More on BAA
"IF YOU DRAW up a list of things that make a deal difficult, BAA had them all." So said Citigroup’s Philip Robert Tissot of Airport Development and Investment’s acquisition of BAA last year. The same could probably said of the proposed refinancing of the ADI acquisition, a massive £8 billion-plus securitization that had been due to be completed by the end of March. In addition to its unprecedented size, this securitization could be backed by both regulated and unregulated assets, will necessitate the takeout of existing debt, will need to achieve investment-grade ratings despite very high leverage and is faced with an uncertain outcome from both an Office of Fair Trading investigation into the structure of the UK airport industry and a regulatory price control review that will cover 2008 to 2013.
It has been clear for some time that the initial timetable for the deal – which envisaged everything being tied up in the first quarter of 2007 – was not going to hold. As early as January 15, BAA felt moved to issue a holding statement to reassure the market that the refinancing was making good progress. But at BAA’s results presentation on February 26, Ferrovial’s chief financial officer, Francisco Clemente, observed simply that the aim was to complete the deal "during 2007". A corporate securitization of this size in an untested asset class is a daunting task, and the addition of the regulatory review to the mix does nothing to help. Although the outcome of the review has never been regarded as a dealbreaker, it could turn out to be more of a headache than anyone expected.
Incorporating a company the size of BAA into Ferrovial was always going to be a tough job. The firm is now faced with three crucial milestones: to complete the regulatory review, complete the refinancing and complete the disposal of non-core assets. The last might turn out to be the most straightforward but the first and second are of critical importance. BAA faces a £9.5 billion capex spend over the next 10 years and cannot afford to be saddled with a weighted average cost of capital (WACC) that will make that impossible to achieve – the investment is the cornerstone on which it plans to develop BAA over the next two years. But the longer it takes for the regulatory position to become clear, the longer Ferrovial could be sitting on its substantial and unwanted debt pile. Sources close to the Spanish company indicate that it feels there is a window of opportunity for the refinancing to go ahead now and is frustrated by the lack of consensus.
In late March negotiations with existing bondholders (which will be conducted through the Association of British Insurers) were yet to start, and details of the process were still being finalized. According to BAA’s latest annual report the firm had gross debt outstanding of £6.2 billion ($12.2 billion) at March 31 2006, which includes four sterling bond issues: £300 million 11.75% bonds due in 2016, £250 million 8.5% bonds due in 2021, £200 million 6.375% bonds due in 2028 and £900 million bonds due in 2031. Some of this was issued through BAA’s £4.5 billion MTN programme. These bonds all carry upfront guarantees that need to be renegotiated for the refinancing to proceed. The plan has always been to migrate this debt into the securitization and it is clearly important that it remains investment grade. In any acquisition scenario it is crucial that existing bondholders are kept happy, and BAA certainly did not endear itself to some of its other bondholders early last year when it persuaded investors that there was no need for change-of-control language in a €2.85 billion bond issue to finance the acquisition of Budapest Airport, since BAA was not a takeover target. Five days later Ferrovial revealed its hand and the documentation on the bonds had to be changed retrospectively.
One reason for the delay in the refinancing could be the concern of the existing bondholders about the outcome of the regulatory review. Those pushing for the refinancing to go ahead would argue that as the UK’s Civil Aviation Authority (CAA) has stipulated the precise range in which it plans to place a revised WACC figure for the two airports, the arrangers of the refinancing are not exactly working in the dark. Sensitivities of the structure can be run at any point in that range and the outcome be reasonably clear. It is for this reason that those involved have been so sure that the review process would not pose substantial problems to the refinancing.
But there are suggestions that some constituencies feel that the outcome of the regulatory review should be more transparent before they commit themselves to the new securitization. If this view prevails the whole refinancing might be delayed until April 2008.
There is no suggestion that the outcome of the review could scupper the deal, just that some involved would prefer to know exactly what that outcome will be before going ahead. The bridge facilities run for five years so this would be feasible but far from desirable. One alternative would be to consider the refinancing of the capex requirement separately from that of the existing debt. However, this would clearly make a very complicated deal even more so. And time costs money. The initial margin on the senior acquisition debt is 100 basis points and on the junior debt 400bp – and most bridge facilities incorporate some form of margin step-up over time. These loans were well-oversubscribed (with commitments of £14 billion) last September but the arrangers are well aware that the clear exit strategy on the table was a big incentive for the senior lenders. And although the company can be reasonably confident of the present appetite for securitized infrastructure debt, things could be very different in a year’s time.