Smooth landing for Chicago O'Hare's $8.5 billion terminal overhaul
CHICAGO – Chicago Mayor Rahm Emanuel won City Council approval for an $8.5 billion terminal redevelopment plan and $4 billion in initial borrowing.
The council on Wednesday overwhelmingly approved the new lease and use agreement with airlines that replaces the agreement that expires in May. It lays the groundwork for funding the terminal makeover with airport-related fees and revenues.
Aldermen praised the construction plans as an economic boon for the city and after the votes Emanuel heralded the benefits of the makeover he unveiled last month, calling the plan a “watershed” moment for the city.
The agreements “will both strengthen the city of Chicago economy for years and decades to come,” Emanuel said, touting the tens of thousands of projected construction and permanent jobs.
Emanuel also highlighted changes in the lease that strip the airport’s two hub operators -- American Airlines and United Airlines – of their veto powers on capital and construction projects so that the airport is no longer a “football” between the airlines.
The path from the plan’s unveiling to approval faced turbulence.
First, American Airlines opposed the new lease arguing it favored United on gates. The carrier’s opposition complicated the city’s plans, but the city pledged to go forward. In the end, it resolved the dispute and appeased American by agreeing to speed up the construction of some gates.
The administration then faced pushback from the council’s African-American and Latino caucuses who wanted more teeth in the city’s pledge that minority and women-owned firms would get a promised share of the construction and other related work.
Council members were won over by a plan to establish an oversight commission that will include minority and women council members tasked with ensuring that major contractors use minority and women-owned firms. The commission was approved as an amendment to the lease and use legislation.
Alderman Gilbert Villegas, the Latino caucus chairman, called the program a “once-in-a-lifetime” opportunity for minority contractors.
“This is a great project” and the commission will help make sure “there is significant participation from African American and Latinos” and disabled and women-owned firms, said Alderman Roderick Sawyer, the African-American caucus chairman.
The $4 billion authorization to sell general airport revenue bonds and passenger facility charge bonds passed in a 40-1 vote with David Moore as the lone no vote. Moore said he supports the terminal makeover but he opposed the borrowing ordinance due to poor percentage of minorities in the senior leadership ranks of two Wall Street banks in the senior manager group.
“We have to push these banks to do better,” he said during the council meeting.
Diversity in both the ownership and workforce among firms chosen to work on the initial borrowing took center stage at a Finance Committee meeting Monday.
Nearly 40% of the bond business will go to African-American, Latino, and women-owned firms, but Latino aldermen voiced frustration that no Latino firm was included in the senior manager group, which consists of Citi, JPMorgan, and majority African-American owned Loop Capital Markets LLC.
The proposed participation levels exceed the city's established goals, but aldermen are pushing hard for more – both on the bond work and in construction contracts -- given the size of the terminal makeover and the opportunity it represents to bolster minority firms. They are also using the opportunity to press banks to do more to mentor, hire, retain, and promote minorities especially at senior levels.
The city has also chosen eight firms for co-senior positions and more than 30 firms are on the co-manager list. Not all firms will participate in each transaction. The participation level on the underwriting team is 20.5% African American, 13.5% Latino, 3.2% women, and 2.3% service-disabled veteran-owned.
Eight law firms were picked to serve in various legal roles, with the underwriter’s counsel still to be named. The team also includes five firms in various advisory and consulting roles. Fees will total $23 million.
The city expects to issue the $4 billion in at least two deals over several years with the first sale likely coming in late 2018 or early 2019. The city expects to return in the coming years for further authorization, according to city chief financial officer Carole Brown.
The airport has about $8 billion of outstanding debt that carries ratings in the single-A category. Fitch Ratings has warned that a recent court ruling in Puerto Rico's Title III bankruptcy could pose a threat to special revenue credits rated above a municipality's issuer default rating. The report specifically noted O’Hare's rating. Fitch rates O'Hare GARBs A while it rates Chicago's general obligation debt BBB-minus.
Municipal Market Analytics in its weekly outlook Tuesday noted the high cost for some issuers such as Chicago if the ruling is not overturned.
MMA noted that Chicago's special revenue ratings on water and sewer could slide by six notches if capped at its BBB-minus general obligation rating, while the airport would face a four-notch cut.
“A 100 basis point jump in yield on the airport bonds (related to a downgrade) could add a cost of $10-20 million in interest per year, assuming continued annual debt sales of $1-2B,” MMA estimated.
Chicago plans to redevelop O'Hare's existing terminals, expand the existing international terminal, and demolish one domestic terminal to replace it with another global terminal to smooth international and domestic connections.