A common way of extracting quick upside for airport owner/operators over the past five years has been to secure five or six year acquisition financing and then refinance as growth in EBITDA outstrips projections. During the boom years airport revenue generally grew at a multiple of GDP growth of the host country – but having a high beta to the underlying economy cuts both ways.

One of the keenest proponents of a quick refinancing has been Macquarie. However, while Macquarie has avoided the fate of its smaller rival Babcock & Brown, the infrastructure model it propagated has been effectively retired.

Listed satellite funds have been quick to sever management contracts with their parent or risk investor ire and endure share prices trading at a significant discount to net asset values. Macquarie Airports (MAp) has made such a move and severed its ties with Macquarie with a one-off payment that ends the vast flow of management fees to the parent. MAp is now keen to highlight its operational expertise over the levered aggressiveness of its previous manager.

"I would describe MAp as fitting somewhere in between the private equity-like investor and buy and hold operator," says Andrew Chambers, infrastructure analyst at Austock Securities. "On the one hand they did buy and sell some European airports, but on the other hand their strengths are as owner operators and it is in fact the operational side where their strengths and strategy are. They only buy assets whereby they can add operational value. In relation to their biggest asset (Sydney Airport) they are very much a buy and hold operator."

In an interim report on 30 June, MAp's NAV-equivalent share price was A$4.57 compared with its traded share price of A$2.31 – a huge discount of 49%. MAp has sought to make itself more attractive to shareholders by deleveraging and severing its management contract. MAp currently sits on a cash pile of around A$800 million following its $211 million sale in July of its 14.9% stake in Japan Airport Terminal (JAT), it has no debt at fund level following the conversion into equity of its Tradable Interest-bearing Convertible to Equity Trust Securities (TICkETS), and its first debt maturity at any of its airports is 2011 when a tranche is due at Sydney airport.

"MAp moved to eliminate most of its refinancing risk by using its large cash balance to repay the banks rather than pay big debt margins during the financial crisis," adds Chambers. "MAp needed to move away from Macquarie as investors did not like the growth for growth's sake model, did not like the fees, did not like the conflicts. The externally managed model is close to dead."

BAA woes

While MAp may be emerging from its most troubling times, Ferrovial-owned BAA, is still mired in uncertainty. On 19-20 October, BAA has a UK Competition Commission hearing where it will appeal the Commission's finding that it has to divest Stansted, Gatwick and one of its Scottish airports.

The Gatwick sale has been a long and tortuous process, but market rumours are that BAA is edging one bidder – Global Infrastructure Partners (GIP), a joint venture between Credit Suisse and General Electric – towards the £1.6 billion regulated asset value of the airport. GIP, the current owners of London City Airport, is supported by Credit Suisse, JPMorgan and RBC. One other bidder is still in the running – a Manchester Airports/Borealis supported by Dresdner Kleinwort and Barclays Capital.

"Valuation is going to be a very serious issue," says an aviation analyst. "There has been a valuation reduction for broadly two reasons: one, overall investor appetite has evaporated so we're not seeing airport assets being bid up to 30x Ebitda and two, passenger traffic has been dropping putting pressure on airport revenues and the valuation multiple they can command. For instance in the UK, passenger numbers have fallen by about 15% over the last 12 months."

Ferrovial (62%), Quebec's CDPQ (28%) and Singapore's GIC (10%) took BAA private for £10.26 billion in 2006 near the peak of the market and have fallen prey to a perfect storm of falling passenger numbers, a tightened bank market and a harsh Competition Commission ruling. When BAA was bought Gatwick had an enterprise value of around £2 billion, and the buying consortium expected to dispose of the asset following a negative Competition Commission ruling for about £3 billion.

BAA will hope that the Gatwick sale will be wrapped up – albeit at around half the price of its expectations in 2006 – before February 2010, because that is when a £1 billion partial repayment of the acquisition financing becomes due.

Data points

The Gatwick sale will provide a useful benchmark of how much valuations have altered. Given the thaw in lending and a nascent global economic recovery net asset values of airport operators have begun to pick up. "Recent market recovery is largely based on the cost of equity and debt falling again as well as upgrades to passenger numbers and earnings," says Chambers.

Already the consequences of scarce bank liquidity have been felt as banks focus on the more resilient pure-project financings rather than their riskier hybrid cousins. Aside from Gatwick, perhaps the most high profile failure has been the inability of the highest bidder for the Chicago Midway 99-year lease, a consortium of Citi Infrastructure Investors, John Hancock and Vancouver Airport Services, to raise sufficient financing for its $2.52 billion bid. As a result, the consortium lost its $126 million bid bond.

As banks seek more headroom for earnings the attachment point of debt to earnings multiples falls, and the multiples bid by operators falls because passenger numbers are falling creating downward pressure on asset valuation. Precisely how far valuations will fall will depend on how much asset values were bid up as a result of cheap debt, how quickly air traffic will recover, and the ability of bidders to sell their forecast projections to banks.

The International Air Transport Association (representing some 230 airlines carrying over 93% of worldwide air traffic) forecasts that in 2009 global passenger traffic will fall 3%, cargo 5%, and revenues by over 6% in 2009, producing an extremely challenging period for the industry. This follows growth of only 0.9% in 2008.

Beyond Croydon

Aside from Gatwick, the highest profile new airport deal is Pulkovo in Russia. In June a Fraport/VTB/Copelouzos consortium was appointed preferred bidder for the 30-year, Eu1.4 billion ($1.95 billion) concession, with an offer of 11.5% of airport turnover as a royalty to the St Petersburg government. There has been little news of the financing – the deal is highly challenging given international banks lack of appetite for non-export Russian risk. The project is supported by an airlines fee cashflow linked to the dollar rather than rouble, and will likely receive the support of the EBRD and IFC. VEB is likely to also participate heavily.

Beyond Gatwick and Pulkovo, things are quiet. The privatisation of Prague's Ruzyne airport has been indefinitely delayed. The Eu3.5 billion new Lisbon airport may finally tender in 2010 and, more concretely, a tender is likely to be launched before the end of 2009 for a new Eu1.1 billion airport on the Greek island of Crete. The Kastelli airport will handle 12 million passengers and replace the current airport at Iraklion. The EU has approved Eu200 million of subsidies, leaving a financing requirement of around Eu900 million.

A heavy legacy

Most active project banks will be keenly monitoring the airport financings they have on their books as most deals banked over the last four or five years are coming under some pressure. According to a consultant at a leading accountancy firm: "We are currently inundated with requests from banks to run independent audits on the models and forecasts of the existing deals in the ports and airports sector. Fundamentally, the long term economics of these projects is sound, but below any high profile restructurings we're likely to see a lot of debt deferral requests behind the scenes as operators grapple with debt service."

To ameliorate refinancing risk operators have already begun to use equity injections either to reduce the leverage and make banks more comfortable or take out debt altogether. In future it is possible that acquisition financings will be structured as longer-term multi-tranched deals or soft mini-perms featuring sweeps with a longer nominal tenor. Although the shareholders' IRR will be crippled by sweeps, at least they will not be forced to restructure at even more punitive terms.

The recent refinancing of Perth airport shows that the bank markets are still open to airport refinancings – but at a price. The ultimate shareholders of the operating company, Westralia Airports, are made up by a band of predominantly Australian infrastructure and pension funds. They have had to inject A$142 million in equity to secure debt of A$760 million to refinance a A$1 billion bridging loan signed in 2006. The deal comprises three- and five-year term loans, priced at 300bp over BBSY and 350bp, and a A$50 million three-year revolving credit. The mandated lead arrangers are ANZ, BBVA, Calyon, CBA, NAB, SMBC WestLB and Westpac.

In February 2009 Sydney Airport's shareholders made the decision to commit A$870 million equity to strengthen the balance sheet of the airport and replace debt maturing in September and November this year. After the shareholder contribution was made, Sydney Airport's proforma net senior debt was around A$4.5 billion, its net senior debt/EBITDA ratio will be lowered to under 7.5x. After the equity injection MAp's ownership interest in Sydney has increased to 74% on the back of a A$711 million contribution.

Winners and losers

As well as selling its stake in Japan Airport Terminal, increasing its stake at Sydney airport and separating from its parent, MAp has also been re-jigging its European assets.

In September MAp agreed to sell its 35.5% stake in Bristol Airport to Ontario Teachers' Pension Plan (OTPP) for £128 million ($212 million), a price 12.7% below the asset's valuation in June. In a role reversal, OTPP sold MAp an additional 3.9% of Copenhagen Airports for DKr570 million ($112 million).

The current environment favours long term buy-and-hold investors, ideally those that are cash-rich and not too reliant on leverage, such as the Ontario Teachers' Pension Fund. Although the climate should favour strategic investors and operator experts, over more private equity-like investors, those operators whose main business is one large airport and have subsequently expanded are capital constrained by falling revenue and high capex demands at their home airport. Within that group could be Fraport, Paris Airport and Vienna, among others.

Based on an underlying improvement in the global economy, S&P, in a European Airports' credit memo published earlier this year, stated: "We expect passenger traffic for the rated European airports to decline on average by 3%-5% in 2009 and to stabilise or modestly rebound in 2010. The degree and timing of the recovery in passenger traffic will probably depend, however, on the duration and depth of the current economic slowdown in the global economy and some airports may, we think, endure falls in traffic in 2010 as well."

Given that aviation fuel is in the crosshairs of green lobbyists and politicians it seems inevitable that there will be a widespread tax on aviation fuel in the future. This increases the long term volatility of revenue streams at airports that should lead to an increase in debt pricing for acquisitions and privatisations.

However in the medium term, as long as the global recovery remains on track, airports should see a bounce back. "EBITDA numbers were reduced from the economic slowdown, mostly on aeronautical side as volumes fell. However, retail earnings were stable and even growing given long term rental agreements and price step-ups," says Chambers.