CHICAGO – Diversity in both the ownership and workforce among firms chosen to work on $4 billion of O’Hare International Airport bonds took center stage in debate over the initial borrowing planned for an $8.5 billion terminal makeover.

Nearly 40% of the bond business will go to African-American, Latino, and women-owned firms, but Latino aldermen voiced frustration that no Latino firm was included in the senior manager group made up of two Wall Street firms, Citi and JPMorgan, and majority African-American owned Loop Capital Markets LLC.

Minority aldermen grilled the city’s chief financial officer, Carole Brown, about the team and put bankers from two of the senior manager firms on the hot seat during a City Council Finance Committee meeting Monday.

The proposed participation levels exceed the city's established goals, but aldermen are pushing hard for more – both on the bond work and in construction contracts -- given the size of the terminal makeover and the opportunity it represents to bolster minority firms.

But the city faces a balancing act when it comes to picks from among the 53 firms it does business with for the top positions in deals because it needs firms with both specialty structuring experience and an adequate capital position to take down bonds if necessary.

“We make an extreme effort to be inclusive of minority firms,” Brown said. “We give each underwriter access and information, and opportunity to work for the city. There are certain restraints we have to adhere to. There are capital constraints. There are expertise constraints and to the extent that those firms can demonstrate that they have sufficient capital to underwrite and they have sufficient expertise to provide banking services we will work with them as senior managers.”

The concerns were not enough to stall the borrowing authorization. The committee approval comes after the Aviation Committee’s recent approval of a new airline lease and use agreement that lays the groundwork for funding the seven-year, bond-financed terminal overhaul, setting the stage for Mayor Rahm Emanuel to seek full City Council approval Wednesday.

Sniping among firms for top positions aside, the city generally gets high marks from broker-dealers for giving smaller and minority firms the chance to prove their ability to distribute bonds. African-American and Latino City Council members have long needled the city’s finance team on the percentage of bond work slated for minority and women-owned firms, but the scrutiny has deepened in recent years.

Brown comes armed to finance meetings with numbers on a firm’s local and statewide presence and the racial and gender makeup of a firm’s local and national payroll and when applicable, its board.

At the hearing, aldermen hit a wide swath of diversity issues.

Alderman Gilbert Villegas questioned why there was no Latino firm among senior managers.

“The three firms we are recommending for senior manager provided a great deal of support to the city on issues related to O’Hare specifically, the aviation industry broadly, and the airline industry,” Brown told him. She also noted that the four Latino firms the city does business with are all on the deal and on many city issues.

Villegas said he would like to see the city do more to put Latino firms in a senior manager position and others said the city should consider doing the deals in smaller tranches to enable the use of minority firms in the top positions.

“Here’s a $4 billion opportunity and, once again, we’re getting the short end of the stick,” Villegas said.

In addition to the Latino members’ concerns about senior managers, African-American aldermen were angry that the underwriters’ counsel firms were not disclosed.

“If we had full disclosure and we knew what direction they were leaning toward,” that would “help us see the complete picture as opposed to relying on them,” Leslie Hairston, who voted against the authorization, told Brown.

Senior managers on Chicago deals typically have chosen a minority-owned firm to serve in the co-underwriter’s counsel role.

Aldermen put public finance bankers from Citi and JPMorgan on the hot seat with questions covering both firms' minority makeup, the 1% to 2% levels of minorities in senior leadership ranks, and their commitment to community investments.

“I think we should encourage firms that are doing business with the city….especially a city as diverse as ours to hire people who are as diverse as our city,” said Alderman Sophia King.

Some aldermen urged the firms to do more to get minority high school students interested in business careers through scholarship programs.

Chicago's chief financial officer, Carole Brown, accepts theFreda Johnson Award for Trailblazing Women in Public Finance at The Bond Buyer Deal of the Year event in New York on Dec. 6, 2017.
“We make an extreme effort to be inclusive of minority firms,” said Carole Brown, Chicago's chief financial officer. Doug Goodman

Citi banker Guy Logan, a managing director, stressed that the firm’s group covering the city includes an African-American, an Asian-American, and a woman. “We recognize the importance of diversity,” Logan told aldermen.

JPMorgan banker Don Wilbon, a managing director based in Chicago, said the firm has a high-ranking African American charged with attracting and retaining minority candidates who reports directly to the bank’s chairman. “There’s an emphasis on hiring, retention, and promotion” of minorities, he said.

It wasn’t all negative. Citi won praise for being the first major financial services firm earlier this month to adopt gun control policies for companies it does business with and JPMorgan won kudos for a $40 million investment for economic programs on the West and South Sides.

TEAM

JPMorgan’s piece of the deal and its liability on overall borrowing represents 20%, with Citi and Loop accounting for 10% each. The eight member co-senior list includes three Latino-owned firms: Cabrera Capital Markets LLC, Ramirez & Co., and Estrada Hinojosa; and African-American-owned Rice Financial Products. RBC Capital Markets, Barclays, Raymond James, and UBS Securities round out the list.

UBS relaunched its municipal business last year and winning a spot on the deal marks one its first major gains in re-establishing itself locally. More than 30 additional firms are on the list of co-managers the city will use of the transactions. Not all firms will participate in each transaction.

The participation level on the underwriting team is 20.5% African American, 13.5% Latino, 3.2% women, and 2.3% service-disabled veteran-owned.

Foley & Lardner LLP and Mayer Brown LLP are on the bond counsel list. Another six firms will be drawn from the city's pool to serve as disclosure and co-disclosure and co-bond counsel. Ricondo & Associates is feasibility consultant. Columbia Capital and Frasca & Associates are advisors. Acacia Financial and Swap Financial Group are pricing advisors.

Fees will total $23 million.

BORROWING PLANS

The city expects to issue $4 billion of general airport revenue and passenger facility charge-backed bonds in at least two deals over several years with the first sale likely coming in late 2018 or early 2019.

“The timing of the issuance is really going to be based on when they need money to proceed with the program,” Brown said. The first deal has not yet been sized.

The city expects to return in the coming years for further authorization. “We would expect that we will finance the majority of that through debt issued at a later debt so we would expected that we might add as much as $8.5 billion to $9 billion of debt at O’Hare,” Brown said.

The initial deal could include a small refunding piece for savings. Brown said about $75 million of outstanding O’Hare bonds that would be callable when the first deal comes to market.

Brown stressed during the hearing that airport fees and revenues will repay the bonds and told aldermen she expects O'Hare to retain its current ratings in the single-A category despite the increased debt load. The airport has about $8 billion of outstanding debt.

In an interview later she acknowledged the wrench a recent Puerto Rico court ruling could throw into the ratings but said she would go directly to investors to make the case for the airport’s strengths in an effort to hold spread penalties in check.

Fitch Ratings has warned that a recent court ruling in Puerto Rico's Title III bankruptcy could pose a threat to special revenue credits rated above a municipality's issuer default rating. The report specifically noted O’Hare's rating. Fitch rates O'Hare GARBs A while it rates Chicago's general obligation debt BBB-minus.

“I think people recognize the quality of O’Hare as a credit,” Brown said. “And as has been the case with other credits we simply go directly to the investor. We don’t rely and the investors don’t rely on the rating to determine whether or not they are approving the credit and we try very hard not to have the rating be what we lead when we are negotiating price,” she added.

O’Hare’s most recent deals have largely avoided the steep spread penalties imposed on Chicago’s GOs. A new report on the airport sector from Janney reports Chicago’s spreads this month at about 36 basis points to the Municipal Market Data AAA benchmark, slightly higher than the Los Angeles and Atlanta airports, which are both rated in the double-A category.

Chicago’s cost per enplanement is the highest among those three airports at $18.84 in 2017, but despite the higher cost, Chicago's market and mid-continent location remain strategically valuable to the carriers, wrote municipal strategist Alan Schankel.

Emanuel last month announced the terminal plan and new lease and use agreements that replace ones which expire in May. American Airlines initially opposed the plan arguing it favored United Airlines on gate allocations. The city agreed to speed up some gate construction and American signed on.

American accounts for 36% of passengers at O'Hare and United 44%. Both operate hubs at O’Hare.

The expansive O'Hare makeover plan calls for the redevelopment of existing terminals, the expansion of the existing international terminal, and demolition of one domestic terminal that would be replaced with another global terminal to smooth international and domestic connections.