Is the Chicago Midway privatisation deal dead or merely in suspended animation?
A number of television ‘celebrities’ such as Simon (X-Factor) Cowell are counted amongst those that claim have chosen to be cryogenically frozen after death in anticipation of the cure for whatever killed them being discovered in centuries to come. Which begs the question of how long the lease deal for Chicago’s Midway airport will lie suspended after it was abandoned on 20-Apr-2009, as a direct result of a failure by the preferred consortium to raise sufficient funding in tough credit conditions? It might not take centuries, but a quick return to negotiation looks unlikely.
It was only at the beginning of April that the City of Chicago indicated it was negotiating to give the successful Midway Investment & Development Consortium, a.k.a. MidCo [Citi Infrastructure Investors/YVR Airport Services (Vancouver)/John Hancock Life Insurance] up to a further six months to find and complete the financing for the USD2.52 billion 99-year lease deal for Midway Airport after it missed the first (Jan-09) and subsequent (Apr-09) deadlines, citing the recession's impact on financing alternatives. MidCo had been the highest bidder for Midway on a simple 'highest bidder wins' basis.
Major hub airport
Midway, Chicago's second airport, but closer to downtown than O'Hare, counted as the 'major hub airport' identified for privatisation by the 1996 Pilot Program even though O'Hare is undeniably the hub airport for the city and region. Midway mainly handles point-to-point traffic and is dominated by low cost carrier Southwest, whose approval was critical to instigate the hard-won privatisation process in the first place. Midway has been losing traffic consistently during the last six months, up to 20% per month or so on a prior-year comparison basis, but then so have most US airports.
If the delay was not a surprise the announcement on 20-Apr that the deal was to be abandoned certainly was, even allowing for the difficulties the Citigroup unit might be having in arranging finance on its other big transaction, London Gatwick Airport.
Chicago gains USD126 million, loses USD2.5 billion
One benefit at least to the City is that it gets to keep a USD126 million letter of credit ('earnest money') as it is entitled to do and as there is no reason an offer could not be resubmitted once the economy improves. But that is small consolation as there is so far no proposed timeframe for a second attempt. Pinning down just when the economy will pick up is difficult despite recent confidence-boosting statements by President Obama and there is no knowing how much Midway might be valued at in the future either, though it is a good bet it will be less. The City authorities must be kicking themselves that protracted negotiations with airlines (the FAA's two-part airline approval process) could not have been completed sooner, in advance of the worst effects of the credit crunch.
At best it looks like it will be 2010 before any attempt will be made to resurrect the scheme, at which stage some of the unsuccessful first-time bidders may have exited the airport sector altogether. Those bidders were:
- Abertis Infraestructuras SA (Barcelona, Spain), Babcock & Brown Group (Sydney, Australia), GE Commercial Aviation Services (Stamford, USA);
- AirportsAmerica Group, consisting of a Carlyle Group fund, Carlyle Infrastructure Partners LP (Washington, DC);
- Chicago Crossroads Consortium, consisting of Macquarie Capital Group Limited (Sydney, Australia), Macquarie Airports (Sydney, Australia),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, USA), HOCHTIEF AirPort Capital GmbH & Co (Essen, Germany);
- Midway Investment and Development Corporation, consisting of YVR Airport Services Ltd. (Vancouver, Canada), Citi Infrastructure Investors (New York, USA), John Hancock Life Insurance Co. (Boston, USA);
- Morgan Stanley Infrastructure Partners (New York, USA), Aeroports de Paris Management (Paris, France), HMSHost Corporation (Bethesda, USA);
Macquarie Airports has already withdrawn from new investment ventures - in fact it did do while the bids were being evaluated - though other parts of the Macquarie machine remain active.
Chicago's example encouraged other cities to covet privatisation
The Chicago authorities had been planning to use some of the lease proceeds to retire USD1.3 billion of outstanding Midway debt. In the main, 90% of the USD1 billion they were to take from the deal was to be spent on infrastructure improvements and on shoring up city pension funds. The deal was among several multi-billion dollar privatisation deals arranged by Chicago, including leases of its Chicago Skyway toll bridge, downtown parking garages, and parking meters. In doing so Chicago became an aspirational benchmark for several other US cities, some of which also began to covet privatisation, in one form or another, of their own airport(s) (See below).
Of the USD126 million it may keep from the cancelled transaction, the City will set aside USD80 million to help balance its budget in 2009 and 2010, with USD6 million allocated to covering transaction costs, according to Chief Financial Officer Gene Saffold.
Worth more than the much bigger Gatwick Airport
But those amounts are small change compared with USD2.5 billion. And the shame of this affair is that it was a pretty good deal for the city, the agreed rate being more than comparable with what the declining number of bidders for London's Gatwick Airport (which is almost twice as big as Midway by passenger numbers), are likely to be asked to pay - almost certainly no more than USD2.35 billion on current exchange rates. And USD2.5 billion, itself, was a 15% discount on the originally anticipated figure for Midway back in the headier economic days of 2006.
Not only that, the operator would have benefited from a 99-year lease (the same as that originally bestowed upon the privatisation of New York's Stewart Airport and almost twice as long as that initially proposed in Chicago). Midway would have benefitted from the input of the respected Vancouver Airport management arm, YVRAS, which operates 18 airports in countries throughout the Americas and beyond and which has experience of handling Westjet, an airline potentially key to Midway's future through its code-sharing tie-up with Southwest. During the bid process 50% of YVRAS's equity had been acquired by Citi Infrastructure Investors and it became CII's exclusive platform for investing in airport assets.
Yet in a way that was always going to be its downfall. Citigroup was an early casualty of the credit crunch, writing off USD11 billion in sub-prime losses in Nov-07, taking a further USD10 billion hit in Apr-08 and then one of USD7.2 billion in Jul-08 for 2Q08. In total its write-downs at the point it became the successful bidder were over USD50 billion. Not only that, it also had to find some way of funding a bid for Gatwick, where it was also leading a consortium bid for an outright purchase transaction.
Equity more desirable than debt
In future deals, at least for the next couple of years, the amount of equity that is going to be required will exceed the 25 (equity)/75 (debt) formula that had become the norm, with 50/50 becoming a more reasonable target. While some analysts point out that the majority of airports, both public and private, have been able to refinance debt recently, and that they remain investment grade, (though some have notably been downgraded), it should be remembered that the vast majority of Collateralised Debt Obligation (CDO) vehicles that got us in this mess carried a similar rating approval, whether they deserved it or not.
There is one obvious question arising from what has happened here, apart from whether or not there will be a second round of bidding and who will take part. This is: where does this leave the privatisation movement in the US?
Despite Midway, many other cities lining up
There are at least half a dozen other airport operators, mainly city authorities, that are either casually examining a privatisation option - typically leasing - much further down the path towards realising one, or somewhere in between. These include Long Beach and Ontario airports in the Greater Los Angeles area; Austin, Texas; Jacksonville, Florida; Milwaukee, Wisconsin; Minneapolis/St Paul, Minnesota; New Orleans, Louisiana; Kansas City International, Kansas; and Bradley International in Connecticut.
There are only four privatisation slots left under the Pilot Programme (or five if Midway disappears forever). But interestingly, in some of these cases, the proposal being put forward by some of these operators would, for diverse reasons, put them outside the scope of the Programme, thus increasing the overall potential for privatisation considerably. From a political angle, despite the allocation of a sizeable chunk of the economic stimulus package to transportation - largely to cover short term contingencies - the fundamental need remains for government to divorce itself from the business of financing airports while city and state governments are under financial duress, and while the majority of city authorities are Democrat controlled.
Private green field airport opens in May-09
With Midway out of the way, attention now turns to the partially privately financed green field Branson Airport in Missouri, which opens in May-09, as the next watershed event. Its construction is being overseen by AFCO (Aviation Facilities Company), a firm that operates almost 30 airports in the US and UK. Branson is another interesting case in that it is the recipient of no federal funding and consequently there is no federal requirement on rates and charges.
Privatisation stalls in Europe, Gatwick valuation collapses
It is not only in the US that airport privatisation has stalled; it has also occurred where it is a much more accepted principle. The same appears to be the case in the UK, where the benchmark re-sale of London Gatwick Airport, the first of three airport sales that have been forced on BAA/Ferrovial by the country's competition watchdog, may also grind to a halt as it becomes more difficult to find the required funding.
A recent shock report for a consortium of airlines at Gatwick suggested its value may have fallen to as little as GBP1.33 billion (USD1.95 billion) in the face of falling passenger and collapsing cargo traffic, the impediment of a legally binding covenant preventing the building of a second runway at what is the world's busiest single runway airport (35 million p.p.a.) the shifting of important airline clients to a to-be-expanded Heathrow under Europe-US Open Skies agreements and the fact that so much of the airport's passenger traffic emanates from the leisure sector.
It is conceivable that the sale may not go through at all now, or be delayed for up to two years - the maximum period allowed - or, conversely, that BAA will be forced into a fire sale that could even push parent Ferrovial over the edge. Half the original putative bidders have pulled out, leaving only three consortia - Global Infrastructure Partners, which already runs London City Airport; Manchester Airport Group with its pension fund partners Greater Manchester Pension Fund (co-opted desperately to provide some last minute equity) and Borealis (Canada), and the Lysander Gatwick Investment Group comprising of - once again! - Citigroup's Infrastructure Fund with Vancouver Airport and John Hancock Life Insurance. "Plus ca change, plus c'est la meme chose" and it may soon be that those three putative bidders will soon be down to two, or less.
In mainland Europe, the long-winded Prague Airport privatisation is definitely on the back burner, along with that at St Petersburg in Russia. In Spain, the much anticipated 30% privatisation of the world's biggest airport operator, AENA, has been delayed in advance of a Ministerial shake-up and the publication of a new schedule.
Dire warnings about the future of UK's airports
The only activity is at the regional level, for example the UK's Bristol Airport, which Macquarie Airports will sell, if it can, to realise some much-needed cash. There are indications that Peel Holdings may be prepared to sell any or all of its three airports, which will task it mightily as they lost between 22% and 50% of their traffic in Mar-09 compared to the same month last year. In fact the UK's Airport Operators Association has warned that some of the country's regional airports may not survive the global financial downturn owing to falling passenger traffic and has requested the cash-strapped UK Government to offer assistance to these airports. With more organisations queuing up for cash handouts than in the US, airports will have to go to the back of the queue.
At least there is some hope in Brazil, where the government has made another announcement confirming its intentions to privatise the airports of Galeao in Rio de Janeiro and Viracopos in Sao Paulo. The conditions for the privatisation will be ready for distribution to potential private investors in Jul-09.
Back in the US, the future for Midway remains unclear. But at least it has not been wiped completely off the privatisation agenda and might well make a cryogenically charged re-entry. Meanwhile, the traffic slump is hunting all airports, privatised or not. Other US airport owners may soon be looking harder for new solutions (and handouts).