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NAER
22 November 2005
Effective Ways of Financing New Airports
Table of Contents
Section 1 Airports: A Very Financeable Asset
Section 2 Equity Financing Considerations
Section 3 Debt Financing Considerations
Section 4 Recent Examples
1
ALFREDO ZAMARRIEGO
Co-Head of European Transportation and Infrastructure Team
Airports: A Very Financeable AssetSection 1
A Very Financeable AssetAirports: A Very Financeable Asset
2
+ =
Strong Proven ResilienceAirports: A Very Financeable Asset
3
200
400
600
800
1,000
95 96 97 98 99 00 01 02 03 04 0540
50
60
70
80
Total Revenue Aero Revenue PAX
Heathrow(1)
Revenue (£ MM) PAX (MM)
9/11
Interesting Asset for Debt Providers…
Monopolistic characteristics
Regulated source of income
Diversified revenue streams
…And Also for Equity Providers
Potential growth of non-aeronautical activities
Room for operational and financial leverage
Note1. Figures calendarised to December year end from March year end
Source BAA Annual Report
Removal of Duty Free
Increasing Accepted Levels of DebtAirports: A Very Financeable Asset
4
10x
8x9x9x
0
2
4
6
8
10
12
London City Airport AdR BIAC Bristol Airport
Airport RefinancingsNet Debt / EBITDA Multiple (x)
1999 2003 2005 2005
BBB BBB+ BBB+ NR
Source Company Information, S&P
Significant Room for ManoeuvreAirports: A Very Financeable Asset
5
Schiphol
AdP Dublin
Birmingham
AdRoma
Zurich
BAA
CPH
BIAC
Newcastle
ManchesterANA
0
5
10
15
20
25
30
35
AA- A+ A A- BBB+ BBB
Airport Credit Ratios vs. Current Credit RatingLast Fiscal Year FFO / Total Debt (%)
Rating
Source Credit Ratios and Ratings for all except ANA from S&P Airport Report, 29-Jun-05; ANA Credit Ratio from 2004 Annual, Rating from Moody’sNote1. AdP actual rating of AA (negative outlook) due to implicit Government support. According to S&P this rating would not
fall below A+ on IPO hence A+ used as indicative rating
(1)
Equity Financing ConsiderationsSection 2
19%
29%
72%
0%
10%
20%
30%
40%
50%
60%
70%
80%
Airports Toll Roads MSCI Europe
Superior Performance From AirportsLast 12 Months
“Public” Market Gaining MomentumEquity Financing Considerations
6
Potential Forthcoming IPOs
Source FactSet as of 14-Oct-05
…Although Still Not Fully DevelopedEquity Financing Considerations
7
BAA55%
Fraport22%
Copenhagen9%
Vienna7%
Zurich4%
Venice3%
Market Cap by Quoted Company - EuropeAs of October 2005
Total: €17.1 Bn
9.7x
8.4x
7.0x
Low(Vienna)
Average High(CPH)
Average Public Valuations“On the Way Up” (AV / 2006E EBITDA)
Source Bloomberg as of 14-Oct-05 Source Morgan Stanley as of 14-Oct-05
“Private” Market Also Growing…Equity Financing Considerations
8
629
2,167
57
476
1,126
2,221
0
500
1,000
1,500
2,000
2,500
3,000
2000 2001 2002 2003 2004 2005
Equity Values of Selected European Airport Deals - 2000 to Date$ MM
Source Thomson Financial; Based on announced equity value of transaction adjusted for stake acquired
AdRHamburg
NewcastleLuton
East MidlandsBirmingham
Bristol
AdR
Belfast
BIACTBI
HochtiefCPH
…With a Significant Valuation PremiumEquity Financing Considerations
9
> 20x
12x - 14x
Avg. PrecedentTransactions
Budapest ExpectedMultiple
Acquisition MultiplesEV / EBITDA (x)
Potential Forthcoming Trades…
And G
rowin
g
Source Morgan Stanley
What Do the Key Buyers Look For?Equity Financing Considerations
10
Size Traffic
Complementarity Operational
Leverage Financial Leverage
Construction Potential Example
Traditional Airport Operators
Construction Players
Toll-road Operators
Infrastructure Funds
• Airports are increasingly attractive assets for equity capital markets; unique combination of stability and potential for growth
• Increasing pipeline of airport IPOs and capital markets readiness to finance significant expansion programmes (i.e. Fraport IPO, AdP expected IPO)
• Private market is also a very attractive option to maximise value, with a number of strategic partners being very interested in the construction angle
• Strategic partners will likely demand a controlling stake. However, they could also accept the Government to keep significant minority positions (e.g. BIAC)
What Are the Key Messages?Equity Financing Considerations
11
Debt Financing ConsiderationsSection 3
Very Good Current Market ConditionsDebt Financing Considerations
12
2.5
3.5
4.5
5.5
6.5
Jan-
00
Feb-0
1
Apr-0
2
Jun-
03
Aug-0
4
Oct-05
10yr German Bund Yield
European Government RatesYield (%) – Since 2000
Source Bloomberg as of 14-Oct-05 Source Bloomberg as of 14-Oct-05
0
50
100
150
200
250
Jan-
00
Feb-0
1
Apr-0
2
Jun-
03
Aug-0
4
Oct-05
AAA A BBBAA
Credit SpreadsSpread over Libor (Bps) – Since 2000
Yields at historical
lows
Credit spreads between rating categories have compressed dramatically
All Financing Alternatives Are AvailableDebt Financing Considerations
13
Unsecured Corporate Debt Structured Key Objective Bank Financing Corporate Bond Finance
Long Tenure
Reduced Level of Covenants
Ability to Pre-pay
Leverage Potential
Unsecured Corporate Debt: BondDebt Financing Considerations
14
•
• Possible to use as an ongoing source of financing for corporate purposes
• Flexibility (limited covenants)
• Currently very supportive market conditions
• Range of maturities available
• Large market capacity
• May not allow maximisation of debt quantum
• Prepayment difficult
Cons
Pros European Airport Examples
How Have the Bond Markets Changed?Debt Financing Considerations
15
• From 1998 to 1999 (date of introduction of the Euro), issuance volumes quadrupled have from c.€30 Bn to c.€120 Bn
• Market more receptive to issuance from lower down in the rating spectrum
– Proportion of issuance from A and BBB corporates now the largest segment
• Larger number of sectors being represented
• Average size larger
• Range of available maturities increasing
33
123 119
186
132
160
107
75
47%
38%
43%44%
61%
47%48%
37%
33%
41%
38%
33%
24%
19%
8%
12%
0
20
40
60
80
100
120
140
160
180
200
AAA AA A BBB
Composition of Corporate Eurobond MarketIssuance Volumes (€ Bn) – 1998 to Date
Source Bondware as of 14-Oct-05
Capital Market Structured DebtDebt Financing Considerations
16
•
• Typically higher leverage and lower cost of funds achievable thanks to
– Security package granted to investors
– Longer bond maturities matching life of concession / asset vs. traditional financing
• Complexity of structuring
• Limits flexibility going forward
• Best suited for individual projects /assets
Cons
Pros European Airport Examples
Spreads for Different Airport BondsDebt Financing Considerations
17
SchipholAA-2013
AdPA+ (AA)
2012
ADR AAA2013
ADR AAA2023
ADRBBB+2010
NewcastleBBB+2021 Birmingham
A-2021
BAAA+
2013
BAAA+
2028BAAA+
2021
AucklandA+
2009
DublinA
2011
0
20
40
60
80
100
120
140
0.0 2.5 5.0 7.5 10.0
Current Swap Spread of Relevant Airport BondsSpread over Swap Rate
Source Bloomberg for spreads as of 14-Oct-05; FFO / Interest from S&P Airport Report, 29-Jun-05
FFO / Gross Interest
Note1. AdP actual rating of AA (negative outlook) due to implicit Government support. According to S&P this rating would not
fall below A+ on IPO hence A+ used as indicative rating
(1)
What Do Debt Providers Like?Debt Financing Considerations
18
Large catchment area High Barriers to entry / local monopolistic characteristics
Competitive Positioning
Wide Exposure to Airlines
Low dependence on single airline? Exposure to LCC: “Double-edged sword”
Stable Passenger Mix High O&D base Balanced tourism/ business Stable and growing
Stable Revenue Mix Exposure to non-aeronautical activities Airport portfolio vs single asset Strong liquidity position
Favourable Regulation
• “S&P views the various frameworks as benign” …• ….. however, RAB frameworks perceived positively in
the context of major expansion programmes
• Security with fixed income characteristics which is:
– Equity accounting treatment
– Long dated (sometimes perpetual);
– Deeply subordinated
– Can allow cumulative and non-cumulative distributions
Examples
New Instruments? Hybrid CapitalDebt Financing Considerations
19
What is it? Pros
• ‘Equity credit’ from agencies (25 – 100%)
• Tax deductibility of distributions
• Non-dilutive financing
• Can optimise cost of capital
• Increasingly favourable Issuing conditions in Europe:
– Recently revised rating agency guidelines
– Greater clarity on accounting treatment
– Favourable pricing conditions
– Significant investor appetite in the European institutional markets
Case Study: Dong Hybrid FinancingDebt Financing Considerations
20
Transaction Summary• 50% equity credit from both agencies
• 100% equity treatment under IFRS
• Tax deductible coupons
• Non dilutive fixed income financing
• Highly successful transaction in the market– Three day road-show with two teams– 2.8x oversubscribed– Over €3.1 Bn of orders– Representation of over 200 ‘quality’ accounts– Strong aftermarket performance
Transaction Rationale:• DONG used the instrument to strengthen its balance
sheet in light of its M&A activities and capital management objectives
Summary Terms & Conditions
Issuer: DONG A/S
Maturity: 1,000 Yrs
Amount: € 1.1 bn
Ranking: Junior subordinated
Coupon: Yrs 1-10: 5.5% thereafter 3mE+320 bps
Coupon Deferral: At issuer’s option-cumulative through ACSM
Market: European Institutional
Structuring Advisor: Morgan Stanley
Investor Profile
Hybrid Transaction
Fund Managers 41%
Alternative Managers 14%
Pension/Insurance 16%
Banks 23%
Other 6%
• A bond which has either its principal or its coupon with an explicit link to a price inflation measure
– Effectively the Issuer pays a real rate plus a measure of inflation over the life of the bond
• Inflation linked market has significantly developed in recent years as inflation linked Government transactions have built the curve
• Main types are:
– Capital Indexed Bonds
– Interest Indexed Bonds
• Main issuers of these securities are entities who have revenues linked to inflation
New Instruments? Inflation Linked BondDebt Financing Considerations
21
What is it? Pros
• Provides a natural hedge to regulated revenue and cost bases
– Especially valuable to public / semi-public entities
• Also acts as a natural hedge to company’s business risk
Examples
Case Study: National GridDebt Financing Considerations
22
Transaction Rationale:• NG wanted inflation linked debt to provide a natural
hedge to their regulated revenue and cost base and also to take advantage of the technical supply / demand imbalance that existed in the market
Transaction Summary• Largest ever pure corporate index-linked issue to be
launched in the primary markets• All tranches priced at the tight end of spread talk• Morgan Stanley proposed and negotiated an
unprecedented use of the monoline insurance wrap (Ambac), rating bulk of issuance AAA
• Single order of £120MM from one institution highlighted depth of index-linked demand amongst the UK pension funds
• Morgan Stanley hedged the entire £300MM 2018 tranche on a sole basis
• Morgan Stanley acted as Gilt manager at the time of pricing, facilitating the closing out of the entire hedge position, across all tranches, and facilitated the entire flow of Gilts out of the investor base, ensuring seamless execution
Summary Terms & Conditions
Issuer: National Grid
Type RPI-Linked / LPI-Linked
Maturity: 18 Years / 28 Years
Amount: £200 MM / £40 M
Ranking: Senior
Coupon: 3.806% / 3.589%
Market: UK Institutional and Selected Europe Institutional
Structuring Advisor: Morgan Stanley
Investor Profile
RPI Tranche LPI Tranche
Insurance Co’s39%
PensionFunds12%
IMG’s44%
Other 5% IMG’s
21%
Insurance Co’s79%
• In general, airports are increasingly attractive assets for debt capital markets due to the stability of their cash flows
• Conditions in the debt markets are currently very attractive (liquidity, interest rates, credit spreads)
• Major airport expansion plans can be addressed with a combination of bank (loans) and capital market solutions (longer term bonds)
• More sophisticated debt products can also offer very attractive financing solutions (e.g. hybrid capital and inflation-linked bonds)
What Are the Key Messages?Debt Financing Considerations
23
Recent ExamplesSection 4
BAA Terminal 5 ExpansionRecent Examples
24
BAA Terminal 5 Expansion – Some FactsRecent Examples
25
• Construction of T5: a £4.2 Bn development project
– Planning Permission applied in 1993, approved in 1999
– Work on-site began in 2002, scheduled for completion in 2008
• Heathrow Capex of £3 Bn since 2003, of which c £2.4 Bn on T5, accounting for c. 90% of Heathrow's annual capex spend and c. 80% of BAA's group capex each year since the project began
• In addition to investing approx. £4.2 Bn to build T5:
– £450 MM being spent on airfield and related improvements to prepare for the A380
– £95 MM being spent on extension to T1 international departure lounge to double seating and space
– £300 MM already spent on Flightswitch to enable T1 to accommodate long-haul and short-haul (new immigration hall, premium check-in facility)
– £100 MM already spent on refurbishment of T3 departures lounge
BAA Expected Debt EvolutionRecent Examples
26
5.2
4.6
3.9
5.55.65.75.75.3
4.8
4.24.6
4.74.9 4.9
4.4
3.9
3.4
2.7
2.1
4.3
0.0
1.5
3.0
4.5
6.0
05 06E 07E 08E 09E 10E 11E 12E 13E 14E2.0
3.0
4.0
5.0
6.0
BAA Gross Debt ForecastMar Y/E Value (£ Bn) Gross Debt / EBITDA (x)
Source Morgan Stanley Equity Research
300250
200
900
513
400425424
200
0
100
200
300
400
500
600
700
800
900
1,000
'07 '08 '09 '13 '14 '16 '21 '28 '31
BAA Corporate Bonds – Total: £3.6 BnIssues Outstanding by Maturity (£ MM)
Opening of T5
Source BAA Annual ReportNote1. Convertible bonds2. Spread vs. £ Libor swap spreads3. Spread vs Euro swap rate
(1) (1)
+19 +43 +39(3) +45 +56 +68 +60Spread over
Swaps (bps): (2)+15 +25
27
Questions ?