The collapse of the privatization process for Chicago's Midway Airport has been chalked up as another victim of poor debt markets. But even more than the roughly contemporaneous Port Mann collapse, bankers are determined not to shoulder the blame for this one. "This one was a problem with the equity and the price the sponsors paid, pure and simple," says one infrastructure banker familiar with the process.

Chicago's chief financial officer, Gene Saffold, was careful not to lay the blame on any particular market when announcing the end of the process. "The global economic recession continues to have a substantial impact on the availability of financing," he said, though most comment about the collapse centred on debt market conditions.

But Midway was the first difficult test of equity investor appetite for infrastructure assets in a post-leveraged world, and the collapse is a stark illustration of the limits of their interest. The city of Chicago emerges from the mess with a $126 million break fee, equivalent to 5% of the agreed purchase price. It says it might look at rebidding the airport in more clement financial markets. But the $2.52 billion bid for a 99-year lease on the airport could well be a high-water mark for airport valuations.

Midway Investment and Development Company, the unsuccessful lessor, is a consortium of Citi Infrastructure Investors, John Hancock and Vancouver Airport Services, the last of which benefits from an equity investment from Citi Infrastructure Investors. Citi, which co-ordinated the bid, submitted an offer on Midway shortly after the collapse of the Pennsylvania Turnpike lease, on which it had worked with Abertis. The bid for Midway was opened the day after the $12.8 billion turnpike bid formally lapsed.

As a sales prospect the airport proved popular, attracting six initial bidders, later whittled down to a shortlist of four. But the winning Midway consortium, as well as other potential bidders, is understood to have struggled to line up bank support for the bid.

By late September banks were reeling from the Lehman Brothers fall-out, and had little inclination to try and price the regulatory framework and revenue-generating potential for an asset – a US airport – which had never been financed with private bank debt.
Shortly after the Citi-led grouping learned it had the highest bid on the airport, consortium members let it be known that they were unlikely to need to raise bank debt to meet the concession payment, which was due as soon as the approval for the lease came from the Federal Aviation Administration (FAA). The assertion was true, or at least it reflected the sponsors' then-operative assumptions about their equity resources.

Citi Infrastructure Investors enjoyed an enormously successful fundraising, achieved a substantial oversubscription, and had succeeded in submitting a much larger financeable bid, though in conjunction with Abertis, for the Penn Turnpike. Bankers familiar with the bid say that the sponsors assumed that appetite from both existing limited partners and other investors that could not participate in the first closing would allow sponsors to meet the balance of the closing price.

During the boom years for leveraged infrastructure finance, offering limited partners a chance to increase their commitments for desirable assets was an important selling point for funds. But this partner option should not be read as a manager put option. Limited partners' valuations of airport assets did not match the valuation that Midway attracted. The sponsors, after failing to raise the additional equity, went to the bank market to round out the financing requirement.

Santander, the mandated lead arranger for the bank debt, tried to line up between $700 million and $800 million. Bank reception of the deal was cool, and although the debt requirement was manageable, at least in a quieter market, the sponsors were looking for larger underwriting commitments than are now the norm. Several bankers that saw the deal's information memorandum said that it would be difficult to go back to credit committees with an asset that had received a chilly reception in mid-2008.

The sponsors' next gambit was to try and line up support from institutional investors by other means. Barclays Capital went out to infrastructure funds and other equity investors to gauge their interest in a subordinated instrument such as a payment-in-kind or convertible loan to support the purchase. The loan did not attract any takers.

The sponsors' last hope was to persuade the City of Chicago to accept an offer closer to the second-placed bid, an offer of $1.7 billion that Macquarie is understood to have lodged. But the City, knowing that it was in line to keep the $126 million deposit if the negotiations fell through, was not inclined to accept the lower offer. To do so would be to accept that airport valuations would never again reach the buyers' level.

Chicago Midway is a difficult asset to value, since it is the second-largest airport serving the city, and its biggest user is low-cost carrier Southwest. The airline's typical passenger profile is less downmarket than its reputation, though less wealthy than some international carriers. But the airport faces competition from the larger O'Hare airport, and is dependent on carriers such as Southwest, AirTran and Frontier. The city needed the approval of four of the seven airlines that use the airport, and gained five, in part by offering a fixed schedule of landing fees until 2033.

The privatization received the assent of the FAA, under an experimental programme that has yet to produce an enduring transfer of an asset to the private sector. The city's advisers insist that both the FAA programme and the asset are compatible with a privatisation.

Recent reports have indicated that Chicago is exploring other ways to monetise the asset in the interim, including a bond issue. Roughly half of the concession proceeds, or $1.2 billion, would have gone towards defeasing the airport's debt, another $225 million towards providing emergency services at the airport, and the rest towards infrastructure investment. The city also owes $6 million in fees to a group of advisers that includes Bank of America, Credit Suisse, MR Beal (financial), Mayer Brown, Johnson & Quandt and Sanchez Daniels & Hoffman (legal).

Whether Midway again reaches the $2.5 billion valuation is open to question, particularly if, as one banker suggested, the second-placed bid was designed mostly to please the city. The private sector's ability to take on US airports remains unproven, and formidable structural obstacles remain to privatizations. But cities' cash needs have not abated. Reconciling those needs with sponsors' return expectations is still a work in progress.