Chicago’s plans to lease Midway Airport are grounded for now, but may still fly another day.
The city terminated the 99-year lease agreement with MidCo, a consortium led by Citi Infrastructure Investors, because MidCo could not secure the financing needed to meet the upfront lease payment of $2.52 billion dollars.
As a result, Midway Airport, a square-mile airfield which last year served 17 million passengers, will remain under the management of the city. The city will also pocket a break fee of $126 million, which it drew down on 6 April, the original deadline for MidCo to reach financial close.
Chicago had agreed to an additional two weeks beyond the deadline to work out an extension of up to six months for Citi and its partners to rescue the deal by lining up additional debt and equity. That extension was not renewed, effectively cancelling the transaction.
The company was unable to finalise the transaction due to current global market conditions that have materially deteriorated since the bid award
MidCo blamed the outcome on difficult market conditions which made financial close difficult to accomplish.
“The company was unable to finalise the transaction due to current global market conditions that have materially deteriorated since the bid award,” George Casey, president of Vancouver Airport Services, a partner in MidCo.
Citi, Vancouver and John Hancock Life Insurance were approximately 89 percent, 3 percent and 8 percent equity owners, respectively, in MidCo, according to an airport privatisation application which they filed on an all-equity basis with the US Federal Aviation Administration (FAA) in October 2008.
They had been seeking to raise debt and additional equity to make the $2.52 billion payment before 6 April. They were able to secure debt commitments but had difficulty finding additional equity, according to a person familiar with the process, and were not able to get the necessary bank financing needed to close the gap.
A spokesperson for Citi declined to comment.
Had the transaction reached financial close, it would have marked the largest-ever long-term lease of an airport in US history. It was only the second airport to take one of the five spots in the FAA’s pilot privatisation programme. Another airport, New York’s Stewart International on Long Island, was leased in 2000 but bought back by the state six years later.
The FAA re-opened Stewart’s spot in the pilot privatisation programme after the state reclaimed the airport. Since Chicago has not withdrawn its application for the programme, the FAA will reserve Midway a spot for “a reasonable amount of time,” according to a spokesperson for the FAA, who declined to comment on precisely how long.
Chicago said it intends to rebid the airport at a later date.
We still retain the right to competitively offer the Midway transaction again
“We still retain the right to competitively offer the Midway transaction again, down the road when financial market conditions improve,” Chicago chief financial officer Gene Saffold said in a statement.
A spokesperson for the city clarified that at this point the city does not have any plans to give MidCo’s partners any preference in a future bidding process, if and when there is one.
The city intends to allocate $40 million of the $126 million break fee to balance the city’s budget over the next two years. Some of the termination proceeds will also be put toward a 2009 neighbourhood infrastructure plan.
The $126 million is still more than the $100 million in discretionary proceeds Mayor Daley would have been left with had the transaction succeeded.
About $1.15 billion of the $2.52 billion in proceeds would have gone toward paying off the airport’s existing debt. Funds for police and fire protection, transaction fees and reserves for various capital projects would have carved off another $370, leaving approximately $1 billion in profit, 90 percent of which was required to be reinvested in infrastructure projects, according to Illinois state law.
This is a speed bump in the history of PPPs. It is a highway bound for success
The deal's collapse drew a mixed reaction from infrastructure professionals, who expressed disappointment mixed with cautious optimism for the market's future.
“This is unfortunate, but it really doesn’t say anything about the likelihood of the PPP market not growing exponentially,” said Frank Rapoport, senior partner in the infrastructure practice group at Washington DC-based McKenna, Long and Aldridge.
“This is a speed bump in the history of PPPs. It is a highway bound for success – look at all the other indicators: Alabama passing a PPP law, Schwarzenegger pulling off a PPP law in California, the I-595 in Florida,” he added.
And while it disappointed Chicago and MidCo’s backers, the deal’s failure was a win for others who
We are thrilled that it didn't happen and I hope it's an indicator for other airports that they should not go private
have vigorously protested it.
“We are thrilled that it didn’t happen and I hope it's an indicator for other airports that they should not go private,” said Kate Hanni, executive director of Flyers Rights, a consumer organisation that represents airline passengers.
“Our primary concern was that airline passengers would not see any benefit and would have to pay double the amount that they would have paid [in fees] had it remained a municipality entity,” Hanni added.