Gary, Indiana, has closed on a sale-leaseback bond transaction to keep the city afloat financially.
The $40 million bond was privately placed with Dallas-based private lender Preston Hollow Capital LLC at a rate slightly lower than the city had originally agreed to and within the city’s recovery budget.
Backers of the deal call it a crucial piece of the city’s plans for financial recovery.
The unrated 20-year bond was sold at a yield of 5.9%, representing a steep 400-basis-point spread to the Municipal Market Data’s top-rated benchmark’s 20-year bond.
The administration of Mayor Karen Freeman-Wilson had originally negotiated a coupon of 6% with total yield at about 6.3% with Preston Hollow. A person familiar with the deal said that the adjusted rate came down due to the lower rate environment and also to address some complaints the city’s mayor-elect, Jerome Prince, made about the deal.
Prince defeated Freeman-Wilson in the May 7 Democratic primary for mayor. He faced no opposition in the November general election and will succeed Freeman-Wilson on Jan 1.
“Building consensus was an important part of the process for Wells Fargo which included engaging with stakeholders like city council and incoming mayor-elect Jerome Prince to make sure they were supportive,” said Kevin Hoecker, lead banker on the financing for underwriter Wells Fargo Securities.
Hoecker, the firm’s head of Midwest public finance, said that during the course of the transaction the city and finance team talked with more than 70 potential investors. The list included all major buyers of debt similar to what the city offered the market. After a competitive process Preston Hollow was selected. The city did not respond to questions asking if the privately placed bond achieved the best rate.
The city will use the bond proceeds to pay off $28 million in higher-yielding, short-term working capital obligations that are due Dec. 31st and bring the city current on all past-due bills. It also allows for some capital spending as well.
Charlie Visconsi, co-head of originations for Preston Hollow, said “the financing provided a lower interest rate of over 100 basis points relative to its interim borrowing allowing the city to reset its borrowing costs.”
Freeman-Wilson had said that without the transaction the Prince administration would have faced a rocky financial start.
“For the first time in two decades, the city of Gary will start the year with money in the bank,” Freeman-Wilson said in a press release. “The Prince team will begin governing on a solid financial foundation.”
Cender & Co LLC and Comer Capital Group LLC were co-municipal advisors.
The U.S. Securities and Exchange Commission sued Comer Capital and managing partner Brandon L. Comer in June for allegedly breaching its fiduciary duty to a public library district in Harvey, Illinois.
Brandon Comer and the firm deny the charges.
The city did not respond to a request for comment on its decision to keep Comer Capital on the deal. Comer advised Gary on the sort-term borrowing it executed earlier this year.
A source working on the deal said at the request of parties involved on the transaction, the city eventually hired Cender & Co as a co-advisor.
Taft Stettinius and Hollister LLP and the Law Office of Kelly White Gibson were co-bond counsel on the transaction.
The deal was jeopardized when Prince called the transaction a “bad deal” for taxpayers in June. The mayor-elect has since softened his views and said in an interview his intention was never to stall the deal. At the very least, the pause his caution created “gave the deal enough time for Wells Fargo and the purchaser of the bond to consider lower rates,” he said.
The city will sell its public safety building to an entity called the Gary Building Corp. for $40 million. In turn, the corporation will lease the building back to the city. The building corporation was created for the sole purpose of owning city facilities and leasing them back to the city.
The bonds are secured by two revenue streams: local income taxes and revenue from a casino local development agreement. The local income tax generates $4.7 million in revenue yearly and the casino local development agreement revenue generates about $6.7 million per year.
Gary’s deficit grew to $42.5 million in 2019 from $7.3 million in 2018. Its recovery hopes include new revenue from a floating casino being relocated inland as part of a new deal with Hard Rock Casino. Spectacle Entertainment has a letter of intent with Hard Rock to build the casino in Gary.
According to bond documents Spectacle Entertainment estimates making a $250 million investment in the casino during phase one of its investment. Gary estimates that this investment will increase the assessed value and yield an estimated $2 million increase in property tax revenue. During phase 2, Spectacle Entertainment estimates making an additional $250 million investment. Gary expects that this investment will increase the assessed value of the city and yield and additional $1 million in property tax revenue starting in 2024.
Hoecker said the bond proceeds coupled with the Hard Rock Casino and a separate $15 million advance payment from U.S. Steel will advance the financial recovery plan.