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Chapter 4 - Credit Assistance

One of the most significant developments in Federal transportation finance during the 1990s was the advent of new ways for Federal transportation funds to help project sponsors access credit - that is, borrow - more easily.  These strategies are known collectively as Federal credit assistance.

Federal credit assistance can take one of two forms:  loans, where a project sponsor borrows Federal highway funds directly from a state DOT or the Federal government; and credit enhancement, where a state DOT or the Federal government makes Federal funds available on a contingent (or standby) basis.  Credit enhancement helps reduce risk to investors and thus allows the project sponsor to borrow at lower interest rates.  Loans can provide the capital necessary to proceed with a project or reduce the amount of capital borrowed from other sources.  In this latter case, Federal loans can serve a dual function.  Not only do they provide capital directly, but under certain conditions they can also serve a credit enhancement function by reducing the risk borne by other investors.

The pressure to close the gap between investment needs and available resources has caused public agencies at all levels of government to look at ways to leverage fixed amounts of public funding or to offer assistance that imposes less of an impact on public budgets.  Credit assistance is one of the leading methods to achieve these objectives, for it encourages the use of pay-as-you-use financing and often introduces new revenue streams (such as toll receipts) into the pool of transportation investment.  When sufficient grant funding is not available, credit assistance can also enable sponsors to build projects sooner than would otherwise be possible.  So, while most project sponsors naturally prefer "free" money over loans that must be repaid, that preference might well change if the choice is between credit assistance today versus grant funding 20 years from now.

Federal transportation funds can provide credit assistance - rather than grant funding - through several mechanisms.  First, states may directly lend their apportioned Federal-aid highway funds to individual projects through Section 129 loans.  Second, states may use their regularly apportioned Federal-aid highway funds, under specific Federal legislative provisions, to capitalize revolving loan funds (in the transportation sector, known as State Infrastructure Banks).  Third, the Transportation Infrastructure Finance and Innovation Act (TIFIA) allows U.S. DOT itself to provide special credit assistance funding to project sponsors directly.

4.1  Section 129 Loans

Section 129 loans allow states to use regular Federal-aid highway apportionments to fund loans to projects with dedicated revenue streams.

What's New

Until 1991, Federal-aid highway funds could be used only on a "grant" reimbursement basis for eligible highway projects.  This changed with Section 1012 of ISTEA, which made state loans to certain transportation projects eligible for reimbursement from Federal-aid highway funds.  This new opportunity provided states with a means to recycle Federal-aid highway funds by lending them out, obtaining repayments from project revenues, and then reusing the repaid funds on other highway projects.

Section 313(b) of the NHS Act built greater flexibility into the original statutory language established under ISTEA by broadening the range of projects eligible to receive loans.  Originally, states could use their apportioned Federal-aid highway funds only to provide loans to toll projects.  Now, given provisions in the NHS Act, it is possible to provide a loan to any project eligible for Federal-aid highway funding so long as it has a dedicated revenue source to repay the loan; the revenue source need not be a toll.

The loan provisions, as amended, are codified at Section 129(a)(7) of Title 23, and for this reason loans under this program are commonly referred to as Section 129 loans. 

One of the key advantages to Section 129 loans is the opportunity for states to get more mileage out of their annual apportionments.  States benefit because every loaned dollar is repaid and recycled into further investment in the transportation system.  From a project sponsor's perspective, loans are useful in offsetting up-front capital requirements that might otherwise have to be borrowed in the open market at higher rates.  Further, Section 129 loans can serve a credit enhancement function by reducing the cost of other borrowing where the Section 129 loan is in a subordinate position as described below.

Candidate Project and Key Requirements

Any Federal-aid highway project is a potential candidate for a Section 129 loan.  States may make loans to public or private project sponsors.  The project sponsor must pledge revenues from a dedicated source to repayment of the loan.  Dedicated revenues may include, but are not limited to, tolls, excise taxes, sales taxes, property taxes, motor vehicle taxes, and other beneficiary fees.  Federal funds cannot be used as a revenue source.  Loans can be in any amount, up to 80 percent of the project cost, provided that a state has sufficient obligation authority to fund the loan.

Use of Loan Proceeds

Proceeds from Section 129 loans can fund the costs of engineering, right-of-way acquisition, and physical construction.  However, only those costs incurred after the date FHWA authorizes the loan may be funded by the loan; no costs incurred prior to the loan authorization can be reimbursed retroactively with loan proceeds. 

Compliance with Federal Regulations

All projects receiving Section 129 loans must comply with all Federal regulations that attach to any other Federal-aid highway project.  There is one exception to this rule.  If the Section 129 loan represents the only Federal participation in the project, it is acceptable for the project sponsor to select consultants and contractors consistent with state law; the Brooks Act and Title 23 competitive bidding procedures do not apply in this instance.

Section 129 Loan Steps in the Process

State identifies project(s) for potential loan and dedicated source(s) for repayment. State requests authorization of Federal-aid funding for the loan to the project and provides written assurance that repayment pledge has been secured. State negotiates repayment schedule and terms with project sponsor. FHWA determines if requirements are met, then approves the project for a loan and executes project agreement. State makes loan to project. State obligates funds and receives Federal share of loan. Project sponsor (borrower) repays loan on approved schedule. State uses repayments for grants or loans to eligible projects.

Loan and Repayment Terms

The NHS Act requires that borrowers begin to repay Section 129 loans within five years after the project is opened to traffic or otherwise completed.  The loan must be wholly repaid within 30 years from the date Federal funds are authorized for the loan.  States have the discretion to determine interest rates that best meet their program needs so long as the rates are at or below market rates, and improve the financial feasibility of the project receiving the loan.

Setting interest rates for Section 129 loans can be a balancing act.  On the one hand, lower interest rates reduce project sponsors' cost of borrowing and thus reduce the projects' ultimate cost.  On the other hand, lower interest rates can cause debt service (i.e., principal and interest payments on the loan) to lag behind the time value of money.  For this reason, below-market-rate interest rates are often referred to as subsidized interest rates.  While subsidized interest rates are advantageous to project sponsors, they are less effective than market rate interest payments at recycling public funds.

States may subordinate the Section 129 loan to other debt.  This means that other investors in the project, such as bondholders, could have a first (or senior) lien on project revenues.  Subordination is the key to making a loan behave also as a credit enhancement product, as it improves debt service coverage on the obligations owed to senior bondholders (see box on "Focus on Subordination").

Use of Loan Repayments

States may use loan repayments to fund any project eligible for funding under Title 23 or credit enhancement in the form of bond insurance purchases or as a capital reserve for project debt.  These credit enhancement opportunities can improve project sponsors' access to the credit markets or to lower interest rates specifically for projects eligible for funding under Title 23.  No Federal requirements attach to projects advanced with loan repayments.

Section 129 Loans in Practice

The process for funding a Section 129 loan is very similar to the process for committing funds to and obtaining reimbursement for any other Federal-aid project.  The first step is for the state to identify a candidate project and a project sponsor that could benefit from public credit assistance through a Section 129 loan, determine the approximate amount of the loan, and the amount and source of Federal-aid highway funding to be committed to the loan.  Apportionments from any program category may be committed to Section 129 loans as long as the project receiving the loan is eligible for funding from that program category.

After identifying the candidate project, the next step is for the state to discuss the project and loan structure with the FHWA Division Office.  After ensuring that the project meets all the requirements specific to Section 129(a)(7), the Division Office will authorize either the entire amount of the loan or an incremental amount, depending on project cash flow needs.  At this point in the process, Federal-aid funds are obligated for whatever portion of the loan was authorized.  Federal reimbursements can be received after the state actually disburses loan funds to the project sponsor.  The non-Federal matching share for all Section 129 loan projects is 20 percent.  Figure 4.1 illustrates the flow of funds.

Use of Section 129 loans for project financing has been very limited.  One reason for this is the creation of the TIFIA direct Federal credit program in 1998, which created new, Federally administered credit opportunities - as well as a new pot of funding - for the same kinds of projects that would likely use Section 129 loans.  However, for projects that do not meet the cost threshold required for TIFIA projects (as discussed later in this chapter) or do not otherwise fit the profile of TIFIA projects, Section 129 loans remain a good alternative.  A Section 129 loan was first used under TE-045 for State Highway 190, also known as the George Bush Turnpike, in Texas (see case study for more information).

Figure 4.1 - Section 129 Flow of Funds

4.2  State Infrastructure Bank

State Infrastructure Banks (SIBs) are revolving infrastructure investment funds for surface transportation that are established and administered by states.  SIBs may be capitalized with regular Federal-aid highway apportionments and state funds and can offer a range of flexible financial assistance, including loans and various forms of credit enhancement.

What's New

Prior to 1995, Federal law did not permit states to allocate Federal highway funds to capitalize revolving loan funds.  However, in the early 1990s transportation officials began to explore the possibility of adding revolving loan fund capitalization to the list of eligible uses for certain Federal transportation funds.  The appeal of this concept derived largely from the capacity of revolving funds to maximize the amount of infrastructure investment that could be supported from the given level of Federal funding used to capitalize the revolving fund.  Money from the revolving fund would be loaned out to project sponsors, repaid, and thus recycled back into the revolving fund, and subsequently reinvested in the transportation system through additional loans.

In 1995, the Federally-capitalized transportation revolving loan fund concept took shape as the State Infrastructure Bank (SIB) pilot program, authorized under Section 350 of the NHS Act.  This pilot program was originally available only to a maximum of 10 states, but then was expanded to include 38 states plus Puerto Rico under the 1997 U.S. DOT Appropriations Act.  TEA-21 established a new SIB pilot program, but limited participation to four states - California, Florida, Missouri, and Rhode Island.  These four states may enter into cooperative agreements with the U.S. DOT to capitalize their banks with Federal-aid funds authorized in TEA-21 for fiscal years 1998 through 2003.  The SIB authorization in TEA-21 also modified some of the key provisions of the NHS Act.

As noted above, SIBs are a close relative of revolving loan funds, as they can lend money to an initial group of projects and then use the subsequent repayments to fund a future generation of loans.  However, SIBs can also provide credit enhancement products (such as lines of credit and payment guarantees) in addition to loans.

Candidate Projects and Key Requirements

Designed to complement traditional transportation funding programs, SIBs can give states significantly increased flexibility in project selection and financial management.  Much like a private bank, a SIB uses seed capitalization funds to get started and offers customers a range of loans and credit enhancement products.  States participating in the SIB program either as authorized under the NHS Act or TEA-21, enter into a cooperative agreement with FHWA that provides the framework for SIB implementation, including the basic structure and purpose of the SIB, the roles of each party, the administration of funds, and reporting and audit requirements.  While the authorizing Federal legislation establishes basic requirements and the overall operating framework for a SIB, states have the flexibility to tailor the bank to meet state-specific transportation needs.  A critical step in implementing a state SIB is ensuring that there is legal authority to achieve the intended objectives of the program.

Eligible Transportation Projects

Candidate projects for SIB assistance include any highway project eligible for Federal assistance under Title 23 of the U.S. Code and any transit capital project eligible for Federal assistance under Title 49 of the U.S. Code.  SIBs can provide financial support to both public and private sponsors of eligible transportation projects, and can assist in financing any stage of the project's development.  There are no Federal share restrictions on the cost of projects eligible to receive SIB assistance.

Forms of Credit Assistance

SIBs can provide two principal forms of credit assistance:  loans and credit enhancement products.

• Loans.   Loans are the most common form of assistance offered by SIBs.  The primary benefit of providing loans to projects is that loan repayments are recycled for future generations of projects.  Each SIB has flexibility to structure loans specifically to meet an individual project's needs by offering below market interest rates and favorable repayment terms.  Types of loans that SIBs can offer include subordinate loans, short-term construction loans, and interest-only loans during construction periods.

Alternative forms of loans, such as grant anticipation notes (GANs) and similar short-term debt instruments, can be issued in anticipation of future revenues, including Federal reimbursement of state transportation expenditures and state appropriations.  For example, the SIB could issue GARVEEs or GANs in the private capital markets on behalf of project sponsors or as a method of capitalizing the SIB.

• Credit Enhancement.   Credit enhancement products offered through a SIB can provide additional security or credit support to transportation projects that are funded primarily through other means, such as the municipal bond market or private participation.  This additional security can result in higher investor confidence which in turn creates lower interest rates, improved marketability of bonds, and lower overall project financing costs.  From a statewide perspective, providing credit enhancement through a SIB can be more advantageous than providing direct loans because fewer resources are tied up, and as a result more projects can be assisted.  States have broad discretion as to the kinds of credit enhancement products they wish to offer; possibilities include guarantees, interest rate subsidies, lines of credit, bond insurance, and provision of capital reserve funds.

During the first round of assistance with Federal capitalization funds, SIBs may not provide project sponsors with grant funding.

Terms of Credit Assistance

The Federal government places very few constraints on the terms that attach to individual loans or credit arrangements offered by a SIB.  This means that each SIB determines what types of credit products to offer, what interest rates to charge, how to screen applicants, and other matters related to the day-to-day business of the SIB.  There is also discretion to determine what forms of repayment are acceptable.  Even though it is desirable for a SIB to introduce new revenue streams (such as toll receipts) into the pool of funding available for transportation investment, it is possible for SIB loans to be repaid with existing state resources or even Federal funds.

Although the Federal government gives states discretion to establish most credit terms, U.S. DOT requires that most SIB-assisted projects comply with the regulations that apply to grant-funded projects.  All projects that receive so-called "first round" assistance - meaning loans or other credit support that derives from the initial Federal capitalization grants - must comply with these regulations. 

For SIBs approved under the NHS Act, projects receiving second round assistance are not subject to the standard Federal highway or transit requirements, with one exception.  If the first-round assistance was repaid with other Federal funds, any project receiving second-round assistance derived from those repayments must continue to comply with all Federal requirements.

For SIBs approved under TEA-21, Federal requirements apply to all SIB-funded projects, regardless of round.  At present this requirement applies only to Florida and Missouri, as those are the only states that have requested and been approved to operate under the TEA-21 provisions.

State Infrastructure Banks in Practice

Before a state can offer financial assistance to surface transportation projects through a SIB, it must first take the appropriate steps to establish and capitalize the bank.  States may need to adopt specific enabling legislation to authorize the creation of a SIB.  The types of assistance offered by a SIB will depend on the specific transportation financing needs of a particular state and the statutory authority given each SIB.

The critical feature of a SIB established under the Federal pilot program, and a key distinction from the TIFIA program, is that it is capitalized with Federal funds but operated by the administering state.  The administration and operation of the SIB can be located within the state DOT, in an independent entity, or split between multiple agencies.  Typically, the organization responsible for the SIB's daily operations is overseen by an oversight body, such as an appointed transportation commission.

Figure 4.2 illustrates the basic structure of a SIB.  The structure is designed to allow for initial seed capital to be used to supply loans and credit enhancements on a revolving basis to eligible surface transportation projects.  Many states are adding their own money to Federal funds to enhance the effectiveness of the SIB.

A SIB, like a private bank, needs equity capital to get started.  The NHS Act allowed states participating in the first pilot program to allocate up to 10 percent of their Federal apportionment as a Federal capitalization grant to their SIB.  States were required to match the Federal monies with funds from non-Federal sources.  States can choose to contribute funds in excess of the required state match.  The TEA-21 pilot states do not have a percentage limitation on Federal capitalization funds.

The mechanics of the capitalization process with Federal funds involve a variation of advance construction known as advance capitalization, as well as transfers from the originating program categories followed by obligations and outlays.  The process is somewhat involved, as outlays, which translate into actual deposits into the banks, must be spread out over time in order to minimize the impact on the Federal budget. ¹   Although this guidance applies to the 1995 pilot program, the steps in the capitalization process remain largely the same under the TEA-21 program.

The 1995 pilot program requires that states keep highway and transit funds separate, but TEA-21 removed this requirement, allowing the funds to be melded.  Also some states that capitalized their banks with funds apportioned in 1996 and 1997 found it desirable to maintain separate accounts for initial capitalization grants and funds made available for second-round assistance.  This structure is not necessary for any Federal capitalization funding under TEA-21, as the same Federal regulations apply to all projects receiving SIB assistance, regardless of the round of assistance.

Figure 4.2 - SIB Capitalization, Lending, and Repayment Process

Options for Structuring a SIB

Basically, SIBs can be structured either as a leveraged SIB or unleveraged SIB.  A "leveraged SIB would issue bonds against its initial capitalization, significantly increasing the amount of funds available for loans.  Rather than loaning Federal funds and state matching funds, these funds together with anticipated loan repayments can be pledged as security for the bond issue.  The proceeds from the debt issuance can then be provided to project sponsors as either loans or credit enhancements.  This approach can make sense if demand for SIB assistance is greater than the cash available in the bank for loans.

An "unleveraged SIB would simply lend available funds or provide credit enhancement to projects.  The loan repayments would then be recycled for funding future projects, but there would be a time lag before the SIB would be replenished through repayments from its original borrowers.  In order to maximize replenishment of a SIB, some state DOTs have limited borrowings to short-term loans.

The decision of whether or not to leverage will depend on the assessment of overall loan demand and policies relative to bond financing.  A state may need specific state-legislated authority to issue SIB loans.  In practice, the leveraging decision may be made later in the SIB's life cycle when loan demand can be more easily identified and quantified.  States also have the option, if demand for SIB financial assistance exceeds the initial Federal and state capitalization monies, to contribute additional state funds above the required match.  While most SIBs are unleveraged, leveraging is a viable alternative for states to facilitate a larger dollar investment in transportation.  For leveraged SIBs, credit and rating considerations will be factors in the overall SIB structure.

An Overview of SIB-Assisted Projects

As of September 2001, 32 states had entered into 245 loan agreements with a dollar value of over $2.8 billion.  The following examples of state SIB programs demonstrate the flexibility and diversity possible in structuring SIBs to best meet state needs.

• As of September 2001, the Oregon SIB had executed nine loan agreements with an aggregate value of over $11 million.  The size, scope, and repayment sources of the SIB's loans are diverse.  The bank has funded two transit projects, three bridge retrofits, a large right-of-way purchase, new street construction, and a reconstruction project to repair a road damaged by land slides.  Loan maturities have ranged from two to 20 years with interest rates generally in the 3.5-5.0 percent bracket.  State law permits the bank to be leveraged; it can issue up to $200 million in bonds, but has not yet used this authority.
• South Carolina's SIB provides the best example of a large, leveraged SIB.  Since its inception, the SIB has approved financing and begun development of $3.0 billion in projects for eight applicants.  SIB loans are financing most of the project costs.  The SIB has issued over $1.2 billion in revenue bonds to provide funds for approved SIB projects.  The SIB expects to issue another $800 million in revenue bonds over the next several years.  The SIB financing mechanism is helping to condense 27 years of projects into seven years (see case study for more details).
• Puerto Rico's SIB program is unique in that the SIB monies have been leveraged to support the issuance of highway bonds.  The Puerto Rico Highway and Transportation Authority used $15 million in combined Federal and state SIB seed money to establish a trust fund which was used as partial security for a $75 million bond issue.  The bond issue financed critically needed highway and bridge projects throughout Puerto Rico.
• Both Florida and Arizona enacted state legislation that significantly expanded the states' ability to capitalize their respective SIBs.
• Initially, the Arizona SIB, designated as the Highway Expansion and Extension Loan Program (HELP), was capitalized with Federal dollars and state matching funds.  In light of funding demands and limited Federal capitalization funds, comprehensive state legislation (SB 1201) was enacted in 1999 to enhance funding through a combination of direct General Fund appropriations, additional state highway funds, and an innovative financing mechanism called Board Funding Obligations (BFOs).  Over the FY 1999-2007 period, by leveraging the new funding sources through short-term loans, the HELP program will provide an estimated $600 million in loans to accelerate needed highway projects (see case study for more details).
• In Florida, as in Arizona, SIB loan demands have exceeded available resources, even though the state had enjoyed expanded capitalization opportunities as one of the four TEA-21 SIBs.  To meet increasing transportation needs in the state, the 2000 legislature passed a major transportation funding package.  This package included state funding of $150 million for Florida's SIB, phased in over three years.  This funding is capitalizing a new flexible state SIB which will in turn provide assistance to a wide range of transportation projects.

4.3  TIFIA - Direct Federal Credit

TIFIA allows U.S. DOT to provide direct credit assistance, up to 33 percent of eligible project costs, to sponsors of major transportation projects.  Credit assistance can take the form of a loan, loan guarantee, or line of credit.

What's New

In 1998, the Congress authorized the Transportation Infrastructure Finance and Innovation Act (TIFIA) under Sections 1501-1504 of TEA-21, subsequently codified at Sections 181-189 of Title 23 of the U.S. Code.  Like Section 129 loans and SIBs, the program's goal is to provide credit rather than grants to sponsors of surface transportation projects.  However, TIFIA differs from these programs in two important ways.  First, U.S. DOT directly negotiates with private and public sponsors of eligible transportation projects.  Second, because the TIFIA legislation authorizes new funding for such credit assistance, TIFIA does not draw from funds already apportioned to the states for grant assisted projects.

The TIFIA legislation authorizes two types of funding over the five-year life of the TIFIA authorization (Federal fiscal years 1999 through 2003):  1) a credit amount of $10.6 billion to directly assist projects, and 2) potential budget authority of $530 million to cover U.S. DOT's costs to reduce defaults or interest rate swings.

Building on successful financings of three specially authorized projects (see the box on "TIFIA Trailblazers"), the TIFIA program was designed to achieve a range of linked objectives, including:

• Improving the financial feasibility of projects on the brink of obtaining capital markets investment by offering credit assistance with flexible terms and a junior claim on repayment revenues;
• Attracting new private and non-Federal public investment in transportation facilities that otherwise would be delayed or not constructed at all;
• Encouraging new revenue streams, especially user fees, and improving their capacity to secure debt obligations; and
• Providing credit assistance in a responsible fashion, relying on the disciplines and practices of capital market participants to achieve a balance between flexible credit terms and repayment, and security.

The TIFIA program offers three credit assistance products:  direct loans, loan guarantees, and lines of credit.  Direct loans reimburse a project sponsor's expenditures for eligible project costs including right-of-way acquisition, design, construction, and financing costs.  Loan guarantees and lines of credit provide sources of capital should project revenues fall short of amounts needed to repay commercial project investors.  TIFIA credit instruments can offer project sponsors an excellent way to boost debt service coverage and enhance senior project obligations at an affordable cost.

Candidate Projects and Key Requirements

The TIFIA objectives are reflected in the program's threshold requirements, which fall into two broad categories related to:  1) project characteristics, and 2) project financial plans.  Selected requirements from each category are profiled below.

Project-Related Requirements

In general, to be eligible for TIFIA credit assistance, a project must be eligible for grant assistance from applicable Federal surface transportation funding programs, and the project rules are the same as those for grant assistance.

Eligible Types of Projects - Highway, transit, passenger rail, and certain intermodal projects are eligible to receive TIFIA assistance.  These include any project eligible for regular grant funding under Chapter 1 of Title 23 of the U.S. Code (highways) or Chapter 53 of Title 49 (public transit).  Eligible projects may also include intercity passenger bus or rail facilities and vehicles (including Amtrak) and publicly- owned intermodal surface freight transfer facilities, so long as these facilities are located on or adjacent to National Highway System routes and are not airports or seaports.

Eligible Borrowers - Both public and private entities may apply for TIFIA assistance. Such entities include, but are not limited to state DOTs, local governments, transit agencies, special authorities or districts, railroad companies, and private firms or consortia.  However, intermodal freight transfer facilities must be publicly owned to receive TIFIA assistance.

TIFIA Steps in the Process

Project sponsor submits letter of interest to U.S. DOT to determine if the project meets basic eligibility requirements. If eligibility is confirmed, sponsor submits application, including fee (currently $30,000), and makes oral presentation to U.S. DOT. U.S. DOT determines whether to provide TIFIA credit assistance. If project is selected, U.S. DOT issues term sheet details that commits to the basic credit assistance. U.S. DOT and project sponsor negotiate and execute final loan agreement. (If direct loan)  Loan proceeds are disbursed on agreed draw down schedule; project sponsor draws down funds to reimburse project costs. (If direct loan)  Project sponsor repays U.S. DOT per the terms of the credit agreement.

Project Cost - In general, the candidate project's eligible costs must reach at least $100 million.  There are two exceptions to this requirement.  A project need cost only $30 million if its principal purpose involves installation of intelligent transportation systems.  Also, the $100 million requirement can be waived if the cost of the project amounts to at least 50 percent of the state's annual apportionment of Federal-aid highway funds.

Public Approval - Any project seeking TIFIA assistance must be consistent with the state's long-range transportation plan and appear in the fiscally constrained STIP.

Environmental and Other Requirements - A TIFIA-assisted project must comply with the relevant Federal regulations that attach to grant-funded transportation projects of the same type.  Thus, all requirements appearing in Chapter 1 of Title 23 or Chapter 53 of Title 49, as appropriate, apply, as do overarching Federal requirements such as Title VI of the Civil Rights Act of 1964 and the Uniform Relocation Assistance and Real Property Acquisition Policies Act of 1970.  To ensure that all projects conform to the National Environmental Policy Act of 1969, TIFIA requires that before a project receives credit assistance the project must have environmental approval from the responsible Federal agency (FHWA, Federal Transit Administration, or Federal Railroad Administration).

Financial Requirements and Credit Considerations

The TIFIA program attempts to balance the Federal government's financial risk against the goal of assisting projects that may face difficulty in accessing traditional capital markets.  On the one hand, U.S. DOT aims to assist those projects that genuinely require credit assistance in order to obtain investment from other sources.  On the other hand, TIFIA seeks credit terms that reflect standard commercial lending safeguards.

Figure 4.3 displays how selected financial requirements play out in this balancing act.  Provisions to the left of the scale seek to demonstrate the creditworthiness of the investment.  Provisions to the right of the scale seek to improve the feasibility of projects that may otherwise have difficulty accessing capital market financing. Of course, a project may simply be too risky to merit investment from prospective creditors - including the Federal government.  A brief description of the key provisions shown in the figure follows.

Rating Requirement - Prior to executing a credit agreement, TIFIA requires that each project's senior debt obligations receive an investment-grade rating of Baa3/BBB- or higher from a nationally recognized credit rating agency.

The rating process is also a critical component of U.S. DOT's process for evaluating candidate projects.  Any applicant for TIFIA assistance must provide a preliminary rating opinion letter from one of the national rating agencies as part of its application.  While a preliminary opinion letter does not assign a rating to a project's obligations, it must express an opinion as to the proposed senior debt obligations' capacity to attain an investment-grade rating and must also express an opinion as to the anticipated credit quality of the proposed TIFIA credit instrument.

Federal Government as Minority Investor - TIFIA credit products can account for no more than 33 percent of all eligible project costs.  This limitation helps ensure that the TIFIA program attracts, rather than displaces, co-investment.  Also, like the rating requirement described above, the limitation helps ensure that capital market discipline applies to the project.

Figure 4.3 - TIFIA's "Balancing Provisions"

Security Features -  Each TIFIA credit agreement must include terms that offer sufficient assurance to U.S. DOT of repayment.  For example, U.S. DOT requires certain covenants regarding coverage and flow of funds for common streams of revenue shared by senior bondholders and U.S. DOT.  This ensures that the investment-grade rating on senior bonds provides a meaningful indication of the revenue risk borne by the Federal government.

Credit Terms - While the three preceding financial requirements speak to the U.S. DOT's efforts to safeguard its position as a creditor, other opportunities presented by the TIFIA statute and exercised in practice highlight the program's efforts to assist projects on the brink of financial feasibility.  For example, repayment terms for TIFIA loans can be very flexible.  The repayment period can extend for up to 35 years following substantial completion of the project.  Also, it is possible for borrowers to propose repayment structures that match anticipated cash flows; U.S. DOT will not necessarily insist on level debt service payments if the borrower can make a convincing case for a more backloaded payment structure.  Credit terms for loan guarantees and lines of credit are similarly flexible.

Subordination - As noted above, it is acceptable - and, in practice, typical - for a TIFIA loan to have a junior claim on project revenues, with bondholders enjoying the first claim.  There is one important exception to a TIFIA credit instrument's functional subordination in the flow of funds, however.  In the event of bankruptcy, insolvency, or liquidation of the borrower, the TIFIA credit instrument's claim on revenues must, by law, rise to parity with that of the senior obligations.

Dedicated Revenue Source - A TIFIA project must pledge repayment of credit assistance in whole or in part from user charges (such as tolls or user fees), special assessments (such as taxes specifically pledged to retiring project debt), or other non-Federal sources.  While many dedicated revenue sources are less secure than general obligation pledges, the TIFIA program places a priority on encouraging new revenue streams and user-based charges (see box on "TIFIA and Project Finance").  Federal funds cannot be pledged to repay TIFIA credit assistance.

Forms of Assistance

As noted above, the TIFIA program makes three types of credit products available.  Each has distinct benefits, and different products may be combined as long as the cumulative value of the credit assistance remains within 33 percent.  Following is a brief description of the purposes served by the three forms of assistance.

Direct Loans - Direct loans provide flexible long-term financing for a portion of construction costs.  Loans must be repaid within 35 years following project completion.  The interest rate must be equal to or greater than the yield on U.S. Treasury securities of a comparable maturity.  In practice, U.S. DOT has offered the comparable U.S. Treasury rate to all borrowers with no distinction for credit risk.

Loan Guarantee s - Loan guarantees are intended to promote private investment in transportation projects by providing a Federal guarantee of debt service payments due to a commercial lender over the life of the loan.  The terms of a loan guarantee are similar to those of a direct loan.  The interest rate will be negotiated between the borrower and the lender and approved by U.S. DOT.

Lines of Credit - Standby lines of credit represent a U.S. DOT commitment to provide one or more direct loans contingent on shortfalls in revenues during the 10 years following substantial completion of a project.  Lines of credit thus provide a secondary source of capital during this so-called ramp-up period when project-based revenues (such as toll receipts) are most likely to fall short of expectations.  Up to 20 percent of the line can be converted into a loan in any given year during the 10-year window, and all draws on the line of credit are payable within 35 years of project completion.  The interest rate on the line is established upon execution of a term sheet and must equal or exceed the current yield on 30-year Treasury securities.

 TIFIA iPractice

Under TIFIA's rolling application process, each sponsor can determine the best timing of a TIFIA application, based on the status of project development and the project's particular needs.

The first step for a project sponsor considering credit assistance to finance the project is to contact the U.S. DOT's TIFIA Joint Program Office (JPO) in order to determine the project's potential suitability for TIFIA assistance.  Then to begin the application process, the prospective applicant submits a detailed letter of interest to the TIFIA JPO.  On the basis of the letter of interest, U.S. DOT will determine whether the project meets the basic eligibility requirements for participation in the TIFIA program.  Upon U.S. DOT's confirmation that the project meets the basic eligibility criteria, the project sponsor may submit a formal application, following published guidelines.  At the time of application, the project sponsor is required to pay a non-refundable application fee, currently $30,000.

Depending on the modal characteristics of the project, U.S. DOT may establish an evaluation team representing several offices and agencies to lead the review of the project application.  Also, U.S. DOT typically employs the services of an expert financial advisor to assist with financial and credit risk assessments of the project.  If the application passes the initial screening process for completeness and compliance with TIFIA program requirements, the project sponsor will be invited to make an oral presentation to the TIFIA JPO and the U.S. DOT evaluation team. 

Based on the financial information in the application and the oral presentation (and any supplemental materials), U.S. DOT will estimate the subsidy cost for the proposed credit assistance.  Concurrent with the preliminary calculation of the project's subsidy cost, the evaluation team will assess the strengths of the application in light of the eight selection criteria specified in law (see box on TIFIA Selection Criteria).

On the basis of the overall evaluation and score, the TIFIA JPO will prepare a recommendation regarding credit assistance to the TIFIA Credit Council, which provides policy direction for the TIFIA program.  The TIFIA Credit Council will make a recommendation to the Secretary of Transportation who has the final determination regarding TIFIA assistance.

Following selection, U.S. DOT will issue a term sheet that establishes the legal commitment to credit assistance and triggers the obligation of budget authority for the project.  U.S. DOT will then initiate negotiations, concluding in the execution of a credit agreement.  The credit agreement is the definitive agreement between U.S. DOT and the borrower, containing all the terms and conditions pursuant to which the credit assistance is provided.  U.S. DOT will assess a credit processing fee to cover its outside consulting expenses during the negotiations, typically expected to range from $100,000 to $300,000.

If the form of credit assistance is a direct loan, funds will be disbursed on a reimbursable basis in accordance with an agreed draw down schedule, based on the project's financing needs.  The borrower will be required to provide repayments according to the terms of the credit agreement.

The first 11 projects approved for TIFIA assistance (beginning in 1999) are valued at a combined total cost of more than $15 billion; case studies for two of these projects - the Miami Intermodal Center and SR 125 - are highlighted in Chapter 6.  Pending execution of credit agreements for each of these 11 projects, TIFIA will provide $3.6 billion in credit assistance at an estimated budgetary cost of about $190 million.  Thus, based on preliminary subsidy estimates, each TIFIA dollar invested in these projects is expected to support approximately $80 in capital investment.