1. Municipal revenue securitization
MaGNY – January 12, 2018

2. Securitization: perceptions and misperceptions
introduction
Securitization: perceptions and misperceptions
Securitization, including use of SPVs, in commercial finance is well-established
State and Municipal structures using securitization are increasingly common
Tobacco settlement entities, TFA, STAR, DC, Pennsylvania
Bankruptcy “remoteness” as opposed to “bankruptcy proof”
Bankruptcy Courts do follow the law – there is more to it than just “when the judge speaks”
2018 is not 2013
Impediments to rational discussion: lumping all cities with Detroit, imprecision/failure to do analytical homework, and government bashing

3. New Illinois state law
a statute governs – an enhancement above document-based corporate securitizations
Public Act permits Illinois Home Rule municipalities to convey to a separate trust or entity revenues and taxes received from the State of Illinois :
Any conveyance shall:
(i) be made pursuant to an assignment agreement in exchange for the net proceeds of bonds issued by the separate issuing entity for the benefit of the transferring municipality and for all purposes constitutes an absolute conveyance;
(ii) not be deemed a pledge or other security interest for any borrowing by the municipality;
(iii) be valid, binding, and enforceable; and
(iv) not be subject to disavowal, disaffirmance, cancellation, or avoidance by reason of insolvency of any party, lack of consideration, or any other fact, occurrence, or State law/rule.
On and after the effective date of the conveyance, (a) the municipality has no right, title or interest in or to the transferred receipts conveyed and (b) the transferred receipts are the property of the bond-issuing entity to the extent necessary to pay the obligations issued by the issuing entity; the funds to be received, held, and disbursed by the issuing entity must be in a trust fund outside the treasury of the municipality.
Bonds issued have a statutory lien in favor of holders.
The State included a non-impairment covenant in the statute.

4. The corporation and sale document structure
Sales tax securitization corporation
The corporation and sale document structure
Corporation is organized for the limited purpose of purchasing Sales Tax Revenues and issuing bonds, notes, or other obligations for the benefit of the City
Separate corporate existence and bankruptcy-remote from the City under the Authorizing Act, and the Corporation’s Articles of Incorporation and Bylaws
Limited purpose restrictions prevent entry into other businesses or incurrence of other debt
Does not have the power to pledge the full faith and credit of the City
No Bond can be an obligation of the City
Assignment Agreement is an absolute and unconditional assignment and true sale of Sales Tax Revenues
Conveyance is further confirmed by the City’s irrevocable direction to the State to pay all Sales Tax Revenues directly to the Corporation’s Trustee after the Closing Date
Includes non-impairment covenant of the City
11/14/2018

5. State control of municipalities remains central in Chapter 9
Basis for true sale and non-consolidation
State control of municipalities remains central in Chapter 9
State law controls property rights, including in bankruptcy
Federal law, including the Bankruptcy Code, does not define debtor property. The U.S. Supreme Court has held that state law governs what a debtor owns (whatever type of debtor) as of the filing.
States unquestionably have the right to create, define, and control the ownership and conveyance of, property -- and particularly municipal property and taxes. Through Pub. Act , Illinois has exercised its right to control the disposition of the Sales Tax Revenues under the Illinois Constitution and has determined that, once sold, they are no longer property of the City.
Property duly sold under state law is not “property of the estate” of the debtor.
A Chapter 9 plan of adjustment cannot be confirmed if it violates State law.
State control of municipal entities does not end in Chapter 9
Under the U.S. Constitution, as acknowledged in Chapter 9, a filing does not limit or impair the right of a state to control the political and governmental powers of a municipality. This would include the structure imposed on Illinois municipalities in the Act.
11/14/2018

6. True sale vs. loan Basis for true sale and non-consolidation
Courts have considered the following factors, among others:
Recourse. The Sale Agreement expressly memorializes the City’s transfer of the Sales Tax Revenues to the Corporation without recourse
Transfer of Opportunity for Gain or Loss. The City has no right to return of the Sales Tax Revenues (although the City is entitled to the return of all Sales Tax Revenues that become Residual Revenues)
Interest Rate. Based on current market rates for comparably rated, tax–exempt or taxable bonds, not the rate at which the City could obtain a secured loan
Proper Form of the Transaction. Both the Act and the Sale Agreement use the form and language of an absolute assignment and transfer of the Sales Tax Revenues and the City, for accounting purposes, will treat the transfer as a sale and not as a collateralized borrowing
The Parties’ Intent. The Sale Agreement explicitly states that the transfer of the Sales Tax Revenues from the City to the Corporation is an absolute sale rather than a secured borrowing
11/14/2018

7. Non-consolidation Basis for true sale and non-consolidation
The Corporation should be is a separate, special purpose not-for-profit corporation, whose organizational documents provide that a voluntary bankruptcy case cannot commence without the unanimous affirmative vote of all of its directors, including an Independent Director.
Applying certain factors that courts have considered in substantive consolidation cases:
The City and the Corporation have a separate corporate existence under the requirements of the Act, the Corporation’s Bylaws, and the Sale Agreement
The City and the Corporation are not only separate entities under State statutes, but are distinct kinds of entities under the Illinois Constitution
The STSC Bonds are not the obligations or debts of the City (or the State) and therefore the holders are not creditors of the City and are not relying on the credit of the City
The financial and other operations of the STSC will be separate from the City; it will hold itself out to the public as an entity separate from the City; other concerted efforts made to prevent a creditor, including bondholders, from being confused that these are City-issued or City- backed Bonds, thereby eliminating a central factor that would be required for substantive consolidation of the Corporation with the City
The Corporation, as a not-for-profit entity, cannot involuntary be placed into bankruptcy.
11/14/2018