Proposed Alternative Financing Feasibility Study
TTC Subway Cars
The Policy and Finance Committee recommends the adoption of the following report (September 13, 1999) from the
Chief Financial Officer and Treasurer:
Purpose:
To seek funding approval for the engagement of a financial advisor or advisors to determine the advisability and feasibility
of employing alternative and innovative financing methods, such as cross-border leasing, to finance the acquisition of
subway cars to be operated by the Toronto Transit Commission.
Costs/Funding Sources, Financial Implications and Impact Statement:
Savings would accrue in the form of a lower cost of funds as compared to the issuance of debentures. Depending upon
capital market conditions, savings of 3 percent to 5 percent of the value of the transaction, or a present value of
approximately $20 to 40 million could be realized.
Costs associated with studying the viability of the project will be approximately $200,000.00. If the project proceeds, total
transaction costs could range from $500,000.00 to $1,500,000.00. These funds are available from the Capital Financing
Reserve and will be considered when comparing the costs and benefits of a potential transaction.
The project will be structured to enable the City to abandon the transaction at any point until a commitment letter is
executed. This may result in the City having responsibility for payment of various costs of approximately $500,000.00
Agreeing to such a stipulation would not be unusual, or unreasonable, given that the City would have the privilege of
abandoning a deal should it begin to appear unfeasible.
Recommendations:
It is recommended that:
(1)a Request for Proposal be drafted for the purpose of seeking suitable external financial advice with respect to the
potential use of alternative methods to finance the purchase of TTC subway cars; and
(2)funding not to exceed $200,000.00 be provided from the Capital Financing Stabilization Reserve.
Council Reference/Background/History:
At its meeting of June 3, 1998, in consideration of Clause No. 11 of Report No. 9 of the Strategic Policies and Priorities
Committee, Council approved the acceleration of the replacement of 156 H2 and H4 subway cars with T1 cars, at a total
cost of $307.9 million. This formed part of a larger subway car deal, for the purchase of 216 cars, at a total cost of $580
million that was approved by Council of the former Metropolitan Toronto on August 20, 1991. To date, temporary
financing measures have been taken, with the intention of arranging a more cost-effective transaction.
On April 26, 1999, in consideration of Clause No. 1 Report No. 8, Recommendation No. 213 (ix)(a) of the Strategic
Policies and Priorities Committee, Council approved the investigation of the option of using cross-border financing to
reduce the debt requirements for the TTC Capital program in 1999.
Discussion:
Finance Department staff have investigated various options that are available to finance the purchase of TTC subway cars
other than traditional debenture financing that could result in lower cost of funds. An option that has previously been
highlighted to Council is the sale-leaseback of subway cars, involving a foreign-based firm. This would entail the purchase
of the subway cars by the City, followed by their immediate sale to the foreign firm, who would then lease the cars back to
the City. Subway cars are an appropriate source for sale-leaseback initiatives due to their long life span, high depreciable
capital costs, and physical portability to other jurisdictions (a theoretical requirement necessary to effect the transaction).
This financing plan would not have any negative impact on TTC operations. A separate working group will be established,
that will include TTC staff members, in order to address any operational concerns that they may have.
Cross-border sale-leaseback presents the potential opportunity to reduce carrying costs, in the form of reducing financing
costs for rolling stock. The tax benefits available within a foreign jurisdiction would be used to reduce the implicit
financing costs below those of conventional debenture financing. The City, as lessee would be responsible for the payment
of the debt and therefore able to access funds at a lower cost, while at the same time realizing the benefit of tax savings that
are available to the foreign entity.
Recent changes in tax legislation proposed in the US may have an effect on the mechanics of a transaction or the financing
method selected. Finance staff has informally examined these changes with various financial advisors and feel that there is
still merit in proceeding with a comprehensive feasibility study on various alternative-financing options.
Savings would take the form of lower financing costs. Depending upon market conditions, the result could be savings of 3
percent to 5 percent of the value of the transaction, or a total of approximately $20 million to $40 million. These potential
savings could be accessed in a lump sum, to be paid up front, or may be received on an ongoing basis over the life of the
transaction.
The process will be structured such that the City would be able to abandon the transaction up until the point that a
commitment letter is executed. This will allow the City to continually evaluate the financing option with respect to its
potential benefits and related risks, as more complete information is received. If investigation of the project results in
evidence indicating a net benefit to the City, then it will proceed. If evidence indicates the contrary, however, then the
financing would be replaced by the issuance of debentures.
There are certain inherent risks that must be considered and managed in order to ensure a successful transaction. Potential
changes to related tax legislation must be evaluated for the impact that they may have upon a potential plan. Additionally,
any cross-border aspect should be structured so as not to trigger a potential Canadian withholding tax liability. Provincial
Sales Tax and GST issues must be identified and addressed. The risk of foreign currency fluctuations must also be
recognized and managed.
In addition, the TTC should be assured that the details of the financing arrangements would not affect their operations, or
the "quiet enjoyment of the subway cars".
It will be necessary to consider the advice of external financial advisors with the necessary tax expertise, an understanding
of municipal entities and their restrictions, as well as those with experience in structuring such innovative financing deals.
Additionally, external legal advisors with similar experience will be required. It may be possible to retain all of the
required external advisors in the form of a consortium.
A Request for Proposals would be developed and advertised by Finance Department staff in order to find the most
appropriate advisors. Payment for services would not depend upon a successful outcome, so as to ensure unbiased advice.
Fees incurred for the investigation of the potential use of cross-border financing will likely be approximately $200,000.00.
A City Workgroup, to include members from the Legal and Finance Departments as well as other participants who are able
to contribute to the process will review the Request for Proposals. The successful candidate will be selected upon the basis
of experience and having the resources and ability to propose, arrange and execute a transaction that will result in a lower
cost of funds as compared to traditional financing methods. Finance Department staff will review the feasibility of various
proposals, subsequently reporting back to the Policy and Finance Committee when the selection process is concluded with
an anticipated date of December 1999.
Conclusion:
It may be possible to achieve a lower cost of funds by utilizing innovative financing methods such as a cross-border
sale-leaseback. In order to investigate the viability of potential financing methods, it is necessary to obtain external
financial, taxation, and legal advice.
Due to the size and scope of a potential transaction as well as the diversity of prospective participants, it is considered to be
appropriate that a Request for Proposals be issued in order to identify and retain suitable external advisors.
Contact Names:
Martin Willschick, Manager, Treasury Services, 392-8072
Len Brittain, Director, Treasury and Financial Services, 392-5380