fees, invest such income until it is needed to fund future operations. For many
SRF Administrators, the projected timing of using these funds for operations, versus current
collection rates, provides a meaningful float that can be a funding source for loss reserves
without risk to operations. Funding can also be provided from third parties, such as Non-
governmental Organizations ("NGOs"), that are committed to the successful implementation of
distributed Gl.
The loss reserve would offset payment defaults and a percentage of monetary losses, net of any
payment recoveries. The level of loss reserves needed to support the funding mechanism will
depend on each SRF's underlying and credit enhancement rating targets, SRF program risk
tolerance and, as modified in the long run by, Gl project owner/developer payment
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performance.
Non-recourse Obligations
For sub-state level programs that issue bonds to fund eligible projects on behalf of direct owners
and third-party developers, bond security will, by necessity, be of a non-recourse nature -
meaning, it will not be a general obligation of the sponsoring entity. As a non-recourse
obligation, the underlying credit strength rests solely on the participants as secured by the loan
repayment obligation, property assessment or on-bill charge. The SRF guarantee on the local
debt obligation issued by the sponsoring municipality, intermunicipal agency or an entity
established by the local entity would be secured, first, by its security interest in the pledged
repayment stream and, second, by a loss reserve.
Non-SRF Eligible Projects and Non-conforming Loan Remedies
Any delegation of project eligibility reviews to sub-SRF Administrators introduces risk that SRF
guarantee support will be extended to projects that are: (i) later found during an internal or
external audit not to be SRF eligible or (ii) determined to be out of compliance with SRF lending
standards. For those projects that are not or cannot be made compliant with SRF eligibility
requirements or lending standards, alternative funding will be needed to replace the SRF
supported funding. A short list of funding remedies may include a prepayment obligation of
project owners that is backed by bank-secured takeout funding or a fee-based purchase
obligation of the SRF Administrator. The first option, the commitment of creditworthy banks to
purchase non-conforming obligations, would add cost to the credit enhancement program,
thereby reducing some of the benefit. In lieu of securing a bank purchase commitment, the SRF
Administrator could rely on non-program income to purchase ineligible obligations, subject to
state investment limitations. Alternatively, U.S. EPA could establish a "safe harbor" and provide
a non-conforming project allowance, or non-conforming obligations could be placed in a senior
lien account within the Gl funding indenture where they would be collateralized solely from the
cashflows of other Gl recipient obligations and not from SRF resources.
Loan Warehousing
Coordinating the roll out of funding for distributed Gl projects will present logistical issues that
will be problematic if not planned for at the creation of the SRF sponsored funding program.
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These issues primarily have to do with project costs and costs of debt issuance. The project
specific issues that present challenges include project cost and expenditure timing uncertainties
relative to funding timing that risk: (i) an over or under issuance of SRF-supported debt
obligations and/or (ii) project delays, which can impair contractor operations and returns on
equity. The debt issuance cost issue arises if projects cannot be sufficiently aggregated to
minimize the impact of issuance costs on financing terms extended to project owners.
The solution to each of these issues is to construct a short-term funding mechanism that can
provide project funding during the period when projects are getting under way and cost
estimates are fluid. Some SRFs have established short-term lending programs to fund projects in
advance of long-term financing in order to address the very same issues identified above. SRFs
could provide resources for early project funding from:
The program liquidity provided by the average daily investment balances of the CWSRF
and DWSRFs; 10
Average daily investment balances of administrative accounts holding non-program
income; or
Short-term market borrowings secured by subordinate liens11 on program cashflows and
available investment balances.
Although an SRF guarantee is designed to support market access to projects that cannot
otherwise benefit from below-market-rate SRF funding, on a day-to-day basis, many SRFs carry
sufficient investment balances to provide short-term financing at market or below market rates
to eligible projects across the board, including those for which long-term assistance is limited to
the guarantee. Although SRF Intended Use Plans encumber investment earnings, recycled
dollars, federal appropriations and state match contributions to fund specific projects or to fund
reserves pledged to SRF bonds, the buildup of stable balances from investment earnings and
recycled dollars can be used to carry short-term funding commitments for periods of time
before priority projects are ready for long-term funding. Conceptually, such balances are
SRF Administrators in Massachusetts and New York have obtained U.S. EPA approval to invest CWSRF and DWSRF assets across
programs to support lending demand for eligible projects.
11 Security liens supporting short-term financing vehicles would reside below that of the SRF guarantee. However, because such
obligations are repaid in the nearterm the credit stresses applied reflect exceedingly low immediate default stress probabilities
resulting in top ratings for SRF subordinated lien short-term financing vehicles (see Section V, "Rating Agency SRF Criteria and Target
Ratings").
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referred to as the "float."
Once committed to a short-term financing program, some SRFs have found it beneficial to
develop short-term borrowing mechanisms to supplement the float and assure short-term
funding availability prior to long-term financing. These mechanisms can be extended to
commercially owned, distributed Gl projects. An additional source of short-term funding could
be provided directly by NGOs or private lenders to approved projects with such funding later
taken out by SRF financing.
Relying on SRF resources, supplemented to the extent needed by short-term borrowing, SRF
Administrators could warehouse loans for their own accounts or on behalf of sub-state
programs until long-term borrowing needs are finalized and aggregated for long-term funding.
Another source of loan warehousing funds could be sub-state SRF sponsors or participating
municipalities. An SRF guarantee or purchase commitment would need to be in place at the time
of origination to secure the loans.
VI. SRF Rating Agency Criteria and Rating Targets
SRF bond ratings are generally a function of: (i) the level and quality of resources pledged, (ii)
the manner in which such resources are pledged (i.e., the credit structure), (iii) the credit quality
of the underlying loan or obligor portfolio, including portfolio size and diversity, and (iv) strength
of the SRF Administrator's management. These factors provide the ingredients for "stressing"
SRF portfolios, inclusive of outstanding and projected SRF recipient obligations. The key driver is
the default tolerance analysis (or the cashflow stress testing) of the SRF portfolio given the
credit quality of the recipient obligations. Prior to providing a bond rating on a new SRF
financing, the rating agencies apply their ratings to the underlying obligations and stress the SRF
portfolio by discounting expected cashflows to assess the ability of pledged SRF assets to meet
bond debt service obligations. The assigned bond rating reflects the probability of a missed debt
service payment. Since 1994, the rating agencies have consistently assigned top ratings to SRF
bond issues, indicating a remote probability of a missed debt service payment and an extremely
high likelihood that SRF bond security provisions will remain sufficient over the life of the bond
financing program to maintain a high margin of safety relative to that required by the rating
criteria.
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For each leveraged program, the pledge of SRF equity reflects financial assistance targets. For
example, a leveraging SRF that seeks to provide financial assistance in the form of interest
subsidies at 50% of the market rate will pledge $1 of equity to the bond issue for every $2 of
projects funded."Consequently, the assignment of top bond ratings is simply a by-product of
this arrangement suggesting a degree of excess or untapped credit capacity that can be put to
work. Generally, the lower the leverage factor, the lower the below market rate and the higher
the untapped credit capacity and vice-versa. The existence of excess or untapped credit capacity
relative to SRF financing program ratings represents funds that can support highly-rated SRF
guarantees of bonds or loans. For SRFs that currently do not leverage program equity to boost
funding capacity, available credit capacity is likely to be even greater. A review of the written
SRF criteria of the three nationally recognized statistical rating organizations ("NRSROs") that
provide the bulk of SRF credit ratings - Moody's Investors Service ("Moody's"), Standard &
Poor's ("S&P") and Fitch Ratings ("Fitch") - is provided in Appendix A. The SRF criteria of the
NRSROs is applied in the following section to estimate the extent of excess program credit
capacity that could support triple-A-rated SRF guarantee programs.
VII. Estimating Excess SRF Funding Capacity in the Context of NRSRO Rating Criteria
The review of the NRSRO SRF rating criteria allows us to assess the opportunity to expand SRF
financial assistance capacity on terms consistent with current program structures and
objectives. In this section of the report we will apply the rating agency's SRF criteria in looking at
program cashflows and other available resources to gauge the credit potential and capacity of
SRFs to successfully expand SRF financial assistance by applying the federal authority of Section
603(d)(3), (4) and (5).
SRF Program Free Cashflow
As used in this report the term "SRF Program Free Cashflow" refers to the dollars that recycle
from financial assistance lending, reserves pledged to SRF bond issues and investment earnings
on equity balances, net of bond principal and interest payments. SRF Program Free Cashflow is
measured as the difference between annual cash inflows and outflows, net of annual federal
12 Fora comprehensive discussion of SRF leveraging models the reader should referto "Relative Benefits of Direct and Leveraged
Loans in State Revolving Fund (SRF) Programs," U.S. EPA Financial Advisory Board, August 2008, pgs. 27-32.
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appropriations and state contributions. Federal appropriations and state contributions are
excluded from the calculation because receipt of such funds has historically been for projects
identified on state Intended Use Plans that will benefit from direct or bond-financed financial
assistance and because paid-in resources are sufficient to support a guarantee mechanism
without diverting the SRF resources from existing delivery mechanisms.
SRF Program Free Cashflow is calculated based on the following inflows and outflows:
SRF Cash Inflows:
Gross SRF financing principal repayments;
Gross SRF financing interest repayments; and
Gross SRF investment earnings
SRF Cash Outflows:
Leveraged bonds repaid;
State match bonds repaid; and
Interest paid on bonds.
The difference between the sum of SRF Cash Inflows ("Gross Receipts") and SRF Cash Outflows
("Total Payments") represents annual free cashflow of SRFs that is available to serve as a source
of security for projects supported by the SRF's guarantee capacity. Figures 5 and 6, show each
state's free cashflow as reported to the National Information Management System for reporting
years ending June 2009 and 2010, respectively.13 As shown in Figures 5 and 6, the free cashflow
for these years was $2.1 billion and $2.4 billion, respectively. These amounts represent the SRF
residual funding capacity as measured solely by free cashflow.
Rating Objectives and Excess Financing Capacity Limits
The premise of this report is that these cashflows provide a potentially significant untapped
source of financial strength which can be used to expand the reach of the SRFs (if these
cashflows are not needed for other eligible purposes). As has been discussed previously in this
report, how much of this cash is actually available to build a resilient credit mechanism for this
purpose depends on the credit quality of each state's portfolio of SRF financings, including the
13 "Clean Water SRF Funds Available for Projects, Detail, By State", Reporting Years Ending June 30, 2009 and June 30, 2010, U.S.
EPA.
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DWSRF, average program cash balances (the "float") and non-program income. The analysis
below tests for the untapped guarantee capacity of the program, represented solely by dollars
recycled from CWSRF direct financing repayments, including such financings pledged to SRF
bond issues. The analysis solves for Gl funding capacity with a set of weighted average SRF credit
quality assumptions for hypothetical state leveraged and direct financing portfolios that recycle,
annually, $100 in SRF equity cashflow. For Leveraged programs, of those recycled funds, it is
assumed that $25 is used for direct loans and the remaining $75 leveraged by a leveraging factor
of 2:1 (representing $2 of project financing funded by $1 of equity and $1 of SRF bond proceeds
or $150 in total leveraged loans), resulting in approximately 15% of the portfolio being direct
financings not pledged to SRF bond issues (calculated as the direct loans divided by the sum of
the direct loans and leveraged loans or $25/($25+$150)). For simplicity, the analysis assumes
the use of bond financed market-rate and 0%-direct loans to achieve the subsidized interest rate
provided to the borrowers. The credit quality of these direct loans is assumed to be slightly
lower than the credit quality of the leveraged portfolio, as the recipients of direct loans are
often the smaller and less credit-worthy borrowers. The assumed credit quality of the
hypothetical cashflows is as follows:
For the hypothetical leveraged portfolio:
Double-A rated financings 10%
Single-A rated financings 45
Triple-B rated financings 40
Non-rated financings 5
Total leveraged 100%
For the hypothetical direct financing portfolio:
Double-A rated financings 0%
Single-A rated financings 30
Triple-B rated financings 50
Non-rated financings 20
Total direct 100%
With leveraged financings comprising 85% of the SRF portfolio and direct financings comprising
15% of the SRF portfolio, the weighted average credit quality for the hypothetical leveraging
state is as follows:
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Double-A rated financings = 10% (.85) + 0% (.15) = 8.50%
Single-A rated financings = 45% (.85) + 30% (.15) = 42.75%
Triple-B rated financings = 40% (.85) + 50% (.15) = 41.50%
Non-rated financings = 5% (.85) + 20% (.15) = 7.25%
Total financings 100.00%
Subjecting the state leveraged and direct financing portfolios to rating agency stress tests
produces the risk adjusted or discounted free cashflow that provides the baseline for
constructing an SRF credit enhancement mechanism. While the SRF Program Free Cashflow is
pledged to the new SRF credit, this analysis assumes that the rating agencies will only credit the
minimum available value from the stressed scenario toward the rating of the new credit. In the
case of Moody's, this number is represented by the inverse of the breakeven default rate across
all CWSRF financing programs, including the hypothetical Gl portfolio. For S&P and Fitch, the
minimum stressed value occurs in the fourth year of the stressed-portfolio defaults. In all cases
there is no rating credit for repayment recoveries, which, in the case of S&P and Fitch criteria,
are projected to commence in the fifth year. The analysis also does not assume any credit for Gl
loss reserves funded from non-SRF sources. (See Loss Reserves discussed previously.) The
Moody's analysis is based on a repayment breakeven; while the S&P and Fitch analysis assumes
default rates for a hypothetical SRF eligible Gl portfolio based on double-B rated credits. Finally,
in applying rating agency criteria, the analysis assesses Gl funding capacity based on underlying
Gl financing terms of 7, 10, 15 and 20 years for Moody's and S&P and 5, 10 and 20 years for
Fitch.
Funding capacity is sensitive to the weighted average interest rate of the hypothetical portfolio
with higher rate assumptions shrinking capacity. In order to approximate state SRF portfolios,
this analysis assumes the average life of the hypothetical leveraged and direct financing
portfolios is 15 years. Interest rate assumptions range from 2.50% for a five-year maturity to
4.00% for a 20-year maturity. These rates are comparable to the triple-A market rates
referenced in Section II of this report.
Results
Below, Tables 1 and 2 show comparative results after applying the three rating agencies' criteria
for leveraged and non-leveraged SRF portfolios, respectively. The results clearly demonstrate
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that both leveraging and direct financing SRF programs can, under the NRSRO's criteria, position
resources to support Gl project financing at the highest rating level. This would be consistent
with the U.S. EPA/Philadelphia Green City, Clean Waters Partnership Agreement.
Table 1
Cashflows Available for Gl Credit Support, Terms and Funding Capacity
After Applying Ratings Criteria for Triple-A Target Ratings Leveraged Model
Moody's
S&P
Fitch
Annual Recycled Equity Cashflow
Before Rating Agency Default Stress Test
Maximum Capital Charge
Minimum Cashflows Available for Gl
Credit Support
Term
($79.28)
$20.72
($65.18)
$34.82
($57.75)
$43.25
Gl Funding Capacity Post Stress Test
$910
$292 $473
$530 $624
$625 $676 $908
Table 2
Cashflows Available for Gl Credit Support, Terms and Funding Capacity
After Applying Ratings Criteria for Triple-A Target Ratings
Direct Financing Model
Moody's
S&P
Fitch
Annual Recycled Equity Cashflow
Before Rating Agency Default Stress Test
Maximum Capital Charge
Minimum Cashflows Available for Gl
Credit Support
Term Interest Rate
5 2.5%
7
15
2.5%
3.0%
3.5%
4.0%
Gl Funding Capacity Post Stress Test
$1,329
$634 $819
$1,151 $1,801
$1,170 $1,325
Based solely on the hypothetical $100 of annual CWSRF free cashflows, discounted for rating
agency default assumptions, the results show that SRFs can produce sizeable annual free
cashflow from leveraged and direct financing models. The leveraged model results, provided in
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Table 1, show annual discounted free cashflow of $20.72 (Moody's), $34.82 (S&P) and $43.25
(Fitch) that converts to aggregate Gl funding capacity over the forecast period of $292 to $625
(Moody's), $473 to $676 (S&P) and $908 to $962 (Fitch). Converting to ratios, the Gl funding
capacity factor for every recycled dollar ranges from 2.9 on the low end to 9 times on the high
end. For SRFs that solely operate direct financing programs, the results are even more
compelling. The direct financing model results, provided in Table 2, show annual discounted
free cashflow of $55 (Moody's), $60.30 (S&P) and $63.13 (Fitch) that converts to aggregate Gl
funding capacity of $634 to $1,359 (Moody's), $819 to $1,170 (S&P) and $1,329 to $1,404
(Fitch). Converting these amounts into ratios, the Gl funding capacity factor ranges from 7.7
times to 14 times each recycled dollar. These results assume that annual payment defaults
within the Gl portfolio are set at rates of 45% (Moody's) and, in accordance with the default
rates based on assumed maturities, 46% to 70% (S&P) and 22% to 65% (Fitch), with no assumed
repayment recoveries.
These results reflect the minimum stressed values of recycled equity cashflows. No analytical
credit is given for repayment recoveries, which S&P and Fitch criteria assume to be 95% and
90%, respectively. To the extent that recoveries can be factored in, Gl funding capacity would
rise exponentially. There are at least two mechanisms that could be invoked to capture the
value of assumed recoveries. These are the securing of bank lines of credit ("Letters of Credit"
or "LOCs") or commitments extended by creditworthy NGOs (each of which could be
collateralized by the assumed recoveries14), SRF non-program investment balances (the "float"
referred to earlier in this report) and/or future free cashflow, including net investment income.
The expense of maintaining bank lines could be covered by non-program income or net
investment income and, similar to the purchase of bond insurance, would qualify as an SRF
eligible expense. For example, an LOG that was triggered at half of the S&P assumed cumulative
default rate would increase Gl funding capacity from the factor ranges cited in the preceding
paragraph to 9.2 to 13 times for the leveraged portfolio and 10 to 15.5 times for the direct
financing portfolio. An expansion of funding capacity with LOCs would require annual LOG fee
expense of 55-65 basis points or 0.55% to 0.65%.
14 Securing such lines with a pledge of recoveries would not violate existing pledges to bondholders as bond payments would have
been provided for by excess pledged cash flows and any draws against the letters of credit. Once drawn, the bondholders rights of
subrogation would pass to the LOG provider(s). For the avoidance of doubt, LOG security could be subject to the prior pledge of cash
flows, including recoveries to bondholders, without affecting LOG terms.
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Results Provide a Baseline for Estimating the SRF's Gl Funding Capacity
These estimates provide a baseline for a deeper discussion of potential Gl funding capacity. As
mentioned above, recycled CWSRF equity cashflow represents one measurable component of
SRF resources that can be used to build Gl funding capacity for a triple-A rated financing
mechanism. In addition to CWSRF equity, on which the above capacity range estimates are
based, additional capacity can be sourced from DWSRF free cashflows and the combined
investment balances of both the SRFs. By law, DWSRF cashflows are already permitted to be
pledged to CWSRF bond financings and vice-versa under existing statutory authority as clarified
through various U.S. EPA Policy Guidance. Consequently, DWSRF cashflows can be added to the
assets that can be pledged to Gl financing indentures or backstop CWSRF guarantees consistent
with the Act.15 It is not unrealistic to assume that the integration of CSWRF and DWSRF
cashflows for this purpose would expand Gl funding capacity by a percentage comparable to the
ratio of a state's DWSRF and CWSRF cashflows, with minor risk adjustments for credit quality
differences between the portfolios of the two programs. Other resources available for capacity
building are the investment balances of the two programs. How much capacity can be added
due to such balances depends on how stable a state's SRF investment balances are, the
investment quality thereof and competing commitments or claims. We can expect that
investment quality is extremely high for the SRFs.16 Also, Moody's SRF rating criteria report
specifically mentions that it has become more comfortable with unpledged funds as a source of
credit support.17 Currently, there is limited information on SRF investment balances and
trends.
VIM. Conclusions and Recommendations
Since program inception in 1989, the CWSRF has received federal appropriations of $29.1 billion
and matching state contributions of $5.9 billion, while amassing retained earnings of $5.7
billion. According to U.S.EPA's website, the CWSRF has utilized these resources to fund $89
billion in financial assistance. Despite these achievements, the nation continues to face
enormous capital funding gaps in the wastewater infrastructure space. The purpose of this
15 See Safe Drinking Water Act, Section 1452(f)(4) and (5) and "New York's Short Term Cross-Investment Structure," January 2000,
U.S. EPA, www.epa.gov/safewater/dwsrf/pdfs/newyork.pdf.
16 See U.S. EPA Financial Advisory Board, "SRF Investment Function: Current Status and Prospects for Enhancing SRF Sustainability",
January 2011.
17 Moody's Investors Service, "U.S. State Revolving Fund Debt," March 20, 2013.
28
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report has been to demonstrate the potential of the CWSRF to expand delivery of financial
assistance by looking to unused federal authority, balance sheet strength and annual free
cashflows. While the guarantee funding mechanisms included herein may be most easily
attained by large SRF programs (and/or those programs that have already leveraged) and SRF
programs that can afford additional staffing and administration costs necessary to start and
maintain this structure, guarantee funding may be accessible to all SRF programs.
Converting this potential into an operating reality will require a number of actions on the part of
local governments, state SRF Administrators, state legislatures and U.S. EPA. Based on the
model provided by the City of Philadelphia and other municipalities, an important step in
catalyzing distributed Gl development will be the need for local governments to implement a
pricing structure for stormwater services that will incentivize property owners to undertake
stormwater mitigation projects. In order to foster a more conducive environment, U.S. EPA will
need to actively partake in the transfer of knowledge related to Gl solutions that are currently
being developed and identify strategies that actively engage SRF Administrators in developing
SRF financial assistance mechanisms that can further lower the costs and expend the pace of Gl
funding on a national scale. At the state level, current barriers to implementation are twofold:
certain states have chosen to limit SRF financial assistance to direct financing through their
enabling legislation and states with bonding authority may not have included guarantee
authority in state law or authorizing resolutions. Some states will need to amend their
governing statutes and indentures if they are to position their SRFs to assist Gl funding efforts in
this manner.
Findings presented in this report suggest that SRFs, after giving full effect to traditional financial
assistance commitments, may have resources available for credit enhancement mechanisms at
the state or sub-state level to support additional eligible projects. The stress models developed
to estimate the funding capacity that indicates a minimum funding capacity at ratios of 3:1 to as
much as 14:1 for every dollar of SRF Program Free Cashflow after adjustment for rating agency
requirements. When applying the estimated $2 billion in aggregate nationwide free cashflow
reported in 2010, these ratios translate to a range of $6 to $28 billion in potential Gl funding
capacity. Additionally, other tools also exist that could be used to expand funding capacity
beyond these levels, such as securing LOCs or NGO commitments that would be collateralized by
assumed default recoveries or using the cross-investment authority provided by Section 1452(f)
29
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of the Save Drinking Water Act to pledge DWSRF free cashflow and investment balances.
Applying these tools could more than double the potential funding estimate. Developing SRF
capacity for credit enhancement products could serve U.S. EPA's efforts to promote both more
effective utilization of SRF resources and the implementation of low cost Gl project solutions in
meeting the nation's clean water goals.
In order to maximize SRF value in service of these outstanding goals, the Board recommends
that U.S. EPA take the following actions:
1. Evaluate and revise, as appropriate, existing SRF guidance and policy to empower
SRF Administrators, municipalities and sub-SRF Administrators with respect to:
a. Project eligibility reviews and approvals; and
b. The construction of SRF funding interfaces consistent with Section 603(d)
authority, including the credit design templates outlined in this report (see
Figures 1-4), short-term funding strategies, use of non-program income and
safe harbor provisions;
2. Actively promote SRF credit enhancement, including sub-state approaches, in
partnership with the promotion of market-based Gl project undertakings, including
outreach to cities that are not currently supported by their SRFs;
3. Promote the development of model SRF financing indentures that can
accommodate existing SRF direct and leverage financings and subordinated state
sponsored or sub-SRF guarantee mechanisms;
4. Direct U.S. EPA's Regional Administrators to inventory state law governing SRF
programs to:
a. Determine the extent of any state legal authority to implement a guarantee
program;
b. Formally report on any variances between federal and state law; and
c. As appropriate, provide legal guidance to those states interested in, and
capable of tapping the federal guarantee authority to expand SRF eligible
project funding capacity;
5. Consider revisions to U.S. EPA's Clean Water Benefits Reporting System to
incorporate metrics that measure SRF guarantee capacity against guarantee support
provided, or its equivalent, under Section 603(d)(3), (4) and (5); and
30
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6. Encourage U.S. EPA's Regional Administrators to promote Gl financing tools,
including SRF applications, especially for those state water programs managing to
total maximum daily load water quality requirements.
31
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FIGURE 1
State Level Framework for a SRF Credit Mechanism to Support Green Infrastructure Projects
Using an Existing Bond Funded "Leveraged" Financing Model
Federal
Government
Annual Appropriations
SRF Equity Account
Receives: Federal and State Contributions,
Loan Repayments and Investment Interest
Funds Loans
Holds Investments
Private
Investors
(Bondholders)
Bond Payments
to Investors
Investor
Dollars
Private
Investors
(Bondholders)
Investor
Dollars
Equity recycled to the extent
not needed to cover Gl
project loan defaults
Bond
Payments
* Loss reserves funded from non-SRF program
sources and/or NGO contributions
Project funds or
bond reserves
Existing State Bond
Trust Indenture
Funds projects from bond
proceeds and SRF Equity
Releases provide
contingent cashflow for
credit enhancement
Subordinate State Gl
Project Financing
Indenture
20% State Match
Project funds
Repayments
Loss Reserve *
Applied first to pay claims
Subordinate to SRF with
respect to payment
recoveries
Bond Proceeds
Repayments
State
Local
Government
and Qualified
Private Entity
Recipients
Gl Project
Recipients
32
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FIGURE 2
State Level Framework for a SRF Credit Mechanism to Support Green Infrastructure Water Projects
Using the "Direct Financing" Model
Federal
Government
Annual
Appropriations
SRF Equity Account
Receives: Federal and State
Contributions, Loan Repayments
and Investment Interest
Funds Loans
Holds Investments
20% State Match
State
Equity Funded SRF
Recipient Financings
Local Government and
Qualified Private Entity
Recipients
Repayments provide
contingent cashflow for
credit enhancement
Loan repayments recycled to
extent not needed to cover
Gl project loan defaults
State Gl Project
Financing Indenture
Loss Reserve*
Applied first to pay claims
Subordinate to SRF with
respect to payment
recoveries
Private
Investors
(Bondholders)
Investor
Dollar:
Bond proceeds
Bond Payments
Repayments
Gl Project
Recipients
* Loss reserves funded from non-SRF program
sources and/or NGO contributions
33
-------
FIGURES
Sub-state Level Framework for a SRF Guarantee of Local Obligations that Fund Gl Water Projects
Using the "Direct Financing" Model
Federal
Government
Annual
Appropriations
Equity Funded SRF
Recipient Financing
Local Government and
Qualified Private Entity
Recipients
SRF Equity Account
Receives: Federal and State Contributions,
Loan Repayments and Investment Interest
Funds Loans
Holds Investments
Repayments recycled
to the extent not needec
to meet Local Obligation
payment defaults
20% State Match
Draws on SRF
balances to meet
payment defaults
and recoveries
Repayments provide
contingent cashflow for credit
enhancement
Investor
Dollars
Local Gl Project
Financing Indenture
State
Loss Reserve*
Applied first to pay claims
Subordinate to SRF with
respect to payment
recoveries
* Loss reserves funded from non-SRF program
sources, local obligor and/or NGO contributions
Private
Investors
(Bondholders)
Repayments
Bond Payments
Gl Project
Recipients
34
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FIGURE 4
Sub-state Level Framework for a SRF Guarantee of Loan Obligations that Fund Gl Water Projects
Using an Existing Bond Funded "Leveraged" Financing Model
Federal
Government
Private
Investors
(Bondholders)
Annual
Appropriations
Project funds or/
bond reserves /
SRF Equity Account
Receives: Federal and State
Contributions, Loan Repayments and
Investment Interest
Funds Loans
Holds Investments
Bond
Payments
Investor
Dollars
Existing State Bond
Trust Indenture
Funds projects from
bond proceeds and
SRF Equity
Repayments
Equity and
Bond Proceeds
Local Government
and Qualified Private
Entity Recipients
* Loss reserves funded from non-SRF program
sources, sub-state revolving fund sponsor and/or
NGO contributions
Releases recycled to the
Extent not needed to meet\
Sub-state Revolving Fund
payment defaults
20% State Match
State
Draws on SRF
balances to meet
loan payment
defaults and
recoveries
Loss Reserve*
Applied first to pay claims
Subordinate to SRF with
respect to payment
recoveries
Releases provide
Contingent cashflow for
Credit enhancement
in?
Sub-state Revolving
FundGI Financing
Indenture
Bond proceed
Repayments
Investor
Dollars
Gl Project
Recipients
Bond
Payments
Private
Investors
(Bondholders)
35
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FIGURE 5
Clean Water SRF Funds: Estimated Free Cashflows Available for Credit Enhancement
July 1, 2008 through June 30,2009
(Millions of Dollars)
State
U.S. Total
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Lousiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Puerto Rico
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
Gross Loan Gross Loan Gross Leverage
Principal Interest Investment Gross Bonds
Repayments Repayments Earnings Receipts Repaic
(1) (2) (3) (4)=(1M2M3) (5)
d State Match Interest Free Cashflow
Bonds Paid on Total Available for Credit
Repaid Bonds Payments Enhancement
(6) (7) (S)=(5)+(6)+(7) =(4)-(7)
$ 2,486 $ 1,011 $ 534 $ 4,031 $ 1,057 $ 159 $ 738 $ 1,953 $ 2,078
35.9 17.4 B.B 62.1 35.3 1.2 20.7 57.2 4.9
12.5 2.0 3.6 18.1
0.0 1.3 0.0 1.3 16.8
47.6 11.3 5.4 64.3 17.2 3.2 25.7 46.1 18.2
17.6 6.0 1.2 24.8
7.2 0.0 3.4 10.6 14.2
176.6 33.7 8.6 218.9 22.9 0.0 B.B 31.7 187.2
33.5 11.9 11.2 56.6 27.2 0.0 22.5 49.7 6.9
52.8 13.4 17.6 83.8 46.9 0.0 30.2 77.1 6.7
8.0 1.4 0.8 10.2
89.3 22.0 4.5 115.8
30.3 15.9 5.8 52.0
17.9 3.2 3.0 24.1
5.4 3.7 2.3 11.4
0.0 0.0 0.0 0.0 10.2
8.9 0.0 5.0 13.9 101.9
0.0 0.0 0.0 0.0 52.0
0.0 0.0 0.0 0.0 24.1
0.0 0.0 0.0 0.0 11.4
103.3 17.8 13.0 134.1 11.7 0.0 6.6 18.3 115.8
69.4 47.4 23.1 139.9 52.6 6.4 72.4 131.4 8.5
33.8 12.7 4.8 51.3 11.6 5.5 6.7 23.8 27.5
36.0 14.9 3.7 54.6 30.2 3.3 19.9 53.4 1.2
21.7 5.7 7.0 34.4
12.1 7.4 2.6 22.1
29.2 5.4 1.9 36.5
0.0 0.0 0.0 0.0 34.4
0.0 0.0 0.0 0.0 22.1
6.1 0.0 2.5 8.6 27.9
61.8 10.9 6.3 79.0 12.0 0.0 4.1 16.1 62.9
114.2 82.0 61.9 258.1 11B.B 0.0 126.5 245.3 12.8
111.3 38.1 52.3 201.7 72.3 11.7 82.7 166.7 35.0
68.1 28.4 14.7 111.2 47.2 0.0 41.7 88.9 22.3
21.0 4.7 1.8 27.5
0.0 0.2 0.3 0.5 27.0
59.3 53.2 6.7 119.2 55.0 3.4 53.5 111.9 7.3
13.4 3.2 0.1 16.7
11.2 5.0 1.6 17.8
15.4 7.4 0.8 23.6
15.3 4.6 1.9 21.8
0.0 2.9 0.5 3.4 13.3
0.0 0.6 0.0 0.6 17.2
4.5 1.5 4.2 10.2 13.4
0.0 0.0 0.0 0.0 21.8
125.2 25.3 10.6 161.1 57.3 0.0 4.2 61.5 99.6
7.2 2.3 0.5 10.0
0.0 0.0 0.0 0.0 10.0
276.4 163.7 145.4 585.5 255.4 0.0 0.0 255.4 330.1
36.7 12.2 9.4 58.3
9.0 3.4 5.5 17.9
0.0 0.0 0.0 0.0 58.3
3.8 1.7 2.8 8.3 9.6
150.9 81.7 18.2 250.8 63.3 13.2 65.6 142.1 108.7
12.8 3.5 6.6 22.9
25.0 9.9 0.5 35.4
70.4 15.5 4.4 90.3
9.5 1.3 0.2 11.0
4.9 0.3 5.2 10.4 12.5
0.0 0.9 0.7 1.6 33.8
0.0 0.0 0.0 0.0 90.3
0.0 0.0 0.0 0.0 11.0
29.6 13.5 7.7 50.8 25.6 0.0 20.0 45.6 5.2
26.3 14.5 5.8 46.6
12.4 3.8 2.5 18.7
29.4 14.2 3.7 47.3
0.0 0.0 0.0 0.0 46.6
1.6 2.7 2.7 7.0 11.7
0.0 0.0 0.0 0.0 47.3
131.8 91.1 9.1 232.0 42.4 59.9 59.9 162.2 69.8
14.2 0.8 0.5 15.5
5.5 0.0 0.4 5.9
0.0 0.0 0.0 0.0 15.5
0.0 0.0 0.0 0.0 5.9
64.2 26.7 20.3 111.2 14.7 32.6 32.6 79.9 31.3
33.3 7.8 1.4 42.5
22.6 2.3 1.2 26.1
64.0 23.2 1.3 88.5
5.9 3.7 1.5 11.1
0.0 0.0 0.0 0.0 42.5
0.0 0.0 0.0 0.0 26.1
0.0 6.0 6.0 12.0 76.5
0.0 0.0 0.0 0.0 11.1
USEPA, Clean Water SRF Funds Available for Projects, Detail, By State, July 1,2008 through June 30, 2009
-------
FIGURE 6
Clean Water SRF Funds: Estimated Free Cashflows Available for Credit Enhancement
July 1, 2009 through June 30,2010
(Millions of Dollars)
State
U.S. Total
Alabama
Alaska
Arizona
Arkansas
California
Colorado
Connecticut
Delaware
Florida
Georgia
Hawaii
Idaho
Illinois
Indiana
Iowa
Kansas
Kentucky
Lousiana
Maine
Maryland
Massachusetts
Michigan
Minnesota
Mississippi
Missouri
Montana
Nebraska
Nevada
New Hampshire
New Jersey
New Mexico
New York
North Carolina
North Dakota
Ohio
Oklahoma
Oregon
Pennsylvania
Puerto Rico
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
West Virginia
Wisconsin
Wyoming
Gross Loan Gross Loan Gross Leverage
Principal Interest Investment Gross Bonds
Repayments Repayments Earnings Receipts Repaic
(1) (2) (3) (4)=(1M2M3) (5)
d State Match Interest Free Cashflow
Bonds Paid on Total Available for Credit
Repaid Bonds Payments Enhancement
(6) (7) (S)=(5)+(6)+(7) =(4)-(7)
$ 3,082 $ 1,074 $ 411 $ 4,567 $ 1,315 $ 103 $ 762 $ 2,180 $ 2,387
37.4 16.7 5.6 59.7 28.9 1.3 18.7 48.9 10.8
14.1 1.6 3.0 18.7
0.0 1.0 0.0 1.0 17.7
50.1 22.4 9.1 81.6 19.8 1.0 37.7 58.5 23.1
21.5 5.8 0.3 27.6
7.2 0.0 2.9 10.1 17.5
185.6 28.9 2.6 217.1 23.7 0.0 7.9 31.6 185.5
33.4 12.7 8.7 54.8 29.4 0.0 21.2 50.6 4.2
60.4 14.5 16.9 91.8 53.7 0.0 -71.6 -17.9 109.7
8.7 1.3 0.5 10.5
0.0 0.0 0.0 0.0 10.5
113.5 23.8 6.7 144.0 17.7 0.0 14.9 32.6 111.4
50.7 20.5 0.4 71.6
19.1 2.9 1.7 23.7
7.2 3.6 1.7 12.5
0.0 0.0 0.0 0.0 71.6
0.0 0.0 0.0 0.0 23.7
0.0 0.0 0.0 0.0 12.5
115.9 16.5 5.3 137.7 12.2 0.0 6.0 18.2 119.5
93.6 47.9 12.5 154.0 61.1 5.9 70.9 137.9 16.1
38.6 15.5 1.8 55.9 13.2 5.3 11.6 30.1 25.8
42.4 14.9 2.4 59.7 27.1 2.1 20.1 49.3 10.4
23.1 5.9 6.8 35.8
17.3 7.1 0.9 25.3
25.5 4.3 1.1 30.9
0.0 0.0 0.0 0.0 35.8
0.0 0.6 0.0 0.6 24.7
6.1 0.0 2.1 8.2 22.7
64.8 10.2 4.8 79.8 11.3 0.0 4.0 15.3 64.5
133.0 79.7 58.9 271.6 134.6 0.0 129.2 263.8 7.8
120.0 40.9 40.3 201.2 75.6 0.0 SS.S 164.4 36.8
81.1 31.5 4.8 117.4 37.8 0.0 39.3 77.1 40.3
22.6 5.1 1.3 29.0
0.0 0.2 0.3 0.5 28.5
68.2 53.6 3.1 124.9 62.1 5.0 53.7 120.8 4.1
12.5 3.4 0.0 15.9
19.5 4.9 1.3 25.7
17.4 5.0 0.4 22.8
15.6 4.4 0.6 20.6
0.0 2.9 0.5 3.4 12.5
0.0 0.7 0.0 0.7 25.0
4.7 1.8 3.9 10.4 12.4
0.0 0.0 0.0 0.0 20.6
131.2 31.7 3.3 166.2 63.6 0.0 2.5 66.1 100.1
7.7 2.3 0.1 10.1
0.0 0.0 0.0 0.0 10.1
313.8 175.4 144.6 633.8 289.3 0.0 23.1 312.4 321.4
40.8 13.0 3.7 57.5
9.6 3.9 4.5 18.0
0.0 0.0 0.0 0.0 57.5
4.0 1.9 5.6 11.5 6.5
163.5 81.2 8.1 252.8 103.4 57.7 64.0 225.1 27.7
14.6 4.3 4.5 23.4
51.6 14.3 0.2 66.1
70.4 16.0 2.5 88.9
16.6 4.6 0.1 21.3
5.5 0.3 5.0 10.8 12.6
0.0 0.9 0.8 1.7 64.4
0.0 0.0 0.0 0.0 88.9
0.0 0.0 0.0 0.0 21.3
31.2 13.4 5.7 50.3 23.9 0.0 20.6 44.5 5.8
53.9 14.2 5.9 74.0
12.8 3.9 2.6 19.3
26.8 16.4 0.7 43.9
0.0 0.0 0.0 0.0 74.0
1.7 1.1 2.7 5.5 13.8
0.0 0.0 0.0 0.0 43.9
379.0 104.4 2.4 485.8 181.9 13.7 69.9 265.5 220.3
17.6 0.8 0.1 18.5
6.5 0.0 0.0 6.5
0.0 0.0 0.0 0.0 18.5
0.0 0.0 0.0 0.0 6.5
69.0 32.1 14.8 115.9 15.2 0.0 90.6 105.8 10.1
35.2 7.9 0.7 43.8
23.0 2.5 0.1 25.6
74.7 23.2 0.3 98.2
19.8 3.0 2.3 25.1
0.0 0.0 0.0 0.0 43.8
0.0 0.0 0.0 0.0 25.6
0.0 0.0 15.0 15.0 83.2
0.0 0.0 0.0 0.0 25.1
USEPA, Clean Water SRF Funds Available for Projects, Detail, By State, July 1,2009 through June 30, 2010
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APPENDIX A
Rating Agency SRF Rating Criteria
Moody''s Investors Service1
Moody's bases SRF ratings on the following four rating factors and weightings:
Portfolio Credit Quality and Default Tolerance Score (50%);
Portfolio Size and Diversity (15%);
Debt Structure, Investments and Cashflows (20%); and
Management and Governance (15%).
Portfolio Credit Quality and Default Tolerance - Default tolerance measures the level of
borrower defaults that an SRF bond program could tolerate over its life and still make full and
timely bond debt service payments. Moody's considers reserves, repayment revenue and/or
draws on program equity when measuring program tolerances and assigning a rating score.
Repayments on SRF recipient obligations are discounted based on the weighted average
portfolio rating. The minimum tolerance thresholds, portfolio ratings and scores are provided in
the following table.
Table A-1
Moody's Rating Factors
Portfolio Credit Quality and Default Tolerance Scorecard
Default Tolerance Threshold
25% and
Higher
20%
15%
Weigh ted A verage
SRF Portfolio Rating
For example, if a portfolio with a weighted average rating of "A" can withstand a scenario where
25% or more of its loans default and remain able to pay the outstanding debt service, this
portfolio would receive a "1" rating. A score of "1" is indicative of "Aaa" rating characteristics,
and a "2" is indicative of "Aa" rating characteristics.
Moody's criteria stipulate that even a portfolio with underlying financings that average a Baa3
rating can receive the top portfolio rating if default tolerances significantly exceed the minimum
required for the top score. This is important for considering the rating potential for an SRF-
guaranteed portfolio backed by liens on commercial property, which are likely to be of lower
credit quality than a traditional SRF portfolio. Moody's currently rates 43 out of 44 state-level
program indentures "Aaa", including many subordinated indentures that benefit from assets
pledged to the senior indenture only after they become free of the senior lien pledge. It is likely
that the average credit quality of some of these portfolios fall into the "Baa3" category.
1 From "U.S. State Revolving Fund Debt," Moody's Investors Service, March 20, 2013.
38
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Portfolio Size and Diversity- In Moody's evaluation, larger portfolios add credit strength as
increasing borrower numbers mitigate event risk or credit deterioration within the portfolio.
Diversity is measured on the basis of the percentage of borrowers that represent less than 1% of
the portfolio and the percentage of loans corresponding to the top five borrowers. If the
concentrated borrowers have high individual ratings assigned, this can mitigate any negative
rating score impacts due to concentration. Table A-2 identifies size, diversity thresholds and
associated ratings.
Table A-2
Moody's Rating Factors
Portfolio Size and Diversity
SRF
Characteristic
Size of
Portfolio
% of Borrowers
with less than
1% of the
Portfolio
% of Loans to
the Top Five
Borrowers
Very Strong
(Aaa)
100 or more
More than
35%
Less than 20%
Strong
(Aa)
50-99
20-34%
20-29%
Medium
(A)
30-49
10-19%
30-39%
Low
(Baa)
20-29
5-9%
40-49%
Weak
(Below Baa)
Less than 20
Less than 5%
More than 50%
SRF financing programs have reached a mature stage in their development. It is unlikely that
many SRF does not currently meet the "Aaa" standard for size, diversity and concentration
limits. Moody's portfolio size requirement underscores the value of aggregating SRF financial
assistance obligations and the importance of building in mechanisms through the "lending" of
program equity or tapping capital markets for short-term funds that can support project funding
as lending activity and project outlays ramp up in advance of long-term financing. (See Section
IV, Loan Warehousing.) The value of portfolio size and diversity in the rating assessment favors
state-level programs that can draw exposure from across the state.
Debt Structure, Investments and Cashflow - This factor focuses on the structure and legal
framework of the program. This includes the governing terms of the SRF trust agreement and
the SRF financing indenture, as each addresses the availability of funds pledged to SRF
bondholders and the flow of fund mechanics, such as priority of payments, the relative timing of
repayment obligations and SRF bond debt service, flow of funds coverage relative to periodic
debt service, the quality, availability and accessibility of reserves and program equity when
needed for SRF debt service. Most, if not all, reserve model programs fund reserves with
investment agreements collateralized by U.S. government or U.S. government-guaranteed
securities that are given the highest marks in accordance with Moody's criteria. Additional
bonds tests are also considered in assigning a rating score. Moody's rating scores for debt
service, investment and cashflow characteristics are provided in Table A-3.
39
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Table A-3
Moody's Rating Factors
Debt Structure (DS), Investments (I) and Cashflows (CFs)
DS/l/CFs
Very Strong (Aaa)
Counterparties and
investments rated A1/P1
or better(short-term) or
Aa3 long-term
Strong (Aa)
Counterparties and
investments rated
A2/P1 or
better(short-term) or
Aa3 long-term
Medium (A)
Counterparties and
investments are rated
at and above A3
Low (Baa)
Counterparties and
investments are rated
at and above Baa3
Counterparties
and
Investments
Cashflows
SRF Financial resources can mitigate funds in lower rated securities;
funds not invested in Guaranteed Investment Contracts (GICs) are in
permitted investments
Counterparty exposure is
well distributed or not
material to the credit
Meets default stress scenarios and variable rate stress tests; asset revenues
demonstrate ability to pay scheduled debt service
financial resources may
be able to mitigate
funds invested in lower
rated securities; funds
not in GICs are in
permitted investments
Counterparty
exposure is
moderately
distributed and may
be material to the
credit
Counterparty exposure
is significantly material
to the credit
Substantial
counterparty
concentration
Meets default
scenarios and variable
rate stress tests in the
nearto medium term
Management and Governance - Based on its criteria, Moody's assignment of top SRF ratings has
required SRF Administrators to demonstrate superior management, including an excellent
understanding of a program's financial strength, challenges and regulatory environment; the
ability to act swiftly and appropriately to address challenges; and an excellent ability to
underwrite, manage and monitor the portfolio. By logical extension, Moody's would necessarily
incorporate its current SRF management and governance assessment in rating SRF financings or
SRF-guaranteed financings geared toward Gl market rate financial assistance.
40
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Standard & Poor's2
Standard & Poor's rating criteria rely on a framework for scoring enterprise risk and financial risk
from which an indicative rating is determined. The final rating is then determined after the
application rating score modifiers are applied. The scoring system assigns values of 1-6 with the
highest/lowest values being assigned the lowest/highest numerical score. The factors that drive
each of these risk scores are as follows:
Enterprise Risk
Industry risk
Market position
Adjustment factor - geographic concentration
Financial Risk
Preliminary loss coverage score - with adjustment for "least favorable" largest obligor
test (discussed below)
Adjusted loss coverage - further adjustment for the average of financial policies and
operating performance scores
Indicative and Final Rating
An indicative rating is derived from the enterprise risk and financial risk score matrix. An
indicative rating of "AAA" requires a combined score of 1. The indicative rating is then subject to
modification by a leverage test and an adjustment for favorable or unfavorable credit features
to produce the final rating.
Enterprise Risk Score - The enterprise risk score presents the lowest ratings hurdle for SRF
Administrators. S&P currently assigns a low industry risk assessment based on the stable credit
quality of municipal pools and governmental, legal and regulatory conditions. Market position
assessments characterized by programs, such as the SRFs, that receive regular capital infusions
from multiple layers of government and which are established through legislative action receive
a very low risk assessment and the highest score. There is a potential adjustment for geographic
concentration. S&P cites programs that target only one metropolitan area as candidates for a
one-notch negative score adjustment.
Financial Risk Score - The financial risk score is derived from the assessment of "loss coverage",
which is the margin by which available resources cover expected defaults based on S&P's
municipal collateralized debt obligation ("CDO") criteria, inclusive of adjustments for borrower
concentration as measured by a test of the largest obligor (the "Largest Obligor Test").
S&P stresses municipal debt portfolios by assuming that over a four-year period defaulted
obligations stop payment for a rolling period of four years. Below, Table A-4 shows the CDO
From "U.S. Public Finance Long-Term Municipal Pools: Methodology And Assumptions," Standard & Poor's, March 19, 2012; "CDOs
and Pooled TOBs Backed by U.S. Municipal Debt: Methodology And Assumptions," Standard & Poor's, March 13, 2012; and "Bond
Insurance Rating Methodology And Assumptions," Standard & Poor's, August 25, 2011.
41
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criteria default rates for hypothetical municipal pools. S&P assumes that 25% of the defaults
occur each year. For a 20-year "A"-rated portfolio the 31.7% default rate shown in Table A-4 (in
bold) would be divided by four to derive the percentage of the portfolio going into default in
each year.
Table A-4
AAA Scenario CDO Default Rates (%)
Asset credit rating
Source: "CDO and Pooled TOBs Backed by U.S. Municipal Debt, Methodology And Assumptions," Standard & Poor's, April 3, 2012.
In year five, the recovered portion of missed payments would start to be paid over the following
four years. From the date that payment resumes, regularly scheduled payments would be made
at the recovery rate. S&P assigns default recovery rates based on four groupings of municipal
credit types from strongest to weakest. Tax-backed general obligation pledges, revenue-backed
water-sewer/solid waste bonds and dedicated tax-backed bonds are included in the strongest
group. For a "AAA" target rating, a municipal credit portfolio for a state-sponsored program
must be able to demonstrate post default loss coverage based on a 95% recovery rate. S&P
criteria's recognizes full value for reserve investments that satisfy its counterparty and
investment guidelines, as applicable. These factors drive the calculation of a loss coverage score.
A score of 1 is a pre-requisite for a "AAA" rating. This score is then subject to adjustment by two
modifiers. The first measures concentration exposure by applying a test of the largest obligor's
impact on the portfolio's ability to pay its obligations owed based on 60% recovery rates. This
test requires that collateralization levels be sufficient to cover defaults from the worst-case
outcome of seven prescribed concentrated default scenarios. Failure drops the financial risk
score out of the "AAA" category. The last S&P modifier measures operating performance and
financial policies based on recipient repayment performance, origination, monitoring, default
and delinquencies policies, long-term planning and investment policies. Atop score here can
offset a negative Largest Obligor Test result.
The new criterion is in stark contrast to pre-2012 criteria that applied much lower stress factors
to municipal credit pools. (For example, the four year stress for 20-year "A"-rated weighted
average portfolios increased to 31.7% from 4.2%.) The increase in stresses was made to realign
how municipal pools were evaluated relative to S&P's corporate debt obligation criteria. The
principal driver for this change was S&P's recent assessment that their rating system and
methods by which ratings are assigned should be equitable across fixed income sectors (i.e.,
ratings assigned at the same level to corporate and municipal debt obligations reflect the same
level of risk to investors). The revision to municipal pool criteria, to rely more closely on
corporate default histories, was made to address corporate and municipal pooled criteria
inconsistencies.
42
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Fitch Ratings3
Fitch identifies five rating factors:
Portfolio credit risk;
Financial structure;
Legal risk;
Program management risk; and
Counterparty risk.
Fitch does not reveal the weightings of these indicators, if any, in the rating determination.
The core of the rating assessment is the two quantitative factors; portfolio credit risk and
financial structure. Portfolio credit risk is assessed against the weighted average credit quality of
SRF recipients. Fitch applies a three step process to measuring SRF default stress and SRF default
tolerance. In the first step, Fitch uses empirical default data of corporate issuers to measure
weighted average default probability of an SRF portfolio by loan term. Using this data, Fitch
derives a weighted average default rate (the "WADR"). Fitch provides an example in its SRF
Criteria, which is incorporated in the following table.
Table A-5
Sample Cumulative Default Rates by
Credit Rating and Loan Term
Loan
Terms
One Year
Five Year
10 Year
20 Year
Asset Mean Probability of Default by Rating (%)
AAA
0.19
0.60
AA
0.01
0.17
0.64
1.58
A
0.07
0.59
1.58
3.82
BBB
0.19
1.91
4.54
10.97
BB
1.16
17.43
29.43
In step two, Fitch applies multiples to the WADR to create cumulative default stresses by rating
category. The multiples are shown below in Table A-6.
Table A-6
Sample Default Stress Coverage Multiples (x)
Default Stress Multiple
by Target Rating
AAA
Portfolio Weighted Average Default Rate ("WADR")
1.3
The multiples produce the cumulative default stress by target rating for portfolios with 5, 10 and
20 year weighted average loan terms provided in Table A-7.
From "State Revolving Fund and Leveraged Municipal Loan Pool Criteria," Fitch Ratings, May 21, 2012.
43
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Table A-7
Sample Cumulative Default Stresses (%)
5 /10 / 20 Year Financing Terms
Cumulative
Default
Stress by
Target
Rating
Portfolio Weighted Average Default Rate ("WADR")
BBB
BB
10
20
10
20
10
20
AAA
AA
A
2.71
2.12
1.59
7.27
5.69
4.27
17.57
13.75
10.31
6.49
5.35
4.20
15.44
12.71
9.99
37.30
30.72
24.13
22.07
20.06
17.05
38.85
34.86
29.63
64.75
58.86
50.03
The last step of the analysis is to determine the four-year default tolerance of the portfolio,
incorporating financial structure considerations including pledged loan repayments, forms of
credit enhancement, reserves, reserve de-allocation provisions, cross-collateralization features
and additional bond tests. Default tolerances are determined by running cashflow models to
solve for breakeven default levels within the portfolio where breakeven is measured over four-
year default periods based on the first, middle and last four years of a program's life. The default
tolerance rate is spread evenly over the four-year period (i.e., the test takes into account annual
cashflows plus available reserves over the period and solves for breakeven against these
amounts).
Fitch then compares the default tolerance rate generated by the model under each four-year
scenario to the cumulative default tolerance rate associated with the outstanding or target
rating. For example, SRFs that pledge a blend of leveraged and direct financings (the "Blend Rate
Model") to issue bonds with a 20-year maturity and leverage program equity 2:1 would show a
default tolerance equal to the free cashflow, net of bond payments, which in this example is
50% of total cashflow over any four-year period. So, if the underlying 20-year portfolio is of
"BBB" average credit quality, as shown in Table 5, the mean probability of default would be
10.97%. For a "AAA" target rating, the product of the 10.97% mean probability of default and
the corresponding stress coverage multiple of 3.4 (shown in Table 6) produces a 37.30% capital
charge against cashflow leaving a net cashflow margin of 12.70%. Based on a 20-year "A"-rated
portfolio, the respective numbers of 3.82% and 4.6 produces a 17.52% charge against cashflow,
leaving a net cashflow margin of 32.48%. These margins represent solely the net cashflow
released from an existing bond indenture that could be pledged to a subordinated Gl financing
indenture. Fitch would discount the releases from direct financing cashflows based on
application of the same risk adjusted default rates. However, because direct financing cashflows
simply represent either return on or return of equity, the default tolerance is 100%. Applying
the Fitch "BBB" and "A" portfolio default rates from the prior example to a direct financing
portfolio produces net cashflow margins of 72.70% and 82.48%, respectively. Fitch's stress tests
also evaluate portfolio concentrations. Concentration is tested by increasing mean probability of
default by 50% for the top five borrowers and weighting it based on each borrower's rating and
percentage of the portfolio. For better or worse, the credit quality of concentrated borrowers is
an important factor in the Fitch analysis.
The remaining factors that drive Fitch's SRF ratings are legal risk, program management risk and
counterparty exposure. Legal risk refers to the integrity of the legal contracts that stand behind
the pledge to bondholders. These generally include the financing indenture, which sets the
44
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terms of the bond pledge (i.e., the pledge of financing recipient cashflows, reserves, investment
limits, coverage and additional bond test requirements), loan agreements, local obligor bonds
and their terms as well as investment agreement provisions. Fitch's assessment of program
management considers underwriting criteria and portfolio monitoring capabilities and
performance. Counterparty exposure is weighted based on the credit quality of third-party
investment providers, the target rating for an SRF financing indenture and the terms of the
pledged investments. This is most critical for reserve fund models that rely on reserve fund
investment instruments to clear default tolerance hurdles necessary to support the highest
ratings. The strongest investments consist of investment agreements collateralized by U.S.
government or U.S. government-guaranteed securities that eliminate any direct counterparty
exposure and that can be liquidated at par on bond payment dates to the extent needed to
cover SRF borrower payment defaults. These terms are characteristic of SRF reserve fund
models throughout the country. Under Fitch's criteria, such investment agreements support
higher default tolerance at any given leverage ratio. This is due to the immediate access to all
available reserve dollars provided by such investment agreements. So, over any four-year test
period, the absolute level of tolerance is a function of the drawdown of investment earnings and
reserve balances against payments due from SRF financing recipients. For SRFs using the Blend
Rate Model, default tolerance is strictly a function of the cashflow match of payments due from
SRF recipients, funded from bond proceeds and equity, and bond cashflows. Compared to a
reserve fund model, this produces lower tolerance thresholds for any given leverage ratio.
However, the Blend Rate Model can demonstrate higher minimum stressed cashflows from
which subordinated financing indentures and SRF guarantees can derive credit benefits.
45
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APPENDIX B
Excel Model Instructions
The purpose of the model is to allow users to test the credit limits for applying the Act's Title VI,
Section 603(d) financial assistance options given Moody's, S&P and Fitch rating criteria and a
state's SRF rating targets. The premise of the model rests on the characteristics of the existing
state CWSRF programs. The model accommodates this with data fields that allow users to input
the variables that reflect existing conditions in a given state. These conditions include the
allocation between equity financed loans that are not part of a bond indenture pledge and loans
pledged to SRF bond financings. Input percentages are provided to capture the respective
portfolios' credit quality. The model also provides a field to input assumptions regarding a
prospective portfolio of guaranteed financings. Each of these inputs can be found on the first
worksheet (Assumption WS - Worksheet No. 1 - General Model Assumptions), which controls all
the independent variable inputs that are needed to run the model.
The inputs included in the General Model Assumptions page are as follows:
Outstanding SRF bond portfolio weighted average interest rate and term;
Outstanding direct financing portfolio weighted average interest rate and term;
Prospective weighted average interest rates and terms of a Gl portfolio;
Actual weighted average bond and direct financing portfolios by credit ratings; and
Assumed weighted average credit rating for prospective SRF Gl portfolio.
These data points are used to solve for Gl funding capacity for a given state SRF programs
average annual equity cashflow. The Model contains a field, "Average Annual SRF Equity
Cashflow", that captures this vital data point. The example provided in the report assumes $100.
Once this assumption is entered the model requires entries for:
the percentage of the cashflows derived from direct financing repayments; the
difference is the percentage of equity being released from the pledge of leveraged
financings;
the leverage factor where 1 represents bonding equal to the sum of the direct financing
debt service payable over the weighted average term; and
Letters of credit secured by a percentage of assumed recoveries on assumed SRF loan
defaults.
The last section on Worksheet No. 1 provides the Gl funding capacity estimates that result from
the above entries after solving for the net SRF cashflow that would be available to support a
triple-A rated SRF Gl funding program. The available net cashflows are provided on Worksheet
No. 1 but are derived from the embedded worksheets used to undertake the analysis.
The Model operates with a total of nine worksheets. These are as follows:
1. General Model Assumptions;
46
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2. Moody's-Solve for Gl Cashflow;
3. Moody's-GI Funding Capacity WS;
4. S&P- Solve for Net CF for Gl;
5. S&P-Bond Cashflow WS;
6. S&P-GI Funding Capacity WS;
7. Fitch-Solve for Net CF Available for Gl;
8. Fitch-Bond Cashflow WS; and
9. Fitch-GI Funding Capacity WS.
It should be noted that for state-specific analysis, the bond cashflow worksheets, which include
direct financing cashflows, can be overridden with actual state data inputs.
Note, the attached model worksheets reflect the SRF leveraged assumptions discussed in the
body of the report.
47
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U.S. EPA Environmental Financial Advisory Board Report:
Utilizing SRF Funding for Green Infrastructure Projects
Worksheet No. 1
General Model Assumptions
State of: Bond Portfolio Weighted Avg. Interest Rate:
Bond Portfolio Weighted Average Term:
SRF-Prospective Gl Financing Terms
Taxable Triple -A Scale
Financing
Term
5
7
10
15
20
Interest
Rate
2.50%
2.50%
3.00%
3.50%
4.00%
Weighted Average SRF Loan Portfolio
Bond-Financed Loans
Credit
Rating
Triple-A
Double-A
Single-A
Triple- B
Non-Rated ("NR")
Percentage
of Portfolio
0%
10%
45%
40%
5%
Direct Financing Portfolio Weighted Avg Interest Rate:
Direct Financing Portfolio Weighted Average Term:
Weighted Average SRF Loan Portfolio
Direct Loans
Credit
Rating
Triple-A
Double-A
Single-A
Triple- B
Non-Rated ("NR")
Percentage
of Portfolio
0%
0%
30%
50%
20%
Average Annual SRF Equity Cashflow:
100.00
Direct Financing %
Leveraged %
Leverage Factor where 1 represents bonding equal to pledged Direct Financing DS
S&P Solve for
Available Cashflow Net of Capital Charges for Direct and Bond Financed Obligations
34.82
Moody's: $ 20.72 S&P: $
Available Net Cashflow After Applying Letter of Credit Support
Moody's: $ 41.43 S&P: $
Results
67.41
(Equity loaned directly to projects
(Equity pledged to bonds)
Weighted Average SRF Loan Portfolio
Guaranteed Gl Loans
Credit
Rating
Triple-A
Double-A
Single-A
Triple- B
Non-Rated ("NR")
Percentage
of Portfolio
0%
0%
0%
0%
100%
Weighted Average
Financing Terms
5
7
10
15
20
Interest Rate
2.50%
2.50%
3.00%
3.50%
4.00%
Gl Funding Capacity
(No LOCs)
Moody's S&P Fitch
$292.32
$392.72
$530.24
$625.68
$473.47
$540.10
$624.73
$676.10
$910.55
$962.06
$907.78
Gl Funding Capacity
(LOCs Collateralized by Recoveries)
Moody's S&P Fitch
$1,507.99
$584.63 $916.54
$785.44 $1,045.52 $1,593.30
$1,060.49 $1,209.36
$1,251.36 $1,308.79 $1,503.40
48
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U.S. EPA Environmental Financial Advisory Board Report:
Utilizing SRF Funding for Green Infrastructure Projects
Worksheet No. 2
Average Annual Cash Flow Available for Gl Credit Support and Capacity Limits
After Applying Ratings Service Criteria for Triple-A Target Ratings
Moody's Investors Service
Moodys Analysis - Leveraged/Direct
Bond Debt Service
Pledged Equity (0% Direct Financing CF)
Cash Flow ("CF") Pledged to Bonds:
Direct Financing Bal. Outstanding: $ 375.00
Direct Financing CF("DFCF"): $ 25.00
DF Investment Credit: 100.00%
Adjusted DF CF:
Total Adjusted CF to Cover Defaults
Less: Bond CF
SRF Free Cash Flow
SRF Breakeven Default %
Before Gl CF (including Adjusted DF CF)
Target Breakeven Default % 45%
After Covering Gl CF
Total Adjusted CF to Cover Defaults
CF at Target Breakeven Default
Net CF for Gl before Loss Reserve
S
S
S
S
S
S
$
S
S
S
101.18 a
75.00
176.18
25.00
201.18
(101.18)
100.00
b
=a+b
Input Field
42.57%
201.18
180.47
20.72
GICF After LOC Support $ 41.43
GICFat Breakeven Default Rate: $ 92.08
S
46.04
Input Field
Model assi
GICFdivid
Gl CF divided by the target breakeven default rate
Weighted Average
Financing Terms
7
10
15
20
Interest Rate
2.50%
3.00%
3.50%
4.00%
Gl Financing
Capacity
$292.32
$392.72
$530.24
$625.68
After LOC
Support
$584.63
$785.44
$1,060.49
$1,251.36
49
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U.S. EPA Environmental Financial Advisory Board Report:
Utilizing SRF Funding for Green Infrastructure Projects
Worksheet No. 3
Gl Debt Service Worksheet
Available Aaa/AAA/AAA Cash Flows
After Applying Ratings Service Criteria
Moody's Ratings Service
Based on Available Cashflow Net of Capital Charges for Direct and Bond Financed Obligations
|GI Cash Flow WS, Cell G36~
I Interest Rate
Financing Tern
Principal Principal
Payment Interest Payment Balance
a b c d 1
=a+b =dprior-c
$ 46.04 $ 7.31 $ 38.73 $292.32
$ 46.04 $ 6.34 $ 39.70 $253.59
$ 46.04 $ 5.35 $ 40.69 $213.89
$ 46.04 $ 4.33 $ 41.71 $173.20
$ 46.04 $ 3.29 $ 42.75 $131.49
$ 46.04 $ 2.22 $ 43.82 $88.74
$ 46.04 $ 1.12 $ 44.92 $44.92
$ 322.27 $ 29.95 $ 292.32
Principal Principal
Payment Interest Payment Balance
a b c d
=a+b =dprior-c
$ 46.04 $ 11.78 $ 34.26 $392.72
$ 46.04 $ 10.75 $ 35.28 $358.46
$ 46.04 $ 9.70 $ 36.34 $323.18
$ 46.04 $ 8.60 $ 37.43 $286.83
$ 46.04 $ 7.48 $ 38.56 $249.40
$ 46.04 $ 6.33 $ 39.71 $210.84
$ 46.04 $ 5.13 $ 40.90 $171.13
$ 46.04 $ 3.91 $ 42.13 $130.22
$ 46.04 $ 2.64 $ 43.40 $88.09
$ 46.04 $ 1.34 $ 44.70 $44.70
$ 460.38 $ 67.67 $ 392.72
Principal Principal
Payment Interest Payment Balance
a b c d
=a+b =dprior-c
$ 46.04 $ 18.56 $ 27.48 $530.24
$ 46.04 $ 17.60 $ 28.44 $502.76
$ 46.04 $ 16.60 $ 29.44 $474.32
$ 46.04 $ 15.57 $ 30.47 $444.89
$ 46.04 $ 14.50 $ 31.53 $414.42
$ 46.04 $ 13.40 $ 32.64 $382.88
$ 46.04 $ 12.26 $ 33.78 $350.25
$ 46.04 $ 11.08 $ 34.96 $316.47
$ 46.04 $ 9.85 $ 36.19 $281.50
$ 46.04 $ 8.59 $ 37.45 $245.32
$ 46.04 $ 7.28 $ 38.76 $207.87
$ 46.04 $ 5.92 $ 40.12 $169.10
$ 46.04 $ 4.51 $ 41.52 $128.98
$ 46.04 $ 3.06 $ 42.98 $87.46
$ 46.04 $ 1.56 $ 44.48 $44.48
$ 690.58 $ 160.33 $ 530.24
Principal Principal
Payment Interest Payment Balance
abed
=a+b =dprior-c
$ 46.04 $ 25.03 $ 21.01 $625.68
$ 46.04 $ 24.19 $ 21.85 $604.67
$ 46.04 $ 23.31 $ 22.73 $582.81
$ 46.04 $ 22.40 $ 23.63 $560.09
$ 46.04 $ 21.46 $ 24.58 $536.45
$ 46.04 $ 20.47 $ 25.56 $511.87
$ 46.04 $ 19.45 $ 26.59 $486.31
$ 46.04 $ 18.39 $ 27.65 $459.72
$ 46.04 $ 17.28 $ 28.76 $432.07
$ 46.04 $ 16.13 $ 29.91 $403.32
$ 46.04 $ 14.94 $ 31.10 $373.41
$ 46.04 $ 13.69 $ 32.35 $342.31
$ 46.04 $ 12.40 $ 33.64 $309.97
$ 46.04 $ 11.05 $ 34.99 $276.33
$ 46.04 $ 9.65 $ 36.38 $241.34
$ 46.04 $ 8.20 $ 37.84 $204.96
$ 46.04 $ 6.68 $ 39.35 $167.11
$ 46.04 $ 5.11 $ 40.93 $127.76
$ 46.04 $ 3.47 $ 42.57 $86.83
$ 46.04 $ 1.77 $ 44.27 $44.27
$ 920.77 $ 295.09 $ 625.68
Available Cashflow Net of Capital Charges and LOC Support
I Gl Cash Flow WS, Cell F3fr
92.08 |
Principal Principal 1 1 Principal Principal
Payment Interest Payment Balance Payment Interest Payment Balance
a b c da b c d
=a+b =dprior-c \ =a+b =dprior-c
$ 92.08 $ 14.62 $ 77.46 $584.63
$ 92.08 $ 12.68 $ 79.40 $507.17
$ 92.08 $ 10.69 $ 81.38 $427.77
$ 92.08 $ 8.66 $ 83.42 $346.39
$ 92.08 $ 6.57 $ 85.50 $262.97
$ 92.08 $ 4.44 $ 87.64 $177.47
$ 92.08 $ 2.25 $ 89.83 $89.83
$ 644.54 $ 59.91 $ 584.63
$ 92.08 $ 23.56 $ 68.51 $785.44
$ 92.08 $ 21.51 $ 70.57 $716.92
$ 92.08 $ 19.39 $ 72.69 $646.35
$ 92.08 $ 17.21 $ 74.87 $573.67
$ 92.08 $ 14.96 $ 77.11 $498.80
$ 92.08 $ 12.65 $ 79.43 $421.69
$ 92.08 $ 10.27 $ 81.81 $342.26
$ 92.08 $ 7.81 $ 84.26 $260.45
$ 92.08 $ 5.29 $ 86.79 $176.19
$ 92.08 $ 2.68 $ 89.40 $89.40
$ 920.77 $ 135.33 $ 785.44
Principal Principal
Payment Interest Payment Balance
a b c d
=a+b =dprior-c
$ 92.08 $ 37.12 $ 54.96 $1,060.49
$ 92.08 $ 35.19 $ 56.88 $1,005.53
$ 92.08 $ 33.20 $ 58.87 $948.64
$ 92.08 $ 31.14 $ 60.93 $889.77
$ 92.08 $ 29.01 $ 63.07 $828.84
$ 92.08 $ 26.80 $ 65.28 $765.77
$ 92.08 $ 24.52 $ 67.56 $700.49
$ 92.08 $ 22.15 $ 69.92 $632.93
$ 92.08 $ 19.71 $ 72.37 $563.01
$ 92.08 $ 17.17 $ 74.90 $490.64
$ 92.08 $ 14.55 $ 77.53 $415.73
$ 92.08 $ 11.84 $ 80.24 $338.21
$ 92.08 $ 9.03 $ 83.05 $257.97
$ 92.08 $ 6.12 $ 85.95 $174.92
$ 92.08 $ 3.11 $ 88.96 $88.96
$ 1,381.15 $ 320.67 $ 1,060.49
Principal Principal
Payment Interest Payment Balance
abed
=a+b =dprior-c
$ 92.08 $ 50.05 $ 42.02 $1,251.36
$ 92.08 $ 48.37 $ 43.70 $1,209.33
$ 92.08 $ 46.63 $ 45.45 $1,165.63
$ 92.08 $ 44.81 $ 47.27 $1,120.18
$ 92.08 $ 42.92 $ 49.16 $1,072.91
$ 92.08 $ 40.95 $ 51.13 $1,023.75
$ 92.08 $ 38.90 $ 53.17 $972.62
$ 92.08 $ 36.78 $ 55.30 $919.45
$ 92.08 $ 34.57 $ 57.51 $864.15
$ 92.08 $ 32.27 $ 59.81 $806.64
$ 92.08 $ 29.87 $ 62.20 $746.83
$ 92.08 $ 27.38 $ 64.69 $684.62
$ 92.08 $ 24.80 $ 67.28 $619.93
$ 92.08 $ 22.11 $ 69.97 $552.65
$ 92.08 $ 19.31 $ 72.77 $482.68
$ 92.08 $ 16.40 $ 75.68 $409.91
$ 92.08 $ 13.37 $ 78.71 $334.23
$ 92.08 $ 10.22 $ 81.86 $255.52
$ 92.08 $ 6.95 $ 85.13 $173.67
$ 92.08 $ 3.54 $ 88.54 $88.54
$ 1,841.54 $ 590.18 $ 1,251.36
\
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U.S. EPA Environmental Financial Advisory Board Report:
Utilizing SRF Funding for Green Infrastructure Projects
Worksheet No. 4
Average Annual Cash Flow Available for Gl Credit Support
After Applying Ratings Service Criteria for Triple-A Target Ratings
Standard &Poor's Ratings Service
S&P Analysis - Leveraged/Direct
Pledged Bond Cash Flow ("CF"):
Maximum Defaulted DS
Payments Net of Default
Bond Debt Service
Min. Stressed Pledged Bd CF:
After LOC Draw $
Direct Financing ("DFCF"):
Maximum Defaulted DS
Minimum Stressed DF CF:
After LOC Draw $
Total Adj. CF Available to Gl
S
s
S
s
s
47.37
S
S
s
20.04
67.41 S
176.18
55.25
120.93
$101.18
19.75
25.00
9.93
15.08
34.82
a
b
c=a-b
d
e=c-d
f
g
h=f-g
l = e+h
Weighted Average
Financing Terms
7
10
15
20
Interest
Rate
2.50%
3.00%
3.50%
4.00%
Gl Financing
Capacity
$473.47
$540.10
$624.73
$676.10
Gl Capacity
With LOCs
$916.54
$1,045.52
$1,209.36
$1,308.79
SRF Bond Portfolio: Weighted Average Default Rate by Credit Rating (
Rating % Assigned Default Rate by Financing Term
Wght /Term 7 10 15
AA
A
BBB
NR
WADR
10%
45%
40%
5%
100%
6.7%
13.3%
23.3%
46.7%
18.3%
10.0%
17.5%
30.0%
55.0%
23.6%
15.8%
24.2%
39.2%
64.2%
31.4%
WADR")
20
22.5%
31.7%
47.5%
70.0%
39.0%
Direct Loan Portfolio by Weighted Average Credit Rating
Rating % Assigned Default Rate by Financing Term
Wght /Term 7 10 15
AA
A
BBB
NR
WADR
0%
30%
50%
20%
100%
6.7%
13.3%
23.3%
46.7%
25.0%
10.0%
17.5%
30.0%
55.0%
31.3%
15.8%
24.2%
39.2%
64.2%
39.7%
20
22.5%
31.7%
47.5%
70.0%
47.3%
Gl Portfolio by Weighted Average Credit Rating
Rating % Assigned Default Rate by Financing Term
Wght /Term 7 10 15
AA
A
BBB
NR
WADR
0%
0%
0%
100%
100%
6.7%
13.3%
23.3%
46.7%
46.7%
10.0%
17.5%
30.0%
55.0%
55.0%
15.8%
24.2%
39.2%
64.2%
64.2%
20
22.5%
31.7%
47.5%
70.0%
70.0%
-------
U.S. EPA Environmental Financial Advisory Board Report:
Utilizing SRF Funding for Green Infrastructure Projects
Worksheet No. 5
Available Aaa/AAA/AAA Cash Flows
After Applying Ratings Service Criteria
To Existing Bond Indentures and Direct Financings
Standard &Poor's Ratings Service
Direct Financing CF
Bond Debt Service
Pledged Cash Flow
Bond Interest Rate("BIR")
$ 75.00
$101.18
$ 176.18
4.00%
15
I Avail able Cashflow Net of Capital Chi
SRF Fi
irges for Direct and Bond Fi
Market Rate
/'age Cum Default Rate:
Annual Default Rate ("ADR").
ery Rate ("RR"):
Aggregate Equity Funded Bond Funded Loan Loan Principal Amount of Payments Net Bond Bond Principal Net Cash Flow Bond Principal
Debt Service Due Direct Loan DS Loan Debt Service Interest Payment Default of Default Debts
a b c d e f g h
=a-b = BIR*m =c-d = Cum ADR*a =a-f =a
$ 176.
$ 176.
$ 176.
$ 176.
$ 176.
$ 176.
$ 176.
$ 176.
$ 176.
$ 176.
$ 176.
$ 176.
8 $
8 $
8 $
8 $
8 $
8 $
8 $
8 $
8 $
8 $
8 $
8 $
5.00 $
5.00 $
5.00 $
5.00 $
5.00 $
5.00 $
5.00 $
5.00 $
5.00 $
5.00 $
5.00 $
5.00 $
rvice Interest Payment Recoveries to SRF Equity Balance ("BOY"|
i j k 1 m
b =g =h-i =RR*f =g-h+k =m-jpr/or
01.18 $ 45.00 $ 56.18 $ 13.81 $ 162.37 $ 101.18 $ 45.00 $ 56.18 $ 61.19 $ 1,125.00
01.18 $ 42.75 $ 58.43 $ 27.63 $ 148.56 $ 101.18 $ 42.75 $ 58.43 $ 47.37 $ 1,068.82
01.18 $ 37.98 $ 63.20 $ 55.25 $ 120.93 $
01.18 $ 35.46 $ 65.73 $ 42.13 $ 134.05 $
01.18 $ 32.83 $ 68.36 $ 28.32 $ 147.87 $
01.18 $ 27.25 $ 73.93 $ 0.69 $ 175.49 $
01.18 $ 24.29 $ 76.89 $ 0.69 $ 175.49 $
01.18 $ 21.22 $ 79.97 $ 0.69 $ 175.49 $
01.18 $ 14.69 $ 86.49 $ 0.69 $ 175.49 $
01.18 $ 11.23 $ 89.95 $ 0.69 $ 175.49 $
01.18 $ 37.98 $ 63.20 $ 19.75 $ 949.62
01.18 $ 35.46 $ 65.73 $ 13.12 $ 45.99 $ 886.42
01.18 $ 32.83 $ 68.36 $ 26.24 $ 72.93 $ 820.69
01.18 $ 27.25 $ 73.93 $ 52.49 $ 126.80 $ 681.24
01.18 $ 24.29 $ 76.89 $ 40.02 $ 114.33 $ 607.31
01.18 $ 21.22 $ 79.97 $ 26.90 $ 101.21 $ 530.42
01.18 $ 14.69 $ 86.49 $ 74.31 $ 367.29
01.18 $ 11.23 $ 89.95 $ 74.31 $ 280.79
01.18 $ 7.63 $ 93.55 $ 0.69 $ 175.49 $ 101.18 $ 7.63 $ 93.55 $ 74.31 $ 190.84
01.18 $ 3.89 $ 97.29 $ 0.69 $ 175.49 $
$ 0.00 $ (0.00| $ - $
$ 0.00 $ (0.00| $ - $
$ 0.00 $ (0.00| $ - $
$ 0.00 $ (0.00| $ - $
$ 0.00 $ (0.00| $ - $
$ 2,642.76 $ 1,125.00 $ 392.76 $ 1,125.00
01.18 $ 3.89 $ 97.29 $ 74.31 $ 97.29
$ - $ - $ 0.00
$ - $ - $ 0.00
$ - $ - $ 0.00
$ - $ - $ 0.00
$ - $ - $ 0.00
$ 392.76 $ 1,125.00 $ 211.92 $ 1,108.32
Leverage Adj. $ 1,125.00
\mptions: Direct Financing Cash Flows
DF Cash Flow $ 25.00
Interest Rate 0.00% in
Financing Term 15 In
Payment Int
a
$ 25.00 $
$ 25.00 $
$ 25.00 $
$ 25.00 $
$ 25.00 $
$ 25.00 $
$ 25.00 $
$ 25.00 $
$ 25.00 $
$ 25.00 $
$ 25.00 $
$ 25.00 $
$ 25.00 $
$ 25.00 $
$ 25.00 $
s
s
s
s
s
$ 375.00 $
Average Cum Default Rate 39.70%
jut Annual Default Rate ("ADR"}: 9.9%
out Recovery Rate ("RR"): 95.00%
Principal Amount of Payments Net Bond Bond
rest Payment Defau t of Default Debt Service Interest
be d e
=a-b =CumADR*a =a-d
$ 25.00 $ .48 $ 22.52
$ 25.00 $ .96 $ 20.04
$ 25.00 $ .44 $ 17.56
$ 25.00 $ .93 $ 15.08
$ 25.00 $ .57 $ 17.43
$ 25.00 $ 5.09 $ 19.91
$ 25.00 $ 2.61 $ 22.39
$ 25.00 $ 0.12 $ 24.88
$ 25.00 $ 0.12 $ 24.88
$ 25.00 $ 0.12 $ 24.88
$ 25.00 $ 0.12 $ 24.88
$ 25.00 $ 0.12 $ 24.88
$ 25.00 $ 0.12 $ 24.88
$ 25.00 $ 0.12 $ 24.88
$ 25.00 $ 0.12 $ 24.88
$ - $ - $
$ - $ - $
$ - $ - $
$ - $ - $
$ - $ - $
$ 375.00
Input
SRF Financings
Principal Net Cash Flow Princpal
Payment Recoveries to SRF Equity Balance ("BOY")
f g h
=RR*e =e+f =BOY-c
$ 22.52 $375.00
$ 20.04 $350.00
$ 17.56 $325.00
$ 15.08 $300.00
$ 2.36 $ 19.79 $275.00
$ 4.71 $ 24.63 $250.00
$ 7.07 $ 29.47 $225.00
$ 9.43 $ 34.30 $ 00.00
$ 7.19 $ 32.07 $ 75.00
$ 4.83 $ 29.71 $ 50.00
$ 2.48 $ 27.35 $ 25.00
$ 24.88 $ 00.00
$ 24.88 $75.00
$ 24.88 $50.00
$ 24.88 $25.00
$ - $0.00
$ - $0.00
$ - $0.00
$ - $0.00
$ - $0.00
Available Cashflow Net of Capital Charges and LOC Support
Adjusted Net Cash Flo
to SRF Equity
$6.91 $
$13.81 $
$20.72 $
$27.63 $
-------
U.S. EPA Environmental Financial Advisory Board Report:
Utilizing SRF Funding for Green Infrastructure Projects
Worksheet No. 6
After Applying Ratings Service Criteria
Solve for Gl Funding Capacity
Available Aaa/AAA/AAA Cash Flows
Standard &Poor's Ratings Service
Based on Available Cashflow Net of Capital Charges for Direct and Bond Financed Obligation;
Gl Cash Flow WS, Cell F25:
$ 34.82
Interest Rate Input
Financing Term Input
Payment Interest
a b
$ 74.57 $ 11.84
$ 74.57 $ 10.27
$ 74.57 $ 8.66
$ 74.57 $ 7.01
$ 74.57 $ 5.32
$ 74.57 $ 3.59
$ 74.57 $ 1.82
$ 521.98 $ 48.52
2.50%
7
Principal
Payment
c
=a+b
$ 62.73
$ 64.30
$ 65.91
$ 67.56
$ 69.24
$ 70.98
$ 72.75
$ 473.47
Available Cashflow Net of Capital Charges a
Gl Cash Flow WS, Cell e25:
Payment Interest
a b
$ 144.35 $ 22.91
$ 144.35 $ 19.88
$ 144.35 $ 16.77
$ 144.35 $ 13.58
$ 144.35 $ 10.31
$ 144.35 $ 6.96
$ 144.35 $ 3.52
11
12
13
14
15
16
17
18
19
20
$ 1,010.46 $ 93.92
$ 67.41
Principal
Payment
=a+b
$ 121.44
$ 124.47
$ 127.59
$ 130.77
$ 134.04
$ 137.40
$ 140.83
$ 916.54
3.00%
10
3.50%
15
Principal
Balance
d
=dprior-c
$473.47
$410.74
$346.44
$280.53
$212.97
$143.73
$72.75
Payment
a
$ 63.32
$ 63.32
$ 63.32
$ 63.32
$ 63.32
$ 63.32
$ 63.32
$ 63.32
$ 63.32
$ 63.32
$ 633.16
nd LOC Support
Principal
Balance
d
=dprior-c
$916.54
$795.10
$670.63
$543.04
$412.27
$278.23
$140.83
Payment
a
$ 122.57
$ 122.57
$ 122.57
$ 122.57
$ 122.57
$ 122.57
$ 122.57
$ 122.57
$ 122.57
$ 122.57
$ 1,225.67
4.00%
20
Interest
b
$ 16.20
$ 14.79
$ 13.33
$ 11.83
$ 10.29
$ 8.70
$ 7.06
$ 5.37
$ 3.63
$ 1.84
$ 93.06
Principal Principal
Payment Balance
c d
=a+b =dprior-c
$ 47.11 $540.10
$ 48.53 $492.98
$ 49.98 $444.46
$ 51.48 $394.48
$ 53.03 $342.99
$ 54.62 $289.97
$ 56.26 $235.35
$ 57.94 $179.10
$ 59.68 $121.15
$ 61.47 $61.47
$ 540.10
Interest
b
$ 31.37
$ 28.63
$ 25.81
$ 22.91
$ 19.92
$ 16.84
$ 13.67
$ 10.40
$ 7.04
$ 3.57
$ 180.15
Principal Principal
c d
=a+b =dprior-c
$ 91.20 $1,045.52
$ 93.94 $954.32
$ 96.76 $860.38
$ 99.66 $763.63
$ 102.65 $663.97
$ 105.73 $561.32
$ 108.90 $455.59
$ 112.17 $346.69
$ 115.53 $234.53
. .
Principal Principal
Payment Interest Payment Balance
abed
=a+b =dprior-c
$ 54.24 $ 21.87 $ 32.38 $624.73
$ 54.24 $ 20.73 $ 33.51 $592.36
$ 54.24 $ 9.56 $ 34.68 $558.85
$ 54.24 $ 8.35 $ 35.90 $524.16
$ 54.24 $ 7.09 $ 37.15 $488.27
$ 54.24 $ 5.79 $ 38.45 $451.11
$ 54.24 $ 4.44 $ 39.80 $412.66
$ 54.24 $ 3.05 $ 41.19 $372.86
$ 54.24 $ 11.61 $ 42.63 $331.67
$ 54.24 $ 10.12 $ 44.13 $289.03
$ 54.24 $ 8.57 $ 45.67 $244.91
$ 54.24 $ 6.97 $ 47.27 $199.24
$ 54.24 $ 5.32 $ 48.92 $151.97
$ 54.24 $ 3.61 $ 50.64 $103.04
$ 54.24 $ 1.83 $ 52.41 $52.41
$ 813.64 $ 188.90 $ 624.73
Principal Principal
abed
=a+b =dprior-c
$ 105.00 $ 42.33 $ 62.68 $1,209.36
$ 105.00 $ 40.13 $ 64.87 $1,146.69
$ 105.00 $ 37.86 $ 67.14 $1,081.82
$ 105.00 $ 35.51 $ 69.49 $1,014.68
$ 105.00 $ 33.08 $ 71.92 $945.19
$ 105.00 $ 30.56 $ 74.44 $873.27
$ 105.00 $ 27.96 $ 77.04 $798.83
$ 105.00 $ 25.26 $ 79.74 $721.79
$ 105.00 $ 22.47 $ 82.53 $642.05
$ 119.00 $119.00 $ 105.00 $ 19.58 $ 85.42 $559.51
$ 105.00 $ 16.59 $ 88.41 $474.09
$ 105.00 $ 13.50 $ 91.50 $385.68
$ 105.00 $ 10.30 $ 94.71 $294.18
$ 105.00 $ 6.98 $ 98.02 $199.47
$ 105.00 $ 3.55 $ 101.45 $101.45
$ 1,045.52 | | $ 1,575.04 $ 365.68 $ 1,209.36
Payment
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
a
9.75
9.75
9.75
9.75
9.75
9.75
9.75
9.75
9.75
9.75
9.75
9.75
9.75
9.75
9.75
9.75
9.75
9.75
9.75
9.75
994.97
Interest
b
$ 27.04
$ 26.14
$ 25.19
$ 24.21
$ 23.19
$ 22.12
$ 21.02
$ 19.87
$ 18.68
$ 17.43
$ 16.14
$ 14.80
$ 13.40
$ 11.94
$ 10.43
$ 8.86
$ 7.22
$ 5.52
$ 3.75
$ 1.91
$ 318.87
Principal
Payment
c
=a+b
$ 22.70
$ 23.61
$ 24.56
$ 25.54
$ 26.56
$ 27.62
$ 28.73
$ 29.88
$ 31.07
$ 32.32
$ 33.61
$ 34.95
$ 36.35
$ 37.80
$ 39.32
$ 40.89
$ 42.53
$ 44.23
$ 46.00
$ 47.83
$ 676.10
Principal
Balance
d
=dpr:or-c
$676.10
$653.39
$629.78
$605.22
$579.68
$553.12
$525.50
$496.77
$466.89
$435.82
$403.50
$369.89
$334.94
$298.59
$260.79
$221.47
$180.58
$138.06
$93.83
$47.83
Payment
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
a
96.30
96.30
96.30
96.30
96.30
96.30
96.30
96.30
96.30
96.30
96.30
96.30
96.30
96.30
96.30
96.30
96.30
96.30
96.30
96.30
1,926.05
Interest
b
$ 52.35
$ 50.59
$ 48.76
$ 46.86
$ 44.89
$ 42.83
$ 40.69
$ 38.47
$ 36.15
$ 33.75
$ 31.24
$ 28.64
$ 25.94
$ 23.12
$ 20.19
$ 17.15
$ 13.98
$ 10.69
$ 7.27
$ 3.70
$ 617.27
Principal
Payment
c
=a+b
$ 43.95
$ 45.71
$ 47.54
$ 49.44
$ 51.42
$ 53.47
$ 55.61
$ 57.84
$ 60.15
$ 62.56
$ 65.06
$ 67.66
$ 70.37
$ 73.18
$ 76.11
$ 79.15
$ 82.32
$ 85.61
$ 89.04
$ 92.60
$ 1,308.79
Principal
Balance
d
=dpr:or-c
$1,308.79
$1,264.83
$1,219.12
$1,171.59
$1,122.15
$1,070.73
$1,017.26
$961.64
$903.81
$843.66
$781.10
$716.04
$648.38
$578.01
$504.83
$428.72
$349.57
$267.25
$181.64
$92.60
-------
U.S. EPA Environmental Financial Advisory Board Report:
Utilizing SRF Funding for Green Infrastructure Projects
Worksheet No. 7
Average Annual Cash Flow Available for Gl Credit Support and Capacity Limits
After Applying Ratings Service Criteria for Triple-A Target Rating
Fitch Ratings
Fitch Analysis - Leveraged/Direct
Pledged Bond Cash Flow ("CF"):
Bond Debt Service
Free CF from Bond Indenture
Direct Financing ("DFCF"):
SRF Free Cash Flow
Minimum Stressed Bond CF:
Minimum Stressed DF CF:
Min. Stressed SRF Free CF:
| Total Adj. CF Available to Gl
LOC
$ 51.23
$ 20.39
$ 71.62
$ 71.62
$
$
$
$
$
$
$
$
176.18
$101.18
75.00
25.00
100.00
27.47
15.78
43.25
43.25
a
b
c= a-b
d
e=c+d
f
g
h=f+g
1 Weighted Average
| Financing Terms
5
10
15
20
Interest
Rate
2.50%
3.00%
N/A
4.00%
Gl Financing
Capacity
$910.55
$962.06
N/A
$907.78
Gl Capacity
w/LOCs
$1,507.99
$1,593.30
N/A
$1,503.40
SRF Bond Portfo
Rating
AA
A
BBB
BB
WADR
%
10%
45%
40%
5%
100%
o: Weighted Average Default Rate ("WADR")
Assigned Default Rate by Financing Term
5 10 15 20
0.1%
1.2%
2.6%
1.1%
5.0%
0.4%
3.3%
6.2%
1.9%
11.7% 0.0%
0.9%
7.9%
14.9%
3.2%
27.0%
Fitch Cumulative Default Rates by Credit Rating and Financing Term
Financing
Term
One Year
Five Year
10 Year
20 Year
Asset Mean of Default by Portfolio Rating (%)
AAA
0.08%
0.19%
0.60%
AA
0.01%
0.17%
0.64%
1.58%
A
0.07%
0.59%
1.58%
3.82%
BBB
0.19%
1.91%
4.54%
10.97%
BB
1.16%
10.03%
17.43%
29.43%
Direct Loan Portfolio: Weighted Average Default Rate ("WADR")
Rating
AA
A
BBB
NR
WADR
%
0%
30%
50%
20%
100%
Assigned Default Rate by Financing Term
5 10 15 20
0.0% 0.0%
0.8% 2.2%
3.2% 7.7%
4.4% 7.7%
8.5% 17.6% 0.0%
0.0%
5.3%
18.6%
12.9%
36.9%
Gl Portfolio by Weighted Average Credit Rating
Rating
AA
A
BBB
NR
WADR
%
0%
0%
0%
100%
100%
Assigned Default Rate by Financing Term
5 10 15 20
0.0% 0.0%
0.0% 0.0%
0.0% 0.0%
22.1% 38.3%
22.1% 38.3% 0.0%
0.0%
0.0%
0.0%
64.7%
64.7%
Fitch Default Stress Coverage Multiples (x)
Default Stress Multiple
by Target Rating
AAA
AA
A
Portfolio Weighted Average Default Rate
AAA AA
5.8
4.4
3.2
A
4.6
3.6
2.7
BBB
3.4
2.8
2.2
BB
2.2
2.0
1.7
Weighted Average Portfolio Rating and Financing Term
Cumulative Stresses for AAA Target Rating (%)
Financing
Term
Five Year
Ten Year
Twenty Year
Portfolio Weighted Average Default Rate
AAA AA A BBB
0.99% 2.71% 6.49%
3.71% 7.27% 15.44%
9.16% 17.57% 37.30%
BB
22.07%
38.35%
64.75%
-------
U.S. EPA Environmental Financial Advisory Board Report:
Utilizing SRF Funding for Green Infrastructure Projects
Worksheet No. 8
Available Aaa/AAA/AAA Cash Flows
After Applying Ratings Service Criteria
To Existing Bond Indentures and Direct Financings
Fitch Ratings
( Financing CF
Bond Debt Service
Pledged Cash Flow
SRF Financing IR
inancing Term
-------
U.S. EPA Environmental Financial Advisory Board Report:
Utilizing SRF Funding for Green Infrastructure Projects
Worksheet No. 9
Solve for Gl Funding Capacity
Available Aaa/AAA/AAA Cash Flows
After Applying Ratings Service Criteria
Fitch Ratings
Based on Available Cashflow Net of Capital Charges for Direct and Bond Financed Obligations
Gl Cash Flow WS, cell F24: $ 43.25
merest Rate 2.50% 3.00%
FinancingTerm 5 10
3.50%
15
Principal Principal
Payment Interest Payment Balance
abed
=a+b =dprior-c
S 195.99 S 22.76 $ 173.23 $910.55
2 S 195.99 S 18.43 $ 177.56 $737.32
H S 195.99 S 13.99 $ 182.00 $559.76
4 S 195.99 S 9.44 $ 186.55 $377.76
5 S 195.99 S 4.78 $ 191.21 $191.21
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
S 979.96 S 69.41 $ 910.55
Payment
a
S 112.78
S 112.78
S 112.78
S 112.78
S 112.78
S 112.78
S 112.78
S 112.78
S 112.78
S 112.78
S 1,127.83
Based on Available Cashflow Net of Capital Charges and LOC Support
Gl Cash Flow WS, cell E24: S 71.62
Principal Principal
Payment Interest Payment Balance
abed
=a+b =dprior-c
S 324.59 S 37.70 $ 286.89 $1,507.99
S 324.59 S 30.53 $ 294.06 $1,221.10
S 324.59 S 23.18 $ 301.41 $927.03
S 324.59 S 15.64 S 308.95 $625.62
S 324.59 S 7.92 S 316.67 $316.67
S 1,622.95 S 114.96 $ 1,507.99
Payment
a
S 186.78
S 186.78
S 186.78
S 186.78
S 186.78
S 186.78
S 186.78
S 186.78
S 186.78
S 186.78
S 1,867.83
4.00%
20
Interest
b
S 28.86
S 26.34
S 23.75
S 21.08
S 18.33
S 15.50
S 12.58
S 9.57
S 6.47
S 3.28
S 165.77
Interest
b
S 47.80
S 43.63
S 39.33
S 34.91
S 30.36
S 25.66
S 20.83
S 15.85
S 10.72
S 5.44
S 274.53
Principal Principal
Payment Balance
c d
=a+b =dprior-c
S 83.92 $962.06
$ 86.44 $878.14
$ 89.03 $791.70
$ 91.70 $702.67
$ 94.45 $610.97
$ 97.29 $516.51
$ 100.21 $419.22
$ 103.21 $319.02
$ 106.31 $215.81
$ 109.50 $109.50
$ 962.06
Principal Principal
Payment Interest Payment Balance
$ - $ -
$ - $ - $0.00
$ - $ - $0.00
$ - $ - $0.00
$ - $ - $0.00
$ - $ - $0.00
$ - $ - $0.00
$ - $ - $0.00
$ - $ - $0.00
$ - $ - $0.00
$ - $ - $0.00
$ - $ - $0.00
$ - $ - $0.00
$ - $ - $0.00
$ - $ - $0.00
$ - $ - $
Principal Principal
Payment Balance
c d
=a+b =dprior-c
$ 138.98 $1,593.30
$ 143.15 $1,454.31
$ 147.45 $1,311.16
$ 151.87 $1,163.71
$ 156.43 $1,011.84
$ 161.12 $855.41
$ 165.95 $694.29
$ 170.93 $528.34
$ 176.06 $357.40
$ 181.34 $181.34
$ 1,593.30
Principal Principal
Payment Interest Payment Balance
$ - $ -
$ - $ - $0.00
$ - $ - $0.00
$ - $ - $0.00
$ - $ - $0.00
$ - $ - $0.00
$ - $ - $0.00
$ - $ - $0.00
$ - $ - $0.00
$ - $ - $0.00
$ - $ - $0.00
$ - $ - $0.00
$ - $ - $0.00
$ - $ - $0.00
$ - $ - $0.00
$ - $ - $
56
Payment
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
a
66.80
66.80
66.80
66.80
66.80
66.80
66.80
66.80
66.80
66.80
66.80
66.80
66.80
66.80
66.80
66.80
66.80
66.80
66.80
66.80
1,335.92
Interest
b
$ 36.31
$ 35.09
$ 33.82
$ 32.50
$ 31.13
$ 29.71
$ 28.22
$ 26.68
$ 25.08
$ 23.41
$ 21.67
$ 19.87
$ 17.99
$ 16.04
$ 14.01
$ 11.89
$ 9.70
$ 7.41
$ 5.04
$ 2.57
$ 428.14
Principal
Payment
c
=a+b
$ 30.48
$ 31.70
$ 32.97
$ 34.29
$ 35.66
$ 37.09
$ 38.57
$ 40.12
$ 41.72
$ 43.39
$ 45.12
$ 46.93
$ 48.81
$ 50.76
$ 52.79
$ 54.90
$ 57.10
$ 59.38
$ 61.76
$ 64.23
$ 907.78
Principal 1
Balance
d
=dprior-c
$907.78
$877.29
$845.59
$812.62
$778.33
$742.66
$705.57
$667.00
$626.88
$585.16
$541.77
$496.65
$449.72
$400.91
$350.15
$297.36
$242.46
$185.36
$125.98
$64.23
Payment
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
a
110.62
110.62
110.62
110.62
110.62
110.62
110.62
110.62
110.62
110.62
110.62
110.62
110.62
110.62
110.62
110.62
110.62
110.62
110.62
110.62
2,212.46
Interest
b
$ 60.14
$ 58.12
$ 56.02
$ 53.83
$ 51.56
$ 49.20
$ 46.74
$ 44.19
$ 41.53
$ 38.76
$ 35.89
$ 32.90
$ 29.79
$ 26.56
$ 23.20
$ 19.70
$ 16.06
$ 12.28
$ 8.35
$ 4.25
$ 709.06
Principal
Payment
c
=a+b
$ 50.49
$ 52.51
$ 54.61
$ 56.79
$ 59.06
$ 61.42
$ 63.88
$ 66.44
$ 69.09
$ 71.86
$ 74.73
$ 77.72
$ 80.83
$ 84.06
$ 87.43
$ 90.92
$ 94.56
$ 98.34
$ 102.28
$ 106.37
$ 1,503.40
Principal
Balance
d
=dprior-c
$1,503.40
$1,452.91
$1,400.41
$1,345.80
$1,289.01
$1,229.95
$1,168.52
$1,104.64
$1,038.20
$969.11
$897.25
$822.52
$744.79
$663.96
$579.90
$492.47
$401.55
$306.99
$208.65
$106.37
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