Sydney Airport: Max volumes

Macquarie's releveraging of the Sydney Airport concession has conclusively justified the faith that the asset's buyers showed in the sector in 2002. At the time, the price paid by Macquarie, through its various funds, as well as Ferrovial and Hochtief, was criticised as excessive. This took place in middle of the post-9/11 slump in aviation, during the collapse of a major carrier, and before equity interest in infrastructure had reached today's levels.

But this second refinancing, a A$4.3 billion ($3.4 billion) exercise, demonstrated the considerable debt appetite that exists for such assets, and allowed the sponsors to include several innovations in capital markets structuring. Among the highlights of this deal are that it maintains the airport's status as the largest issuer of corporate debt in Australia, and it makes the airport the largest private issuer of index-linked debt in Australia.

The financing combines a new bank facility, a combination of domestic medium term note (MTN) and capital indexed bond (CIB) facilities, and a new form of hybrid equity instrument. Of the roughly A$3.6 billion in senior debt, A$1.4 billion features a delayed draw element, another first, both in size and in structure, for the country's debt markets.

The first element of the deal is A$959 million in bank debt, whose lead arrangers are ABN Amro, BBVA, BNP Paribas, China Construction Bank, Commonwealth Bank of Australia, KfW-IPEX, Mizuho, Société Générale and Westpac. This debt, split into capital expenditure, working capital and liquidity facilities, achieved pricing and tenor inside an earlier 2004 bank deal, which itself had used capital markets business. The new debt lost three arrangers from the original deal, but gained an additional three – BBVA, China Construction and Mizuho.

The main element of the deal is the multi-tranche capital markets issue, which, broadly, breaks down into index-linked and medium-term notes (MTNs). Southern Cross Airports, the borrower, issued A$150 million in floating-rate MTNs due 2011, and priced at 20bp over BBSW, A$250 million in fixed-rate MTNs due 2011 with a coupon of 6.25%, and A$217 million in floating-rate MTNs due 2013, and priced at 23bp over BBSW, all of which featured a wrap from Ambac.

MBIA wrapped a further three tranches: A$198 million in fixed-rate capital indexed (inflation-linked) bonds due 2020 and with a 3.76% coupon, A$200 million in floating-rate 2021 MTNs priced at 31bp, and A$750 million in partly-paid floating-rate MTNs due 2022 and priced at 29bp. FSA wrapped a further A$659 million in partly-paid MTNs due 2027 and priced at 33bp, and Ambac wrapped a further A$300 million in fixed-rate capital indexed bonds due 2030 and with a coupon of 3.12%.

The highlight of the A$2.724 billion in senior capital markets debt, on which the underwriters were Commonwealth Bank of Australia, Dexia Credit Local, Goldman Sachs JB Were, Macquarie Bank and National Australia Bank were underwriters, is the partly paid element – the gap of ten months before drawdown allows the borrower to minimise refinancing risk, and is a genuine breakthrough in the product. Southern Cross faces looming MTN maturities in 2007, and the A$1.409 billion delayed draw tranches make facing this prospect less daunting.

The capital indexed bond element expands vastly the airport's existing line of inflation-proof securities. As one underwriter close to the process notes, "the inflation-linked market in Australia is not large, but there's some interest from asset swappers." While the Australian federal government's CIB programme has not been too heartily missed, the small number of issues that come to market tend to benefit from strong demand.

Co-ordinating the process, even with the benefit of earlier exercises in 2002 and 2004, was a formidable task. Ratings agencies had to maintain their investment grade assessments, even in the face of the higher leverage on the asset. All three came in with ratings at the same level, BBB/Baa2/BBB (S&P/Moody's/Fitch).

Moreover, the three separate monoline insurers, spread across a multitude of tranches, needed to work out their intercreditor issues, as well as coming to an agreement with the bank lenders. Macquarie managed a bid for the financing mandates that brought in offers from 50 institutions.

The refinancing included another hybrid equity offering with an apt acronym. The 2002 financing involved A$600 million in Floating IPO Exchangeable Reset Securities (FLIERs), a new type of convertible that allowed Macquarie more leverage at the holding company level in financing the purchase price.

But the FLIERs could be converted into equity at a 5% discount, featured restrictive terms and redeeming them was not straightforward. The new securities, known as Sydney Kingsford Smith Interest Earning Securities (or, yes, SKIES for short) were refinanced early through a capital reduction and special dividend mechanism, and holders of FLIERs were encouraged to reinvest in the new version.

The size of the issue – A$650 million – was slightly larger to deal with these complications and the securities priced on 22 November at 160bp over BBSW. The bookrunners for the issue, rated BBB-, were ABN Amro Rothschild and Macquarie. The two needed to close the sale close behind another hybrid deal – TICKETS – which funded Macquarie Airports' purchase of a stake in Brussels Airport.

The refinancing cements the progress that has been made in increasing passenger volumes and the yield on retail opportunities at the airport's two terminals. The operations have benefited from the continued balmy economic conditions, the growth in domestic travel and the regional tourism market. In particular, the bankruptcy of Ansett created an opportunity for the Virgin Blue low-cost carrier, which is now a major user of the domestic terminal, as well as a low-cost offering from Qantas, the national carrier.

On 27 February, Macquarie Airports, the Macquarie-managed vehicle with the largest stake in the airport, finally exercised its call option to buy Ferrovial's 20.9% stake in the airport. It paid A$919 million. While all of Australia's large airports have closed refinancings in the last 18 months, M&A activity might bring more holding company deals to market.

Southern Cross Airports Corporation
Status: Closed 18 December 2006
Size: A$4.3 billion ($3.4 billion)
Location: Sydney, New South Wales
Description: Refinancing of senior debt and mezzanine facilities for Australia's largest airport
Sponsors: Macquarie Airports, Hochtief, Ontario Teachers, Ferrovial (until 27 February)
Senior debt: $3.6 billion, in bonds and bank facilities
Bank arrangers: ABN Amro, BBVA, BNP Paribas, China Construction Bank, Commonwealth Bank of Australia, KfW-IPEX, Mizuho, Societe Generale and Westpac
Bond underwriters: Commonwealth Bank of Australia, Dexia Credit Local, Goldman Sachs JB Were, Macquarie Bank and National Australia Bank
Hybrid underwriters: ABN Amro Rothschild, Macquarie
Monolines: Ambac, FSA, MBIA
Borrower legal counsel: Mallesons Stephen Jaques
Lender legal counsel: Alllens Arthur Robinson