January has been set as the date for financial close on the $1 billion debt financing for the $1.82 billion 99-year lease of the Chicago Skyway won by Cintra and Macquarie on 27 October. When the deal closes it will be the biggest in the city's history. Moreover, with this kind of money on offer, there is an expectation that other municipal authorities around the US will begin to look at European-style PPP more seriously.

Despite the transaction's inherent appeal, some industry experts remain sceptical. "I don't know if the Chicago Skyway project will have any impact - it is unique," says Anne Rabin, managing director at Ambac. "And there are not a lot of assets out there, so it's hard to tell if it will change the market. This was an asset that was not a core responsibility for the City and it's unclear how many other assets there are like that nationally, so it is difficult to tell if we will see a rush to do more of these transactions."

But the same was said last year of the first US toll road PPP - the SR125 - and others are taking a more open-minded approach. "The deal may be a one-off, but it can also be relevant," says Jim Taylor, managing director of the Public Private Ventures Group at Bear Stearns. "The question is whether it is positive enough to provide a major breakthrough."

Although the Chicago Skyway project marks a US first for the privatisation of a toll bridge or road, it may be years before the impact of the deal comes to light.

More US PPP deals - should there be any - are not expected to hit the market for some time. However, in the short-term, Chicago Skyway may go some way in changing the way cities and municipal authorities approach their funding issues. According to industry sources, the municipal market continues to cry out for a serious alternative to the tax-exempt municipal bond market. Whether PPP is the right solution remains to be seen.

Chicago Skyway so far
On October 27, in a special session, the Chicago City Council voted to approve the 99-year lease to the Cintra-Macquarie Consortium. The voting was unanimous: a clear-cut 45 votes to 0. By all accounts, the deal was won on price, rather than fraught with the usual political intrigues of municipal deals.

The City is rumoured to have had a minimum figure of around $800 million in mind and the final price tag of $1.82 billion exceeded all expectation.

According to an industry source, what set the transaction apart was the distinct political isolation in the bidding process. Local lobbying teams and minority partners, the usual staple of municipal finance transactions, were dispensed with.

Earlier this year, two months after the March request for qualifications (RFQ) was declared, the City of Chicago drew up its short-list of five consortia qualified to bid. In addition to MIG-Cintra these included:

* 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.

Although the city's evaluation committee evaluated the teams' technical and financial qualifications, Goldman Sachs and Loop Capital Markets acted as financial advisors to the city. It is rumoured that Goldman Sachs will pocket some $10 million for its participation, while Loop Capital Markets will take home a more modest $300,000.

The potential bidders were asked to demonstrate that, in addition to maintaining the Skyway, they were able to come up with the purchase price. Under the terms of the client confidentiality agreement, details of the losing bids cannot be divulged until the deal is closed.

It is now apparent that the winning bid was 10% higher than the next bid. Under the bidding provisions, if the top two bids were in 10% of each other then another round of bidding would be required.

It is unclear what the actual deal specifics are because negotiation of the minutiae did not begin until the City Council had given its final approval. Moreover, those close to the deal continue to be bound by confidentiality clauses.

In addition, although BBVA, SCH, Depfa and Calyon are on the deal, a mandate has yet to be signed. The parties to the transaction will have until the 1 January 2005 transfer date in order to finalise the deal mechanics.

With long-dated project finance debt still difficult to raise in the US - even at the height of the US power boom, sponsors were looking for debt of less than 10 years - a mix of Australian equity and European debt is expected.

And symptomatic of a trans-Atlantic divide over long term PPP lending, US players seem to be staying away. According to one US project financier, "Have you seen the margins on the deal? I'm not touching that." Others baulk at the idea of getting back in to the long-term lending business. "I really can't see any reason why," states another US banker.

This may, however, be a diversion. The fact remains that many US banks remain averse to entering the municipal finance market, while more investment opportunities present themselves in other sectors. "Why involve yourself in a four- to five-year development process, when you could do 10 deals in two years. In addition, one of the problems in the US is that public private initiatives are seen as a national duty, or as a form of pro bono work," says Taylor.

With attitudes such as these, it is no wonder that European players are looking to take advantage of a nascent market. Though whether there are enough opportunities to have teams looking specifically at this market is unclear.

There seems to be little resistance to the fact that PPP in the US, if it does take off, will be driven by European banks. According to a New York-based banker, "No-one really cares about that anymore: it's not like the Japanese investors who came over in the 1980s. The attitude these days is that if they're dumb enough to spend that kind of money, it's up to them. If it ever becomes a real issue, the government will expropriate the assets."

However, whether foreign players have the stomach to hang on to these assets for the long-term is unclear. Certain US players are sceptical as to the Australian toll developer's long-term aims. "Macquarie didn't over-bid. But whether or nor they'll flip it [into a bond deal] is another matter," muses a US-based project financier.

A further rumour is that Macquarie may be looking to sell on its tax benefits, which it is not in a position to utilize. With its experience of the leveraged lease market, Macquarie should be well positioned to make the sale.

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 8 p.m. and 4 a.m.

Opened in 1959, the Chicago Skyway Toll Bridge System 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 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.

Balancing municipal budgets
On November 9, the Chicago mayor, Richard M. Daley, announced a balanced budget of $5.08 billion for the forthcoming year. Even with the $1.82 billion injection from the Chicago Skyway deal, Mayor Daley will have to raise moneys through the increase of fees, fines and taxes.

According to Daley, "Even with major spending cuts over the last 15 years, we still faced very difficult choices in preparing this budget. Do we cut services and set our city's progress back, or do we make the tough choice to find new revenue to keep our city moving forward?"

Part of the plan will be to use the proceeds of the lease transaction prudently. Accordingly, $463 million is being slated to retire Skyway debt, while $134 million will go someway to pay down the City's long-term debt. Moreover, the City intends to establish three funds that are expected to generate annual income in order to stave off the need to put up taxes.

It is not just Mayor Daley who is faced with difficult choices, but many municipal authorities in the US. "Many cities may look to replicate these deals; it's a great way for them to solve their issues," says Peter Glick, first vice president at ABN Amro.

Others are more brazen. According to one industry source, "Mayor Daley got $1.8 billion from that Skyway road, can you guess what the other mayors are thinking?"

Whatever other mayors may be thinking, political considerations should not be underestimated. "Whether or not these deals get done may come down to jobs. The operators may not need to keep the people; and there could be a huge battle with the unions," adds Glick.

The future of transportation projects
With Chicago Skyway about to close and another US deal already under its belt, it comes as no surprise that many believe Macquarie to have the edge. "If any opportunity arises, Macquarie can just go in and use the Chicago Skyway documents," says an industry source.

Last year, Macquarie closed its SR125 deal - a $900 million private sector financing of the San Diego Expressway. The deal marked a first for TIFIA (Transportation Infrastructure Finance and Innovation Act of 1998) funding to be used alongside private capital.

The TIFIA money accounted for some $140 million of the project's total cost, with the bulk coming from a $400 million construction loan from the leads. Sponsor equity, backed by letters of credit and injected at close, was $180 million. The balance came from the Federal government as a grant and San Diego Association of Governments, and goes toward the construction of the free sections. The bank debt has a tenor of 18.5 years, which includes a 3.5-year construction period, a four-year interest-only period, including an 18-month stabilization period, a partial cash sweep for three years, and then eight years with a full cash sweep.

Although no one is saying whether Skyway will pave the way for future transactions, there is a common consensus. While municipal authorities may have to consider long-term bank and bond financing for their infrastructure, they cannot rely solely on Australian equity and European debt. And the continued lack of domestic involvement in the two major transactions of the past year remains disconcerting.

Moreover, those wishing to steal a march on Macquarie will have to do their homework. "Because there is not one single national entity in the US that you can go to if you're interested in transportation infrastructure, you've got to build contacts at local level," says Taylor.

While this is certainly true, it looks like those in need of funds will start having to knock on doors. In May, Emil Frankel, a US assistant transportation secretary, told a Congressional subcommittee that: "[highway] congestion represents a significant and growing risk to our economy". And with traditional government funding sources being what they are, there will be little in the kitty to upgrade roads let alone build them.

Although the opportunities are apparent, it is too early to tell when these one-off transactions will become a trend.

Chicago Skyway Financial Structure ($m)
Financing: shareholder equity + senior bank debt

Sources of funds Applications of funds
Cintra equity: 500.5 Acquisition: 1,820 + 10
Macquarie equity: 409.5 Reserve account: 37
Debt (tranche A): 1,020 Transaction costs: 53
Total: 1,920 Total: 1,920

Bank loan underwritten by SCH, Calyon, BBVA and DEPFA
Use: acquisition (tranche A: $1,020 million), liquidity, facility (tranche B: $90 million), 2005-2008 investment programme (tranche C: $80 million)
Maturity: 9 years

Possible bond issue: refinancing of loan and partial reimbursement of shareholders contribution
Firm offers from monocline insurers                                                                                                                                 Preliminary investment grade rating from S&P and Moody's
Period: up to a maximum of 40-45 years from 2005, in several stages

The sale calendar
Milestone Date
Pre-qualification May 2004
Economic Disclosure Statement (EDS) 30 June
for affiliate companies
Non-binding indicative offer 8 July
Meeting with City/Site Visit 20 July
Due diligence July-August
Final comments on Concession Agreement 10 September
Receipt of offer forms and final concession 30 September contract
Incorporation and registration of new companies 4 October
and submission of new EDS
Final binding offer 14 October
Award 15 October
Signature of concession contract 27 October
Financial close End January
Transitory period February-May
(i.e. services provided by the City of Chicago)

No. of advisers/auditors managed: 18
No. of people involved: internal (15); external advisors (60)
Teams located in Madrid/Chicago/New York/Sydney
Bid budget for external advisors: $2.2 million