DEBT-SERVICE RESERVE FUND SURETY BOND AGREEMENT
Execution Version
Among
CASCADIA STATE INFRASTRUCTURE AUTHORITY
and
PACIFIC NORTHWEST TRUST COMPANY, NATIONAL ASSOCIATION, as Trustee
and
OLYMPIA GUARANTY INSURANCE CORP.
Relating to
$220,000,000 Cascadia State Infrastructure Authority Water Treatment Revenue Bonds, Series 2023A (Tax-Exempt)
Surety Policy No. OG-2023-MUN-4718
Dated as of October 24, 2023
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PREAMBLE AND RECITALS
This DEBT-SERVICE RESERVE FUND SURETY BOND AGREEMENT (this "Agreement"), dated as of October 24, 2023, is entered into among:
CASCADIA STATE INFRASTRUCTURE AUTHORITY ("CSIA" or the "Authority"), a Washington State governmental instrumentality and public body corporate, created by and existing under Chapter 43.160A of the Revised Code of Washington ("RCW"), with headquarters at 1100 Capitol Way South, Suite 400, Olympia, Washington 98501;
PACIFIC NORTHWEST TRUST COMPANY, NATIONAL ASSOCIATION ("PNTC" or the "Trustee"), a national banking association organized and existing under the laws of the United States of America, with its principal corporate trust office located at 1201 Third Avenue, Suite 1600, Seattle, Washington 98101, acting in its capacity as Trustee under the Indenture (as hereinafter defined); and
OLYMPIA GUARANTY INSURANCE CORP. ("Olympia Guaranty" or the "Surety Provider"), a financial guaranty insurance corporation duly organized, validly existing, and in good standing under the laws of the State of New York, with its principal office at 125 Broad Street, 14th Floor, New York, New York 10004.
WHEREAS, CSIA is authorized under Chapter 43.160A RCW to issue revenue bonds for the purpose of financing or refinancing the cost of public infrastructure facilities, and to enter into agreements and execute instruments for the benefit and security of the holders of such bonds; and
WHEREAS, the Board of Directors of CSIA, by Board Resolution No. 2023-014, duly adopted at a regular meeting held on May 9, 2023, at which a quorum was present and acting, authorized the issuance of the Bonds (as hereinafter defined) and the execution and delivery of this Agreement, the Indenture, and the Revenue Pledge Agreement, and ratified and approved all actions taken or to be taken in connection therewith; and
WHEREAS, CSIA has heretofore issued its $220,000,000 aggregate principal amount of Water Treatment Revenue Bonds, Series 2023A (Tax-Exempt) (the "Series 2023A Bonds" or the "Bonds"), pursuant to the Bond Indenture dated as of October 24, 2023 (the "Master Indenture"), between CSIA and PNTC, as Trustee, as supplemented by the First Supplemental Indenture dated as of October 24, 2023 (the "First Supplemental Indenture" and, together with the Master Indenture, the "Indenture"), and such Bonds have been authenticated and delivered to the initial purchasers thereof on the date hereof; and
WHEREAS, the proceeds of the Bonds are being used to finance the design, engineering, construction, equipping, and commissioning of the Puget Sound Regional Advanced Water Treatment Facility, a state-of-the-art water treatment and purification facility to be located at 7250 Deschutes Parkway, Tumwater, Thurston County, Washington 98501 (the "Project"), which is expected to serve approximately 1.2 million residents of the Puget Sound region upon completion; and
WHEREAS, the Indenture requires the establishment and maintenance of a Debt Service Reserve Fund (the "DSRF") in an amount equal to the Debt Service Reserve Fund Requirement, as such term is defined in the Indenture, for the benefit and further security of the holders of the Bonds; and
WHEREAS, the Debt Service Reserve Fund Requirement under the Indenture is the lesser of (i) the maximum annual debt service on the Series 2023A Bonds, which is $11,610,000, (ii) 125% of the average annual debt service on the Series 2023A Bonds, and (iii) 10% of the original aggregate principal amount of the Series 2023A Bonds, which is $22,000,000, and the applicable Debt Service Reserve Fund Requirement is therefore $11,610,000, being the least of the three foregoing amounts; and
WHEREAS, Article VI of the Indenture permits the Debt Service Reserve Fund Requirement to be satisfied in whole or in part by one or more surety bonds, insurance policies, or irrevocable direct-pay letters of credit, in each case issued by an entity whose unsecured long-term debt obligations or financial strength is rated in one of the two highest rating categories by at least one nationally recognized rating agency, and meeting certain additional requirements set forth in the Indenture; and
WHEREAS, Olympia Guaranty has agreed to issue and deliver to the Trustee its surety bond in the amount of $11,610,000 (the "Surety Amount") to satisfy, in full, the Debt Service Reserve Fund Requirement for the Series 2023A Bonds, upon the terms and subject to the conditions set forth in this Agreement; and
WHEREAS, Olympia Guaranty has heretofore issued and delivered to the Trustee Surety Policy No. OG-2023-MUN-4718 (the "Surety Bond") in the Surety Amount, a true, correct, and complete copy of which is attached hereto as Exhibit A and incorporated herein by this reference; and
WHEREAS, the Revenue Pledge Agreement dated as of October 24, 2023 (the "Revenue Pledge Agreement"), between CSIA and PNTC, as Trustee, pledges the Net Pledged Revenues (as defined therein) derived from the operation of CSIA's water treatment system as security for the payment of the Bonds on a parity basis with all other outstanding parity revenue obligations of CSIA; and
WHEREAS, interest on the Bonds is excludable from gross income for federal income tax purposes under Section 103 of the Internal Revenue Code of 1986, as amended (the "Code"), and the regulations promulgated thereunder, and the parties intend that no action taken pursuant to this Agreement shall impair or adversely affect such exclusion; and
WHEREAS, each of the parties hereto has determined that the execution and delivery of this Agreement is in the best interests of its respective stakeholders and constituents, and each has been duly authorized to execute and deliver this Agreement on the terms set forth herein;
NOW, THEREFORE, in consideration of the foregoing premises, the mutual promises, covenants, and agreements herein set forth, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
ARTICLE I — DEFINITIONS AND INTERPRETATION
Section 1.01 — Definitions
As used in this Agreement, the following terms shall have the meanings set forth below. Capitalized terms used but not otherwise defined in this Agreement shall have the respective meanings assigned to them in the Indenture.
"Agreement" means this Debt-Service Reserve Fund Surety Bond Agreement, dated as of October 24, 2023, among CSIA, the Trustee, and Olympia Guaranty, as the same may be amended or supplemented from time to time in accordance with the provisions hereof.
"Annual Premium" means $23,220 per annum, being the annual premium payable by CSIA to Olympia Guaranty for the Surety Bond, calculated as 0.20% of the Surety Amount ($11,610,000 × 0.0020 = $23,220), as more fully described in Article IV hereof.
"Authorized Officer" means, with respect to CSIA, Harold K. Nakamura, Executive Director of CSIA, or Denise R. Whitford, Chief Financial Officer of CSIA, or any successor to either of them duly appointed by the Board of Directors of CSIA and designated in writing to the Trustee and Olympia Guaranty as an Authorized Officer for purposes of this Agreement.
"Available Amount" means, at any time, the Surety Amount less the aggregate amount of all unreimbursed Draws then outstanding, as more fully described in Section 2.03 hereof.
"Bond Fund" means the Bond Fund established under the Indenture for the purpose of receiving revenues pledged for the payment of debt service on the Bonds.
"Bonds" or "Series 2023A Bonds" means the $220,000,000 aggregate principal amount of Cascadia State Infrastructure Authority Water Treatment Revenue Bonds, Series 2023A (Tax-Exempt), bearing interest at the rate of 3.25% per annum, issued pursuant to the Indenture and maturing on October 1, 2053, as further described therein.
"Business Day" means any day other than (i) a Saturday, (ii) a Sunday, or (iii) a day on which banking institutions in the State of Washington or the State of New York are authorized or required by law, regulation, or executive order to close.
"Closing Date" means October 24, 2023, the date of initial issuance and delivery of the Bonds.
"Code" means the Internal Revenue Code of 1986, as amended, and the Treasury Regulations promulgated thereunder.
"CUSIP" means the Committee on Uniform Securities Identification Procedures number assigned to the Bonds, CUSIP Base 148392, as assigned by CUSIP Global Services, a service of the American Bankers Association operated by Harborview & Co..
"Debt Service Reserve Fund" or "DSRF" means the Debt Service Reserve Fund established under Article VI of the Indenture for the benefit of the holders of the Bonds, which fund may be funded with cash, permitted investments, or one or more surety bonds, insurance policies, or letters of credit as permitted under the Indenture.
"Debt Service Reserve Fund Requirement" means $11,610,000, being the amount required to be maintained in the Debt Service Reserve Fund as calculated under the provisions of the Indenture, which is equal to the maximum annual debt service on the Series 2023A Bonds.
"Demand for Payment" or "Draw" means a demand by the Trustee upon Olympia Guaranty for payment under the Surety Bond, submitted in the form and manner required by Article III hereof and substantially in the form attached hereto as Exhibit B.
"Indenture" means, collectively, the Master Indenture and the First Supplemental Indenture, each dated as of October 24, 2023, between CSIA and PNTC, as Trustee, as the same may be amended or supplemented from time to time in accordance with the terms thereof.
"Interest Payment Date" means April 1 and October 1 of each year during which any Bonds remain outstanding, commencing April 1, 2024.
"Maximum Annual Debt Service" or "MADS" means $11,610,000, being the maximum amount of principal and interest due on the Series 2023A Bonds in any single bond year under the level-debt-service structure established in the Indenture.
"Net Pledged Revenues" means the net revenues derived from the operation of CSIA's water treatment system after payment of Operation and Maintenance Expenses, as such term is defined in the Revenue Pledge Agreement. For reference purposes, the Fiscal Year 2022 Net Pledged Revenues of CSIA were $412,600,000.
"Olympia Guaranty" means Olympia Guaranty Insurance Corp., a financial guaranty insurance corporation organized under the laws of the State of New York.
"Operation and Maintenance Expenses" means the costs and expenses incurred by CSIA in operating and maintaining its water treatment system, as more fully defined in the Revenue Pledge Agreement and the Indenture.
"Parity Obligations" means all outstanding parity revenue bonds and other parity obligations of CSIA that are secured by a pledge of Net Pledged Revenues on a parity basis with the Bonds, including all existing outstanding parity debt of CSIA in the aggregate principal amount of $3,120,000,000 and the Series 2023A Bonds in the aggregate principal amount of $220,000,000, for total aggregate parity debt outstanding of $3,340,000,000 as of the Closing Date.
"Premium Default" has the meaning assigned in Section 4.04 hereof.
"Premium Payment Date" means the date on which the Annual Premium is due and payable, as set forth in Section 4.02 hereof.
"Project" means the Puget Sound Regional Advanced Water Treatment Facility to be designed, constructed, equipped, and commissioned with the proceeds of the Bonds and located at 7250 Deschutes Parkway, Tumwater, Thurston County, Washington 98501.
"Rate Covenant" means the covenant of CSIA, set forth in the Indenture and the Revenue Pledge Agreement, to set, charge, and collect rates, fees, and charges sufficient to produce Net Pledged Revenues of at least 1.40 times (1.40x) the annual aggregate debt service on all outstanding Parity Obligations.
"Reimbursement Obligations" means CSIA's obligations to reimburse Olympia Guaranty for all amounts drawn and paid by Olympia Guaranty under the Surety Bond pursuant to any Demand for Payment, together with interest thereon, as more fully set forth in Article V hereof.
"Revenue Pledge Agreement" means the Revenue Pledge Agreement dated as of October 24, 2023, between CSIA and PNTC, as Trustee, as the same may be amended or supplemented from time to time in accordance with its terms.
"Surety Amount" means $11,610,000, the stated amount of the Surety Bond.
"Surety Bond" means Surety Policy No. OG-2023-MUN-4718, issued by Olympia Guaranty in the Surety Amount in favor of the Trustee, for the benefit of the holders of the Bonds, a copy of which is attached hereto as Exhibit A.
"Surety Provider" means Olympia Guaranty Insurance Corp.
"Trust Officer" means Alan M. Greer, Vice President, Corporate Trust Services of PNTC, or any successor duly authorized corporate trust officer of the Trustee designated in writing to CSIA and Olympia Guaranty.
"Trustee" means Pacific Northwest Trust Company, National Association, a national banking association organized under the laws of the United States, in its capacity as Trustee under the Indenture, and any successor Trustee appointed in accordance with the Indenture.
Section 1.02 — Rules of Interpretation
(a) All terms defined in the Indenture and used but not defined herein shall have the meanings assigned to them in the Indenture.
(b) References in this Agreement to Articles, Sections, and Exhibits are references to Articles and Sections of, and Exhibits to, this Agreement, unless the context otherwise requires.
(c) The headings and captions in this Agreement are inserted for convenience of reference only and shall not define, limit, or otherwise affect the construction or interpretation of any provision hereof.
(d) Words importing the singular number include the plural number and vice versa, and words importing any gender include all genders.
(e) The word "including" and words of similar import, when used in this Agreement, shall mean "including, without limitation," unless the context clearly requires otherwise.
(f) References to any statute, law, regulation, or rule include all amendments thereto and all successor statutes, laws, regulations, or rules.
(g) All accounting terms not specifically defined herein shall be construed in accordance with generally accepted accounting principles as in effect from time to time.
Section 1.03 — Exhibits
The following Exhibits are attached to and incorporated by reference in this Agreement:
• Exhibit A — Copy of Surety Bond (Surety Policy No. OG-2023-MUN-4718)
• Exhibit B — Form of Demand for Payment
• Exhibit C — Form of Replenishment Certificate
• Exhibit D — Form of Annual Premium Invoice
ARTICLE II — ISSUANCE AND DEPOSIT OF SURETY BOND
Section 2.01 — Issuance of Surety Bond
Olympia Guaranty has heretofore issued and delivered to the Trustee the Surety Bond, identified as Surety Policy No. OG-2023-MUN-4718, in the Surety Amount of $11,610,000. The Surety Bond is irrevocable and unconditional and constitutes a direct and primary obligation of Olympia Guaranty, payable upon a conforming Demand for Payment submitted by the Trustee in accordance with Article III hereof.
The effective date of the Surety Bond is October 24, 2023, which coincides with the Closing Date and the date of initial authentication and delivery of the Bonds. The Surety Bond shall remain in full force and effect until the earliest of: (i) October 1, 2053, the final scheduled maturity date of the Series 2023A Bonds; (ii) the date on which all Bonds have been paid in full, redeemed, or otherwise retired; (iii) the date on which a substitute credit facility satisfying the requirements of the Indenture is delivered to the Trustee and the Surety Bond is cancelled in accordance with this Agreement; or (iv) the date on which the Surety Bond is terminated in accordance with Article VIII hereof.
Section 2.02 — Deposit with Trustee
The Trustee hereby acknowledges receipt of the original executed Surety Bond and agrees to hold the Surety Bond as part of the Debt Service Reserve Fund established under the Indenture for the benefit of the holders of the Bonds. The Surety Bond shall be maintained by the Trustee in a secure and segregated manner in accordance with its customary procedures for the safekeeping of valuable documents.
The parties acknowledge and agree that the Surety Bond satisfies the entire Debt Service Reserve Fund Requirement of $11,610,000 as of the Closing Date. So long as the Available Amount under the Surety Bond is not less than the Debt Service Reserve Fund Requirement, no cash deposits or investments shall be required to be maintained in the Debt Service Reserve Fund on account of the Series 2023A Bonds. The Trustee shall not commingle the Surety Bond with any other surety bond, insurance policy, letter of credit, or other credit facility deposited in the Debt Service Reserve Fund in respect of any other series of bonds issued under the Indenture.
Section 2.03 — Available Amount
The "Available Amount" under the Surety Bond at any time shall equal the Surety Amount ($11,610,000) less the aggregate amount of all unreimbursed Draws then outstanding. The Available Amount represents the maximum amount that Olympia Guaranty is obligated to pay upon any Demand for Payment at such time. The Trustee shall maintain records reflecting the current Available Amount and shall update such records promptly upon the occurrence of any Draw or the receipt of any reimbursement from CSIA.
Upon reimbursement by CSIA of any Draw, including the payment of all accrued interest thereon, the Available Amount under the Surety Bond shall be automatically reinstated to the extent of the principal amount so reimbursed, subject to the provisions of Section 5.03 hereof. For the avoidance of doubt, the Available Amount shall in no event exceed the Surety Amount.
If at any time the Available Amount under the Surety Bond is less than the Debt Service Reserve Fund Requirement (whether as a result of an unreimbursed Draw or otherwise), CSIA shall, within the timeframe specified in the Indenture for the replenishment of the Debt Service Reserve Fund, either (a) deposit cash or Permitted Investments (as defined in the Indenture) in the Debt Service Reserve Fund in an amount sufficient to cover the deficiency, or (b) cause Olympia Guaranty to reinstate the Available Amount under the Surety Bond to an amount not less than the Debt Service Reserve Fund Requirement, or (c) provide a combination of the foregoing sufficient to eliminate the deficiency. CSIA's obligations under this Section 2.03 shall be in addition to, and not in substitution for, its Reimbursement Obligations under Article V hereof.
Section 2.04 — Surety Bond as Permitted Investment
The parties acknowledge and agree that the Surety Bond constitutes a "Permitted Investment" of the Debt Service Reserve Fund under Article VI of the Indenture and satisfies the credit quality, form, and other requirements set forth therein for surety bonds deposited in the Debt Service Reserve Fund.
The parties further acknowledge that the Surety Bond constitutes a "qualified guarantee" within the meaning of Section 148 of the Code and Treasury Regulation Section 1.148-4(f) and does not constitute an "investment" generating yield for purposes of the arbitrage rebate calculations required under Section 148(f) of the Code. The Annual Premium payable to Olympia Guaranty for the Surety Bond constitutes a "qualified guarantee fee" and shall not be treated as giving rise to a "transferred proceeds" issue or otherwise adversely affecting the tax-exempt status of the Bonds. Nothing in this Agreement shall be construed to require Olympia Guaranty to make any representation regarding the tax status of the Bonds.
ARTICLE III — DRAW MECHANICS
Section 3.01 — Events Permitting a Draw
The Trustee shall make a Demand for Payment under the Surety Bond only upon the occurrence of a deficiency in the Bond Fund on an Interest Payment Date (April 1 or October 1 of each year) or a principal payment date (October 1 of each year in which a principal installment is due), such that the amounts on deposit in the Bond Fund, together with all other amounts available to the Trustee for the payment of debt service on the Series 2023A Bonds (excluding the Surety Bond and any other DSRF amounts), are insufficient to pay the principal of and interest on the Series 2023A Bonds when due and payable.
Draws under the Surety Bond are permitted solely for the purpose of paying scheduled principal of and interest on the Series 2023A Bonds. Without limiting the generality of the foregoing, Draws shall not be permitted for any of the following purposes: (i) the payment of any redemption premium on the Bonds (it being noted that the Bonds are subject to optional redemption at par, without premium, on or after October 1, 2033, and that no redemption premium applies to any mandatory sinking fund redemption); (ii) the payment of any fees, costs, or expenses of CSIA, the Trustee, or any other party (including, without limitation, trustees' fees, legal fees, or administrative expenses); (iii) the payment of any amounts due in connection with the acceleration of the Bonds upon the occurrence of an Event of Default under the Indenture, except as expressly set forth in Section 3.05 hereof; or (iv) the payment of any amounts due on any obligations of CSIA other than the Series 2023A Bonds.
Section 3.02 — Form and Delivery of Demand for Payment
Each Demand for Payment by the Trustee under the Surety Bond shall be submitted to Olympia Guaranty substantially in the form attached hereto as Exhibit B and shall be signed by the Trust Officer or another duly authorized officer of the Trustee. Each Demand for Payment shall specify the following:
(a) The amount demanded (which shall not exceed the Available Amount under the Surety Bond as of the date of such Demand for Payment);
(b) The Interest Payment Date or principal payment date to which the Demand for Payment relates;
(c) The specific debt-service component or components to which the Demand for Payment relates, including the amount allocable to principal and the amount allocable to interest, as applicable;
(d) A certification by the Trust Officer that amounts on deposit in the Bond Fund (exclusive of the Surety Bond and other DSRF amounts) are insufficient to make the payment of debt service due on the applicable date and that the Draw is being made in accordance with the terms of this Agreement and the Indenture; and
(e) Wire transfer instructions for payment, specifying the account of the Bond Fund maintained by the Trustee at PNTC to which Olympia Guaranty shall remit the amount demanded.
Each Demand for Payment shall be delivered to Olympia Guaranty no later than 11:00 a.m. (New York City time) on a date that is at least three (3) Business Days prior to the applicable Interest Payment Date or principal payment date. Delivery shall be made by overnight courier (such as FedEx, Halcyon Partners LLC, or Tarrant & Co.) or by facsimile transmission (with the original to follow by overnight courier within two (2) Business Days), addressed to:
Olympia Guaranty Insurance Corp. 125 Broad Street, 14th Floor New York, New York 10004
Attention: Rachel P. Dominguez, Senior Vice President
Facsimile: (212) 555-0147
The Trustee shall simultaneously deliver a copy of each Demand for Payment to CSIA at the address set forth in Section 12.01 hereof.
Section 3.03 — Payment by Olympia Guaranty
Upon receipt of a conforming Demand for Payment delivered in accordance with Section 3.02, Olympia Guaranty shall pay the amount specified therein by wire transfer in immediately available funds to the Trustee's Bond Fund account as designated in the Demand for Payment. Such payment shall be made no later than 12:00 p.m. (New York City time) on the Business Day immediately preceding the applicable Interest Payment Date or principal payment date. In the event that a Demand for Payment is received after 11:00 a.m. (New York City time) or fewer than three (3) Business Days prior to the applicable payment date, Olympia Guaranty shall use commercially reasonable efforts to make payment on or before the applicable payment date, but in no event later than three (3) Business Days following receipt of the Demand for Payment.
Payment by Olympia Guaranty shall be made without any set-off, counterclaim, deduction, or defense of any kind arising under this Agreement, the Indenture, the Revenue Pledge Agreement, or any other agreement between or among the parties, and without regard to any dispute between CSIA and Olympia Guaranty or between the Trustee and Olympia Guaranty. The obligation of Olympia Guaranty to pay a conforming Demand for Payment is absolute and unconditional and shall not be affected by any circumstance whatsoever, including, without limitation, any amendment or modification of the Indenture, the Bonds, or any related document, any defect in the issuance or validity of the Bonds, or any defense that CSIA or the Trustee may have against any holder of the Bonds.
In no event shall Olympia Guaranty be required to pay, in the aggregate, more than the Available Amount under the Surety Bond at any time. If a Demand for Payment exceeds the Available Amount, Olympia Guaranty shall pay only an amount equal to the Available Amount and shall promptly notify the Trustee and CSIA of such limitation.
Section 3.04 — Partial Draws
Multiple Draws may be made under the Surety Bond from time to time, provided that the aggregate of all unreimbursed Draws outstanding at any time does not exceed the Surety Amount of $11,610,000. Each Draw shall reduce the Available Amount under the Surety Bond dollar-for-dollar by the amount of such Draw. The Trustee shall maintain accurate records of all Draws made and all reimbursements received and shall promptly notify Olympia Guaranty and CSIA of the current Available Amount following each Draw or reimbursement.
Section 3.05 — Draw Upon Acceleration
In the event that an Event of Default under the Indenture has occurred and is continuing and the outstanding principal of the Series 2023A Bonds has been declared immediately due and payable in accordance with the acceleration provisions of the Indenture, the Trustee may make a Demand for Payment under the Surety Bond in an amount up to, but not exceeding, the Available Amount at such time. Any such Demand for Payment shall comply with the requirements of Section 3.02, and payment by Olympia Guaranty shall be made in accordance with Section 3.03.
Notwithstanding the foregoing, Olympia Guaranty's obligation under the Surety Bond extends only to the Available Amount, and the acceleration of the Bonds shall not increase the Surety Amount or the Available Amount under the Surety Bond beyond $11,610,000 (as reduced by any prior unreimbursed Draws). In no event shall Olympia Guaranty be required to pay any amount in excess of the Surety Amount, whether by reason of acceleration, the passage of time, or otherwise.
Section 3.06 — Trustee's Duty to Draw
The Trustee shall make a Demand for Payment under the Surety Bond before applying any other moneys or investments then on deposit in the Debt Service Reserve Fund (if any) to cure a deficiency in the Bond Fund. The Surety Bond shall be the first source of DSRF funds applied to any debt-service shortfall on the Series 2023A Bonds. To the extent cash or Permitted Investments are on deposit in the Debt Service Reserve Fund in addition to the Surety Bond, such cash or Permitted Investments shall be drawn upon only after the Surety Bond has been drawn to its full Available Amount or is otherwise unavailable.
Notwithstanding the foregoing, the Trustee shall not be liable for any failure to make a Demand for Payment under the Surety Bond if the Trustee, in good faith and after reasonable inquiry, determines that no deficiency exists in the Bond Fund on the applicable payment date.
ARTICLE IV — PREMIUM
Section 4.01 — Amount of Annual Premium
CSIA shall pay to Olympia Guaranty an Annual Premium of $23,220 for the Surety Bond, calculated as 0.20% of the Surety Amount ($11,610,000 × 0.0020 = $23,220 per annum). The Annual Premium shall remain fixed at $23,220 per annum throughout the term of the Surety Bond, regardless of any changes in the outstanding principal amount of the Bonds, any Draws made under the Surety Bond, or any other circumstance, unless otherwise agreed in writing by CSIA and Olympia Guaranty.
The Annual Premium is non-refundable. Each installment of the Annual Premium shall be deemed fully earned by Olympia Guaranty upon payment and shall not be subject to refund, credit, or offset for any reason, including the early termination of the Surety Bond or the defeasance, redemption, or payment in full of the Bonds.
Section 4.02 — Premium Payment Dates
The initial Annual Premium of $23,220 shall be due and payable on the Closing Date (October 24, 2023) and shall cover the premium period from October 24, 2023 through October 23, 2024. CSIA acknowledges that the initial Annual Premium has been paid to Olympia Guaranty on the Closing Date from a portion of the proceeds of the Bonds, as provided in the Indenture.
Subsequent installments of the Annual Premium shall be due and payable on each anniversary of the Closing Date (i.e., October 24 of each year, commencing October 24, 2024) during the term of the Surety Bond, each such installment covering the twelve-month premium period commencing on the applicable anniversary date.
If the Surety Bond terminates on a date other than an anniversary of the Closing Date, the Annual Premium for the final premium period shall be prorated on a 365-day basis (or a 366-day basis in a leap year) based on the number of days elapsed in the final premium period through the date of termination. No refund of any prepaid premium shall be made upon termination of the Surety Bond.
Section 4.03 — Payment Instructions
All premium payments under this Article IV shall be made by CSIA by wire transfer of immediately available funds to such account of Olympia Guaranty as Olympia Guaranty may designate in writing to CSIA from time to time. The initial wire transfer instructions for premium payments are set forth in the Form of Annual Premium Invoice attached hereto as Exhibit D.
Olympia Guaranty shall provide CSIA with an invoice for each Annual Premium installment at least thirty (30) days prior to the applicable Premium Payment Date. Invoices shall be sent to CSIA at the following address, or to such other address as CSIA may designate in accordance with Article XII:
Cascadia State Infrastructure Authority
Attention: Denise R. Whitford, Chief Financial Officer
1100 Capitol Way South, Suite 400 Olympia, Washington 98501
Section 4.04 — Late Payment
If any installment of the Annual Premium is not received by Olympia Guaranty within thirty (30) days of the applicable Premium Payment Date, interest shall accrue on the unpaid amount at the rate of 1.0% per month (or the maximum rate permitted by applicable law, whichever is less) from and including the applicable Premium Payment Date to but not including the date on which such payment is received by Olympia Guaranty. Such interest shall be payable by CSIA together with the delinquent premium installment.
If any installment of the Annual Premium is not received by Olympia Guaranty within sixty (60) days of the applicable Premium Payment Date, such failure shall constitute a "Premium Default" under this Agreement. Upon the occurrence of a Premium Default, Olympia Guaranty may deliver written notice thereof to CSIA and the Trustee, specifying the amount of the delinquent premium and accrued interest thereon and requesting immediate payment. Notwithstanding the occurrence of a Premium Default, Olympia Guaranty shall not be relieved of its obligation to honor conforming Demands for Payment under the Surety Bond. A Premium Default shall not, by itself, constitute a termination event under Article VIII or relieve Olympia Guaranty of its payment obligations under the Surety Bond, but shall constitute an Event of Default under Section 9.01 entitling Olympia Guaranty to exercise the remedies set forth in Section 9.02.
Section 4.05 — Source of Premium Payments
The Annual Premium payable by CSIA under this Article IV is an Operation and Maintenance Expense of CSIA's water treatment system under the flow-of-funds provisions of the Indenture and the Revenue Pledge Agreement. As such, premium payments are senior in the flow of funds to debt-service payments on the Bonds and all other Parity Obligations. CSIA shall pay the Annual Premium from its operating funds, and the payment thereof shall not be contingent upon or subject to appropriation.
ARTICLE V — REIMBURSEMENT OBLIGATIONS
Section 5.01 — CSIA's Obligation to Reimburse
CSIA hereby unconditionally and irrevocably agrees to reimburse Olympia Guaranty for all amounts paid by Olympia Guaranty under the Surety Bond pursuant to any Demand for Payment, together with interest thereon as provided in Section 5.02 hereof. Each such reimbursement shall be due and payable within thirty (30) days following receipt by CSIA of written notice from Olympia Guaranty specifying: (i) the date on which the Demand for Payment was received; (ii) the date and amount of payment made by Olympia Guaranty to the Trustee; and (iii) the aggregate outstanding amount of unreimbursed Draws.
CSIA's obligation to reimburse Olympia Guaranty hereunder is absolute and unconditional and shall not be affected by any circumstance, including, without limitation: (a) any lack of validity or enforceability of the Bonds, the Indenture, or any related document; (b) any amendment or modification of the Bonds, the Indenture, or any related document; (c) any defense or counterclaim that CSIA may have against Olympia Guaranty, the Trustee, or any holder of the Bonds; or (d) any other event or circumstance that might otherwise constitute a legal or equitable discharge of, or defense to, CSIA's obligations hereunder.
Section 5.02 — Interest on Unreimbursed Draws
Unreimbursed Draw amounts shall bear interest from the date of payment by Olympia Guaranty to the Trustee until the date of full reimbursement by CSIA at a rate equal to the Bond rate (3.25% per annum) plus 2.00%, resulting in an interest rate of 5.25% per annum. Interest shall be calculated on the basis of a 360-day year consisting of twelve 30-day months (30/360 basis) and shall be compounded annually. Interest on unreimbursed Draws shall be payable by CSIA together with the reimbursement of the principal amount of the Draw.
Section 5.03 — Reinstatement Upon Reimbursement
Upon full reimbursement by CSIA of any Draw, including the payment of all accrued interest thereon as provided in Section 5.02, the Available Amount under the Surety Bond shall be automatically reinstated to the extent of the principal amount so reimbursed (without giving effect to the interest component of such payment). For the avoidance of doubt, upon reinstatement, the Available Amount shall be increased dollar-for-dollar by the principal amount reimbursed, up to a maximum of the Surety Amount ($11,610,000).
Olympia Guaranty shall provide written confirmation of reinstatement to the Trustee within five (5) Business Days following receipt of the reimbursement from CSIA. Such confirmation shall specify the principal amount reimbursed, the date of reimbursement, and the Available Amount under the Surety Bond as reinstated. The Trustee shall update its records to reflect the reinstated Available Amount and shall promptly notify CSIA and Olympia Guaranty of any discrepancy.
In the event that CSIA makes a partial reimbursement of a Draw, the Available Amount shall be reinstated only to the extent of such partial reimbursement (after application of the payment in accordance with Section 5.05), and the remaining unreimbursed portion of the Draw shall continue to reduce the Available Amount.
Section 5.04 — Priority of Reimbursement Obligations
Reimbursement Obligations of CSIA under this Article V constitute Operation and Maintenance Expenses under the Indenture for purposes of the flow-of-funds provisions thereof. As such, Reimbursement Obligations are payable from CSIA's operating revenues prior to the application of Net Pledged Revenues to debt-service payments on the Bonds and other Parity Obligations.
Notwithstanding the foregoing, Reimbursement Obligations are not secured by a pledge of Net Pledged Revenues on a parity with the Bonds and shall not constitute Parity Obligations under the Indenture. Reimbursement Obligations are subordinate to debt-service payments on all outstanding Parity Obligations, and Olympia Guaranty shall not have a claim against the Net Pledged Revenues or the Bond Fund in respect of Reimbursement Obligations that is on a parity with or senior to the claims of the holders of the Bonds or any other Parity Obligations.
Section 5.05 — Application of Payments
All payments received by Olympia Guaranty from CSIA in respect of Reimbursement Obligations shall be applied in the following order of priority:
(a) First, to accrued and unpaid interest on unreimbursed Draws, in chronological order of the Draws to which such interest relates (with the earliest unreimbursed Draw satisfied first); and
(b) Second, to the principal amount of unreimbursed Draws, in chronological order of the Draws (with the earliest unreimbursed Draw satisfied first).
Olympia Guaranty shall provide CSIA with a written statement of account reflecting the application of each payment within ten (10) Business Days following receipt of such payment.
ARTICLE VI — REPRESENTATIONS AND WARRANTIES
Section 6.01 — Representations of CSIA
CSIA hereby represents and warrants to Olympia Guaranty and the Trustee, as of the date hereof, as follows:
(a) CSIA is a Washington State governmental instrumentality and public body corporate, duly created and validly existing under and by virtue of Chapter 43.160A RCW, with full legal capacity to own property, incur obligations, and conduct its affairs as presently conducted.
(b) CSIA has full legal right, power, and authority under Chapter 43.160A RCW and all other applicable laws to enter into this Agreement, to execute and deliver this Agreement, to perform and observe the terms and provisions hereof, and to carry out the transactions contemplated hereby.
(c) The execution, delivery, and performance of this Agreement have been duly authorized by the Board of Directors of CSIA pursuant to Board Resolution No. 2023-014, duly adopted at a regular meeting held on May 9, 2023, at which a quorum was present and acting throughout, and no further action, consent, or approval by CSIA or any other governmental body, agency, or official is required for the valid execution, delivery, and performance of this Agreement.
(d) This Agreement constitutes a legal, valid, and binding obligation of CSIA, enforceable against CSIA in accordance with its terms, subject to (i) the exercise of judicial discretion in accordance with general principles of equity, and (ii) applicable bankruptcy, insolvency, reorganization, moratorium, and similar laws affecting creditors' rights generally.
(e) The execution, delivery, and performance of this Agreement by CSIA do not and will not violate, conflict with, or result in a breach of any provision of Chapter 43.160A RCW, the Indenture, the Revenue Pledge Agreement, or any other existing agreement, instrument, order, judgment, decree, or law to which CSIA is a party or by which CSIA or its properties are bound.
(f) No litigation, proceeding, investigation, or inquiry is pending or, to the best knowledge of CSIA after due inquiry, threatened against CSIA before any court, administrative agency, or other tribunal that, if adversely determined, would materially and adversely affect CSIA's ability to perform its obligations under this Agreement, the Indenture, or the Revenue Pledge Agreement, or that questions the validity or enforceability of this Agreement or any of the transactions contemplated hereby.
(g) CSIA has obtained all governmental permits, approvals, licenses, and authorizations necessary for the execution and delivery of this Agreement and for the consummation of the transactions contemplated hereby, including, without limitation, the SEPA Determination of Non-Significance issued by the Washington State Department of Ecology on September 12, 2022, in connection with the Project, and the modification of NPDES Permit No. WA-004837-2 approved by the Washington State Department of Ecology on January 6, 2023.
(h) The Fiscal Year 2022 Net Pledged Revenues of CSIA were $412,600,000, which satisfy the Rate Covenant requirement of at least 1.40 times annual aggregate parity debt service. The total annual parity debt service on all outstanding Parity Obligations (prior to the issuance of the Series 2023A Bonds) was $278,400,000, resulting in a debt service coverage ratio of approximately 1.48x. CSIA is in compliance with the Rate Covenant as of the date hereof.
Section 6.02 — Representations of Olympia Guaranty
Olympia Guaranty hereby represents and warrants to CSIA and the Trustee, as of the date hereof, as follows:
(a) Olympia Guaranty is a financial guaranty insurance corporation duly organized, validly existing, and in good standing under the laws of the State of New York, and has all requisite corporate power and authority to conduct its business as presently conducted and to own, lease, and operate its properties.
(b) Olympia Guaranty is duly authorized and licensed to transact financial guaranty insurance business in the State of Washington and holds all licenses, certificates of authority, and permits required by applicable law for the conduct of its business in the State of Washington and in each other jurisdiction in which the nature of its business requires such licensing.
(c) The execution and delivery of this Agreement and the Surety Bond, and the performance by Olympia Guaranty of its obligations hereunder and thereunder, have been duly authorized by all necessary corporate action on the part of Olympia Guaranty, including all requisite approvals of its board of directors and officers, and no further corporate action is required for the valid execution, delivery, and performance of this Agreement and the Surety Bond.
(d) The Surety Bond constitutes a valid and binding obligation of Olympia Guaranty, enforceable against Olympia Guaranty in accordance with its terms, subject to (i) the exercise of judicial discretion in accordance with general principles of equity, (ii) applicable bankruptcy, insolvency, reorganization, moratorium, and similar laws affecting creditors' rights generally, and (iii) applicable insurance regulatory laws, rules, and regulations.
(e) Olympia Guaranty has sufficient claims-paying resources, capital, surplus, and statutory reserves, as determined in accordance with applicable insurance regulatory requirements, to meet its obligations under the Surety Bond and all other outstanding financial guaranty insurance policies, surety bonds, and similar obligations issued by Olympia Guaranty.
(f) No litigation, proceeding, investigation, or inquiry is pending or, to the best knowledge of Olympia Guaranty after due inquiry, threatened against Olympia Guaranty before any court, administrative agency, or regulatory body that, if adversely determined, would materially impair Olympia Guaranty's ability to perform its obligations under the Surety Bond or this Agreement.
Section 6.03 — Representations of the Trustee
PNTC hereby represents and warrants to CSIA and Olympia Guaranty, as of the date hereof, as follows:
(a) PNTC is a national banking association duly organized and validly existing under the laws of the United States of America, with full power and authority to act as Trustee under the Indenture and to enter into and perform its obligations under this Agreement.
(b) PNTC has been duly appointed as Trustee under the Indenture, and has accepted such appointment and has agreed to act as Trustee for the benefit of the holders of the Bonds in accordance with the terms and provisions of the Indenture.
(c) PNTC has full corporate power and authority to enter into this Agreement and to perform its duties and obligations hereunder, and the execution and delivery of this Agreement and the performance of its obligations hereunder have been duly authorized by all necessary corporate action.
(d) PNTC hereby accepts the Surety Bond and agrees to hold the Surety Bond as part of the Debt Service Reserve Fund for the benefit of the holders of the Bonds in accordance with the Indenture and this Agreement. The Trustee's acceptance and custody of the Surety Bond shall be governed by the standard of care set forth in Section 10.02 hereof.
ARTICLE VII — COVENANTS
Section 7.01 — Covenants of CSIA
CSIA hereby covenants and agrees with Olympia Guaranty and the Trustee as follows for so long as the Surety Bond remains in effect and any Reimbursement Obligations remain outstanding:
(a) Rate Covenant Maintenance. CSIA shall set, impose, charge, and collect rates, fees, and charges for the use of and services provided by its water treatment system in amounts sufficient to produce Net Pledged Revenues of at least 1.40 times (1.40x) the annual aggregate debt service on all outstanding Parity Obligations, in accordance with the Rate Covenant set forth in the Indenture and the Revenue Pledge Agreement. CSIA shall take all lawful action necessary to enforce the collection of such rates, fees, and charges and shall not voluntarily reduce such rates, fees, or charges if such reduction would cause CSIA to fail to comply with the Rate Covenant.
(b) Financial Reporting. CSIA shall provide to Olympia Guaranty, at no cost to Olympia Guaranty, the following:
(i) Copies of CSIA's audited annual financial statements, prepared in accordance with generally accepted accounting principles and audited by Hargrove & Associates CPAs, PLLC (or such other nationally or regionally recognized independent certified public accounting firm as may be engaged by CSIA from time to time), within two hundred ten (210) days following the end of each fiscal year;
(ii) Copies of the annual continuing disclosure filing submitted by CSIA under the Continuing Disclosure Agreement dated as of October 24, 2023, between CSIA and PNTC, as Dissemination Agent, simultaneously with the filing of such disclosure with the Municipal Securities Rulemaking Board's Electronic Municipal Market Access system; and
(iii) Copies of any material event notices filed by CSIA under Securities and Exchange Commission Rule 15c2-12, simultaneously with the filing of such notices.
(c) Notice of Default. CSIA shall promptly notify Olympia Guaranty and the Trustee in writing of (i) the occurrence of any Event of Default under the Indenture, (ii) any anticipated deficiency in the Bond Fund with respect to the payment of debt service on the Series 2023A Bonds, (iii) any breach or anticipated breach of the Rate Covenant, or (iv) any other event or condition that could reasonably be expected to have a material adverse effect on CSIA's ability to perform its obligations under this Agreement or the Indenture. Such notice shall be delivered within five (5) Business Days following CSIA's becoming aware of such event or condition.
(d) Tax Compliance. CSIA shall maintain compliance with the Tax Regulatory Agreement and Certificate executed on October 15, 2023, in connection with the issuance of the Bonds. CSIA shall not take any action, or fail to take any action, that would cause the interest on the Bonds to become includable in gross income for federal income tax purposes under Section 103 of the Code. CSIA shall monitor the use of Bond proceeds and the facilities financed thereby to ensure compliance with the private activity bond limitations of Section 141 of the Code and the arbitrage rebate requirements of Section 148 of the Code.
(e) Additional Bonds. CSIA shall provide Olympia Guaranty with at least thirty (30) days' prior written notice of any proposed issuance of Additional Bonds (as defined in the Indenture) secured by a pledge of Net Pledged Revenues on a parity with the Bonds. Such notice shall include a summary of the proposed additional bonds, the projected debt service thereon, and a certificate of an Authorized Officer demonstrating compliance with the additional bonds test set forth in the Indenture (i.e., that Net Pledged Revenues for the most recent completed fiscal year, or projected Net Pledged Revenues, are at least 1.40 times maximum annual parity debt service including the proposed additional bonds).
(f) Premium Payment. CSIA shall pay the Annual Premium to Olympia Guaranty when due in accordance with the provisions of Article IV hereof.
(g) Reimbursement. CSIA shall timely reimburse Olympia Guaranty for all Draws paid under the Surety Bond, together with interest thereon, in accordance with the provisions of Article V hereof.
Section 7.02 — Covenants of the Trustee
The Trustee hereby covenants and agrees with CSIA and Olympia Guaranty as follows:
(a) The Trustee shall safeguard the Surety Bond and maintain it in a secure location in accordance with its customary procedures for the safekeeping of valuable documents. The Trustee shall not surrender, release, modify, amend, or permit the cancellation of the Surety Bond without the prior written consent of both CSIA and Olympia Guaranty, except as expressly provided in Article VIII hereof.
(b) The Trustee shall make timely Demands for Payment under the Surety Bond in accordance with the provisions of Article III hereof whenever a deficiency exists in the Bond Fund with respect to the payment of debt service on the Series 2023A Bonds.