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Cleared for Landing

In the thick of the credit crisis, Ferrovial pulls off a record refinancing.
Janet Kersnar, CFO Europe Magazine
November 3, 2008

August 18th is a date etched indelibly in Nicolás Villén Jiménez's memory. The CFO of Ferrovial will always remember it as the day earlier this year when he finally proved sceptics wrong. Announcing the completion of the Spanish construction-to-tollroad firm's massive £13.3 billion (€17.1 billion) debt refinancing — the largest ever of its kind, the company claims — he closed the book on a gruelling two-year saga, with twists and turns that regularly threw his plans into disarray. The CFO concedes that the credit crisis made this summer an unusual time to make a transaction such as this, but a lot about the refinancing of its takeover of UK airport operator BAA could be called unusual.

Involving more than a dozen banks, the transaction "ring-fenced" BAA's three regulated airports — Heathrow, Gatwick and Stansted — and migrated £4.5 billion of BAA's unsecured bonds and set up some £7 billion of loan and capex facilities to the new securitised structure. Secured against its unregulated airports — Edinburgh, Glasgow, Aberdeen and Southampton — were £1.3 billion of facilities. Other "positive outcomes," according to a report by Exane BNP Paribas, were £2.7 billion of undrawn capex credit lines, a £600m liquidity facility and, perhaps most important in today's tough funding conditions, a 30-basis-point reduction of the average cost of the refinancing, to 7.5%

A successful refinancing was never assured. As one follower of the deal quips, "If there was banana skin to slip on, they'd find it."

So how did Ferrovial, founded in the 1950s to serve Spain's national railway system, avoid becoming one of the biggest victims of the credit crisis? Was it confidence or bravado that led it to pile up so much debt? Some sceptics believe that executives at the €14.6 billion Madrid-based firm simply didn't know what they were getting into, and were swept up with the deal-making fever and cheap money of the time. Always keen to diversify globally and distance itself from highly cyclical construction markets in Spain, the company assured investors when it launched a hostile bid for BAA in early 2006 that the acquisition would provide solid, cash-generating assets. But soon after closing the deal, Ferrovial was reeling from terrorist threats at its new airports on the one side and fast-deteriorating credit conditions on the other, leaving the highly leveraged, £10 billion takeover — a price nearly 20% higher than its initial offer and at an EV/Ebitda multiple of some 16 times — under attack on numerous fronts, from regulators and bondholders to ratings agencies and, of course, the press.

Mayday, Mayday
"We were sailing in very volatile conditions, with the wind increasing and changing directions," is how Villén puts it. Though BAA and its new parent needed to replace expensive bridge financing — paying an initial margin of 100bp on the senior acquisition debt, with step-ups over time, and 400bp on the junior debt — action in the bond markets was "non-existent," Villén recalls. The company was also not helped by the subprime-related turmoil in financial institutions such as the monoline bond insurers, which would have been used more extensively to guarantee some new debt against default under normal circumstances.

Doubts began to surface, particularly among rating agencies and analysts, not so much as to whether Ferrovial could indeed pull off the refinancing — "It was too important for us not to," says Villén — but whether it could to come up with a credible Plan B.

It did. When markets started to turn for the worse in 2007, it was clear to the refinancing team that dealing with the fallout in addition to their regular, full-time jobs wasn't feasible. From a new base camp set up at Heathrow, a full-time team, comprising dozens of in-house and external advisers got to work. "We offered our best people," says Villén, a former engineer who was appointed Ferrovial's CFO in 1993.

Rather than relying on the initial plan for big bond issues, the refinancing team turned to banks, a syndication of nine for the regulated assets and five for the unregulated ones. It was a sign of the turbulent times that so many were needed, notes Villén, but getting the banks on side was relatively easy. "Because of the importance of the assets and the size of the transaction, we were always able to get the interest of the banks." A trickier proposition was how to structure the financing. "We had to think of a banking facility that would recreate a profile of different bonds and be able to obtain an investment grade, single-A rating," the CFO explains.

Contrary to what many external deal watchers believed, it wasn't the refinancing's complexity or market jitters that delayed the transaction's completion, says José Leo, a Ferrovial veteran who became CFO of BAA shortly after the takeover. Holding the deal's fate in its hands was the UK's Civil Aviation Authority (CAA). While BAA was negotiating with banks and bondholders, nothing could be finalised before the spring of this year, when the CAA planned to announce new airport passenger tariffs for Gatwick and Heathrow for the next five years, to 2013.

BAA's entire business plan relied on the results of CAA's review. All else was "completely irrelevant," says Leo, clearly as weary as other Ferrovial executives from defending the two-year period that elapsed between the acquisition and completion of the financing. "We could only [move after] we had a set of numbers blessed by the regulator," he explains. "And then the financial markets could have been going fantastically well, and it wouldn't have made any difference to us in terms of timing — probably in terms of outcome, but not in timing."


As it happened, the CAA published its review in April and was more generous than expected. Allowing tariffs to increase to 7.6% above inflation at Heathrow and 2% at Gatwick, the new plan is expected to help BAA pay for badly needed infrastructure improvements, such as new runways.

But that news alone wasn't be enough to win over BAA's existing bondholders, an understandably wary constituency. For the refinancing plan to move forward, at least 75% of bondholders needed to vote in favour of transferring their holdings into a new, investment-grade issuer, BAA Funding. Yet financial incentives for bondholders who agreed to accept the offer before the August deadline didn't gain much traction. And whether a £490m capital increase from BAA's Singaporean shareholder (reducing Ferrovial's stake in the company to 56% from 61%) in May helped confidence is still debated. Whatever the case, it was clear that Ferrovial might not complete the refinancing by the third quarter of this year, as it had pledged to the rating agencies.

Following protracted bondholder negotiations throughout the spring, Ferrovial made more concessions. In a conference call in July, Leo announced that BAA would guarantee any bonds with an expected maturity of 2018. Beyond that, the protection package included a range of strict financial and operational covenants. And addressing the trickle of information from BAA that had been irritating bondholders, Leo pledged improved reporting, with disclosures every six months, including "information on both historic and forward-looking ratios." As for financial incentives, in return for a yes vote, BAA offered pre-2002 issues coupons with an increase of 70 basis points and post-2002 issues a ten basis points increase.

The bondholders' vote in August, with 99% in favour of the group's proposal, was a "critical milestone" that left BAA and Ferrovial executives sighing with relief, says Leo, a former CFO of construction company Amey, Ferrovial's first major acquisition in the UK in 2003. Ferrovial and its two minority deal partners — Quebec's pension fund and GIC, Singapore's private equity arm — now had what they wanted: a £50 billion multicurrency programme giving BAA access to both bank debt and bond markets. Critically, Villén stresses, the package not only covers the £9 billion of debt Ferrovial piled up to beat out rival BAA bidder Goldman Sachs, but also gives it access to much-needed funding for improving its airports. "If you look at the next 15 years, BAA needs to invest a minimum of £1 billion annually, so it was essential for us to set up a framework that would allow us to do that," says Villén. "If we say that was our main objective, we have accomplished that."

Ferrovial has reason to boast. "Transactions of this nature have been done before, but not providing everything — the migration of the bonds, a backstop facility [arranged in early 2008], a co-ordinated facility with a clear structure between regulated and non-regulated assets," says Villén. "What you see here is probably the most complex transaction in the history of refinancing an acquisition. I think that is something that should be celebrated."

However, few in the corporate world — engrossed in the turmoil of financial markets — are in the mood for celebrations, leaving little doubt that Ferrovial is not in the clear just yet. The refinancing may be finalised, but the continued deterioration of the financial markets means Ferrovial's executives can't rest easy. In that sense, it's business as usual.

Plane Truth
Some observers say that it was no coincidence that the refinancing was completed a week before the UK's Competition Commission announced in August that BAA needed to sell at least one of its airports for the deal to win its approval. Had the refinancing taken place after that, investors could have forced Ferrovial to go through another major rebuilding exercise.

A few days after the announcement, Ferrovial volunteered to put Gatwick up for sale. Hardly an ideal time to be selling such an important asset, Ferrovial is expected to struggle to get the £3 billion that observers say it will seek, and which, in accordance with the securitisation's rules, will go towards paying down debt.

By selling Gatwick, Ferrovial will want to avoid adding to the negative publicity that its shabby, overstretched airports and the bungled opening of Heathrow's £4.3 billion Terminal 5 have already drawn. While the ferocity of the criticism initially caught Ferrovial's executives by surprise, it served to wake them up to the possibility that the deal's finances could unravel if public criticism began turning off investors. After a new chairman was appointed at BAA in 2007, numerous management changes have followed, culminating with the arrival of a new CEO in the spring of this year. "We were not focused 200% on fixing the [airports'] problems," admits Iñigo Meiras, a Ferrovial veteran who was appointed CEO of its airports division in May 2007. Now, Meiras says, everyone knows that "when you are the owner of Heathrow, which is one of the UK's key assets, you are in the press every day, especially if you are not delivering."

But could the vilification of BAA be more a matter of UK xenophobia than the incompetence of its new Spanish owners? "It doesn't matter for the passenger whether the company is Spanish, Singaporean, British or Chinese," says Meiras. "Forget about whether we're Spanish or not. We have to be focused on operations and for a period of time that was not the case." For that reason, he takes every opportunity to point out the intensity of the firm's new focus. During a recent presentation, for example, he explained to analysts how senior managers receive news flashes every 15 minutes, followed by daily reports, monitoring security procedures at each airport. Today, he claims, 98% of passengers get through security queues at Heathrow in less than five minutes.


But more potential PR nightmares are around the corner, if Michael O'Leary, CEO of low-cost carrier Ryanair, has his way. He's told the press that BAA will have a fight on its hands, particularly at Stansted, if it tries to increase the fees it charges airlines to help offset the cost of airport improvements. "Unlike Heathrow, Stansted is really driven towards the low-cost market," explains Manish Gupta, a director of the infrastructure advisory practice at Ernst & Young. The low-cost airlines "don't want fancy infrastructure. If they could fly out of a tent, they would." The struggle for BAA, he adds, is to meet passenger expectations while creating infrastructure "at an extremely low marginal cost."

At the moment, Villén has other issues on his mind. BAA needs to start replacing its bank debt with bonds. BAA should be "one of the main private issuers of bonds in the coming decade," the CFO says, starting "as soon as possible." With all the documentation ready, he says the company will jump into the market as soon as it sees a window of opportunity.

Will that be any time soon? In a conference call with asset managers early last month, Olek Keenan, an infrastructure analyst at JPMorgan, said that "the European high-yield bond market has been shut for 14 months." As for (marginally) higher-grade companies like BAA, "people want to wait because they feel the pricing is not advantageous and the first person who comes is going to pay a premium." The market will return, he predicts, but not until the beginning of 2009.

That's a little later than Villén would like. Given the heavy investments needed to upgrade its facilities, not to mention the rising costs racked up with bankers and bondholders under the current financial structure, it's easy to see why.

As for how he is holding up after negotiating a deal as all-encompassing as BAA's refinancing, Villén admits wearily that "you do feel some emptiness." In any case, he says that by the time August 18th rolled around, he — like rest of the refinancing team — was eagerly looking forward to a much-needed holiday. "I gave myself to the end of the month," he says. "It was probably not long enough."

Janet Kersnar is editor-in-chief at CFO Europe.






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