CHICAGO — The Chicago Infrastructure Trust is close to wrapping up its inaugural financing, but only after scaling back its size by more than half to $13 million and altering other terms to reduce investors' risks.

The City Council's approval of the private placement deal Wednesday paves the way for its closing. It comes nearly two years after Mayor Rahm Emanuel unveiled with great fanfare his proposal to create the trust as an alternative financing vehicle for the city that could raise $200 million for energy retrofit upgrades.

Over the last year, the size and shape of the financing has shifted as the timetable for closing on a first tranche was pushed back. In the end, the city settled on a 15-year loan at 4.95% with Bank of America Merrill Lynch.

The trust late last year solicited investors on a $27.5 million loan with a potentially longer term at 4.7% or lower. It had few takers as investors were worried about the risk without city backing, according to sources familiar with the bidding process.

The trust entered into negotiations with Bank of America and sought to keep the rate below 5% but was forced to reduce the size and limit the maturity to 15 years in order to do so, sources said. Piper Jaffray Inc. is serving as placement agent.

Though modest in size, the city did accomplish its goal of borrowing for energy efficiency projects with a tax-exempt financing that keeps the loan off its balance and credit sheet and does not put taxpayers on the hook for repayment.

"Two hundred people are going to go to work making sure that buildings in the public sector are energy-efficient and we're not wasting energy," Emanuel said after the council meeting. "This was a way to do it that didn't tax the taxpayers, but actually found a creative way to finance."

City and trust officials have defended the time it's taken to reach a final deal, saying it reflects a painstaking process to establish a first-of-its kind local governmental agency which then had to weigh various structures to accomplish the city's goals.

Some market participants and city council members have viewed the trust skeptically questioning whether it's worth the effort given the low cost of traditional tax-exempt borrowing. The city has countered that the goal is to preserve its already stretched bonding capacity. It viewed energy retrofits as a good first endeavor given the availability of a revenue stream to leverage in the form of energy savings.

The trust's board in November settled on $27.5 million tax-exempt private placement and the city pressed for a closing before the end of the year. But lackluster investor interest forced the delay.

The deal is structured as an energy savings agreement, or ESA, model to fund projects for the city's Department of Fleet and Facility Management.

Trust staff said the deal would mark only the second tax-exempt ESA transaction to date. Legal advisors believe the tax-exemption is permitted because the trust is designated as the on-behalf issuer for the city. Advisors believe the structure keeps the financing off the city's balance sheet and won't negatively impact its credit profile because the repayment stream is contingent on savings not guaranteed by the city, and the assets are owned by the trust.

The trust will serve as the ESA project sponsor or owner and issue tax-exempt debt on behalf of the city. The city will forward an agreed upon energy savings level to the trust to repay the loan.

If the savings are not achieved, energy contractors managing the projects must make up the gap. The model has some similarities to a revenue bond in that creditors' claims are based on the pledged revenues, but energy contractors guarantee the savings and the funds flow through the trust. The energy upgrades are expected to generate more than $1 million of annual savings.

The city and trust first eyed raising $200 million in a few tranches for the fleet department, water department, and Chicago Public Schools. A financing method for the water department is still being assessed and the trust is handing financing for the CPS projects over to the district which is considering a capital lease instrument to reimburse itself as the projects are already completed.

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