Gatwick up for grabs? Ferrovial stumbles on debt mountain at BAA, as airport chief quits

The prospect for more BAA asset sales is rising, including the possible sale of London Gatwick Airport, as the UK airport operator’s 61% owner, Grupo Ferrovial, struggles under rising debt servicing costs.

BAA CEO, Stephen Nelson, has announced his resignation after almost two turbulent years in the position, while anti-Third Heathrow Runway activists have dramatically stepped-up their campaign with a protest on the roof of the UK Parliament yesterday.

Against this backdrop, Ferrovial reported a 49% reduction in net profit in 2007, due to sharply higher servicing costs on its massive debt pile of EUR30 billion – particularly on debts related to the BAA acquisition.

Ferrovial, whose share price has halved in the past 12 months, is having troubles refinancing almost GBP10 billion in debt taken to purchase BAA.

The company aims to securitise BAA's debt against its airports in two investment grade parcels. These are, the regulated London airports, and the non-regulated UK airports.

However, the prospects for successfully completing the refinancing are severely challenged by the fragile state of capital markets and the collapse of the monoline insurance market.

Ferrovial’s refinancing plans, which it now aims to complete by mid-year, also depend on regulatory decisions concerning rates BAA can charge airlines at London Heathrow and Gatwick airports, with a decision expected in early Mar-08. No date has been set for the completion of its refinancing plans, and until it does so, will continue to pay punitive interest rates.

BAA's earnings are also a drag on the Spanish construction major, with the UK airport operator generating EUR216.8 million in losses during 2007. The figure is expected to increase to EUR300 million in losses in 2008, due to higher costs associated with the inauguration of its new Terminal 5, and the potential negative accounting impact of EUR1.2 billion from tax changes in the UK. EBITDA was well below market expectations, although capital expenditure was better than expected.

Ferrovial’s overall financing costs rose 45.5% year-on-year to EUR1.9 billion in 2007. Total debt stood at EUR30.26 billion at the end of 2007, a 7.8% year-on-year reduction (due to the appreciation of the euro against the pound). The cost of servicing debt now accounts for 50% of Ferrovial’s EBITDA.

Ferrovial's total revenue rose 18% year-on-year to EUR14.6 billion in 2007, while EBITDA increased 31% to EUR3.0 billion, as a result of the first time incorporation of BAA. Airports now account for 50% of Ferrovial's core earnings.

During 2007, Ferrovial divested assets to lower financing costs linked to BAA's purchase. In 2007, the group sold its 20.9% stake in Sydney Airport to a group led by Macquarie Airports, resulting in a capital gain of approximately EUR474.8 million. It also divested BAA's controlling stake in Budapest Airport Zrt to a unit of German construction company, Hochtief AG, for EUR1.9 billion and a capital gain of approximately EUR107 million.

The sale of BAA’s real estate unit has struck some difficulties, while the World Duty Free sale is nearing completion. If both are completed, as hoped in 1H08, up to EUR930 million could be raised to help retire debts.

Further BAA asset sales are highly probable, due to the market's weak appetite for Ferrovial’s debt restructure. Gatwick could soon join the growing pipeline of privatisation opportunities that includes Chicago Midway, Prague, French regionals and Lisbon airports.

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