The British Airport Authority (BAA), which is owned by Grupo Ferrovial, said it is considering a combination of bank and bond financing.
By pursuing these options, BAA thinks it could increase the chances of a successful and timely completion of its planned refinancing considering the current challenges in the debt capital markets.
The group said that, over time, the funding for its designated assets - Heathrow, Gatwick, Stansted airports and Heathrow Express - will be raised primarily through bonds issued in the capital markets.
The initial financing of the group comprised GBP4.27 billion ($8.43 billion) of equity; a GBP4.72 billion senior facility; GBP373 million pounds of pay-in-kind notes; a GBP2 billion subordinated facility; and a GBP600 million pound perpetual PIK facility.
As part of the current refinancing proposal, BAA intends to migrate the existing bondholders into an investment grade, ring-fenced securitization structure backed by BAA's designated assets.
"It is possible that BAA will be able to complete the structure for the securitization prior to the credit markets recovering. In this scenario, the existing bonds would be transferred into the new structure and granted security over the assets," Merrill Lynch analysts said. These bonds will likely rank pari passu with the existing security granted over part of the assets.
BAA said it will commence a formal consultation with leading bondholders led by the Association of British Insurers (ABI). This move was done to migrate BAA's existing euro and sterling bonds into the proposed structure as well as to further update bondholders.
"On balance, although it is possible that one investor may have built a single position in one of the bonds only and is therefore likely to negotiate hard for windfall prepayment penalties, for most bonds we would expect investors to agree to transfer into the securitization in return for security over the assets, mark-to-market gains for their total BAA position and an investment grade rating," Merrill analysts said.
For bondholders betting on receiving their payments early or to make whole, the prospect of making mark to market gains following the restructuring might act as a bigger incentive to support the proposed refinancing. At the moment, BAA's five-year CDS is about 405 basis points.
Meanwhile, single-A and triple-B rated whole business securitization spreads for Anglian Water are currently trading at 175 basis points to 245 basis points over gilts, offering bondholders an upside if the BAA securitization moves as planned, according to Merrill Lynch.
It's likely that BAA is seeking to structure a transaction with no new debt issued because, in the current market environment, Ferrovial has had the opportunity to negotiate a deal with the existing bondholders and to avoid paying the lender at a price equivalent to the yield of the underlying benchmark bond as dictated by the spens clause in this particular structure. Merrill Lynch estimated these fees would cost approximately GBP400 million.
"BAA will need to ensure that it has continued access to the capital markets as it will need to finance significant capex into the future," Merrill analysts said. "To do so on favorable terms, BAA will benefit from not causing the credit ratings to fall to junk status."
The development of the proposed financing structure and discussions with key transaction parties, including rating agencies and the banks providing facilities for both financings, are in advance stages.
BAA wants to implement both financings as soon as possible, and currently expects to initiate the financings in 2Q08 and complete them by early 3Q08.
Grupo Ferrovial said that a separate bank debt refinancing of other U.K. airports, outside of the designated airport group, is also planned.
"The proceeds of both the designated and non-designated financings will allow the group to make the requisite repayments of its acquisition facilities," Grupo Ferrovial said in a statement last week. "Both processes will conclude simultaneously."
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