Financing for the A$5.588 billion ($3.19 billion) acquisition of Sydney Airports Corporation (SAC) by the Southern Cross consortium, by far and away the largest acquisition seen in the Australian market, is set to close in late September or early October with the launch of a bond program. The purchase price may have raised more than a few eyebrows in the Australian equity market, but deal arrangers are congratulating themselves following the largest debt package ever arranged for an Australian borrower.

Financing size is A$3.95 billion, of which A$2.45 billion is in the form of a senior secured bank debt facility and a A$1.5billion bridge facility The senior loan is rated BBB by S&P and Baa2 by Moody's. Barclays Capital, Commonwealth Bank of Australia (CBA), Royal Bank of Scotland and SG are joint lead underwriters and arrangers of the bank loans. The bridge facility is due to be taken out by the bond issue which will be led by Barclays, CBA, Macquarie and SG. The bond will be credit wrapped by MBIA. Macquarie takes the roles of sponsor, financial adviser, business adviser and equity arranger for the deal.

Banks were comfortable with the large volumes partly because of the substantial equity cushion. Over A$2.5 billion of equity supports the acquisition. 19 banks have now signed up for the syndicated loan (which was oversubscribed by 100%) joining the original four arrangers.

Equity investors were less at ease with the deal, ditching shares in Macquarie Airports, a listed vehicle which holds about 40% of the equity raised for the bid. As one would expect, Kerrie Mather, executive director at Macquarie Bank and managing director of Macquarie Airports (MAp), defends the buy. ?There was always likely to be sentiment in the market that the winning bidder had paid too much, although we didn't fully anticipate how strong the negative response would be,? Mather admits.

Southern Cross concedes that the Southern Cross consortium bid was substantially higher than the offers from the two other potential buyers, Sydney Gateway, backed by AMP and Deutsche Bank, and the ABN Amro-led Connect consortium (Southern Cross reportedly paid A$640 million more than Sydney Gateway, the next highest bid). ?But we believe we paid a fair price and indeed less than the airport was worth,? Mather says. She points out that Sydney Airports' most recent earnings of A$316 million have already outperformed earnings estimates contained in the MAp prospectus.

Mather says that Southern Cross conservatively estimated A$377 million in earnings next year, earnings growth based simply on recovery in an aviation industry hit hard by 9/11. ?We also used a fair EBITDA multiple on our earnings expectations which you'll find places us near the average multiple of other Australasian airports,? the executive says. Nor did Southern Cross make any great assumptions about cost savings. Mather says no synergy-related cost savings were factored into the equation. ?We did rely on the assumption of increasing economies of scale, specifically that airport traffic can grow with incremental costs but this is a commonly observed phenomenon in the airports business.?

This is the second time that SAC has come to the market ? the sale process was delayed last year following the 9/11 attacks. Mather notes that bids this year were lower than those under discussion last year, while the value of the airport, she argues, has actually increased. ?The business is actually worth more because of a change in regulatory framework which allows the airport to set its own fees. The collapse of Ansett Australia also allowed us to purchase Ansett's terminal at a favourable price and freed up 20% of the slots at Sydney, providing more room for international growth.?

For the three bidding consortia to each identify 51% Australian equity for such a large acquisition was always going to be a major challenge. One of the key deal innovations, which allowed Southern Cross to find additional sources of equity, was the use of a 10-year hybrid equity instrument called Fliers (Floating Rate IPO Exchangeable Reset Securities). Macquarie and UBS Warburg jointly underwrote the BBB- rated, $600 million issue.

According to another arranger source behind the deal, ?Fliers allowed us to leverage up and secure a larger bid price as the securities can be accounted for as Australian equity, thus helping us to fulfil the government requirement that the airport be 51% Australian-owned. Neither of the other bids utilized a similar structure.?

Since Southern Cross's success came at a higher cost than expected, market sources have speculated that the airport might be floated, perhaps five years hence. Mather scotches such rumours. ?All combined,? she says, ?Macquarie Funds hold over 50% of the airport, it doesn't really make sense for us as listed entities to be investing in another listed vehicle.?

The senior facilities are comprised of a A$2.25 billion tranche drawn to complete the acquisition and a A$200 million three-year capital expenditure facility for ongoing airport development. The drawn facilities are made up of a A$900 million three-year tranche and a A$1.350 billion five-year tranche with bullet maturities. Pricing is based on a ratings grid with the initial margin set at 97.5 bps over BBSY for the three-year tranche and 110 bps for the five-year tranche.

Sub-underwriters were invited for commitments of A$225 million of A$150 million, with upfront fees set at 85bps and 70bps respectively.

Security for the senior loan includes a charge over the airport assets, a fully funded six-month debt-service reserve and a first claim on cash flows. Covenants stipulated a cash flow coverage ratio of a minimum of 1.1 times and a gearing ratio maximum of 0.75 times.

Southern Cross Airports

Status: closed, in syndication

Description: Financing of Sydney Airports Corporation acquisition.

Sponsors: Commonwealth Bank of Australia, Hochtief Airport, Macquarie Bank

Equity: Macquarie Airports (40%), Ferrovial Aeropuertos (20%), Hochtief Airport (15%) Macquarie Airports Group (12%) Ontario Teachers' Fund (5%), Abbey National Treasury (5%). MTAA (2%), Macquarie Global Infrastructure Fund (1%)

Debt: A$1.5 billion bridge facility, A$2.45 billion syndicated bank debt facility.

Arrangers: (Bank debt): Barclays Capital, Commonwealth Bank of Australia, Royal Bank of Scotland and SG; (Bond): Barclays, CBA, Macquarie and SG; (Fliers): UBSW, Macquarie

Lawyers to the sponsors:

Blake Dawson Waldron

Lawyer to the lenders:

Allens Arthur Robinson