CHICAGO — The Chicago Infrastructure Trust may move next month to solicit private market interest in funding energy efficient upgrades to city facilities and public schools in what would mark the not-for-profit's first project financing on behalf of the city.
The city's goal — if the trust approves — is to raise financing on an initial tranche of projects of at least $50 million and possibly up to $100 million, said Chicago's chief financial officer Lois Scott. The city hopes the deal can close by summer when work would begin.
City officials and their advisers laid out a tentative timeline, preliminary term sheet, and project analysis for trust board members at its meeting Thursday. It marked the first detailed look to date as to how the city envisions the trust will assist it in financing the upgrades by leveraging anticipated energy savings as a repayment stream to lure private investors.
With state and federal funds lagging and the city's bonding capacity stretched thin, Chicago Mayor Rahm Emanuel won city council approval earlier this year to establish the trust as a not-for-profit to serve as an alternative financing vehicle to leverage private investment.
The goal is to fund special, larger or pooled projects with defined revenue streams on behalf of the city and its sister agencies like the Chicago Public Schools, Chicago Transit Authority, and Chicago Park District while preserving bonding capacity for traditional infrastructure.
The first financing, dubbed Retrofit Chicago, eventually will seek a total of $200 million for energy upgrades to public facilities with the savings - $20 million annually - or some portion of it going to repay private investors. The overall program will be financed in tranches.
Working in tandem with the trust and its advisers, the city hopes to ready a request for qualifications document that can be approved at the trust's meeting in January. It would seek to identify a pool of potential financial partners.
The questions would seek to gauge the interest of banks, pension funds, union-friendly investors, and community reinvestment act funds.
The RFQ would describe the trust and proposed projects, outline the city and trust's policies and financial objectives, gauge investor interests, seek compliance with city economic disclosure rules, and include a preliminary term sheet, said David Winters, chief assistant corporation counsel.
The energy projects provide a series of benefits as the trust's inaugural financing. "They offer a revenue stream" that is defined, can be pooled between agencies, and segregated, and the stream of energy savings "are well understood by the financial community," Winters said.
While energy efficiency projects have been designed and financed by private firms elsewhere, the structure of the Chicago financing would differ on several fronts. "Our transaction is groundbreaking," said Courtney Shea, of Acacia Financial Group Inc. which is advising the city. The city entities would continue to own, operate, and maintain the assets and the financing and actual work would be completed by separate entities.
The RFQ would provide a preliminary term sheet with input sought from potential investors on the viability of the proposed terms. The city envisions seeking a minimum $50 million investment with a financing term limited to 20 years. The pledged source of repayment would be limited to the energy savings and some operating and maintenance savings.
The city and trust may consider some revenue sharing agreement between the city and the investors, but that decision is still pending. Such a provision would allow the city to capture savings before investors are repaid but it could impact pricing.
Some of the value in using the trust over a traditional bond financing model lies in the transfer of project risk to the investor, city officials stressed. Investors would receive some shield as the energy service firms hired to conduct project audits and do the work would provide a three-year guarantee and warranty. In projects financed and completed by energy contractors, a longer term is typically offered, but a similar provision here would dampen the level of savings.
The city believes the three-year period is sufficient to ensure that the retrofits are working and will achieve the expected savings, said city Department of Fleet and Facility Management Commissioner David Reynolds. The city would segregate the savings in some form to allay potential investor concerns over the security of repayment stream.
The city's tentative timeline anticipates a review of the responses from potential investors would be conducted over the spring and if the trust decides to move forward a formal bidding process would be launched. After a due diligence period, the timeline anticipates a vote by the trust and City Council and school board.
Tom Morsch from Public Financial Management Inc., the trust's temporary, pro-bono adviser, praised the city's proposed process outlined Thursday. "We need to begin to tell the investment community what we hope to achieve," he said.
Over the course of the more than two-hour board meeting, trust members posed a range of questions as they digested the first-time information. "It's clear that we are about to go down this road," member David Hoffman said.
The questioning primarily came from Hoffman, a lawyer and former city inspector general; board chairman James Bell, a retired Boeing Corp. executive; and Diana Ferguson, a financial professional who has served as chief financial officer for Chicago Public Schools.
Bell noted that the limited three-year guarantee from the energy contractor would likely factor in an investors' valuation and interest. "It will have an impact on pricing," Bell said.
Board members also made clear their desire that the RFQ not provide the final word on qualifying potential investors.
The trust members and city officials face heightened public and political scrutiny over transparency issues on any potential public-private partnership or asset privatization. That's due to lingering resentment over former Mayor Richard Daley's unpopular $1.15 billion parking-meter system lease to private investors in 2009.
The city has challenged the parking meter system's private operators on the validity of their claims for tens of million in reimbursements for meters taken out of commission and Emanuel has ordered audits of the city's three asset leases.
The pressure is heightened as the city faces an end of the year deadline to revive its lease of Midway Airport under a federal pilot program. A $2.5 billion deal fell apart in 2009 after the winning bidders couldn't raise the financing. Sources have said the city is eyeing pursuit of a new lease deal under sharply revised terms.
The trust board members also on Thursday were interviewing candidates for the position of executive director.