The Work

April 6, 2009 7:05 PM

Mayer Brown Awaits Outcome of Midway Airport Privatization

Posted by Brian Baxter

Midway Airport

A $2.5 billion privatization of Chicago's Midway Airport failed to close on Monday as credit concerns caused a consortium seeking a 99-year lease for the facility to negotiate an emergency extension to shore up financing.

Initially agreed to in early October, the public-to-private partnership (P3) deal would have been the first privatization of a major airport in the U.S. But deteriorating economic conditions forced the consortium--led by the Vancouver International Airport Authority (VAA), Citi Infrastructure Investors, and John Hancock Life Insurance--to seek additional financing.

"The city and the consortium are still in the process of working out the extension," says Mayer Brown M&A and P3 deal lawyer John Schmidt, who advised the city on the transaction. "What we have at the moment is a two-week extension to allow everyone enough time to work on the exact terms of a six-month extension that will [help the consortium] come up with the $2.5 billion that they need to pay the city."

Schmidt says a series of factors have contributed to a delay in closing the Midway privatization.

"The market was already tough when we did [this deal], but the stock market has fallen about 35 percent since the bidding in late September, so it's even tougher," he says. "But it's not just the debt financing. It's also the equity crunch, which is created by the fact that what looked like a good deal in September doesn't look quite as good now compared with the falling prices of other airports."

If Schmidt seems remarkably calm for someone with a billion-dollar deal on the brink, perhaps it's because Chicago won't exactly be left in the lurch if a Midway privatization doesn't materialize.

Schmidt and other Mayer Brown lawyers--the team included government transactions partner Joseph Seliga and municipal finance partner David Narefsky--negotiated an interesting insurance policy for the city should the consortium fail to close.

"[The consortium] initially posted a $75 million unconditional letter of credit when they bid," Schmidt says. "And when they were declared the winning bidder, they had to raise that to five percent of the amount of their bid."

That means the consortium is on the hook for $126 million if it walks away from the Midway agreement without a deal. Schmidt says the city has started drawing down on that letter of credit, which the consortium can deduct from Midway's $2.5 billion price tag if it goes forward with the privatization.

"The structure is unusual in that you don't see it much in the private sector where the buyer puts up that kind of money if the deal fails," Schmidt says.

The idea for the "penalty provision" grew out of the $1.83 billion privatization of the Chicago Skyway Toll Bridge that Mayer Brown advised the city on in 2005. That deal highlighted the significant investment of political capital required to secure city and state support for the privatization of public assets.

"You really don't want  to be in a position of [supporting privatizations] unless you have a very high level of certainty that you're going to close," Schmidt adds. "So those amounts of money--like the $75 million and $126 million--have always been set at levels so that no one would ever voluntarily fail to close with that much money at stake."

O'Melveny & Myers project development and finance partner Eric Richards and real estate partner Denise Raytis are advising the consortium on the Midway privatization. Last month Richards led an O'Melveny team advising the Port of Oakland on a partial privatization plan valued at $686 million.

Also advising the city of Chicago on the Midway privatization were Chicago firm Pugh, Jones, Johnson & Quandt--which formed an alliance with McCarter & English on Monday--and Eduardo Cotillas, a former Pugh Jones partner now with his own practice.

Schmidt says that with the exception of the financing, albeit a rather large exception, the rest of the Midway privatization is ready to move forward. The Federal Aviation Administration has approved the deal, he says, and the VAA team that will assume control of Midway has been "living on the ground here in Chicago" for several months.

Now everyone waits on the consortium, which will likely have another six months to secure financing for a deal that it has about $126 million reasons to complete.

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