The Illinois Finance Authority will go to market with an $850 million deal for the Illinois Environmental Protection Agency next week, replenishing the state revolving fund loan program's clean water initiative and refunding two series of bonds previously issued by the authority.
The green bonds include $500 million of Series 2025A revenue bonds, roughly $247.18 million of Series 2025B refunding bonds — which will refund certain Series 2016 and Series 2017 bonds issued for IEPA via tender offer — and approximately $108.56 million of Series 2025C refunding bonds, which will refund on a forward delivery basis any remaining Series 2016 bonds.
"IFA coordinated with IEPA to craft a plan of finance that provides optionality to attain savings in a volatile market," Brad Fletcher, managing director of the public finance group at IFA, told The Bond Buyer.
He said the tender offer will be funded by the issuance of the Series 2025B bonds on a parallel track with the issuance of the 2025A bonds. Any unpurchased Series 2016 bonds will be defeased to their first optional redemption date of January 1, 2026, through the issuance of the forward delivery Series 2025C bonds, he said.
Fletcher noted that the par amounts of the Series 2025B and 2025C bonds are preliminary, and "will be driven by participation in the tender, which expires Friday, March 28. Following the expiration of the tender, IFA will communicate, through the underwriters, the size of each tranche to the market," he said.
Senior managers on the deal are Jefferies and Ramirez & Co. The financial advisor is Acacia Financial Group. Katten Muchin Rosenman is bond counsel.
The bonds are rated AAA by Fitch Ratings and S&P Global Ratings. The outlook is stable.
The tax-exempt bonds are secured by a pledge of revenues from loan repayments and investment income earned from various pledged funds and accounts. The SRF funds are also fully cross collateralized through a pledged equity fund.
The Series 2025A and 2025B bonds will price April 1. Fletcher said the pricing date is set, but "is subject to change." The delivery date for the Series 2025C bonds is Oct. 7.
The Series 2025A bonds will fund IEPA loans to local governments for wastewater and sewer facilities as well as drinking water facilities, according to an
The IFA had $1.402 billion of IEPA SRF bonds outstanding as of March 1.
Illinois' SRF program has previously funded projects like an Urbana-Champaign Sanitary District effort to increase capacity at its southwest treatment plant, the goal being to improve removal of nitrogenous compounds from local wastewater.
Another project involved installing 10,500 feet of water main for the village of Shorewood, addressing concerns about local aquifers' ability to meet the village's water capacity demands, and laying the groundwork for the village to start receiving Lake Michigan water in 2030.
"These programs are annually the recipients of federal capitalization funding, which is combined with state matching funds, interest earnings, repayment money and the sale of bonds to form a robust source of financing for infrastructure projects," said Kim Biggs, public information officer at IEPA.
"Our programs provide vital funding to eligible public and private applicants for the design and construction of a wide variety of projects that… improve the quality of Illinois' water resources," she added.
None of the proceeds of the Series 2025 bonds will be used to fund the state match. According to the
Credit rating agency analysts are following any potential impact of Trump administration cutbacks, said John Kennedy, a director for U.S. public finance at S&P.
"We are watching SRF federal funding closely since federal support is a contributing factor in our enterprise risk analysis of long-term municipal pools," he said.
Kennedy noted that in addition to direct grants, SRF programs benefit from many softer forms of ongoing federal support — like technical assistance from the EPA — that also set them apart from most state or local lending programs.
"If one aspect of federal support weakens for SRF programs, we would likely analyze the level of expected ongoing support and its holistic impact on enterprise strength," he said.
S&P said its rating on the Series 2025 bonds reflects a strong enterprise risk profile that benefits from state and federal government support; overcollateralization capable of withstanding S&P's loss coverage scenario; solid operating performance and strong to adequate financial and loan origination policies.
It noted that the pledged loan pool is a bit concentrated — loans to the city of Chicago and the Metropolitan Water Reclamation District of Greater Chicago comprise nearly 40% of loans outstanding — but the program's loss coverage score was "extremely strong."
A set of rule amendments in 2017 cleared the way for the restructuring of loan agreements through the clean water SRF, and since then, 12 borrowers have sought to restructure their loans. Nine loans were approved, totaling $23.2 million of principal, with the borrowers extending their loan terms to 30 years from 20. Six also received a change in interest rate.
"Our operating performance analysis evaluates how proactively a program manages challenging loans," Kennedy said. "We would potentially view an increase in restructurings negatively if we felt they were driven by borrower distress in a way that indicates a higher level of loan delinquencies or defaults are more likely in the future."
In its credit opinion, S&P flagged the fact that about 4% of the loan portfolio made late payments over the past year, but said those were due to administrative issues rather than credit stress.
"This is something we will continue to monitor," Kennedy said. "The strength of the other factors in the program's financial risk profile, particularly loss coverage capability, continues to support our 'extremely strong' assessment. If other financial factors weakened while late payments remained relatively high, there may be a slightly slimmer cushion from a rating change there than there would be if additional controls succeeded in bringing down late payments."
There have been no pledged loan defaults in any of the IEPA SRF programs to date. IEPA's Biggs said every loan applicant has to meet capability metrics, and the program offers some flexibility in loan term and interest rate.
The lack of defaults "is largely due to the extensive financial capability review a loan applicant must go through before obtaining funding in the program," she said. "Each loan applicant must demonstrate their ability to not only afford the loan but also repay it back according to the terms and conditions set forth in the program."
Fitch's rating reflects the SRF program's financial structure and its ability to absorb hypothetical defaults in excess of Fitch's stress scenario, the rating agency said.
"Fitch's cash flow modeling demonstrates that the program can continue to pay bond debt service even with a default tolerance rate of up to 100% in the first, middle, and last four-year periods," Fitch said in its rating action. "Obligor security is strong as nearly all obligors are secured by net utility-system revenue or general obligation pledges, or a combination of both."
It noted that management's formal underwriting policy includes minimum coverage requirements and reserve requirements for subordinate lien pledges.
"We view those water, sewer and GO [pledges] as kind of the stronger pledges in terms of recovery," said Vicky Raso, an associate director at Fitch. "But if it's unrated, we will assume the BB [rating]."
Fitch Director Kristen Reifsnyder said "the program is strong on its own" but also benefits from the IEPA's payment intercept authority, which it may use to secure repayment obligations.
"The structure is strong, but one of the things that allows that to happen is what the leverage is," she said. "So if they were to give more loans, it might impact that. So I think there's a balance in terms of… how much they're lending versus how much they're able to support."
IEPA's currently pledged agreements, as of Jan. 31, comprised 1,074 loans totaling $4.84 billion. That included 564 clean water program loans totaling $3.308 billion and 510 drinking water program loans totaling $1.532 billion.
The Series 2025 bonds are on parity with the Series 2016 bonds, Series 2017 bonds, Series 2019 bonds and Series 2020 bonds.
The issuance of the refunding bonds is expected to generate debt service savings without extending the final maturity, according to the investor presentation.
"[The] Illinois Clean Water Initiative SRF Bonds are a known quantity in the municipal bond market," Fletcher said. "The SRF program is a critical financing source of essential water and wastewater infrastructure projects in Illinois.
"This is the first refunding being undertaken under the 2013 Master Trust Agreement, and the savings being generated will enhance IEPA and IFA's ability to deliver to units of local government throughout Illinois important capital for their projects," he added.
