Midway Airport Lease Deal Is Too Important to Fall Through

There are several news stories on the extension needed to work out the Midway Airport privatization deal. I’m not surprised that financing the $2.5 billion deal to lease Chicago’s Midway Airport is taking longer than expected to put together. The global credit crunch has made large-scale infrastructure concessions more difficult and costly to finance, since debt is less available and more costly than it was a year ago. But such deals are getting financed.

Earlier this year, the $1.8 billion I-595 expressway project in Florida was financed, and other large-scale concessions are being financed in Europe. But the easiest deals to finance are those in which the private-sector developer/operator can finance the deal based on annual payments from the government over the life of the deal (typically called “availability payments”). That means the company and its investors don’t take on the “revenue risk”—i.e., that projected usage of the facility and user payments turn out to be less than projected at the outset. Airports and toll roads that are financed based on the future stream of landing fees and toll payments do involve revenue risk, and that means lenders demand more “skin in the game” from the developer/operator. So whereas the I-595 deal (based on availability payments) was financed based on about 10% equity and 90% debt, projects with significant revenue risk (such as Midway) might require something like 40% or even 50% equity in today’s market. Since debt providers have first priority for getting paid out of user-fee revenues, the larger equity cushion gives lenders a high enough comfort level to proceed.

An investment banker I talked with last month, who is close to the Midway deal, said then that he was still highly confident the deal would get financed. And despite the current delays, I agree with that view. The Midway lease is too important to the City of Chicago and to the infrastructure investment community (the first major U.S. airport privatization) to let it fall through.