CHICAGO - Chicago's chief financial officer called the $2.521 billion price a private consortium will pay to operate Midway Airport for 99 years a "good value" for the city that may not get any better even if delayed until the current international fiscal crisis subsides.
"We believe this is a good agreement for the taxpayers and people of Chicago, and given the economic outlook, we don't have any reason to believe that a better agreement could be reached next year or in the near future," Paul Volpe told Chicago City Council members at a hearing on the landmark airport concession-lease agreement held yesterday by the council's finance and aviation committees.
The panels are expected to advance the lease today and the full council will vote tomorrow just a week after Mayor Richard Daley and Volpe announced that it had accepted the $2.5 billion bid from Midway Investment and Development Co. LLC - made up of YVR Airport Services Ltd. of Vancouver, Citi Infrastructure Investors, and John Hancock Life Insurance Co. - to operate the airport. The city first announced four years ago that it would explore the privatization of Midway under a federal pilot program that permits up to five airports to be converted from public to private hands.
MIDCo.'s bid met the city's minimum threshold - an undisclosed figure - and equals about 28 times the annual earnings ratio of Midway, a level that "exceeded" the city's original expectations dating back about two years ago after the finance team was in place, Volpe said. It is also one that also exceeds the 23 to 24 times ratio generated in other recent airport leases entered into overseas.
Volpe's defense of the transaction came in response to questions from some skeptical council members who fear the asset could garner more interest and a higher payment during a stronger economic cycle. "I am concerned that we are not getting what we could get," said council member Thomas Allen.
Volpe said the city had similar concerns, but was reassured by the bid's size and earnings ratio comparison. The city had pre-qualified a handful of teams to bid, but officials have not disclosed how many submitted formal bids last month.
He told council members investor interest remains robust in asset leases because they are rare and viewed by potential investors such as public pension funds as a safe haven with a solid return. "There's a lot of money chasing few transactions," Volpe added.
Under terms of the lease, the group was required to post $75 million in collateral in either cash or a letter of credit. Once the City Council approves the lease, that number rises to 5% of the transaction, or $126 million. That collateral provides officials with some comfort that Midway Investment is confident it will have the $2.5 billion at closing.
"They are not going to want to lose that money," said the city's chief legal adviser on the deal, John Schmidt of Mayer Brown LLP.
The deal is expected to easily win council approval, in part because up to $900 million is earmarked for infrastructure and pension funding. Under Illinois legislation that had paved the way for the lease, Chicago agreed to restrict about 90 % of the net proceeds. All of the 90% can go for infrastructure, or up to half can be put aside to help address the city's $9 billion unfunded pension liability.
The first $1.2 billion of the deal will go to defease existing Midway airport revenue bonds with another $225 million earmarked for an escrow that will help the city pay for police and fire services at the airport which it retains control over. The financial and legal team that put the deal together will receive $19 million in fees, Volpe said. About $100 million is unrestricted.
Volpe will return to the council in the coming "weeks" he said to outline plans for the $900 million. The mayor will reveal how he intends to use the $100 million when his 2009 budget is unveiled next week. Daley faces pressure to use the $100 million to help close a $420 million deficit, but Volpe yesterday stressed the importance of stretching out its use over a few years.
