CHICAGO Chicagos market-sensitive $500 million general obligation refunding plan failed to win committee approval yesterday due to opposition from African American and Latino City Council members angered over the degree of minority participation in the underwriting team and the inclusion of a firm one aldermen alleges profited from slavery.
The City Council Finance Committee will reconvene this morning prior to the full City Council meeting and may vote on the ordinance authorizing the city to refinance $500 million of outstanding GOs for a net present values savings of $25 million.
If the deal is approved today, the city hopes to hold a two-day retail order period beginning on Feb. 22 and then an institutional pricing on the 24th, according to finance officials. The fixed-rate bonds would extend to 2040 and are expected to carry triple-A insurance. Other details have not yet been set. The deal would mark the first time the city has held a retail order period a move officials hope will expand the citys investor base and lower interest rates. Banc of America Securities LLC is the book-runner.
This is an unusual time in the market because rates are so low. We think given where rates are right now this is the right time to come to market, the citys new chief financial officer Dana Levenson said during committee testimony yesterday.
The city had been looking at the transaction for some time with savings hovering around 3%. That figure recently grew to 5% due to the flattening of the yield curve that has reduced the drain on savings caused by negative arbitrage. We take significant interest-rate risk if we dont move quickly, Levenson said.
Still, Levensons comment on market timing did not convince aldermen to immediately advance the deal.
City bond deals often whisk through the committee with only general questions about transaction benefits and requests for percentages on the level of minority participation.
On some rare occasions, however, deals have prompted tough questions, often reflecting issues in the local news. Over the past year, Mayor Richard Daleys administration has been stung by corruption scandals stemming from the awarding of lucrative city contracts that have resulted in both scathing published news reports and in federal indictments.
Some of the charges involve the incorrect awarding of contracts in some cases to cronies of Daley under minority participation rules to firms that used a woman or minority as a front. The scandals have revealed flaws in the minority set-asides program Daley established more than a decade ago, which requires that 25% of city contracts go to African American- and Latino-owned firms and another 5% to women-owned firms.
The city finance department is not legally obliged to hit those targets, though it has always met and sometimes exceeded those figures. Though the corruption charges have not alleged any wrongdoing among underwriting selections, finance officials were nevertheless forced yesterday to defend their choices to aldermen who themselves have come under fire for failing to discover the corruption and for acting as a rubber stamp on mayoral actions.
African-American aldermen first questioned Levenson as to what proof he had that minority-owned firms on the deal were, in fact, owned by minorities. Levenson, unprepared for such questions, said he had none other than the fact that the city has longstanding relationships with both M.R. Beal & Co., which will be a co-senior manager, and Siebert Brandford Shank & Co., which is among the co-managers.
About 20% of the bonds are designated to Beal and another 12% to Siebert figures that together exceed city contracting rules. Beal is an African American-owned firm and Siebert meets the citys criteria as black- and women-owned. Neither however is certified as such because the firms net worth exceeds the limits that allow for such certification.
We want to make sure that these firms are legitimate these questions have to be answered from now on, said Alderman Ed Smith, who asked that finance officials bring documentation to future meetings proving the authenticity of a firms status.
When two aldermen learned that no Latino-owned firm was on the finance team, they announced their intention to delay approval of the ordinance. When asked why one was not included, Levenson said: The Hispanic firms have not come to us with structuring ideas on the refunding.
Levenson told aldermen that Latino-owned firms have long won city business and would benefit on upcoming city sales, but it was a pledge that did not appease the aldermen. Going forward there will be ample opportunities where Hispanic firms will be treated extraordinarily well, he said.
Aldermen also resurrected the low level of minority participation in the citys $1.8 billion privatization of the Chicago Skyway. Of the $9.5 million of fees, minority-owned firms collected $1.2 million. When told of those numbers, Smith was incensed: I would be ashamed to come down and even mention those numbers.
Levenson said the city did its best job putting together the team, and attempted to deflect criticism by noting that those choices predated him.
The deal was struck long before I got here, he said. Levenson joined the city in September, just a month before the Skyway concession lease arranged by Goldman, Sachs & Co. and co-adviser Loop Capital Markets Inc. was announced and he has benefited from the financial flexibility the infusion of cash has afforded the city.
The grilling was not limited to minority-contracting issues. Alderwoman Dorothy Tillman, who has led the citys efforts to get companies to acknowledge past profits linked to slavery, questioned the city finance chiefs choice of Banc of America to lead the deal.
A pending federal lawsuit seeking reparations from more than a dozen businesses that allegedly profited from slavery names Fleet Boston as a defendant. Bank of America, the underwriters parent company, acquired Fleet Boston last spring.
According to Tillman and allegations in the federal lawsuit, John Brown, a director of Providence Bank, a predecessor to Fleet Boston, received money from the bank to purchase slave trade ships and the bank collected fees tied to the slave trade.
You are in violation of the law, Tillman told Bank of America officials for failing to disclose the profits.
Companies that do business with the city are required to reveal any financial gains from connections to slavery in filings with the city. Lehman Brothers has acknowledged ties through its predecessor companies to slavery but no profits. J.P. Morgan Chase & Co. last month disclosed ties to slavery by its predecessor banks in Louisiana that had accepted slaves as collateral and then became their owners in cases where defaults occurred.
Bank of America in its filing with the city stated that it has reviewed internal documents and has not found any evidence that the bank profited from slavery. Public finance banker Neil Pritz signed the statement, but in questioning he said the finding was based on information provided to him.
We do not have anything that shows investment profits, said Bank of America government lobbyist Patricia Holden.
Holden acknowledged that the finding was based on an internal review of various documents and that an external review was just now being conducted. The city ordinance requires that firms make a good faith effort to uncover past profits by reviewing various sources of information.
The hour-long grilling marked the first truly heated exchange between council members and Levenson, who remained calm and deferential. Levenson came to the city from the private sector, having worked as a corporate investment banker at the former Bank One Corp.
Levenson must strike a balance from his financial aim to keep the citys borrowing costs to a minimum while meeting the citys long established policy goal to help minority- and women-owned firms grow their businesses. We are trying to make the correct decisions when it comes to structuring and executing a transaction so that the city receives the lowest possible interest rates, Levenson said.
Levenson last month held the citys first underwriters conference in which he outlined his expectations among underwriters.
Some bankers have questioned Levensons commitment to help minority-owned and regional firms. They have voiced concerns that his expectations such as requiring buyers to hold onto bonds for a certain time before they are traded in the secondary market and rewarding firms by the amount of orders filled favors the Wall Street firms and would hurt the ability of both smaller local firms and minority-owned firms to compete for city business.
Levenson had to leave the committee meeting after it adjourned to attend Daleys annual state of the city address and was not immediately available to comment.
