31 TAC §371.52
The Texas Water Development Board (board) proposes amendments
to 31 TAC Chapter 371, concerning the Drinking Water State Revolving Fund.
Proposed amendments to §371.52 revise the rule to provide the methodology
for setting interest rates for all loans under the chapter and include the
method for determining the interest rates charged for loans with a debt service
schedule in excess of twenty years and when the annual debt service payments
are not level through the term of the bonds.
The proposed amendments to §371.52 include new subsection (a) to insert
definitions for terms commonly used in the section. The term "average life"
is included as a necessary component of the methodology used to calculate
the loan interest rate to be set by the executive administrator in this section.
The average life is defined as the number that results from dividing the sum
of the payment periods of all maturities of a loan by the principal amount
of the loan. The term "borrower" is used to refer to eligible applicants that
have received a commitment for financial assistance from the Drinking Water
State Revolving Fund (DWSRF). The term "Delphis" is defined as the Delphis
Hanover Corporation Range of Yield Curve Scales in order to identify the source
of information that the board will use to identify the market cost of funds
to a borrower. The board will use the Delphis because it is a standard recognized
in the financial services industry for determining the market cost of funds.
The term "loan interest rate" is used to identify the rate of interest that
the board will charge a borrower for a loan from the DWSRF. Since financial
assistance is provided by the purchase of a series of bonds or a loan agreement
that identifies specific amounts to be repaid on specific dates, loan interest
rate is defined as the series of interest rates that the board will charge
for each bond in the borrower's bond series or for each principal payment
in the loan agreement. The term "market rate" is defined since the loan interest
rate will be determined in relation to the borrower's cost to acquire funds
on the open market, which is determined by reference to the Delphis. The term
"payment period" is included as a necessary component in determining the average
life. It is the number that is determined by multiplying the maturity principal
amount of each bond in the series or each maturity in the loan agreement by
the standard period for such loan. The term "standard period" is defined because
it is a necessary component in the calculation of average life. It is the
number of days between the delivery of funds from the board to the borrower
and the maturity date of a principal payment, calculated on the basis of a
360-day year composed of twelve 30-day periods, divided by 360.
Current subsection (a) is amended to be subsection (b). Subsection (b)(1)(A)
is amended to include loan agreements because loan agreements are an available
option to which this subsection should apply. Otherwise no other amendments
are proposed to this subsection. Current subsection (b) is restructured as
subsection (c) and completely replaced with new language to clarify the current
procedure implemented by the board as well as to include additional methodologies
to be used by the executive administrator for a loan for which the annual
debt service schedule is not level. The first sentence currently provides
that the loan interest rate is set at exactly 120 basis points below the fixed
rate index rates. As a practical matter, a uniform rate exactly 120 basis
points below the fixed rate index rates may result in annual debt service
payments from the borrower becoming not substantially level, which could impair
the ability of the board to meet its debt service obligations. Therefore it
is necessary to recognize that the executive administrator is authorized to
make adjustments to the loan interest rate to insure a level debt service.
To aid in the organization of this section, the statement about the reduction
in interest rates is moved to proposed new subsection (c)(2). Also, the rule
is amended to refer to market rate rather than fixed rate index scale, as
is currently used, because it is believed that market rate improves the clarity
of the rule. A sentence is added to subsection (c) to summarize the process
pursuant to which loan interest rates will be determined in the succeeding
subsections.
Proposed new subsection (c)(1) is included to clearly delineate the existing
method of identifying the market rate for the various categories of borrowers
but otherwise is not intended as a substantive change. Subsection (c)(2) is
intended to delineate, without substantive change, that the purpose of the
program is provide interest rate reductions for each of two classes of borrowers
and the circumstances that create each class. A provision is added in this
subsection to make explicit the current practice of the board that regardless
of the amount of the reduction from the market rate, the loan interest rate
cannot be less than zero. This restriction is necessary in order to minimize
the board's program costs.
Proposed new subsection (c)(3) identifies two methodologies for setting
the loan interest rate. New subsection (c)(3)(A) assumes that this method
will be applied unless the borrower requests otherwise. Under this subparagraph,
the method for determining the interest rate as currently applied by the board
is identified. This new subparagraph now accommodates the need of the board
to insure level annual debt service payments even if doing so requires that
the interest rate subsidy to be modestly adjusted from the full subsidy anticipated
for the borrower. Under this process, the executive administrator determines
the average life, as defined, and applies the subsidy to the market rate for
the maturity for the year before the year in which the average bond life is
reached. If the resulting debt service schedule is level to the satisfaction
of the executive administrator, the loan interest rate will have been determined.
However, if the resulting debt service schedule is not level to the satisfaction
of the executive administrator, this subparagraph then specifically authorizes
the executive administrator to adjust the interest rate in any of the maturities
in order to insure that the bond repayment schedule is level. This amendment,
as well as the amendments in subsection (c)(3)(B) acknowledges the authority
of the executive administrator to determine whether the borrower's proposed
debt service schedule is level. The financial services industry recognizes
that annual debt service payments need not be exactly equal in order to be
considered level. If the annual debt service schedule is not level, the cash
flow necessary for the board to repay its obligations under the program may
be impaired. Additionally, an un-level debt service structure may cause the
amount of the subsidy that would be provided from the DWSRF to increase and
potentially compromise the integrity of the fund. However, the degree to which
the debt service payments may not be equal yet still remain sufficiently level
for the purposes of funds management is a matter of judgement that should
reside in the executive administrator. Therefore, in these amendments the
determination of whether the debt service payment schedule is level is explicitly
assigned to the executive administrator.
Proposed new subsection (c)(3)(B) identifies the method for determining
an interest rate for a borrower that requests principal maturity schedule
that does not have level annual debt service payments. This subparagraph provides
that the executive administrator determines the amount of the subsidy that
the borrower would have had from a level debt service structure following
the procedure identified in subsection (c)(3)(A) and using the interest rate
reduction identified in subsection (c)(2). The executive administrator then
determines the loan interest rate for the debt service schedule requested
by the borrower in the manner that as closely as possible provides the same
amount of subsidy that would have been provided had the debt service payments
been level.
Amendments are proposed to re-letter current subsections (c), (d), (e),
and (f) accordingly and to change subsection references contained therein.
Melanie Callahan, Director of Fiscal Services, has determined that for
the first five-year period the amendments are in effect there will be no fiscal
implications to state government as a result of enforcement and administration
of the amended sections and no impact to local governments.
Ms. Callahan has also determined that for the first five years the amendments
as proposed are in effect the public benefit anticipated as a result of implementing
the amended sections will be improved clarity of the rules that will assist
public water systems to evaluate the merits of the DWSRF. Additionally, the
new provisions relating to identification of interest rates for loans will
provide incentives to public water systems that construct water systems improvements
for disadvantaged communities that require assistance to achieve compliance
with national drinking water standards. Ms. Callahan has further determined
there will be no increased economic cost to small businesses or individuals
required to comply with the amended sections as proposed because the provisions
apply only to political subdivisions applying for board assistance.
It is estimated that the rule amendments will not adversely affect local
economies because the proposed amendments relate only to the level of financial
participation of the state in local projects. Indeed, by the state financially
contributing to these projects, the local economies should be positively affected.
Comments on the proposed amendments will be accepted for 30 days following
publication and may be submitted to Jonathan Steinberg, Attorney, (512) 475-2051,
Texas Water Development Board, P.O. Box 13231, Austin, Texas, 78711-3231,
or by e-mail to jonathan.steinberg@twdb.state.tx.us or by fax at (512) 463-5580.
Statutory authority: Water Code, §6.101 and §15.605.
Cross-reference to statute: Water Code, Chapter 15, Subchapter J; and Chapter
17, Subchapter L.
§371.52.Lending Rates.
(a)
Definitions. The following words and terms,
when used in this section, shall have the following meanings, unless the context
clearly indicates otherwise.
(1)
Average life--the number determined by dividing the sum
of the payment periods of all maturities of a loan by the total principal
amount delivered to the borrower;
(2)
Borrower--each eligible applicant receiving a loan from
the board;
(3)
Delphis--Delphis Hanover Corporation Range of Yield Curve
Scales;
(4)
Loan interest rate--the individual interest rate for each
maturity of a loan as identified by the executive administrator under this
chapter;
(5)
Market rate--the individual interest rate for each maturity
of a loan payment that is the borrower's market cost of funds based on the
Delphis index's scale for the borrower as identified under subsection (c)(1)
of this section;
(6)
Payment period--the number determined by multiplying the
total principal amount due for an individual maturity as set forth in the
loan by the standard period for the loan;
(7)
Standard period--the number identified by determining the
number of days between the date of delivery of the funds to a borrower and
the date of the maturity of a bond or loan payment pursuant to which the funds
were provided calculated on the basis of a 360 day year composed of twelve
30-day periods and dividing that number by 360.
(b)
[
(a)
] Procedure for setting fixed
interest rates.
(1)
The executive administrator will set fixed rates for loans
on a date that is:
(A)
five business days prior to the adoption of the political
subdivision's bond ordinance or resolution
or the execution of a loan
agreement
; and
(B)
not more than 45 days before the anticipated closing of
the loan from the board.
(2)
After 45 days from the assignment of the interest rate
on the loan, rates may be extended only with the executive administrator's
approval.
(c)
Fixed Rates. The fixed interest rates
for DWSRF loans under this chapter will be determined as provided in this
subsection. The executive administrator will identify the market rate for
the borrower, determine the amount of adjustment from the market interest
rate appropriate for the borrower, apply the identified interest rate adjustment
to the market rate for the borrower to determine the loan interest rate, and
apply the loan interest rate to the proposed principal schedule, as more fully
set forth in this subsection.
(1)
To identify the market rate:
(A)
for borrowers that will not have bond insurance and with
a rating by a recognized bond rating entity, the executive administrator will
rely on the higher of the Delphis scale for the current bond rating of the
borrower or the Delphis 90 index;
(B)
for borrowers with no rating by a recognized bond rating
entity or for borrowers with a rating that is less than investment grade as
determined by the executive administrator, the executive administrator will
rely on the borrower's market cost of funds as related to the Delphis 90 index;
or
(C)
for borrowers with bond insurance and that are rated by
a recognized rating entity or for borrowers with bond insurance and no rating
by a recognized bond rating entity, the executive administrator will rely
on the higher of the borrower's uninsured fixed rate index scale or the Delphis
96 index scale.
(2)
The program is designed to provide borrowers with a 120
basis point reduction from the market rate based on a level debt service schedule.
For borrowers to which §371.22(c) of this title (relating to Administrative
Cost Recovery) must be applied or for borrowers which choose to have §371.22(c)
of this title applied, the program is designed to provide borrowers with a
150 basis point reduction from the market rate based on a level debt service
schedule. Notwithstanding the foregoing, in no event shall the loan interest
rate as determined under this section be less that zero.
(3)
To determine the loan interest rate, the following procedures
will apply:
(A)
Unless otherwise requested by the borrower under subparagraph
(B) of this paragraph, the loan interest rate will be determined based on
a debt service schedule that provides interest only will be paid in the first
year of the debt service schedule and in which the annual debt service payments
are level, as determined by the executive administrator. The executive administrator
will identify the appropriate Delphis scale for the borrower and identify
the market rate for the maturity due in the year preceding the year in which
the average life is reached. The executive administrator will reduce that
market rate by the number of basis points applicable according to paragraph
(2) of this subsection and thereby identify a proposed loan interest rate.
The proposed loan interest rate will be applied to the proposed principal
repayment schedule. If the resulting debt service schedule is level to the
satisfaction of the executive administrator, then the proposed loan interest
rate will be the loan interest rate for the loan. If the resulting debt service
schedule is not level to the satisfaction of the executive administrator,
then the executive administrator may adjust the interest rate for any or all
of the maturities to identify the loan interest rate that as closely as possible
achieves the interest savings applicable according to paragraph (2) of this
subsection while maintaining the principal schedule proposed by the borrower.
(B)
A borrower may request a debt service schedule in which
the annual debt service payments are not level through the term of the loan,
as determined by the executive administrator. In this event, the executive
administrator will approximate a level debt service schedule for the loan
amount and identify a proposed loan interest rate that provides for annual
debt service payments that are level for the term of the loan following the
procedures set forth in paragraph (1)(A) of this subsection. From the level
debt service schedule, the executive administrator will determine the amount
of the subsidy that would have been provided if the annual debt service payments
had been level. The executive administrator will then identify the loan interest
rate that as closely as possible provides the borrower the identified subsidy
amount for the principal schedule requested by the borrower.
[(b)
Fixed Rates. The fixed interest rates
for DWSRF loans under this chapter are set at rates 120 basis points below
the fixed rate index rates for borrowers plus an additional reduction under
paragraph (1) of this subsection, or if applicable, are set at the total basis
points below the fixed rate index for borrowers derived under paragraph (2)
of this subsection. Using individual coupon rates for each maturity of proposed
debt based on the appropriate index's scale, the fixed rate index rates shall
be established for each uninsured borrower based on the borrower's market
cost of funds as they relate to the Delphis Hanover Corporation Range of Yield
Curve Scales (Delphis) or the 90 index scale of the Delphis. For borrowers
with either no rating or a rating less than investment grade, the 90 index
scale of the Delphis will apply. The fixed rate index rates shall be established
for each insured borrower based on the higher of the borrower's uninsured
fixed rate index scale or the Delphis 96 index scale.]
[(1)
Under §371.22(c) of this title (relating to Administrative
Cost Recovery) an additional 30 basis points reduction will be used, for total
fixed interest rates of 150 basis points below the fixed index rates for such
borrowers.]
[(2)
For borrowers filing applications on or after September
21, 1997 for loans with an average bond life in excess of 14 years or, at
the discretion of the board for borrowers filing applications on or after
September 21, 1997 for loans which have debt schedules less than 20 years
and which produce a total fixed lending rate reduction in excess of a "standard
loan structure" (defined as a debt service schedule in which the first year
of the maturity schedule is interest only followed by 20 years of principal
maturing on the basis of level debt service), the following procedures will
be used in lieu of the provisions of paragraph (1) of this subsection to determine
the fixed lending rate reduction:]
[(A)
The interest rate component of level debt service will
be determined by using the 13th year coupon rate of the appropriate index
of the Delphis scales that corresponds to the 13th year of principal of the
standard loan structure and that is measured from the first business day on
the month the loan application will be presented to the board for approval.]
[(B)
Level debt service will be calculated using the 13th year
Delphis Scale coupon rate as described in subparagraph (A) of this paragraph
and the par amount of the loan according to a standard loan structure. For
a loan which has been proposed for a term of years equal to a standard loan
structure, the dates specified in the loan application shall be used for interest
and principal calculation. For a loan which has been proposed for a term of
years less than a standard loan structure or longer than a standard loan structure,
level debt service will be calculated beginning with the dated date and based
upon the principal and interest dates specified in the application, and continuing
for the term of a standard loan structure.]
[(C)
A calculation will be made to determine how much a borrower's
interest would be reduced if the loan had been made according to the total
fixed lending rate reduction provided in paragraph (1) of this subsection
and based upon the principal payments calculated in subparagraph (B) of this
paragraph.]
[(D)
The board will establish a total fixed lending rate reduction
for the loan that will achieve the interest savings in subparagraph (C) of
this paragraph based upon the principal schedule proposed by the borrower.]
(d)
[
(c)
] Variable Rates. The interest
rate for DWSRF variable rate loans under this chapter will be set at a rate
equal to the actual interest cost paid by the board on its outstanding variable
rate debt plus the cost of maintaining the variable rate debt in the DWSRF.
Variable rate loans are required to be converted to long-term fixed rate loans
within 90 days of project completion unless an extension is approved in writing
by the executive administrator. Within the time limits set forward in this
subdivision, borrowers may request to convert to a long-term fixed rate at
any time, upon notification to the executive administrator and submittal of
a resolution requesting such conversion. The fixed lending rate will be calculated
under the procedures and requirements of subsections [
(a) and
]
(b)
and (c)
of this section.
(e)
[
(d)
] Private and taxable borrowers.
The interest rate for loan agreements for those borrowers receiving financial
assistance who are determined to be private or taxable issuers will be 140%
of the rate pursuant to subsections [
(a),
] (b)
,
[
and
] (c)
, and (d)
of this section.
(f)
[
(e)
] NPNC borrowers. NPNC borrowers
that issue tax-exempt obligations and that operate community/non-community
water systems will receive interest rates pursuant to subsections [
(a),
] (b)
,
[
and
] (c)
, and (d)
of this
section.
(g)
[
(f)
]
Adjustments.
The
executive administrator may adjust a borrower's interest rate at any time
prior to closing as a result of a change in the borrower's credit rating.
This agency hereby certifies that the proposal has been reviewed
by legal counsel and found to be within the agency's legal authority to adopt.
Filed with the Office of
the Secretary of State on July 16, 2003.
TRD-200304307
Suzanne Schwartz
General Counsel
Texas Water Development Board
Proposed date of adoption: September 17, 2003
For further information, please call: (512) 463-7981