The Wall Street Journal earlier this month reported on the sale and subsequent leaseback of Chicago’s Skyway toll road to Macqaurie Bank of Australia. The sale price of this transaction, referred to as a SILO (sale-in, lease-out) was $1.8 billion. Good for Chicago, I say, as the cash was much needed to fund other city operations. But I also have to ask if it is really in our long-term interests to shift ownership of key US infrastructure into foreign hands, especially when there are US alternatives?
Two years ago, this transaction most likely would have been consummated with a US bank, or other financial institution. Recent tax legislation, however, has cast transactions such as these as schemes and financial artifices if a US company is involved. Same economics, same structure, the only difference being that the ultimate owner is a US lessor. What gives?
As many things go in Washington, US-owned leases to tax-exempt entities such as the city of Chicago were the casualties of hype and hysteria. There was even a documentary on PBS examining tax-exempt leases that characterized the leasing industry as ‘a bunch of hucksters.’ An interesting term to use to describe companies such as GE, Bank of America, and Citibank.
The line in Washington was that such deals gave away $80 billion in tax deductions to greedy corporations. True, US lessors participating in SILOs could reduce their taxable income by $80 billion by deducting tax depreciation on the assets they purchased. This is nothing new. It has been an accepted component of the Congressionally-mandated tax code for decades.
What critics choose to ignore is that, if the same US lessors (or banks, for that matter) provided bond financing for the same deals, they could reduce their taxable income by $80 billion – the exact same amount as in the lease. This time, however, they would do so by excluding the principal of the loan from income. Plus, they would not have to pay taxes on the profit!
The upshot of this legislation has several ramifications. First, a tax-exempt entity’s cost of capital has been made more expensive than that of a private entity, increasing the cost of capital for cities, hospitals, universities, and public transit facilities. Second, as illustrated by the Macquarie deal, US infrastructure is much more likely to be owned by foreign interests. Furthermore, profits and, hence, jobs, also are flowing out of the country. Something is just not right about that. Does it make sense to increase a city’s cost to finance vital infrastructure by changing longstanding and well-established tax principles?
WOW - So with the latest 156 mile Indiana Toll Road, 75 year lease, for $3.85 B what you are saying is that while the state of Indiana received a $1 B windfall above its estimated valuation, the state could have acheived an even better margin through bond finance?
The Goldman Sachs team that did the structuring/underwriting for the Skyway, and are doing the work for the Tollway and any other consortia that bid are more than symbols of the globalization that exists in the economy of 2006. There is more capital chasing deals now, but the risk/reward evaluation and the hype may prompt us to see in the short term, a pull back from the chase for such deals, a kind of caution flag, until these and perhaps another transaction or two allow provide the market an opportunity to evaluate the public indentures, the terms and conditions. That's what I am hearing.
Posted by: Mr. Inquiry meets Mr. Enquiry | March 29, 2006 7:24 AM | Permalink to Comment