US infrastructure investors have had few opportunities to buy parking assets in the US to date. In 2006, a Macquarie-led consortium bought 192 Icon parking garages in New York from the company's founders and a Goldman Sachs-managed real estate fund. Chicago sold long-term leases of both its parking garages, in 2007, and its on-street parking in, 2008, in two separate sales to the same sponsor, Morgan Stanley Infrastructure Fund.

Now Los Angeles, California; Pittsburgh, Pennsylvania; Hartford, Connecticut; Las Vegas, Nevada; and Indianapolis, Indiana have issued requests for qualifications and expressions of interest to prospective bidders to lease municipal car parking systems. Other cities, including Detroit, are expected to follow suit.

J. Perry Offutt is a managing director and head of infrastructure investment banking for the Americas at Morgan Stanley, and is advising the cities of Pittsburgh and Indianapolis on their respective deals. He says that both of these deals have been in development for some time, "Parking is a logical asset class for municipalities to consider, given the benefit that a private operator can bring."

Soft targets, easy rate hikes

Cities may be looking to raise money, but the social and political implications of selling assets have made the process contentious. Still, according to one infrastructure investor, municipalities need to address deficits and the recession has galvanised political will. "Politically, parking assets are soft targets," he says.

"Think of the public and political backlash against the [proposed privatisation of the] Pennsylvania turnpike; or look what happened with Midway. Parking is seen as easy, where airports and roads are contentious. Airports and roads are regarded as necessities but people don't have to use parking lots. Also, parking companies don't have many employees, the assets can be neatly handled, and the deals should close quickly."

Morgan Stanley's Offutt says, "There are key lessons learned from a lot of the prior public-private partnerships that are helpful, not just prior parking PPPs. We are very focused on gradual rate increases, detailed operating standards, transition of services and clear enforcement provisions."

All of these provisions will play well with the public, if parking rates do not increase too steeply, but parking facilities improve. Sharp increases in parking rates are potentially problematic, though sponsors will depend on them to see an acceptable return on investment. This issue proved problematic for Chicago, which experienced a huge backlash after the metered parking deal. Critics questioned the justness of the increases, the implementation of the handover, and whether the city got a fair price.

The new wave of sales will include technological and operational developments which, Offutt says, "will improve services for customers by modernising equipment and can reduce traffic congestion. For example, introducing wireless space sensors in warm-climate locations to help drivers more efficiently find parking spaces."

Technological advances work both ways, and Offutt notes that the private sector participant may also benefit and "maximise revenue by reducing piggybacking," that is to say, replacing coin meters with digital meters, so that drivers do not benefit from the leftover time bought by the drivers parked in the space before them. The introduction of variable parking rates to address fluctuations in supply and demand has also been mooted as a way for sponsors to maximise revenue.

These deals could be a way for municipalities to cut their teeth on public-private partnerships, and provide the model for other asset classes, while guaranteeing upfront payments to the cities and stable revenue streams for the private sector. "All of the major funds are interested in these deals and are teaming up with operators," says one potential investor, "Morgan Stanley, JP Morgan, EQT, Macquarie, all of them. And companies like Cintra are keen, too."

Las Vegas received more than twenty expressions of interest from bidding consortiums for its parking assets. The RFQ stage has also closed for both the Indianapolis and Pittsburgh procurements, which attracted roughly 12 interested bidders with shortlisted teams will be asked to submit proposals imminently, and the Hartford proposals are due in June. Loop Capital and Scott Balice are advising on the LA deal. William Blair is advising the City of Hartford, and also formerly advised Chicago on its deals.

The cities are reluctant to divulge bidder details, saying confidentially agreements are already in play. They have been persuaded that the advantages of increased bids from keeping bid details under wraps will outweigh whatever later criticisms they field of a lack of transparency.

Lender lessons learned

While the equity may be eager, the debt providers are more cautious. Some infrastructure lenders do not believe that parking systems are genuinely infrastructure assets and have tightened lending restrictions on assets that are not core infrastructure, such as airport service providers and ports-related and stevedoring companies, which were changing hands at the same time as the Chicago deals. Other lenders have been stung by earlier parking deals.

The first Chicago parking deal was done in a much more robust debt market. Societe Generale led the bank debt financing for Morgan Stanley Infrastructure Fund and LAZ Parking's 99-year lease of the Chicago garages featured heavy leveraging and a fairly aggressive 20-year accreting swap. The debt was syndicated widely.

One lender familiar with the first deal says, "some traffic-related transactions including parking in 2006 and 2007 used accreting interest rate swaps, but we're unlikely to see that kind of additional leverage structure in the current environment."

The UK's M6 motorway and the Indiana toll road are the more notable users of accreting swaps, but a lender at one of the banks in the Chicago garages syndicate says that the accreting swap on this deal had to be broken, in part because it proved unsustainable.

Morgan Stanley Infrastructure Fund also acquired Chicago's on-street parking assets, a year later, for a reported $1.5 billion, which it funded entirely with equity. However, the sponsor funded the acquisition with a view to refinancing it with debt at a later date in a more welcoming market. Societe Generale provided the sponsor with an interest rate swap  for a potential debt financing when the deal closed, locking in early-2009 interest rates. Sources close to the sponsor suggest that the refinancing is imminent.

In 2006, DEPFA, with BBVA and Santander, provided a $350 million bank loan for the Macquarie-led acquisition of Icon Parking for $634 million. DEPFA struggled to syndicate the debt, and though in time it brought in a few other lenders including Bank of Ireland and WestLBs, the bulk of the debt remains on its balance sheet.

The debt was structured as a five-year bullet, and is due to reach maturity in 2011. A banker at one of the syndicate lenders says, "We're really concerned about the refinancing risk; there is some bad feeling in the market about this deal." Icon, unlike other recent deals, was a private-private sale, though its business includes garages on sites subject to long-term leases.

Despite negative feelings surrounding the Icon deal, the syndicate lender claims there is a certain irony, as the assets are performing very solidly, above expectations, and better than the Chicago garages. "In parking deals, one thing is often overlooked. New York City restricts the number of garages that can be built in Manhattan, so Icon has a 20% share of the market that can't be diluted."

The city of New York actively discourages drivers from coming into and parking in Manhattan through tolls on some of the bridges and tunnels, and a controlled parking system. Visiting drivers are therefore willing to pay inflated rates to park in the city, and the Icon lender says that the bulk of the revenues come from the minority of casual users. "The majority of the Icon spaces are reserved for monthly customers who get a reduced rate for paying upfront and in advance. It's like renting an apartment versus checking into a hotel in the city."

Compared to other cities, this kind of monopoly is unusual. "In Chicago for instance," he says, "new buildings are required by law to provide parking spaces for workers, which is killing demand for the private garages. Supply is less restricted." Morgan Stanley Infrastructure Fund's assets are not performing as well as expected, though revenues are said to be steady.

There is more of a restriction on supply in busy areas in large cities. Offutt notes that these considerations have been important in determining valuations for the forthcoming deals, "As with other long-term concession transactions, valuation will be driven based on discounting the cash flows to equity by the appropriate cost of capital," he says. He also believes that, "parking exhibits a number of infrastructure characteristics, including steady and predictable cash flows and though they are not true monopolies, they have monopolistic characteristics, especially for on-street metered spaces."

Parking assets may, however, be a soft reintroduction for infrastructure bank lenders, which have been marginalised in the few deals to close in recent months. With no construction risk, guaranteed revenues and smaller commitments, the deals may prove compelling to borrowers if the margins on loans reflect the risk profile accurately and can still be less expensive than equity.

The meter's running

But while there are some precedents for US parking monetisation, none of the five parking systems in the market is as big as any of the earlier deals. The large Chicago metered-parking deal included operation of more than 35,000 spaces and an upfront payment of up to $1.5 billion.

Comparatively, the Indianapolis deal only involves around 3,500 on-street spots and 14,000 garage spaces; parking revenue in 2008 for the metered spaces was $4.3 million. Pittsburgh's 11 garages and on-street system generated annual revenue of $25.8 million in the same year, and is expected to require a bigger upfront sum.

The LA assets are also substantially smaller than with previous deals, with ten garages comprising around 9,000 spaces and no metered spaces. The city is expecting to receive up to $200 million upfront. There have been so few deals to come to market at all in the US PPP space in the last couple of years that these municipalities and other procuring authorities have the upper hand in determining concession agreements, as equity is beginning to recover and seek out investment opportunities. There is a far bigger pool of equity than US deals to invest in, stress sell-side advisers.

Though asset valuations have been significantly constricted since Icon and the Chicago deals, there are more interested investors than there are deals, so the cities may require larger upfront sums, as well as structuring the concessions to control how parking rates are increased, while balancing the requirement for investor return.

Selling parking assets still requires some political effort, even if some cities see them as a soft target. The municipalities taking the lead in parking concessions for the most part have already exhibited pro-PPP tendencies, with mixed results. Chicago closed the Skyway road and the parking deals, and is still eager to lease Midway Airport, and Detroit has announced its airport privatisation plans before its parking. If debt markets are receptive, or equity is aggressive enough, their enthusiasm will have paid off.

Dependent on the size of the deals and which consortiums prove successful in the bidding processes, some of these deals could be executed as all-equity acquisitions. According to a number of lenders, banks are tracking these deals but few have yet lined up behind bidders, even though most are past the RFQ stages.