Case study
Financing the BAA Acquisition

Prof. Ian Giddy, New York University



The Company
BAA plc is engaged in the provision and management of airport facilities in the United Kingdom and overseas. It is also involved in airport-related property development, and duty-free retailing. The Company's London airports are Heathrow, Gatwick and Stansted. BAA owns and operates the Heathrow Express and Heathrow Connect rail links. Its three Scottish airports are Glasgow, Edinburgh and Aberdeen. BAA also owns or holds a controlling stake in Budapest, Naples and Southampton airports. The Company's wholly owned tax and duty-free business, World Duty Free plc, is engaged in airport retailing. Its property management company, BAA Lynton, manages property interests in and around the airports. The Company also has stakes in six Australian airports; airport management contracts to run airport retail in Boston, Pittsburgh and Baltimore/Washington, and manages Indianapolis Airport in the United States.

Ferrovial Acquisition
BAA, based in London, agreed in June 2006 to be acquired by Grupo Ferrovial SA, Spain's second-biggest builder, for 10.1 billion pounds ($18.6 billion).

Financing the Acquisition
The initial financing includes: 4.27 billion pounds of equity; a 4.72 billion pound senior facility; 373 million pounds of pay-in-kind ("PIK") notes; a 2 billion pound subordinated facility; and a 600 million pound perpetual PIK facility.
ADI intends to refinance the senior portion with "a longer-term financing structure based upon proven techniques adopted by other regulated companies", to "provide the medium and long-term financing required to support the investment needs of BAA."

Credit analysts and investors expect the Ferrovial-led consortium to borrow against the utility-like cash flows BAA enjoys at Heathrow, Gatwick and Stansted through a securitisation, but bondholders are not sure if their outstanding bonds will be bought back, or at what price. Aside from its convertible bonds, which are being bought back, BAA has 3 billion pounds and 2.5 billion euros (1.7 billion pounds) of bonds. With billions of pounds of future investment in British airports to fund, and the aviation regulator warning it will not factor in extra takeover costs when it caps BAA's airport charges, bondholders expect the consortium to tread carefully. The consortium's bid vehicle, Airport Development and Investment (ADI), said on Monday it would continue to evaluate "alternatives for the efficient long term financing of the business" over the next few months.

A spokeswoman for the consortium said it was negotiating with bondholders and the process was "fairly complex." However, an ABI spokeswoman said: "They haven't contacted us yet but we are expecting them to contact us in the next few months." Some takeovers, such as the private equity buyout of Denmark's ISS, have left bondholders smarting as their paper fell to "junk" while shareholders were bought out at a premium and bank loans were re-negotiated to reflect the higher risks.
<> The picture is clouded by "Spens clauses" in four of BAA's sterling bonds that could oblige them to buy the bonds back at a hefty premium. Ferrovial may not want to buy back its bonds but could restructure them into a new vehicle, in a similar way to "whole business securitisations" by the country's water companies. <>

But Joe Biernat, head of credit research at European Credit Management, said in a big refinancing such as this it was much easier to "redeem and refinance everything." After Ferrovial's interest first emerged earlier this year, Biernat led a campaign forcing BAA to insert "change of control" covenants into newly sold bonds, allowing investors to sell them back to the company if they fell to "junk". 
Bondholders, one way or the other, are likely to come out just fine here, and the only reason is because they have covenants," he said.



Questions

1. What do you believe Ferrovial should do about the existing BAA debt?
2. Could BAA's debt be refinanced using some for of securitisation? Explain.




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