Economy may downsize infrastructure privatizations

By Karen Pierog - Analysis

CHICAGO (Reuters) - The demise of a deal to lease Chicago's Midway Airport to private operators may put the brakes on the privatization of bigger and high-profile government assets as the global recession eats into the availability of financing.

Financing for future deals may become more selective even as increasing numbers of state and local governments turn to leasing their assets to bolster coffers diminished by the sagging economy.

"It's very, very much deal specific," said Dana Levenson, managing director and head of North American infrastructure banking at Royal Bank of Scotland.

"Clearly this is a setback, but a slight setback for the industry," he added, referring to the failed Midway deal.

The mega deal for Midway Airport was to produce a $2.52 billion upfront payment to Chicago in exchange for a 99-year lease. But Chicago Chief Financial Officer Gene Saffold said on Monday that the inability of the winning lease bidder, Midway Investment and Development Company, to secure financing killed the deal.

The company is made up of Citigroup (C.N) unit Citi Infrastructure Investors, YVR Airport Services Ltd and John Hancock Life Insurance Company.

With the Midway deal's high cost and the airport's limited potential for increased revenue, the death of the transaction was not surprising, said H. Woods Bowman, professor of public service at DePaul University in Chicago.

"I don't see much of a future for such deals because the typical deal is highly leveraged, and credit on that scale will be hard to come by for a long time," he said. "There is probably a niche for low-leverage, low-risk projects, however."

Levenson, a former Chicago CFO who worked on the city's first lease deal for the Skyway toll bridge, said deals will continue to take place for smaller assets such as those involving parking facilities.

"Those more prosaic assets are more financeable," he said.

For Chicago, which is struggling with budget problems, the Midway deal marks the first privatization not to be consummated after a successful bidding process.

Since the $1.83 billion Skyway deal in 2005, the city has leased other assets, including parking garages and parking meters, in exchange for upfront payments. Those funds allowed Chicago to pay off the leased assets' outstanding debt, fund specific programs and provide a financial cushion for the city budget.

Saffold said the city was not giving up on a deal for Midway.

"We continue to believe that a long-term lease of Midway Airport would provide great benefit to Chicago taxpayers and residents -- including providing hundreds of millions to invest in city infrastructure," he said on Monday, adding the city retains the right to rebid the Midway deal when financial market conditions improve.

The city also retains $126 million in earnest money from the failed Midway deal with $80 million set aside to help balance the city's budget this year and next, Saffold said.

(Reporting by Karen Pierog; Editing by Padraic Cassidy)