Crisis may force BAA airport sale

ADI, a Ferrovial subsidiary through which the Spanish took control of Heathrow and its six sister UK airports 15 months ago, today admitted that its year-long refinancing plans for BAA are in disarray.

Although the debt markets have for some days been alive with speculation that BAA was having difficulty rearranging its borrowing commitments, Ferrovial blamed the derailing of its plans on the regulatory settlement BAA is set to get covering its ongoing investment in Heathrow and Gatwick.

After a six-month investigation, the Competition Commission today said airports regulator the Civil Aviation Authority should grant BAA an 18% rise in take-off and landing charges at Heathrow next year and annual rises over the next five years of the Retail Prices Index rate of inflation plus 7.5%.

That would effectively allow an annual increase of more than 10% at current RPI levels for work including a new £4 billion Heathrow East terminal. The Commission said charges at Gatwick should rise 11% next year but be pegged to 0.5% less than RPI in future years.

However, BAA reacted with immediate anger, saying such a settlement would only allow it a cost of capital for its future investments at Heathrow and Gatwick of between 6.2% and 6.5%. That will put pressure on its finances and the amount of profit it might make on its investment, as the allowed rate over the past five years has been 7.75%.

"As we prepare to hand over Heathrow Terminal 5 on time and on budget, we are being rewarded with a regulatory settlement of unprecedented severity," said BAA chief executive Stephen Nelson. "We see little in the Commission's report which delivers the incentives to transform the airports. Nor do we believe the Commission recognises the scale and nature of the challenges we face in seeking to deliver a step change in the passenger experience."

However, the company also put out a statement to bondholders, admitting its refinancing plans have been " negatively affected" and are effectively on hold.

"These [Commission] proposals introduce a high degree of risk that the refinancing plans in the form developed over the last year might not be able to be implemented as currently envisaged," it said in a statement.

The BAA acquisition is weighing heavily on Ferrovial's finances, making up about half the Spanish construction group's e30 billion (£20.9 billion) debt mountain. The first big tranches need to be paid back or refinanced by 2011.

Speculation that Ferrovial is planning to cut BAA's debt by selling one of its three London airports was fuelled recently when Ferrovial finance director Nicolas Villen admitted the possibility of a sale had been factored into the restructuring.

Investors' reactions:

Francisco Salvador, analyst, Venture Finanzas: "Ferrovial has said it won't be able to refinance debt with these tariffs. But in our opinion, the solution could be found in thesale of some assets, which is what the market is hoping for. These could be sold at a good price."

JP Morgan analyst Robert Crimes: "We view the BAA response... as part of a strategy to try to increase the regulatory return. Other utilities have historically tried similar strategies. We do not believe Ferrovial and the banks have based the refinancing work on a higher level of return that that proposed."

For full details of the Competition Commission inquiry and details on how to respond to the investigation see today's report on the Civil Aviation Authority's website - click here