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Strategy – Debt Service Reserves Background
New financing will create a bond funded Debt Service Reserve sized to the lesser of three tests, typically equal to Maximum Annual Debt Service. IRS Rule – maximum at issuance (MADS, AADS, 10% Proceeds). Trust Agreement – annual tests, funding requirement declines through life. Financing also triggers a TIFIA loan covenant to add a dedicated reserve, cash funded from revenues. Debt Service Reserves are a credit ratings factor. Break Even Analysis – Surety Policy versus Cash Funded Investment Goals and Considerations 1. Minimize carrying cost or differential between financing rate and earnings rate a. Probable financing rate is calculated to the call date, not maturity. 2. Minimize interest rate volatility while maximizing the return toward Goal 1. a. In most years, income accruing will be removed from the reserves. Mark-to- Market losses may exceed accruals in a single year and require additions, though less likely in the relatively high rate environment. 3. Consider expected life of Reserve to at least the first call date in 10 years. Annual Considerations 1. Forward looking return. 2. Additional break even analysis for lower rate environments and when surety premiums are less the PV of the net carrying cost.
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