CHICAGO The Chicago Infrastructure Trust approved its inaugural financing -- a $27.5 million tax-exempt private placement to finance city energy efficiency projects advancing it to the City Council Wednesday for its review.
The board approved a resolution in support of the deal at a meeting Tuesday in an attempt to keep the financing on a swift timetable that calls for it to close before the end of the year.
The trust staff initially sought a vote Nov. 7, but the board decided to wait until they had more time to review the proposed terms and structure which they had only just received the night before. They also sought additional information.
The trust plans to use an energy savings agreement, or ESA, model to raise $27.5 million to fund 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 trust believes 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 the assets are owned by the trust. Piper Jaffray Inc. is serving as placement agent and bid sheets from potential investors were due Wednesday.
Board member David Hoffman, who resisted approving the deal last week, endorsed it Tuesday after having additional time to review the proposed structure and more recent documentation and after posing a series of questions over risks to the city or trust.
“It’s a good transaction. It’s a good model for the future,” Hoffman said, assuming the interest rates come within the perimeters discussed.
“The cost to do this is all paid for solely out of either energy savings, or the guarantee” which is being provided by the energy companies that will manage the projects, he said. “It is really is a project that will pay for itself. That’s a great thing.”.
Hoffman also called the structure “clearly better than a bond” at meeting the city’s objectives because the city is not at risk to repay the debt should energy savings fail to meet expectations.
Despite those benefits, the final financing rate is not yet set and so a direct cost comparison to a tax-exempt bond issue is not possible.
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 a deal done.
Chicago’s chief financial officer, Lois Scott, believes the financing lives up to that billing.
“Rather than the taxpayers bearing the risk, we hope to achieve a low cost of financing paid for from savings, not taxpayers,” she said in an interview after the meeting. “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.”
While a more complete assessment of the value of the transaction won’t be known until prices are locked in, Scott said it’s the city’s hope that the structure will provide a template for other city and sister agency projects.
The trust opted for the ESA model over a handful of financing models it considered because it was the only one to meet the city’s objectives and preserve the city’s 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 which would carry a roughly 20-year term and pay an interest rate of between 3.8% and 4.7%.
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. The trust and city keep any energy savings that exceed expected levels, said the trust’s chief executive officer, Stephen Beitler.
John Coan, a managing director at Piper Jaffray, said last week 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.
Under the schedule laid out last week, rates would be locked in Nov. 20 contingent on City Council approval slated for Dec. 11 with a closing on Dec. 19.
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 monitoring of the project. The energy upgrades for the Fleet and Facility Department are expected to generate at least $2 million of annual savings.
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. 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 looking at a capital lease instrument to reimburse itself for the projects it’s already completed.