CHICAGO - Six teams are interested in bidding for the right to operate Chicago's Midway Airport under a long-term lease in exchange for an upfront cash payment - a transaction that could raise several billion and would mark the first privatization of a major U.S. airport.

The statements of interest came in response to a request for qualifications process launched by the city in February in which it asked potential bidders to submit proof of their technical ability to run a major airport and to finance the transaction.

"We are very enthused with the strong indications of interest we have received from teams wishing to operate Midway in what would be the first lease of a major U.S. airport," the city's chief financial officer, Paul Volpe, said in statement.

Market participants have said the lease - anticipated to run at least 50 years - could fetch around $3 billion, garnering strong interest because of its unique status as a first of its kind transaction, even as the credit markets have tightened significantly in recent months.

The city would use the funds to cut its unfunded pension liability of $9 billion and to fund neighborhood infrastructure projects after retiring about $1.25 billion of outstanding first and second lien Midway Airport revenue bonds are retired.

The six teams are:

* Abertis Infraestructuras SA (Barcelona, Spain), Babcock & Brown Group (Sydney, Australia), GE Commercial Aviation Services (Stamford, Conn.).

* AirportsAmerica Group, consisting of Carlyle Infrastructure Partners LP (Washington, D.C.).

* Chicago Crossroads Consortium, consisting of Macquarie Capital Group Limited (Sydney), Macquarie Airports (Sydney), Macquarie Infrastructure Partners (New York, USA), Macquarie Infrastructure Partners II (New York, USA).

* Chicago First Consortium, consisting of HOCHTIEF AirPort GmbH(Essen, Germany), GS Global Infrastructure Partners I, LP (New York), HOCHTIEF AirPort Capital GmbH & Co (Essen).

* Midway Investment and Development Corporation, consisting of YVR Airport Services Ltd. (Vancouver, Canada), Citi Infrastructure Investors (New York, John Hancock Life Insurance Co. (Boston).

* Morgan Stanley Infrastructure Partners (New York,Aeroports de Paris Management (Paris), HMSHost Corporation (Bethesda, Md.).

Mayor Richard Daley first floated the idea of leasing the airport to a private operator more than three years ago. At the time, Chicago was preparing to close on the 99-year concession lease of the Chicago Skyway toll bridge to a foreign consortium of Cintra Concesiones de Infraestructuras de Transporte SA and Macquarie Infrastructure Group for $1.8 billion.

That deal launched national interest in public-private partnerships involving an existing asset. The city has since entered into a long-term lease on its downtown parking garages in a $563 million deal and has advanced plans to privatize its parking meter system and three waste/recycling centers.

Navigating a Midway deal has proven more tricky given the complexities involved in operating an airport and the multiple parties whose approval is needed, including the Federal Aviation Administration and Midway's airlines.

The FAA accepted the city's application in the fall 2006 to reserve one of five spots under a 1996 federal pilot program that allows airports to enter into long-term operating leases or pursue the sale of a facility to a private firm. Chicago reserved the one slot allotted for a hub airport. 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 assumed control of it last year.

Airline negotiations proved more tricky and it was not until late last year that Chicago reached a preliminary agreement with the largest carrier, Southwest Airlines. Under the federal program, a majority of the airlines operating at the airport must sign off. An additional three of the remaining five have signed off now too.

A due diligence process now begins and a final bidding process is expected to be conducted in the third quarter with closing on a transaction - if the bids are acceptable to the city - by the end of the year. In addition to FAA approval needed for the lease structure and airline use agreement, any deal would need the approval of federal Transportation Security Administration and the Chicago City Council. It would require that a private operator assume a 25-year use agreement with Midway's airlines. The plan would generate millions of dollars in net present-value savings for airlines by capping fees for six years and then tying increases to inflation.

The airport, located about 10 miles southwest of downtown, generated operating revenues of $105.6 million from landing fees, terminal area use charges, rents,concession, and parking revenues and another $24.4 million in passenger facility charges and $22.2 million of federal grants in 2006.

It handled nearly 304,000 flights on its five runways carrying more than 19 million passengers with an average rate of growth over the last 10 years of 5%. The airline has five runways and 43 gates and parking areas with over 13,500 spaces.

The city's financial advisers include lead Credit Suisse Securities LLC, Banc of America Securities LLC, M.R. Beal & Co. Its legal advisers include lead Mayer, Brown, Rowe & Maw LLP, Pugh, Jones, Johnson & Quandt PC, and Sanchez Daniels & Hoffman LLP.

 

 

Subscribe Now

Independent and authoritative analysis and perspective for the bond buying industry.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.