CHICAGO – Chicago wants to introduce its new sales tax-backed securitization credit to the market by the end of the year in an inaugural $600 million to $700 million deal, chief financial officer Carole Brown said Thursday.

Brown outlined the new borrowing program and the finance pools the city will draw from on deals during a Finance Committee Thursday. Mayor Rahm Emanuel’s administration is seeking approval to establish by ordinance a special purpose corporation to securitize city sales tax revenue and authorize up to $3 billion of sales tax backed and general obligation bonds.

The committee after several hours of questions advanced the measure to the full council which could vote on it Wednesday despite the concerns of some aldermen that more time was needed to review the complex financial program. Some worried about oversight issues and the future use of the program.

Carole Brown

The structure because of legal provisions such as a statutory lien designed to insulate the debt from a bankruptcy threat should “result in a better rating” and “that should give us much lower rates,” Brown told aldermen. “I think it’s the prudent thing for the city to do” as it lowers debt service costs without adding to the “city’s risk profile.” Any corporation borrowing must be approved by the council.

Brown told aldermen the city is hoping the rating agencies view the relief on the city’s GO credit and favorably and that coupled with “discipline” in chipping away at the budget’s structural imbalance and shedding poor borrowing practices could win upgrades in the coming years. The city carries ratings that range from a low of junk to a high of BBB-plus.

The city believes it can shave about 2% off its GO borrowing costs although the administration declined to put a figure on total expected savings. Bankers have told the city the bonds could sell at a spread under 100 basis points to the Municipal Market Data’s top-rated benchmark. City spreads that had topped 300 basis points have narrowed since the July passage of a state budget hovering around 200 bp.

The city expects to tap the $3 billion authorization in about four deals over the next several years. The first deals would refund $500 million of existing sales tax bonds, freeing up city sales tax revenue to flow to the new corporation, and also some high-coupon, mostly callable GO bonds.

Initially Brown hoped to establish the corporation and get into the market by the end of October. The goal is now by the end of the year as the city looks for the best opportunity given an influx of Illinois paper expected this fall. That's being led by Illinois’ plan to borrow $6 billion of GOs to pay down its bill backlog as soon as later this month. Brown said the tollway and school district are also planning deals.

The city will draw from a list of four senior managers – Jefferies, Goldman Sachs, Stifel Nicolaus, and Ramirez – for individual deals. It will draw from a list of four firms as co-seniors – Rice Financial, Cabrera Capital Markets, Loop Capital Markets, and Citi. An additional 15 firms would be chosen as co-managers.

Nixon Peabody is bond counsel with disclosure counsel coming from among four firms and special counsel being chosen from among five firms.

The city will use Swap Financial Group and PFM Financial Advisors as pricing advisors, Columbia Capital Management as financial advisor and Bank of New York as trustee.

Brown left the door open to tapping other city revenues that flow through the state in the future, or to securitize revenues for new money in the future if the administration believed it was “prudent.” Any such move would require council approval.

The city will assign its sales taxes collected by the state directly to the corporation, which will use the funds to pay debt service. All sales tax revenues not needed by the corporation will then go to the city. All debt issued by the corporation would have a statutory lien attached to it. The new borrowing program created for home rule units of local government securitizing revenue streams that flow through the state was included in the $36 billion fiscal 2018 state budget package.

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