Chicago Skyway: Bridging the PPP knowledge gap

The $1.83 billion Chicago Skyway 99-year lease has already spurred a number of state leaders across the US to publicly state they are looking at the potential for a similar deal – and although devoid of fans in the US lending sector, the deal may yet prove to be the long awaited kick-start to a European style US transport public-private-partnership (PPP) market.

Opened in 1959, the Chicago Skyway Toll is a 7.8-mile six-lane toll bridge which links I-90 from the Illinois-Indiana state line, over the Calumet River, and into a junction with the Dan Ryan Expressway (I-94). There is one mainline toll plaza, which is located just west of the Calumet River Bridge and collects tolls for both eastbound and westbound traffic.

Sponsored by Cintra and Macquarie Infrastructure Group (MIG), to date the $1.19 billion debt financing backing the deal has been a purely European banking affair: the project was underwritten on 16 December 2004 with equal takes from Santander Central Hispano (SCH), BBVA, Depfa and Calyon. The deal is currently in general syndication and 25 European banks have been approached to participate.

Chicago is rumoured to have had a minimum figure of around $800 million in mind for the asset, and the final price tag of $1.83 billion (including $10 million to the granting authority) exceeded all expectation: Goldman Sachs and Loop Capital Markets acted as financial advisors to the City.
Five consortia originally qualified to bid for the deal:

• MIG-Cintra
• Chicago Skyway Group, consisting of VINCI Concessions/ ASF/COFIROUTE, Borealis Infrastructure Management, Canadian Highways Infrastructure Corp., ABN Amro, Parsons, American Bridge, and Kenny Construction ;
• The Skyway Infrastructure Group, consisting of Bilfinger Berger BOT Inc. and Cheung Kong Infrastructure Holdings Limited (CKI);
• Transurban Infrastructure Developments Limited, VMS Inc., Ontario Teachers' Pension Plan, Gary/Chicago International Airport Authority, Bear Stearns & Company, and Vollmer Associates, LLP;
• Abertis Infraestructuras, S.A.

Only three of the five qualifiers went on to bid. Under the bidding provisions, if the top two bids had been within 10% of each other another round of bidding would have been required. A second round was unnecessary. MIG-Cintra came in $1.1 billion above the nearest rival Chicago Skyway Group at $700 million, and $1.3 billion above Abertis with $505 million.

The difference has fired claims that Cintra and MIG paid too much. Certainly, they could have paid less. But the deal adds up to a 10%-plus IRR, both sponsors are in it for the long term, and Skyway is as much about a strategic play for market share in what is potentially a big US market.
The bid already looks set to pay off for Cintra with a number of potential contracts from its new relationship with TexDoT (for more details search "TexDoT"). And the banks underwriting the nine-year financing for the project are clearly comfortable that it can support debt payments.

Furthermore, debt pricing is reasonable, but not particularly cheap compared with similar European deals and given the predictability of the cashflows. Financing comprises a $1.2 billion A tranche, a $110 million liquidity tranche and a $80 million Capex tranche. Pricing is 125bp over Libor for years 1 to 5, 150bp for 6-7, and 175bp through 8-9.

The step-up indicates that a refinancing – probably a monoline wrapped long-term bond – will be sought before year five. And Goldman Sachs is rumoured to have been working on a bond take out on a no issue no fee basis since the deal's inception in 2002.

The structure of the concession is very explicit and used the problems experienced by the sponsors on Highway 407 as a template. Under the terms of the lease agreement, tolls for passenger vehicles are limited to no more than $2.50 until 2008, $3.00 until 2011, $3.50 until 2013, $4.00 until 2015, $4.50 until 2017, and $5.00 starting in 2017, with later adjustments equal to the greater of 2% per year or the annual increase in inflation.

Limits on commercial vehicles are comparable to passenger cars except that the agreement allows a further 40% increase in daytime commercial tolls if the operator has a program in place for granting a reduction equal to that amount for commercial vehicles between the hours of 8pm and 4am.

Despite being the first existing toll privatisation in the US, the only major legal hurdle to Skyway was amending the statutes in 2002 so that the deal did not become subject to Illinois real estate tax. Nevertheless, a repeat by Chicago looks unlikely. "We'd like to but there is no other asset in the Chicago portfolio that qualifies quite as nicely as Skyway," says Dana Levinson, chief financial officer at City of Chicago.

The impact on the City's finances has been stark. Chicago called $463 million of Skyway bonds and reduced overall long and short-term debt by $392 million. But the majority of the cash is going into a savings account – $875 million has been set aside to establish a $500 million long-term reserve fund, and a $375 million mid-term annuity the city can use to smooth the effects of economic cycles and stabilize the need for additional revenues.

Although Chicago may not have another similar deal in the pipeline, other US infrastructure assets are certain to be in the market as City treasurers struggle with tightening budgets and the tax-exempt bond market reaches saturation.

Chicago Skyway
Status: Underwritten 16 December 2004; currently in syndication
Description: Acquisition funding for 99-year lease of Chicago Skyway toll bridge
Acquisition cost: $1.83 billion
Total project cost: $1.92 billion
Project debt: $1.19 billion
Sponsors: Cintra (55%); Macquarie Infrastructure Group (45%)
Mandated lead arrangers: SCH; BBVA; Calyon; Depfa
Traffic and revenue analysis:
Maunsell (consortium); Halcrow (lenders)
Technical advisory: Halcrow; CTE; Sponors in-house
Financial advisory to concession awarder: Goldman Sachs; Loop Capital
Legal counsel to concession awarder: Mayer Brown Rowe & Maw
Legal counsel to sponsors: Milbank Tweed Hadley & McCloy
Legal counsel to lenders: Orrick, Herrington & Sutcliffe