Chicago Infrastructure Trust Inaugural Deal Pushed to January

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CHICAGO — The Chicago Infrastructure Trust has pushed back to January the timeline for bringing its inaugural deal to the City Council for approval.

The trust's board in November approved its first transaction — a $27.5 million tax-exempt private placement to finance city energy efficiency projects — with hopes of closing on it before the end of the year.
Rates were to have locked in Nov. 20 contingent on City Council approval slated for Dec. 11 with a closing on Dec. 19. Piper Jaffray Inc. is serving as placement agent.

The trust, however, has struggled to finalize a deal with a lender based on its proposed term, structure, sizing, and pricing, according to market participants with knowledge of the process. The trust did not provide a comment on the reasons behind the delay.

In November Chicago's chief financial officer, Lois Scott, defended the city's push to get the deal before the end of 2013 saying: "We need to move it forward …we are anxious to get the improvements done so we can get the savings."

Tom Alexander, a spokesman for Mayor Rahm Emanuel, late last week said the city expects the deal to go before the council in January and referred questions on the reasons behind the delay to trust officials.

"We're not disappointed," he said. "We are glad they are moving forward thoughtfully."

The trust staff initially sought a vote Nov. 7 from its board, but the board decided to wait until members had more time to review the proposed terms and structure which they had only just received the night before. After further review and additional information was provided, the board voted the following week to sign off on the deal.

The trust plans to use an energy savings agreement, or ESA, model to raise funds for the first batch of 75 energy efficiency projects for the city's Department of Fleet and Facility Management. The trust would privately place tax-exempt bonds repaid with energy savings.

Trust staff said the deal would mark only the second tax-exempt ESA transaction to date. Bond counsel for the trust believe the tax-exemption is permitted because the trust is designated as the on-behalf issuer for the city pursuant to several Internal Revenue Service rulings.

Participants in the transaction believe the structure keeps the financing off the city's balance sheet and won't negatively impact its credit profile in part because the repayment stream is contingent on savings not guaranteed by the city and because the assets are owned by the trust.

The trust — an initiative announced by Emanuel in early 2012 to provide an alternative financing vehicle that taps private investment for infrastructure projects — has been slow to get a deal done.

Scott in November praised the trust for being deliberative and said she believes the financing lives up to city expectations.

"Rather than the taxpayers bearing the risk, we hope to achieve a low cost of financing paid for from savings, not taxpayers," she said. "The risk of what happens with these projects and with the energy savings to be achieved is a risk we are transferring to the private sector."

The trust opted for the ESA model over a handful of other financing models because it was the only one to meet the city's objectives and preserve its stretched bonding capacity.

Chicago and the trust would enter into an energy savings agreement. The trust would serve as the ESA project sponsor or owner and issue tax-exempt debt on behalf of the city in a private placement. The city would forward an agreed upon energy savings level to the trust to repay the loan. If not achieved, the energy contractors managing the projects must make up the gap.

While the final terms of any deal have not been made public, the trust in November outlined a plan to seek a 20-year term with interest rates between 3.8% and 4.7%. The trust and city are seeking to keep the rate under 5% in the latest negotiations with potential lenders, sources said.

The ESA model has some similarities to a revenue bond in that creditors' claims are based on the pledged revenues, but the energy contractors guarantee the savings and the funds flow through the trust. The contractors are responsible for the design, installation, management, and project monitoring. The energy upgrades are expected to generate at least $2 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 but has since tweaked the plans. 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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