The National Federation of Municipal Analysts has released a best practices for the Environmental Protection Agency managed Clean Water State Revolving Funds and Drinking Water State Revolving Funds in a 10-part document detailing what to include on official statements, annual reports and in interim disclosures.
That follows the
“This is our first Recommended Best Practices in Disclosure for the State Revolving Fund sector and we are very proud of it,” said NFMA’s Disclosure Committee chair Angela Kukoda. “It is the result of a long and thoughtful collaboration on the part of not only analysts but members of the issuer, banking and bond counsel communities. One of our primary goals as an organization is to facilitate the flow of information. In releasing these papers, we are fulfilling our mission.”
Both the Drinking Water State Revolving Fund and the Clean Water State Revolving Fund, created in 1987 and 1996, respectively, are partnerships between the Environmental Protection Agency and states to help construct municipal wastewater facilities, control pollution, improve drinking water treatment as well as fund other water quality projects, among other uses.
The paper is divided into 10 sections: summary/general description of the issuer, pledged obligors, significant obligors, obligor performance, forecast financial metrics, legal authority and bond security, legislation/litigation, ESG/cybersecurity/risk management and resiliency, debt portfolio structure and market risks, and governance and management.
According to NFMA, an official statement should include a description of the issuer and an indication of its relationship to the state, a description of the outstanding SRF programs including fund type, purpose and projects typically financed, a description of any other state agencies or departments responsible for the administration of the SRF program, as well as a link to a website where investor information, ratings and issuer contact information can be found, which should also be included in interim disclosures.
The official statement and annual report should, for each separately secured pool, include a list of each individually pledged obligor, such as full legal names, legal security supporting the repayment of borrowed funds, aggregate amount of principal funded, such as any undrawn amounts, the terms of the longest dated obligation and the percentage of each obligor of the overall pool or portfolio.
The official statement, annual report and interim disclosures should provide a list of any obligors currently accounting for more than 1% of the pool total experiencing delinquencies of more than 90 days, as well as a description of “any plans to remedy or prevent write-offs that could impact financial coverage ratios,” NFMA said. “Obligors accounting for more than 5% of the pool that are experiencing such delinquencies should be reported on an interim basis.”
For every secured pool, issuers must provide in tabular format annual revenues, expenses, net revenue available for debt service, debt service and financial coverage ratios. Those should be included in the official statement and annual report, in addition to any balances of funds pledged to bondholders.
The official statement should also include a description of the revenue sources pledged to the repayment of the bonds, including “priority of payment from revenue stream, additional bonds test with an explanation of how the calculation is made, flow of funds including any surplus release requirements/deallocation rules, cross collateralization mechanics, bond reserve fund requirements and how they are satisfied,” NFMA said.
The OS should also include discussion of perfection of liens, a description of state law and whether the SRF or obligors are permitted to declare bankruptcy and what those bankruptcy implications are on the structure of the security. It should also include, for each separately managed pool, all funds and accounts to be established, minimum funding levels, replenishment requirements and any restrictions on the use of bond proceeds.
The OS should also provide details on the different restrictions for the issuer’s reserves, and a description of all available enforcement mechanics for obligor delinquencies, such as the ability to intercept any state aid.
A description of any material ongoing litigation that may affect operations, operations autonomy, revenue collection, expense management or overall financial performance should be included in the OS, annual report and interim disclosures. Any legislation that may affect capitalization grants or other types of state or federal funding should be included in the OS.
A discussion of any ESG or third party verifiers should be included in the OS and annual report, as well as in the OS, a description of policies and procedures in place to address emergency preparedness planning for environmental, cybersecurity and health crises and related insurance coverage. In all three documents any cybersecurity breaches over the last three years should also be disclosed.
The remainder of the best practices can be found on NFMA’s site.