Société Générale is close to completing syndication on the $403.1 million debt financing for Morgan Stanley Infrastructure Fund's acquisition of the Chicago parking concession. Morgan Stanley acquired the 99-year lease in December 2006 for $563 million. The price raised eyebrows at the time, but the deal is flourishing in syndication and in early revenue growth. Syndication is due to close on 22 May 2007, and to date, nine banks have committed, and two more may participate at retail level.

The assets comprise 4 downtown parking garages in the city, with a total of 9,500 parking spaces, equating to an acquisition price of $59,000 per space. The financing structure bears comparisons with the Chicago Skyway deal, which closed in 2005. Not only do both deals have the same concession awarder – the City of Chicago – but both use an accreting swap structure.

But Chicago Parking is the first use of the structure for an asset other than a toll road. The total debt was $403.1 million, with a bullet term loan of $350 million and $53.1 million delayed-draw term loan to finance refurbishments. All the debt has a 10-year tenor, maturing in 2017.

SG is mandated lead arranger and syndication agent on the deal, while Depfa and MCC are mandated lead arrangers and co-syndication agents. Depfa is not syndicating its $100 million share of the debt. Though the $350 million term debt component is thought to be comparable with the other bids, the high equity injection secured the acquisition for Morgan Stanley.

The total equity input was substantial; at $236 million it accounted for 47% of the purchase price, and is shouldering a greater share of revenue risk than the debt. However, the rationale for such a low gearing is that the assets already have a demonstrated cash flow, but have not until now performed to their greatest potential, according to sources close to the buyer.

Pricing will start at 105bp over Libor, and will increase to 115bp after five years. The debt features a 20-year accreting swap, with no amortisation, which starts at 3% and could potentially rise to 8% over the life of the debt, though a refinancing is expected before the maturity. The debt service coverage ratio (DSCR) was originally sized at 1.2x, but is currently running significantly higher, at over 1.5x.

There is also a cash sweep provision to be imposed from the fifth year: In years 5, 6 and 7 the sweep is set at 25%, increasing to 50% in year 8, 75% in year 9, and 100% thereafter. These features were written into the deal to provide an incentive for the equity-provider to refinance within a set timeframe, as there is no regular amortisation.

Though a refinancing was envisaged for the years 2009 and 2011, when the cash sweep kicks in, the assets' better than expected revenue streams make a refinancing a more imminent proposition. The arranger considered the use of a monoline-wrapped deal for the initial financing, though it is questionable whether such a deal would have received an investment grade rating. However, if and when the sponsor refinances, monoline involvement is very probable.

All four of the assets are underground; three have been recently refurbished, and the fourth is pending a refurbishment, which has been factored into the financing. This fourth garage, East Monroe, is the oldest of the assets, since it was built in 1974. Its state of disrepair and the sums needed to refurbish it are thought to be significant contributing factors in the city's decision to lease the assets.

Morgan Stanley has retained Laz Parking to operate the garages. Its contract with the sponsor is incentive-based, and it will need to find ways to unearth or grow revenue streams. As the assets were formerly publicly owned and maintained, revenues were not maximised. According to sources close to the sponsor, the research conducted by the new operator has unveiled potential for a number of initiatives to increase cash flow.

Until now, the parking rates have been standardised by the hour. The operating history demonstrated low elasticity, but parking prices were significantly below market value. Though the prices have now been raised, there has been no loss of volume. Under the new operation, certain busier times of the week will be charged at a premium, with separate rates for sporting and cultural events, and rates reduced at low-traffic times.

Some of the space will be leased out to retail stores, to a greater extent in East Monroe, but with minor developments in the other garages. Wall space will also be used for advertising opportunities. The locations are around the Millennium Park area of the city, which as well as being a commercial area in the week, is also the city's cultural district. In addition to the number of museums already served by the parking garages, the city's Art Institute is in the midst of an expansion, and a new children's museum is to open shortly. Deals are being brokered with local businesses and hotels for discounted rates.

However many of the contracts for advertising and refurbishment have been assembled in advance of the close of financing. Morgan Stanley has therefore been able to account for the revenue streams in constructing a model, projecting cashflows, and thus fixing the assets' interest rate margin.

Even factoring in risks such as decreased traffic volumes and the possibility of congestion charging (as is being suggested in other US cities), the assets have the potential for very stable revenue flows, and thus refinancing possibilities. So confident has the buyer been over the assets' financial health, one source close to it has suggested that the buyers would have been able to comfortably top the earlier bid if necessary.

The parallels with Skyway's first financing are intriguing. In both instances the buyer paid much more than most observers thought prudent, assembled a bank deal with low leverage, and watched cashflows improve markedly almost immediately. The second act, a capital markets refinancing and the withdrawal of this, equity, has yet to play out.

Chicago Loop Parking LLC
Status: Closed January 2007, syndication underway
Size: $563 million
Location: Chicago, Illinois
Description: Acquisition of 99-year concession for 4 underground parking garages
Sponsor: Morgan Stanley Infrastructure Fund
Operator: Laz Parking
Debt: $403.1 million
Equity: $263 million
Mandated lead arrangers: Société Générale, Depfa, MCC
Tenor: 10 years
Margin: Starting at 105bp over Libor for five years, and 115bp over Libor thereafter.
Technical adviser to lenders: Desman Associates
Technical adviser to seller: Walker Parking
Financial adviser to seller: William Blair
Legal counsel to sponsor: Freshfields
Legal counsel to lenders: Milbank Tweed Hadley & McCloy
Legal counsel to seller: Mayer Brown Rowe & Maw