Flight Departures
Booming tourist and business travel is putting a strain on runway
capacity and landing and takeoff slots at airports across Europe.
And as the airport operators scramble to keep up with the growing
passenger volume, they are turning to new financing techniques to
bring in the large amounts of capital needed.
There is a backlog of airports waiting to be privatised, and over the next few years many billions of Euros will be raised from retail and institutional investors via Initial Public Offerings. Parallel with this IPO pipeline there is also a merger & acquisition (M&A) wave in progress, with airport operators diversifying their portfolios, and private equity players looking for investment opportunities.
But analysts note that once they have raised fresh equity, the privatised entities are going to dramatically increase their leverage, as they expand airport capacity, add more retail space, and pursue more aggressive profit targets than their previous public sector owners.
On the debt side there are already more sophisticated structures being used, other than traditional full recourse corporate loans to airport operators. One important trend is a move towards funding in the debt capital markets, and bond offerings are set to become more common.
Already the Amsterdam based Schiphol Group does much of its financing via a Euro Medium Term Note (EMTN) programme, and regional airports have also been tapping the bond markets. Birmingham International Airport, rated single A by S&P, launched a bond offering late last year. And in February of this year Aer Rianta, the Irish operator, sold Eu250 million worth of 10-year fixed rate bonds.
Nonetheless there are challenges facing airports which wishes to issue project bonds, since relatively short tenors are typically on offer in the Euromarkets. Demand for ten year paper is generally strong, but further out along the yield curve placing paper becomes much more difficult.
In addition, some continental European airport operators remain quite conservative, and many remain reluctant to get a credit rating. Their reluctance will not be helped by the fact that overall credit quality in the sector is probably on a downward trend. As more aggressive private sector players get involved in operating airports, and M&A activity picks up, airport operators are becoming more highly leveraged. Consequently, just at the time that they are being pressed to get credit ratings they may be dissuaded from doing so because their credit quality may be deteriorating.
The lack of ratings will have to be addressed before the airport sector can take full advantage of the bond markets. But even where banks are providing the financing the structures are becoming more complex.
?There is still a reliance upon traditional bank finance, but we are starting to see more financing done off balance sheet,? says Jan Plantagie, associate director at Standard & Poor's in London. ?For example, the recent acquisition of East Midlands & Bournemouth Airports by Manchester Airport was done with an off balance sheet finance structure from a bank loan. More and more deals are getting done on a non-recourse basis, and sentiment is very positive at the moment on the part of the banks, who have a security package over the airport assets.?
The East Midlands & Bournemouth acquisition loan was made to Crow Aerodromes, a special purpose vehicle (SPV) created by Manchester Airport for the acquisition. The transaction is taking a privately owned airport back into public ownership, since the seller of its stake was National Express, while Manchester Airport is owned 55% by Manchester City Council and the balance by nine other Greater Manchester district councils.
Royal Bank of Scotland arranged £120 million worth of 15-year term loans to Crow Aerodromes. The £90 million senior loan has a grace period of two years, and is repaid semi-annually. There is also a £15 million subordinated loan with an 11 year grace period, plus a £15 million working capital loan, also with an 11 year grace period. The senior loan was priced at Libor plus 175 basis points.
This was a fairly typical financing for the airport sector, but the financing of the acquisition of Bristol International Airport in January was more unusual. Bristol was acquired by the Macquarie Global Infrastucture Fund together with Cintra, having seen off competition from other bidders including Copenhagen Airport. Cintra is a subsidiary of the Spanish group Ferrovial, which is Spain's leading operator of international airports, including facilities in the United States, Mexico and Chile.
The acquisition was made via an SPV called Tidefast Ltd, and Abbey National Treasury Services arranged a £218 million loan with a bullet principal repayment.
?The Bristol International acquisition loan had a quite interesting feature because it was done via a five year bank loan which has the form of a mini-perm,? explains Plantagie at S&P. ?Mini-perms are often seen in the United States, and are often used to cover the construction period. There will be a need to refinance the Bristol loan after five years, and there is a chance that it will go through the bond market.?
But he notes that getting long term finance can still be a challenge in Europe. ?Airport assets are long term assets, but so far the Eurobond markets have been offering ten year tenors, but the market is developing long term finance, which match the kind of assets that airports have,? says Plantagie, pointing to Portugal where a wrapped toll road deal has attracted 26-year financing.
Insurers and monolines have already stepped up on airport transactions in Australia and in Latin America. Adelaide Airport in Australia had a bond offering wrapped late last year, with MBIA coming in to wrap the bonds to triple A level.
IPOs
The next big privatisation being awaited in Europe is that of Amsterdam Schiphol Airport, which some analysts forecast will be valued at around Eu4 billion. At present the Dutch government owns a 75.8% stake. It still hopes to get this done in the autumn, though weak equity markets are a problem. The share price of Fraport AG, the operator of Frankfurt Airport, has fallen from its June offer price of Eu35, and in late July was trading around the Eu30 level.
Schiphol certainly needs plenty of fresh capital. The airport is spending $123 million on a fifth runway that is scheduled to open in 2003, and last year announced a $1.2 billion investment program which will start with a new pier for small and medium sized aircraft. The project also includes the construction of an overhead automated people mover connected to the main terminal.
The Schiphol group has said that the stock flotation will give it better access to the capital market, and make it easier to take part in alliances and acquire stakes in other airports. Schiphol has entered the Pantares alliance with Fraport, which will manage retail outlets and develop logistics operations at key hubs. Pantares is studying opportunities in more than one hundred forthcoming privatisation projects worldwide.
?With equity markets in such a poor state, the timetable for IPOs is not very clear, but we are still hoping to see an equity offering from Amsterdam Schiphol this year,? comments Andrew Lobbenberg, equity analyst at JP Morgan Chase in London. And in 2002 and 2003 the list of potential IPOs includes Milan, Brussels, and Aeroports de Paris. ?There are also plenty of M&A possibilities, since there are still a few remaining regional airports in the UK which have not yet been sold, and a large number of regional airports in countries such as Italy, France and Germany which are likely to be sold off,? says Lobbenberg.
In addition to the raising of equity via IPOs, Lobbenberg anticipates greater use of the debt capital markets. ?European airports have large expansion plans,? he says. ?For example BAA need £2 billion just to build Terminal Five, while Frankfurt has a DM5 billion expansion programme, so there will certainly be a bigger role for bond offerings from the airport sector.?
?Airport developments such as new runways or terminals with a long term life could be better financed by a bond with a long term repayment profile, so there is an attraction to bond offerings, especially if you are able to fix the interest rate,? says Robert Phillips, partner at CMS Cameron McKenna.
?We are seeing long term financing in relation to project finance in the UK, so it should be applicable to the airport sector,? says Phillips. ?Many PPP deals are running on 20 to 30 year term finance, and some bond financings have been done without credit wraps, such as Greenwich Hospital PFI with the Prudential.?
?Some road schemes are now proposed without a wrap, and you obviously don't get the same rating, but the critical issue is to consider the overall cost of finance. But particularly where it is the first or second deal of its kind, and you are trying get the market interested, going for a wrap may be sensible.?
But even if very long tenors are still something of a challenge, the overall level of interest in the airport sector is currently very high, whether from infrastructure funds on the private equity side, or commercial banks on the debt side.
?The banks are comfortable with the sector,? says Richard Tollis, director at PricewaterhouseCoopers. ?Generally people like airports because they show strong growth, so you are looking at a relatively solid asset. But I think that as the private sector gets more involved you are going to see more use of the bond markets.?
He views the PPP at Newcastle Airport as a promising model which may be applicable elsewhere. Newcastle Airport was 100% owned by seven local authorities, and they now own 51%. There is also a 15 year Technical Services Agreement with Copenhagen Airports. However there may be pressure for local authorities to hold a stake of less than 51%, otherwise borrowings will be counted under the Public Sector Borrowing Requirement.
?The PPP at Newcastle is significant not only for the UK but also continental Europe, where local authorities are keen to be involved in the development of an airport, but also see a role for the private sector,? says Tollis.
?The size of the equity stake sold will vary from case to case,? Tollis continues. ?The trick is to come up with a good balance between the public and private sector, and you might see local authorities with minority stakes. But you need to look beyond what the equity stakes are, at matters such as board structure, voting rights, and the structuring of management or support contracts. All those features will add up to an overall position of influence.?
Airlines putting up cash
Another source of financing may be the airlines themselves. It is quite common in the United States for airlines to help finance terminals, but thus far it has been very much the exception in Europe. However, both Lufthansa and Aeroflot are currently involved in financing and building new terminals.
Lufthansa is stepping up its operations at Munich, whose importance as a second hub is growing, especially since Lufthansa is unhappy with a night flying ban which will take effect at Frankfurt from 2006. Lufthansa is investing Eu378 million in the construction of a second terminal at Munich, in association with the operator Flughafen Munchen GmbH. This new terminal will open in 2003.
Meanwhile Aeroflot is trying to establish a major Moscow transit hub between Europe and Asia, and in May awarded Bovis Lend Lease a project management contract for the design and construction of a new passenger terminal at Sheremetyevo Airport. Completion is slated for 2004, and total costs are estimated at around $300 million.
Airports in the former Eastern Bloc are also getting assistance from multilateral lenders. Last year the European Bank for Reconstruction and Development (EBRD) signed a $120 million term loan for the state owned St Petersburg Airport for its upgrade and terminal construction project.
Elsewhere in continental Europe, in Zurich new terminals and an airport Metro system are under construction, adding more shops and lounges as well as extra gates, in a program which will cost SFr1.5 billion (Eu990 million). In Vienna the Masterplan 2015 program continues, including an additional runway, new control tower, Airo Cargo centre and office park. By 2005 the new Eu400 million Terminal Nord will be opened.
And in Berlin, the expanded Schonefeld Airport is being privately financed by a Build Operate Transfer mechanism with a 50-year operating franchise. With the help of between Eu3 billion to Eu4 billion worth of capital spending, Schonefeld is being rebuilt and will become Berlin Brandenburg International (BBI), which still hopes to open in 2007, in spite of the controversy surrounding the bidding process and the subsequent restructuring of the consortium.
There is a backlog of airports waiting to be privatised, and over the next few years many billions of Euros will be raised from retail and institutional investors via Initial Public Offerings. Parallel with this IPO pipeline there is also a merger & acquisition (M&A) wave in progress, with airport operators diversifying their portfolios, and private equity players looking for investment opportunities.
But analysts note that once they have raised fresh equity, the privatised entities are going to dramatically increase their leverage, as they expand airport capacity, add more retail space, and pursue more aggressive profit targets than their previous public sector owners.
On the debt side there are already more sophisticated structures being used, other than traditional full recourse corporate loans to airport operators. One important trend is a move towards funding in the debt capital markets, and bond offerings are set to become more common.
Already the Amsterdam based Schiphol Group does much of its financing via a Euro Medium Term Note (EMTN) programme, and regional airports have also been tapping the bond markets. Birmingham International Airport, rated single A by S&P, launched a bond offering late last year. And in February of this year Aer Rianta, the Irish operator, sold Eu250 million worth of 10-year fixed rate bonds.
Nonetheless there are challenges facing airports which wishes to issue project bonds, since relatively short tenors are typically on offer in the Euromarkets. Demand for ten year paper is generally strong, but further out along the yield curve placing paper becomes much more difficult.
In addition, some continental European airport operators remain quite conservative, and many remain reluctant to get a credit rating. Their reluctance will not be helped by the fact that overall credit quality in the sector is probably on a downward trend. As more aggressive private sector players get involved in operating airports, and M&A activity picks up, airport operators are becoming more highly leveraged. Consequently, just at the time that they are being pressed to get credit ratings they may be dissuaded from doing so because their credit quality may be deteriorating.
The lack of ratings will have to be addressed before the airport sector can take full advantage of the bond markets. But even where banks are providing the financing the structures are becoming more complex.
?There is still a reliance upon traditional bank finance, but we are starting to see more financing done off balance sheet,? says Jan Plantagie, associate director at Standard & Poor's in London. ?For example, the recent acquisition of East Midlands & Bournemouth Airports by Manchester Airport was done with an off balance sheet finance structure from a bank loan. More and more deals are getting done on a non-recourse basis, and sentiment is very positive at the moment on the part of the banks, who have a security package over the airport assets.?
The East Midlands & Bournemouth acquisition loan was made to Crow Aerodromes, a special purpose vehicle (SPV) created by Manchester Airport for the acquisition. The transaction is taking a privately owned airport back into public ownership, since the seller of its stake was National Express, while Manchester Airport is owned 55% by Manchester City Council and the balance by nine other Greater Manchester district councils.
Royal Bank of Scotland arranged £120 million worth of 15-year term loans to Crow Aerodromes. The £90 million senior loan has a grace period of two years, and is repaid semi-annually. There is also a £15 million subordinated loan with an 11 year grace period, plus a £15 million working capital loan, also with an 11 year grace period. The senior loan was priced at Libor plus 175 basis points.
This was a fairly typical financing for the airport sector, but the financing of the acquisition of Bristol International Airport in January was more unusual. Bristol was acquired by the Macquarie Global Infrastucture Fund together with Cintra, having seen off competition from other bidders including Copenhagen Airport. Cintra is a subsidiary of the Spanish group Ferrovial, which is Spain's leading operator of international airports, including facilities in the United States, Mexico and Chile.
The acquisition was made via an SPV called Tidefast Ltd, and Abbey National Treasury Services arranged a £218 million loan with a bullet principal repayment.
?The Bristol International acquisition loan had a quite interesting feature because it was done via a five year bank loan which has the form of a mini-perm,? explains Plantagie at S&P. ?Mini-perms are often seen in the United States, and are often used to cover the construction period. There will be a need to refinance the Bristol loan after five years, and there is a chance that it will go through the bond market.?
But he notes that getting long term finance can still be a challenge in Europe. ?Airport assets are long term assets, but so far the Eurobond markets have been offering ten year tenors, but the market is developing long term finance, which match the kind of assets that airports have,? says Plantagie, pointing to Portugal where a wrapped toll road deal has attracted 26-year financing.
Insurers and monolines have already stepped up on airport transactions in Australia and in Latin America. Adelaide Airport in Australia had a bond offering wrapped late last year, with MBIA coming in to wrap the bonds to triple A level.
IPOs
The next big privatisation being awaited in Europe is that of Amsterdam Schiphol Airport, which some analysts forecast will be valued at around Eu4 billion. At present the Dutch government owns a 75.8% stake. It still hopes to get this done in the autumn, though weak equity markets are a problem. The share price of Fraport AG, the operator of Frankfurt Airport, has fallen from its June offer price of Eu35, and in late July was trading around the Eu30 level.
Schiphol certainly needs plenty of fresh capital. The airport is spending $123 million on a fifth runway that is scheduled to open in 2003, and last year announced a $1.2 billion investment program which will start with a new pier for small and medium sized aircraft. The project also includes the construction of an overhead automated people mover connected to the main terminal.
The Schiphol group has said that the stock flotation will give it better access to the capital market, and make it easier to take part in alliances and acquire stakes in other airports. Schiphol has entered the Pantares alliance with Fraport, which will manage retail outlets and develop logistics operations at key hubs. Pantares is studying opportunities in more than one hundred forthcoming privatisation projects worldwide.
?With equity markets in such a poor state, the timetable for IPOs is not very clear, but we are still hoping to see an equity offering from Amsterdam Schiphol this year,? comments Andrew Lobbenberg, equity analyst at JP Morgan Chase in London. And in 2002 and 2003 the list of potential IPOs includes Milan, Brussels, and Aeroports de Paris. ?There are also plenty of M&A possibilities, since there are still a few remaining regional airports in the UK which have not yet been sold, and a large number of regional airports in countries such as Italy, France and Germany which are likely to be sold off,? says Lobbenberg.
In addition to the raising of equity via IPOs, Lobbenberg anticipates greater use of the debt capital markets. ?European airports have large expansion plans,? he says. ?For example BAA need £2 billion just to build Terminal Five, while Frankfurt has a DM5 billion expansion programme, so there will certainly be a bigger role for bond offerings from the airport sector.?
?Airport developments such as new runways or terminals with a long term life could be better financed by a bond with a long term repayment profile, so there is an attraction to bond offerings, especially if you are able to fix the interest rate,? says Robert Phillips, partner at CMS Cameron McKenna.
?We are seeing long term financing in relation to project finance in the UK, so it should be applicable to the airport sector,? says Phillips. ?Many PPP deals are running on 20 to 30 year term finance, and some bond financings have been done without credit wraps, such as Greenwich Hospital PFI with the Prudential.?
?Some road schemes are now proposed without a wrap, and you obviously don't get the same rating, but the critical issue is to consider the overall cost of finance. But particularly where it is the first or second deal of its kind, and you are trying get the market interested, going for a wrap may be sensible.?
But even if very long tenors are still something of a challenge, the overall level of interest in the airport sector is currently very high, whether from infrastructure funds on the private equity side, or commercial banks on the debt side.
?The banks are comfortable with the sector,? says Richard Tollis, director at PricewaterhouseCoopers. ?Generally people like airports because they show strong growth, so you are looking at a relatively solid asset. But I think that as the private sector gets more involved you are going to see more use of the bond markets.?
He views the PPP at Newcastle Airport as a promising model which may be applicable elsewhere. Newcastle Airport was 100% owned by seven local authorities, and they now own 51%. There is also a 15 year Technical Services Agreement with Copenhagen Airports. However there may be pressure for local authorities to hold a stake of less than 51%, otherwise borrowings will be counted under the Public Sector Borrowing Requirement.
?The PPP at Newcastle is significant not only for the UK but also continental Europe, where local authorities are keen to be involved in the development of an airport, but also see a role for the private sector,? says Tollis.
?The size of the equity stake sold will vary from case to case,? Tollis continues. ?The trick is to come up with a good balance between the public and private sector, and you might see local authorities with minority stakes. But you need to look beyond what the equity stakes are, at matters such as board structure, voting rights, and the structuring of management or support contracts. All those features will add up to an overall position of influence.?
Airlines putting up cash
Another source of financing may be the airlines themselves. It is quite common in the United States for airlines to help finance terminals, but thus far it has been very much the exception in Europe. However, both Lufthansa and Aeroflot are currently involved in financing and building new terminals.
Lufthansa is stepping up its operations at Munich, whose importance as a second hub is growing, especially since Lufthansa is unhappy with a night flying ban which will take effect at Frankfurt from 2006. Lufthansa is investing Eu378 million in the construction of a second terminal at Munich, in association with the operator Flughafen Munchen GmbH. This new terminal will open in 2003.
Meanwhile Aeroflot is trying to establish a major Moscow transit hub between Europe and Asia, and in May awarded Bovis Lend Lease a project management contract for the design and construction of a new passenger terminal at Sheremetyevo Airport. Completion is slated for 2004, and total costs are estimated at around $300 million.
Airports in the former Eastern Bloc are also getting assistance from multilateral lenders. Last year the European Bank for Reconstruction and Development (EBRD) signed a $120 million term loan for the state owned St Petersburg Airport for its upgrade and terminal construction project.
Elsewhere in continental Europe, in Zurich new terminals and an airport Metro system are under construction, adding more shops and lounges as well as extra gates, in a program which will cost SFr1.5 billion (Eu990 million). In Vienna the Masterplan 2015 program continues, including an additional runway, new control tower, Airo Cargo centre and office park. By 2005 the new Eu400 million Terminal Nord will be opened.
And in Berlin, the expanded Schonefeld Airport is being privately financed by a Build Operate Transfer mechanism with a 50-year operating franchise. With the help of between Eu3 billion to Eu4 billion worth of capital spending, Schonefeld is being rebuilt and will become Berlin Brandenburg International (BBI), which still hopes to open in 2007, in spite of the controversy surrounding the bidding process and the subsequent restructuring of the consortium.
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