CHICAGO - Chicago expects to receive a $1.82 billion cash windfall from its sale of the Chicago Skyway operating rights to a private company, and city officials said Friday they plan to use a good chunk of the cash to defease toll-backed bonds and other debt and to create a rainy-day budget reserve.
Although the city is faced with a $220 million deficit in its $5 billion 2005 budget, Mayor Richard Daley said he won't use the funds to fully close the looming gap -- a move that would still leave the city with a structural deficit. "I want to make it very clear that, once the deal is concluded, we will act responsibly and prudently with these funds," Daley said.
The city announced that Cintra-Macquarie Consortium was the winning bidder from among five finalists seeking the long-term rights to operate the 7.8 mile, six-lane toll road for 99 years. The company is a consortium that paired Cintra Concessiones de Infraestructuras de Transporte SA and Macquarie Investment Holdings Inc. The two manage several dozen toll roads in Canada, Europe and South American countries.
The deal is subject to City Council approval later this fall. City officials described it as a first involving an existing toll road in the U.S. but commonplace in other parts of the world.
The city launched the bidding process earlier this year for experienced toll operators to purchase the rights under a contract the city has compared to a long-term concession agreement. Goldman, Sachs & Co. and Loop Capital Markets Inc. acted as financial advisers to the city and Mayer, Brown, Row & Maw LLP served as transaction counsel.
The operating agreement is a long-term one to allow the company to capitalize on the tax benefits of asset depreciation, thereby increasing the value of the deal. The proposed financing is an evolution of sorts of the lease-leaseback and sale-leaseback transactions that have come under heightened Congressional and Treasury Department scrutiny. The federal tax bill approved by Congress places new restrictions to curb lease-related deals.
Once the cash is in hand, the city would defease to the first call date all of the outstanding $430 million of Skyway-backed bonds that were sold in 1996, 2000, and 2001. City finance officials are still crafting a long-term plan for the usage of the remaining proceeds.
"We have been charged by the mayor to make recommendations as to what would be the most prudent use of the money and will formalize those recommendations in the coming days," said Dana Levenson, Chicago's new chief financial officer.
Repayment of other debt and the creation of the city's first formal budget reserve are top priorities, although officials would not disclose how much would be earmarked for either action.
Chicago has no formal reserve account and a precipitous drop in recent years in its ending balance, which now hovers around $20 million, has led to warnings from rating agencies. In August, Moody's Investors Service revised the outlook to negative from stable on the city's A1 credit. Analysts cited narrow fund balances, the looming budget deficit, and the city's decision to convert about $70 million of cash-flow debt to a 10-year repayment term. Fitch Ratings rates the city AA-minus and Standard & Poor's rates it A-plus.
Moody's analyst Edward Damutz called the city's comments Friday positive. "They are saying that they won't be using the proceeds to pay for operations, which is certainly a positive thing in terms of improving their credit quality," he said.
The Illinois legislature two years ago gave the city the ability to privatize the road that links the southeast side of Chicago to northwest Indiana. The Skyway was once an albatross for the city when Chicago defaulted on interest payments and faced eventual default on principal for the original debt sold in the 1950s to finance construction of the road. Those bonds were refunded in the early 1990s.
As traffic picked up in that corridor, the Skyway grew in popularity and it currently generates a profit of $20 million annually. Toll fees now set at $2 could double in the next 10 years.
