Grounded in Chicago

On 1 October 2008, two stories broke that caught the attention of infrastructure investors everywhere. “Citi-led consortium lands $2.5 billion Midway Airport deal”, proclaimed one. “Abertis-led group drops $12.8 billion Pennsylvania Turnpike bid,” said the other.

Midway was to be the largest airport deal in US history; Pennsylvania the largest toll road deal. But six months and $126 million later, Midway has gone the way of the turnpike – albeit for different reasons.

The turnpike deal – in which Citi was a major financial backer – fell apart for political reasons. The Pennsylvania legislature refused to vote on the deal and essentially let it die a slow, public death.

Midway, in contrast, died for financial reasons. On 20 April, Chicago– which approved the deal nine days after it was awarded – terminated the 99-year lease agreement with MidCo, Citi’s concessionaire, because it could not secure the financing needed to meet the upfront lease payment of $2.52 billion.

As a result, Midway Airport, a square-mile airfield which served 17 million passengers last year, will remain under the city’s management. Chicago will also get to keep a break fee of $126 million, which it drew down on 6 April, the original deadline for financial close.

MidCo said deteriorating market conditions made the financial close hard to accomplish. It submitted its bid to the city in September on an all-equity basis, assuming it could refinance its obligations before a 6 April 2009 deadline for financial close.

But the bid could not have been awarded at a worse time: Lehman had just gone bankrupt and AIG was under life support; the commercial paper market froze, credit dried up and markets worldwide went into a tailspin and near panic.

Small surprise, then, that refinancing proved a tall order. A person familiar with the process says MidCo was able to secure debt commitments but had difficulty finding additional equity. It couldn’t get the bank financing needed to close the gap. It asked for an extension of up to six months to reach financial close, but the city refused.

The deal’s death doesn’t spell the end for Chicago’s plans to lease the airport. Chicago hasn’t formally withdrawn its application from the Federal Aviation Administration’s Pilot Privatisation Programme for five airports, which means that the FAA will reserve a spot for Midway for the time being.

Moreover, it plans to “competitively offer the Midway transaction again, down the road when financial market conditions improve,” Gene Saffold, the city’s chief financial officer, said in a statement.

The bigger question, of course, is what the deal’s collapse means for America’s young public private partnership industry. By and large, industry insiders say the deal’s collapse is more a reflection of difficult financial markets than of problems in the PPP market.

“This is a speed bump in the history of PPPs. It is a highway bound for success,” says Frank Rapoport, senior partner in the infrastructure practice group at Washington DC-based McKenna, Long and Aldridge. “Look at all the other indicators: Alabama passing a PPP law, Schwarzenegger pulling off a PPP law in California, the I-595 in Florida.”

Meanwhile, Citi and its partners (Vancouver Airport Services and John Hancock Life Insurance) live to fight another day – and pretty soon, actually: their final bids for London’s Gatwick Airport are due 27 April.