Optimism High For P3s, Despite Worsening Municipal Finances
US P3 transactions generally are not threatened by Chapter 9 municipal bankruptcies, and could actually help those municipalities that are facing bankruptcy due, in part, to large pension fund deficits. That was the consensus at a panel discussion on current developments in US infrastructure organized by the law firm Mayer Brown in New York Apr. 7. A total 100 P3 and infrastructure finance executives and attorneys attended the discussion.
Mayer Brown attorneys were also optimistic about the FAA Reauthorization and Reform Act of 2011, due to be signed by President Obama by the end of the year, which could re-ignite talks over deals to monetize US airports including Chicago’s Midway Airport.
Midway Airport occupies major hub status under the FAA’s current pilot airport privatization program.
While the US economy is still feeling the effects of high unemployment and burgeoning debt, the panel of attorneys was quick to note that municipal bankruptcies, which fall under Chapter 9 of the bankruptcy code, most likely would have minimal impact on P3 deals. That is largely due to the fact that unlike bankruptcies filed under Chapter 11 of the code, municipalities must voluntarily file for Chapter 9.
“There’s no provision for the liquidation of a municipality,” said Sean T. Scott, a partner at Mayer Brown and one of the panelists. “The only exit strategy for an investor is a combination of a scaled-back plan for payments, or a dismissal of the case by the bankruptcy court. Fears of municipal bankruptcy might be a bit overblown.”
Panelists also noted that some states, such as Illinois, do not permit their municipalities to file for bankruptcy. One of the reasons that Chicago monetized its parking facilities in 2008 was that it faced a fiscal crisis and did not have the option to declare bankruptcy.
Chicago entered into a 75-year agreement with Morgan Stanley’s infrastructure fund in 2008 to lease its street meter parking system in a deal worth USD1.15bn. Allianz Capital Partners and the Abu Dhabi Investment Authority (ADIA) are Morgan Stanley’s co-investors in the deal.
Pension Obligations Driving Necessity
Joseph Seliga, a partner at Mayer Brown and another of the panelists, said that increasing pension obligations could cause municipalities, especially those that are not allowed to declare bankruptcy, to look to do P3 deals.
He said that municipalities, unlike their private sector counterparts, are not allowed to restructure their pension obligation payments. “That’s certainly a question that’s been out there for a long time,” he said. He cited Orange County, California as an example of a municipality that is prohibited by the state to modify or terminate its pension obligations.
Panelists, however, agreed that municipal bankruptcy does pose some threat to P3 participants and their debt holders, especially in the case of a contracted deal.
Scott noted the South Bay Expressway bankruptcy in Southern California, and said that creditors only got one to two percent of the distribution of payouts. “If it’s purely a contract deal, people can be left holding the bag,” he said.
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