The transport system now rivals the weather as a topic of conversation among disgruntled Britons. So there was considerable interest in investor appetite when National Air Traffic Services (Nats), which runs air traffic control services in UK airspace, followed another transport-sector debutant, Network Rail, which maintains the UK rail infrastructure, to the bond markets this summer.
On August 11, Nats (En Route) issued £600 million ($960 million) of 5.25% guaranteed secured amortizing bonds due 2026.
In July, Network Rail launched a £4 billion Euro-commercial paper and US commercial paper programme.
Controversial life Like Network Rail, Nats has had a short and controversial life. It was created by a controversial PPP deal in 2001, which separated the Nats Group, which is part-owned by a consortium of commercial airlines, from the UK’s Civil Aviation Authority (CAA).
Nats was highly leveraged, with four banks committed to lending it £1.6 billion, intending to syndicate the debt. Three months after it took over air traffic control, the 9/11 attacks slashed air traffic volumes over the UK and therefore Nats’ revenues.
For over a year, Nats and its banks wrestled with a restructuring process that was completed on March 19 2003. The government and the British Airports Authority (BAA) put new equity into Nats, the banks accepted new covenants, and the CAA allowed Nats to increase its charges.
Correction In the July issue of Euromoney, an editing error led us to state incorrectly that Alfa Bank is a subsidiary of Austrian firm RZB. It is not. We would like to make it clear that Alfa Bank is Russian-owned and not a subsidiary of any foreign firm.
In the same issue, we stated in the awards for excellence that Eliezer Yones was the former CEO of Bank Hapoalim. In fact, though he has resigned that post, Yones remains acting CEO and president.”The conceptual changes meant persuading the banks that the project finance model that they’d used was the wrong model,” says Roddy McKean, a Lovells corporate partner and one of Nats’s legal advisers on the restructuring and bond issue. “That impacts on the bank covenants, the financial ratios, and what Nats can do without bank consent. It is more of a relationship-driven structure than one governed by stages and milestones.”
UBS worked on the restructuring, having taken over from Schroder Salomon Smith Barney as Nats’ financial adviser. The final stage of the restructuring was refinancing £600 million of bank debt with the August bond. Barclays Capital, also one of the lending banks, acted as bookrunner to the issue, with Abbey National Treasury Services, Banc of America Securities, and Bank of Scotland acting as joint lead managers and RBS as co-lead manager. MBIA wrapped the bonds.
During its financial restructuring, some critics called Nats “the Railtrack of the skies”, referring to the failed predecessor of Network Rail. But there are important differences. Nats has the exclusive licence to run UK air traffic control services for 30 years. It is not a public company. And air traffic is predicted to increase massively over the lifetime of Nats’s licence, giving it greater and greater revenues.
Although bond issues by highly regulated UK utilities provided a loose benchmark, that is another comparison that has to be treated carefully. “In some ways Nats is trying to move away from a utility model, because utilities have very fixed levels of demand,” says a banker who worked on the deal. “Nats doesn’t. It will want capital expenditure from time to time, and it needs to be flexible, so it will do a public bond. A water company will have 30-year debt and nothing but 30-year debt.”
With the national rail network operator and now its air traffic controller issuing bonds, some bankers point to other parts of Britain’s creaking transport network that could do the same. London mayor Ken Livingstone originally favoured bond finance to raise the money needed to modernize London Underground.
“Livingstone could raise billions of dollars in minutes if he had a UK guarantee,” says a securities banker. “The Paris Metro is regularly active in the bond market through the Paris Transport Authority.”
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