A proposal to use federal grant money as credit enhancement is gaining the attention of officials looking for ways to finance infrastructure projects, according to people familiar with the plan.

The grant-backed proposal would bring techniques familiar to the structured finance market into the municipal arena.

"We've been working at how the securitization of municipal bonds can held fund infrastructure investment," said Scott Reznick, president of Commonwealth Development Associates, a Philadelphia consulting firm that has been studying the issue. "In a structured municipal bond, we can use the cash flow from current and anticipated grants as a vehicle for supporting today's loans."

Reznick said the concept, which he calls "grant-backed credit enhancement," is very similar to a proposal by Vice President Al Gore for the Department of Transportation in his National Performance Review for Reinventing Government. The proposal states: "This recommendation would allow federal transportation grant recipients to use grant fund capital reserves to back debt financing to construct eligible transportation projects."

The concept is gathering support in Washington because "it is a very cost-effective way to accelerate the availability of federal funding and increase essential investment in infrastructure," said Reznick, who is working with the Department of Transportation on the grant-backed infrastructure plan.

"We're interested in anyone's ideas but I would be reluctant to endorse or disparage any proposal at this time," a spokesman for the department said. "We are looking at Mr. Reznick's proposal but it is not something that everyone [in the department] has expressed their views on yet. We cannot endorse it until it goes through the entire process."

Meanwhile, Standard & Poor's Corp. is evaluating grant-backed credit enhancement and developing rating criteria for the concept.

"We've had some good favorable discussions, but still need to take it through our whole process," said Ernie Perez, a director in the Standard & Poor's municipal finance group. "We would need to feel comfortable with the whole grant process, but I'm hoping by yearend we could have everything finalized. It looks very favorable."

In addition to providing capital to back bonds for infrastructure projects, grants can be used to help raise weaker credits to the higher investment-grade rating levels, Reznick said.

"If you combined the securitization structure with grant-backed credit enhancement, you could support municipal bonds for a wider range of projects," he said.

Reznick said it was premature to discuss further details of the plan.

"We are busily developing the concept and looking forward to describing it further in Washington, to state and local governments, and to the investment community once our research and policy development process has been completed," he said.

Estimates vary on how large an increase in infrastructure investment is necessary in the United States, but Reznick said "whatever set of statistics you use, it seems clear that the U.S. is underinvesting in infrastructure. A more efficient structured municipal bond market can help fill the gap."

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.