Airport operator BAA managed to post an interim pre-tax loss of £545.7m last week.
That widened loss, in fact, is despite the debt-ridden airport operator growing its Regulatory Asset Base by 3.1 per cent in the period.
The Regulatory Asset Base is an important thing for BAA, since the fees the company is allowed to charge for using its biggest British airports, which are regulated by the UK’s Civil Aviation Authority and the Competition Commission, are based on the figure. RAB is basically a proxy value of the airport operator’s operating assets, upon which BAA earns a return. Put simply, the higher the RAB, the greater the level of airport fees that BAA is allowed to charge.
So what’s stunning about BAA’s recent results is just how badly it’s fared even as revenue per passenger and the RAB increased.
The RAB also comes into play with regards to BAA’s planned disposal of London’s Gatwick airport. The airport operator is under regulatory orders to break itself up and BAA was originally targeting the ludicrously lofty figure of about £2bn for Gatwick — well above the airport’s RAB of £1.6bn. As economic conditions worsened however, and suitable bidders mysteriously dropped out, that target has slowly slipped lower.
BAA is now aiming for as close to Gatwick’s RAB value as it can get.
However, even with the lower target, bids have so far been unsatisfactory for the airport operator . The last bidder, a consortium led by Manchester Airport Group and Borealis, dropped out after bidding £1.4bn. Before that, Credit Suisse’s Global Infrastructure Partners’ bid of £1.36bn was also rejected.
Here’s BAA CEO Colin Matthews on the subject, from the FT:
“There’s more than one party interested and talks are carrying on. If we can’t sell it, we won’t,” said Colin Matthews, chief executive, “but I hope and think we will [sell it].”
Mr Matthews pointed to a 41.6 per cent rise in cash from operations to £431.4m to show that BAA was not reliant on a sale of Gatwick proceeding to repay its 2010 debt maturities.
Right.
Only, for a glimpse into just how bad things might be for BAA look no further than to ratings agency Fitch, which on Tuesday affirmed its long-term ratings on BAA Funding Ltd.’s Class A and B bonds at A- and BBB, respectively.
But, while the agency agrees that BAA could pay down its debt due March 2010 without a sale of Gatwick, it does see problems further out in 2011:
In the short-term, Fitch expects BAA to repay a GBP1bn tranche, which matures in March 2010, under its GBP4.4bn refinancing facility. BAA can either use the proceeds of the London Gatwick disposal, raise new debt by issuing bonds, or use internal cashflows (post-interest cashflow of GBP600m-700m p.a.) plus its largely undrawn GBP2.7bn five-year capex facility. Should the first two options prove unfeasible, and despite the adverse economic conditions, BAA would have enough cash to meet the March 2010 repayment under the third option. Fitch notes that BAA is not reliant on the imminent disposal of Gatwick to repay the 2010 amortisation. Even if the net proceeds received from the Gatwick sale are as low as around 50% of Gatwick’s regulatory asset base, BAA Funding would still be in compliance with its post-disposal leverage covenant limits.
Depending on Gatwick proceeds used to reduce the refinancing facility debt across its different maturity buckets, a second GBP1bn amortisation is also due in March 2011. Fitch estimates that by this time, BAA will probably not be able to use operational cash flows and draw on the remaining capex facility but will likely need to tap the bond markets or seek shareholder support. Failure to raise funds by mid-2010 would put the ratings under pressure.
Related links:
Breaking up BAA: What price an airport? – FT Alphaville
BAA schadenfreude – FT Alphaville
(Another) deal of the day: London Gatwick – FT Alphaville
London Gatwick, the saga continues – FT Alphaville