Lois Scott is one of the four founders of Women in Public Finance.
Chicago chief financial officer Lois Scott

CHICAGO — The Chicago Infrastructure Trust has settled on a model for its inaugural financing but its goal of closing on the $27 million deal by the end of the year hit a potential roadblock this week.

The trust's board Wednesday did not vote on the deal, choosing to wait until final terms are available for review.

The trust's staff outlined its choice of an energy savings agreement model to raise $27.5 million to fund the first batch of 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 under the financing scheme.

Staff had sought approval of a resolution that would allow the trust's chief executive officer to enter into various contracts after negotiations with participants are completed and final terms set, with the goal of submitting the package to the City Council next week.

Board member David Hoffman resisted granting such approval since the preliminary terms were only just outlined in documents received by board members the night before and did not represent a final package.

"This is all happening last minute and quickly," Hoffman said, adding that he had a "comfort level" with the summary of the general terms and their adherence to the city and trust goals but the documents before the board fell short of what he needed to approve the resolution.

"It's hard to do a decent job of assessing" the costs versus benefits of the financing based on the preliminary terms, he said. "I do think we need something more detailed."

Board chairman James Bell made clear that the trust staff and their advisors, including placement agent Piper Jaffray, have authority to negotiate the final terms of various agreements included in the financing package but action on the resolution authorizing the transaction was put off for a week or two.

"What I'm not certain of, is can we meet that timetable" laid out by the city, Bell said. "We are going to have to see this before it goes to the City Council…we want to have a review of the documents."

Bell said he believed the basic tenets of what the trust was created to do were met by the staff's proposal and he hoped to still meet the timeline.

The trust — an initiative announced by Mayor Rahm Emanuel in early 2012 to provide an alternative financing vehicle that taps private investment for infrastructure projects — has been slow to get up and running.

Its initial goal was to finance in a series of energy efficiency projects in tranches totaling $200 million for a program dubbed Retrofit Chicago.

The trust opted for the ESA model because it met the city goals of achieving a low cost of borrowing while keeping the debt off balance sheet and outside the scope of what rating agencies consider a long-term city obligation. Only the ESA model met all three objectives while shifting project risks off taxpayers and preserving the city's already stretched bonding capacity.

Under the model, the city and 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 difference.

The contractors include Noresco LLC, Ameresco Inc. and Schneider Electric Billing Americas Inc. Piper Jaffray was selected to serve as the placement agent on the financing that would carry a 20 year term.

The package would include a guaranteed energy performance contract, the ESA between the city and trust, and a financing agreement between the lender and the trust with the lender receiving a security interest in the project. It grants the lender certain rights in the event of a default. Although the structure resembles a privately placed revenue bond, its more closely follows a project financing structure and insulates the city's balance sheet by transferring the risk to other parties.

"The trust gets to keep the potential upside, not investors" if energy savings exceed expected levels, said the trust's chief executive officer, Stephen Beitler.

Bid sheets from potential investors are due Nov. 13 but that's also the day the trust anticipated introducing the deal to the City Council, underscoring just how tight a schedule the trust faces to close before the end of the year.

John Coan, a managing director at Piper Jaffray, said the firm expects to place the debt with a single buyer given its small size and has a handful of interested parties. Potential lenders include large banks and possibly infrastructure funds and other institutions.

"The size is a sweet spot for investors because it doesn't commit to much capital," he said.

Under the original schedule laid out Thursday by the trust staff, rates would be locked in Nov. 20 contingent on City Council approval. The proposal would be vetted by the City Council Finance Committee on Dec. 9th with a vote slated for Dec. 11 and a closing Dec. 19. Another sticking point still to be resolved is inclusion of a minority-owned firm in the financing.

The board's launched a request for qualifications from potential financial partners in January. It then issued a request for proposals for a placement agent with an August deadline. The trust solicited additional information from the firms to determine their experience on ESAs and lease financings, and their proposed finance terms.

The trust selected Piper Jaffray based on its pricing and favorable terms and conditions, Beitler said. Piper's projected interest rate of 3.84% on a 15-year term tax-exempt ESA model financing was more than 100 basis points under other proposals with a fee estimate of .09%.

The trust and its pro-bono advisors settled on the ESA model from among six examined as it sought a structure that would attract investors and meet the city's city risk transfer policy goals. The other models included a traditional tax-exempt or taxable bond financing, a tax-exempt or taxable capital lease or operating lease, a grantor trust model, and an Energy Performance Contract, or ESCO model.

The ESA model is not considered a long-term debt for the city by rating agencies because its repayment stream is contingent on the savings expected under the contract. It 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 monitoring of the project. The energy upgrades for the Fleet and Facility Department are expected to generate at least $2 million of annual savings.

"We believe the methodology is a template for future transactions" such as a streetlight replacement program, Beitler said.

Municipal market participants have been watching closely since the trust set up shop in the summer of 2012 to see just how it would work and whether it would live up to its billing as an innovative means to leverage private investment for special projects with defined revenue streams.

The initial intention of the city was to use the trust to raise up to $200 million in projects for the fleet department, water department, and Chicago Public Schools, but the original plan has evolved and is now narrower.

Beitler said 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. The school projects have already been completed, complicating the types of financing structures available. CPS is looking at a capital lease instrument to reimburse itself.

Chicago's chief financial officer Lois Scott said she was hopeful the timetable could still be met and praised the trust for its work.

"I think the trust has really taken the analysis to a new level for the city and been very deliberative," Scott said.

While some might say political pressure is driving the city to get the deal done this year, Scott said: "We need to move it forward …we are anxious to get the improvements done so we can get the savings."

Trust officials said penalties could arise if certain contracts are not closed by the end of the year with the energy contractors, although they could waived.

Emanuel has received strong support from the City Council on fiscal measures, but council members are likely to view the deal skeptically especially if they are given little time to review it. Council members were criticized for swiftly signing off on former Mayor Richard Daley's troubled privatization of the parking meter system in 2009.

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