CHICAGO - Chicago's $2.52 billion groundbreaking agreement to lease Midway Airport to a private consortium under a federal pilot program was canceled yesterday over the group's inability to raise financing for the 99-year transaction amid the ongoing international credit crunch.
The deal with Midway Investment and Development Co. announced last fall by Chicago was once on the fast track for local and federal approval before President Obama took office and it was being closely watched by other airport managers across the country interested in following Chicago's lead.
The first signs of trouble came earlier this year when the Federal Aviation Administration said the consortium had delayed the submission of various pieces of financing documentation. Chicago announced earlier this month a two-week extension in the April 6 closing deadline on the transaction as negotiations continued on a possible six-month extension.
Then, yesterday, Chicago's chief financial officer, Gene Saffold, said the city and Citi-led group known as MidCo had agreed to terminate the proposed lease. The consortium includes YVR Airport Services Ltd. of Vancouver, Citi Infrastructure Investors of New York, and John Hancock Life Insurance Co. of Boston.
Saffold laid the blame on the worsening credit situation that has escalated since last fall when the city rushed the transaction through City Council approval just a week after the deal was announced.
"The global economic recession continues to have a substantial impact on the availability of financing, which has created serious challenges for many businesses and financial institutions, including those involved in this transaction," Saffold said. He left on the table the possibility that the city might re-bid the Midway lease in an improved economic climate.
Chicago walks away from the transaction with $126 million in earnest funds posted by the consortium. About $6 million will go to cover various transaction costs. The collateral posting was required under the agreement.
Before the council vote last fall, Mayor Richard Daley's aide Paul Volpe and the lead legal adviser on the deal, John Schmidt of Mayer Brown LLP, said they were not too concerned over financing because investor interest remained robust in asset leases due to their rarity and solid returns. And the collateral posting provided strong incentive for the consortium to get the financing needed.
"They are not going to want to lose that money," Schmidt said at the time.
Chicago first began exploring the Midway deal four years ago as it prepared to close on its groundbreaking asset lease of the Chicago Skyway toll bridge for $1.8 billion in early 2005. A federal pilot program permits up to five airports to be converted from public to private hands.
The first $1.2 billion of the payment from MidCo would go to defease existing Midway revenue bonds, while another $225 million would be earmarked for an escrow to help the city pay for police and fire services at the airport.
About 90% of the remaining $1 billion in net proceeds would have gone to pay for infrastructure projects or to help reduce the city's $9 billion unfunded pension liabilities as required under state legislation that paved the way for the transaction. Rating agencies have cited the size of the pension liabilities as a credit concern.
About $100 million would be unrestricted and $40 million of that was earmarked to help cover deficits in the 2008 and 2009 budgets.
"Even though our efforts on Midway will not move forward at this time, the city still comes out ahead. Because we negotiated a solid agreement, the city has received the full $126 million in earnest money," Saffold said. He added that the city had not decided what portion of the proceeds would have gone to pensions or infrastructure.
The city's advisory team included lead Credit Suisse Securities LLC, Banc of America Securities LLC, and M.R. Beal & Co., lead legal adviser Mayer Brown, as well as Johnson & Quandt PC and Sanchez Daniels & Hoffman LLP.
Midway in 2006 generated operating revenue of $105.6 million from landing fees, terminal area use charges, rents, concession, and parking revenues, with another $24.4 million in passenger facility charges and $22.2 million of federal grants.
The airport is located about 10 miles southwest of downtown. In 2008, its five runways and 43 gates handled 266,000 flights and more than 17 million passengers. The airport includes four parking areas with over 13,500 parking spaces.
Other airports and municipal managers across the country had been closely watching the Midway deal, which many believed would serve as a model that could lead to an expansion of the program. The 1996 program allows for one hub airport to be privatized, and Midway had reserved that slot in 2006. It was not immediately clear if the termination of the deal frees up that slot for others.
The pilot program allows airports to enter into long-term operating leases or pursue the sale of a facility to a private firm. The program exempts the airports from laws that require that airport revenues be spent on airports.
To date, only Stewart International Airport in New Windsor, N.Y., had been privatized, but the Port Authority of New York and New Jersey has since assumed control of the facility.
Privatization of domestic airports has faced a tough hurdle under the pilot program because it requires that at least 65% of the airlines operating at the airport approve the transaction, as well as airlines with at least 65% of the traffic.
Airlines have been resistant to privatization, but the city found a more willing partner, albeit initially a skeptical one, in Southwest Airlines - the airport's largest carrier. The majority of other airlines have agreed to the lease terms that would cap their fees for six years and then limit increases to a rate tied to inflation over a 25-year term.
