Cash-strapped Gary, Indiana, readies sale-leaseback bond

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Fiscally distressed Gary, Indiana, is close to finalizing a long-planned sale-leaseback bond transaction involving its public safety building to help pay its bills.

Backers of the transaction bill it as a cornerstone of the city's financial recovery plan. It would provide $35 million for city coffers under plans outlined by Mayor Karen Freeman-Wilson, who lost her re-election bid and will leave office early next year.

The delays in getting the deal approved may pay off in the final rate the city pays for its direct placement agreement given the market's demand for paper in general, and high-yielding paper in particular.

Dallas-based Preston Hollow Capital LLC is the sale leaseback bond purchaser and Wells Fargo is the underwriter.

While the deal is being directly placed, current market factors provide the city with better leverage to negotiate a better rate, said market participants.

Under the plan, the city will sell its public safety building to an entity called the Gary Building Corp. for $40 million. In turn, the corporation will lease the building back to the city. The building corporation was created last September for the sole purpose of owning city facilities and leasing them back to the city.

The corporation will issue unrated lease rental obligations in a principal amount not to exceed $40 million. The 20-year bonds were originally anticipated to be sold with an approximate coupon of 6% with total yield being around 6.3%, but the delay and changing market conditions may bring a better rate.

The bonds would be secured by two revenue streams: local income taxes and revenue from a casino local development agreement. The local income tax generates $4.7 million in revenues yearly and the casino local development agreement revenue generates about $6.7 million per year.

“The casino revenue is not a primary source of repayment but additional security for investors. Casino dollars would still be available for use by the Prince administration,” Freeman-Wilson said.

Jerome Prince defeated Freeman-Wilson in the May 7 Democratic primary for mayor. He faces no opposition in November and will succeed Freeman-Wilson on Jan 1.

“The timing is good in that there has just been a tremendous amount of demand for municipal paper and yield so the fact that they have delayed this has helped them in trying to lower the rates,” Howard Cure director of Municipal Bond Research at Evercore Wealth Management said.

Freeman-Wilson said the deal is expected to close in the next 20 to 45 days. “We believe that the market is very favorable and we are discussing the rate now and so we anticipate that pricing very shortly,” she said in a phone interview. “The city doesn’t need to seek out any extra approval.”

Freeman-Wilson has said that the $35 million dollars in revenue derived from the transaction and the Financial Recovery Plan would place the city on a solid financial foundation for years to come.

The city of 76,000 on the Lake Michigan shore about 25 miles southeast of Chicago has struggled economically for years, losing residents and businesses.

The plan, which has been in development now for almost a year, was jeopardized when Prince called the transaction a “bad deal” for taxpayers in June.

Prince has since softened his views and said in an interview his intention was never to stall the deal. At the very least, the pause his caution created "gave the deal enough time for Wells Fargo and the purchaser of the bond to consider lower rates," he said.

“The most salient point was about the rate and the interest that would have been associated with it,” Prince said. “To that point I came out very publicly and opposed the deal. I say that very carefully because my intention was never to impede the city’s ability to operate. Clearly the city is in a financial crisis and that is putting it mildly.”

Prince said that his team's conversations with the finance team have all been about securing a lower rate and also the ability to go back and refinance that deal once he is office.

"We have been able to successfully speak to the financier and at least get them to reconsider a ten-year limitation on the call and so now there is a 2-year period and at least an opportunity to refinance and find a lower rate once I get in office, that is, if the city takes the first deal,” Prince said.

Gary’s deficit has grown to $42.5 million in 2019 from $7.3 million in 2018. Without the sale leaseback, the city would run out of cash by the end of the year, with the yearly deficit projected to grow between $3 and $5 million yearly, reaching $58 million by 2023 according to Curtis Whittaker of Whittaker & Co., a financial analyst hired by the city last year.

The city would also be at risk of defaulting on $28 million in loans in the form of tax anticipation warrants, he said. This is money the city has borrowed against future tax collections.

"We still continue to look for other options but the challenge there is the short window of time that we have because those TAWs that have to be satisfied by Dec. 31; if not the city is in jeopardy of defaulting," Prince said.

“The real question for Prince and the market to ask is if the city is borrowing money to solve a current problem or does this fit into a recovery plan which has a broader view and more assurance if we pay them,” said James Spiotto, a municipal restructuring expert and managing director at Chapman Strategic Advisors.

Prince estimates that the city will owe nearly $89 million in outstanding debt when he takes office, a debt level he said that even the controversial sale/leaseback cannot solve.

“We will be taking office on January 1, 2020, with an unprecedented amount of municipal debt,” Prince said in a press release on Tuesday. “Turning the city around will take more than austerity measures to keep the lights on. To run the city with grossly depleted resources, we are turning to our best resource- our people- for their creative ideas on how to move the city forward.”

As part of that plan, Prince has selected volunteers to serve on one of eight transition committees that represent a cross-section of the city. Participants will be tasked with developing their top ideas to present to the incoming administration.

Gary faces a long road to rebuild its financial condition.

In August 2018 U.S. Steel announced a $750 million revitalization of its northwest Indiana facilities.

“Part of the hope I think was that the city expected the steel industry would improve a bit with new tariffs from the Trump administration,” Cure said. “That hasn’t generated much in terms of new steel jobs.”

Cure said that although the investor likely sees the deal as part of the city’s larger recovery plan, it’s a very speculative proposition.

The five-year U.S. Steel project included a building expansion and the installation of new production equipment and technology. Since the 2018 announcement steel prices have fallen drastically, due in part to a global cooling economy and decreased demand. In June, U.S. Steel announced it was temporarily idling a blast furnace at Gary Works in response to decreasing steel prices and changing market demands, but there were no layoffs.

As part of the investment in the Gary mill, U.S. Steel plans to borrow $120 million, $100 million of which will finance mill improvements, city officials said.

The city government will receive $15 million of these funds this year to keep the city in the black. The school district will receive $4 million and the library $1 million, for a total of $20 million, city officials said. That money is traditionally paid through property taxes over several years but will instead be paid upfront in 2019.

Freeman-Wilson is counting on the sale leaseback’s $40 million, minus $5 million set aside as costs of the transaction, and the one-time $15 million payment in lieu of taxes from the steel company to net the city $50 million in cash.

Whittaker said the investment from U.S. Steel would also help boost the city’s property tax collections which are projected to rise to $44 million from $26 million as a result of the transaction.

The city is also relocating its floating casino as part of a newly inked deal with Hard Rock Casino. The city would get a $5 million advance on gambling revenue as part of the agreement, possibly in the form of a loan.

Freeman-Wilson said that the real opportunity for the city is that the old casino is being moved out of what is considered to be a key commercial and industrial corridor and the new land casino will come with a hotel and restaurant development.

“That has been the plan all along to increase our assessed valuations we believe that success begets success when this casino and the development of the non-gaming pieces succeeds you will find people that are more inclined to invest,” Freeman-Wilson said. “Right now we have a housing project going on in the downtown area, a development project on our lakefront and there are a number of projects that are all contemplated to add to the assessed valuation.

"So all of those developments will work together to create more revenue for this city and once that happens you will see our fortunes change.”

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