BAA: BAA is walking a financial tightrope. The UK airport group avoided a fire sale of Gatwick last week after it rejected a bid by Manchester Airport, said to be at £1.4bn. BAA, and its majority owner Ferrovial, are thought to want something closer to Gatwick’s £1.56bn regulated asset value. But the need for a quick sale remains. And even that wouldn’t get BAA out of its financial hole.
BAA has bought itself some time by appealing the UK Competition Commission’s decision to break up the airports group. The appeal is in October, and a decision is expected by December. If it loses, it could appeal again to the UK’s Court of Appeal, giving it another four to six months.
But BAA won’t want to drag things out that long. For a start, if it lost a second appeal, there is a risk that the sale would be put in the hands of a trustee – hardly an attractive proposition. What’s more, BAA has to repay £1bn of debt by next March. But the company only generates about £400m - £500m in free cash flow a year.
In theory, BAA could issue bonds to fill the gap. But that doesn’t yet look like a realistic option. Debt investors are worried about a new idea from the government that it might appoint a “special administrator” to keep Heathrow, BAA’s flagship airport, open in the event that the company went bust.
IF the government followed this idea through – and it won’t complete its review until the autumn – this would be bad for creditors. Their ability to seize Heathrow if BAA couldn’t service its debt would be compromised. In the short term, a Gatwick sale would take the pressure off the immediate debt repayment. But a further £2.6bn is due to be repaid in 2011, including subordinated debt at the holding company level above BAA. Selling Stansted, another airport earmarked for sale by the competition watchdog, wouldn’t bridge the gap by a long shot.
If by then, the bond markets aren’t receptive to BAA, the shareholders may ultimately have to put in more equity. It’s not obvious the equity investors, which include the Singapore’s GIC, would be willing to pour yet more cash into an investment that has caused nothing but headaches in the last three years. Then Ferrovial would have to enter yet another game of brinkmanship, this time with BAA’s debtholders.
