In this market, any deal is news. But the BAA deal is big news. It is a complex refinancing involving the separation of regulated and non-regulated assets and the establishment of a single funding vehicle for BAA under which it can tap various sources of finance.
"I don’t think that I have ever been involved in a transaction presented with so many challenges," says Steve Curtis, partner at Clifford Chance, which advised the arranging banks. "There were so many constituencies that needed to agree: shareholders, existing bondholders, junior lenders, new senior lenders, rating agencies and pension trustee – which was an enormous undertaking even before you consider the impact of the credit markets, the price review for the London airports, the market investigation and other regulatory matters."
The deal involves the establishment of a £50 billion ($90.1 billion) multi-currency programme (BAA Funding) under which BAA has access to both the bank and bond markets. It has entailed a corporate reorganization of the company into separately financed designated and non-designated airports. The designated airports include Heathrow, Gatwick and Stansted and the non-designated airports are Edinburgh, Glasgow, Aberdeen and Southampton. The structure is designed to cope with the sale of one or more airports and if, as has been proposed, BAA is forced to sell Gatwick and Stansted the company will pay down debt in order to remain within its covenants.
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"As and when the bank facilities are replaced with bond facilities the cost savings will be realized"
Simon Dudley, Citi |
These facilities are being refinanced via a £7.15 billion bank facility. This comprises £4.4 billion of new bank facilities and £2.75 billion of new committed, undrawn facilities to fund working capital and planned investment projects. The MLAs are Banco Santander, BBVA, BNP Paribas, Caja Madrid, Calyon, Citi, HSBC, RBC and RBS. Five of these eight banks – BSCH, Calyon, Citi, HSBC and RBS – arranged the original £8.97 billion acquisition loan for the LBO of BAA by Ferrovial.
The designated airports are being additionally funded with a £440 million loan from the European Investment Bank and a £1.56 billion subordinated loan facility. $400 million of the existing subordinated debt has been paid down.
The non-designated airports are being refinanced via £1.25 billion of seven-year bank facilities – £1 billion of term loans and £255 million capex and working capital facilities. MLAs on these loans are Citi, Export Development Bank of Canada, HSH Nordbank, ICO, ING, La Caixa and RBS.
Secured corporate debt
Although the refinancing has been touted as the largest ever whole-business securitization, it seems curious to describe it as such when not a single new bond has been issued. "This is a secured corporate debt programme," says Simon Dudley, managing director at Citi, which co-arranged the deal with RBS. Perhaps the closest comparison is the Land Securities Capital Markets deal of 2004, which involved the property company incorporating bond and bank funding into a single structure to fund its business. It is no accident that many of the parties involved in BAA Funding were also involved in the LandSec deal. The two-tier investment-grade structure gives BAA substantial flexibility and gives the company five years’ breathing space. "The company has established a platform for programmatic issuance, allowing it to issue investment-grade paper at short notice as and when the bond market returns," says Curtis at Clifford Chance.
But a mix of bank and bond funding is rare in a whole-business securitization, because of the need to have separate floating charges over the bond and bank assets. Under the UK Enterprise Act, companies with more than £50 million of capital markets issuance are exempted from the abolition of administrative receivership. But bank debt is not exempt. The greater the bank debt in the structure, the greater the challenge for the structures. But in this case the likelihood of BAA, a regulated utility, entering receivership must be remote.
The bond element of the deal is the result of the transfer of the outstanding BAA bonds into the new BAA Funding structure. This process has been protracted given existing bondholder concerns about regulatory uncertainty (see "Why BAA’s refinancing can’t get off the ground", Euromoney, April 2007). Once the regulatory position became clear in March, negotiations with the Association of British Insurers (ABI) could proceed. Getting the existing bondholders to migrate to the new structure proved to be a time-consuming exercise fraught with difficulty but eventually 99% of bondholders by volume signed up.
Downgrade loomed
Although various bondholders considered and were in a position to exercise blocking stakes, the delay to the refinancing drew the threat of downgrade to the existing bonds ever closer (although the agencies themselves were prepared to exercise patience as the delay to the deal stretched on). Although the original timetable envisaged the deal being wrapped up before March 2008, existing bondholders were never going to get comfortable until the Civil Aviation Authority’s position on BAA price controls was clear.
Following protracted negotiation between the liability management desks of Citi and RBS and the ABI (and coupon pick-ups of 70 basis points for post-2002 bonds and 10bp for pre-2002 bonds), agreement was reached. The cost to the structure of getting the bondholders on side was £12 million to cover the early acceptance fee and £15 million for extra coupon payments.
"There was a lot of noise around existing bondholders but in the event they supported the proposal," says Richard Bartlett, head of corporate origination at RBS. Rumours were rife that BAA had been forced to buy back bonds from holders that were not happy but Dudley at Citi denies this. "BAA did not purchase any bonds," he states, adding: "It was not in anyone’s interests to see the existing bonds downgraded."
The migrated bonds proved to be the entire bond component of the deal, as no new bonds were issued. "When we started it was always the view that £4.5 billion would be executed in the bond markets," explains Dudley. "But in the latter stages of 2007 we and the sponsors arrived at the decision that we needed to have a component of bank financing in there."