Heathrow engulfed by debt
When BAA was taken over in 2006, there wasn’t much fuss or controversy whipped up about the deal.
Our most important airports – those vital to the prosperity of the South of England – were to fall under the sway of a Spanish construction and transport group, Ferrovial, in partnership with a Canadian manager of pension funds and an arm of the Singapore Government.
But it was – and is – par for the course for Britain’s largest and most famous businesses to come under the control of overseas interests.
So, true to form, the various regulators nodded it through.
However a few of us raised a concern about another characteristic of the takeover: the financing of the deal with a spectacular amount of borrowed money. BAA was bought by Ferrovial’s consortium at almost the peak of what was a bubble in debt markets, when it was possible to borrow enormous sums on advantageous terms.
Ferrovial and its partners borrowed £9bn, but hoped to replace that with cheaper finance in the subsequent two to four years.
Refinancing on advantageous terms looked a sure thing when they acquired BAA. Debt was cheap and plentiful, and financiers had become convinced that this deluge of cheap money would last forever.
Well, flood turned to drought last summer. Suddenly debt is neither easy to obtain nor cheap.
And although Ferrovial is not facing demands from its lenders for immediate repayment and has a year or two to sort itself out, it will not be easy to replace that £9bn with new loans on attractive terms.
There’s another headache for the Ferrovial gang of three.
In just a few days, the Civil Aviation Authority will announce new caps on what BAA’s airports can charge their customers. Barring a last minute change of heart by the regulator, BAA will be permitted to earn significantly less revenue per unit of invested capital than it had been doing – about a fifth less, on average.
So Ferrovial and its partners are seemingly in a painful vice.
The costs of financing operations and investment at Heathrow, Gatwick, Stansted and so on are turning out to be significantly greater than they hoped, due to the global crisis in money markets. But their ability to generate incremental revenues looks set to be significantly restricted.
How bad could it get for the Ferrovial troika?
Well the value of their investment in BAA could be severely impaired, perhaps almost wiped out.
There’s only a remote possibility that BAA would actually go bust – because however much customers moan about the experience of flying from its airports, they are top quality assets that would always find a buyer.
In the worst case where the consortium could not obtain sufficient finance from debt markets, they could raise capital by selling a lesser airport, such as Gatwick. They may indeed be obliged to do so, if an investigation into BAA’s virtual monopoly by the Competition Commission goes the wrong way for them.
Or, in extremis, the owners could sell a substantial stake to one of those deep-pocketed sovereign wealth funds – which are currently on a mission to own a few pillars of the western economies.
But it would be naïve to assume that all the risks of BAA’s agony are with Ferrovial and friends. They also fall on us. If our airports are less than best in class, that’s detrimental to our economic growth prospects.
We all have a powerful interest in seeing those airports transformed into world-leading hubs. They are in need of billions in investment, an estimated £10bn over the next decade.
In order to secure that investment, it is just possible that the CAA will relax the price controls it had been planning to impose on the airports.
But many would see that as bailing out Ferrovial and its partners for their foolishness in borrowing too much.
It’s a proper old mess. And the regulators must shoulder some of the responsibility, in permitting our airports to be engulfed by debt.