Airports should be among the best candidates in European infrastructure for bond financings. They are almost always brownfield concessions, often occupy monopoly positions, and usually produce stable revenue streams. Some of the larger airport operators, particularly those in the UK, have been able to access the capital markets in recent years. They have usually closed a combination of bank and bond debt, in part because the large debt requirements of airport acquisitions and expansions have required sponsors to tap as many sources of debt as possible. European regulators review the tariffs that airport operators can charge at regular intervals, making medium-term debt, whether in the bank or bond market, an important part of airports’ funding mix.

This perceived regulatory risk made banks reluctant to lend long- term even before the onset of the global recession, which dampened banks’ enthusiasm for long-dated debt commitments in all sectors. For European airports banks have preferred to lend using hard miniperm structures, featuring regular margin increases and cash sweeps. Providing sponsors can maintain access to the bond markets, rolling programmes of short- and medium-term bullet bond issuances can provide airports with more flexible debt terms and more manageable maturity profiles. Bonds are likely to be important parts of the financing mix for airport acquisitions, but larger and better-quality assets will have the best chance of accessing these markets.

Activity in the European airport sector is likely increase in the short term. Global Infrastructure Partners (GIP) is set to acquire Edinburgh from BAA for £807.2 million ($1.266 billion) and is expected to close the financing for this acquisition imminently. BAA is selling the airport in the wake of a ruling from the UK’s Competition Commission, The Commission also ruled that BAA must sell Stansted and although BAA is appealing the decision, the likelihood is that it will be forced to sell that asset as well.

The UK, while the most consistent source of airport assets, and the best source of capital markets business, is not the only source. For Eurozone states that have witnessed deteriorations in their public finances, the privatisation of airport assets is a popular option. Spanish airport authority AENA, advised by RBS, is set to relaunch the sale of its two main airports, Madrid Barajas and Barcelona El Prat, shortly.

More volatile than expected

The risk-averse nature of bond investors means that they have been most enthusiastic about core hub airports. This tendency has been more acute since the onset of the global recession. While the 2008-09 crisis saw a fall in traffic at nearly all European airports, the downturn exposed the difference in financial resilience between the larger hub airports and the smaller regional ones.

“From airport to airport you see different dynamics,” says one analyst who follows the sector. “During contractions airlines will typically consolidate operations into their main hubs in order to maximise yields. The more peripheral of the airports, whether that’s by their own characteristics or their location, may experience more volatile operating conditions.”

The recession showed that after years of traffic growth, fuelled partly by deregulation, airports are more susceptible to downturns than investors had previously believed. In fact, deregulation has largely been a double-edged sword. Airports no longer hold a truly monopolistic position and increased completion means that both airlines and passengers are able to choose between airports.

Unsurprisingly, the first-tier airports showed the least contraction. In the UK, for example, Heathrow bounced back sharply and saw a relatively modest peak-to-trough decline in traffic volumes of 4.6%. London’s largest airport benefited from pent-up demand, since the airport has been operating at near capacity for several years. Stansted, conversely, which is more reliant on low cost- carriers, experienced a contraction of 22.9%.

For some of Europe’s less established airports, falls in revenue outstrippedthecontractioninGDP,andaccesstocreditremains tough. “In Europe at the moment, there are a lot of assets for sale, but most of these are at the regional level” says one Europe-based lender. “Airports in Europe are not going to be the easiest sale at the moment; everything with volume or traffic risk is difficult to take to credit at the moment.”

Prime candidates

Edinburgh has shown more resilience than some of the UK’s other regional airports and last year generated EBITDA of £48.3 million. But bank appetite for the financing of GIP’s acquisition was still thin, partly because of the fairly high EBITDA multiple on the sale price, but also because of its proximity to Glasgow, which has a larger traffic base.

The deal is still expected to close in June, however, with roughly £400 million in non-recourse debt from a club of six banks: BTMU, CBA, Credit Suisse, ING, NAB and RBS. The financing, which is split between a term loan, a revolving credit facility and a working capital facility, will have a maximum tenor of 5 years. Market rumour suggests that the documentation for the financing includes intercreditor agreements that would allow for a capital markets exit on or before maturity.

But lenders remain sceptical about whether Edinburgh has sufficient traffic volumes to allow it to access the capital markets. The UK’s creditor-friendly insolvency regime, not to mention the size of some of its major airports, has made its airports prime candidates for bond financings. BAA, which owns both Stansted and Heathrow, has been successful in rolling over its debt in the bond market. Its majority owner, Ferrovial, had to face down accusations that it overpaid for BAA in 2006, not to mention relentless UK press scrutiny, but has to date successfully managed its debt load.

In September 2010, BAA refinanced £1.566 billion of holding company debt, which Ferrovial had used to fund part of the June 2006 acquisition. It refinanced it in part with £1.1 billion of cash upstreamed from the operating company. The operating company in turn raised that cash through £375 million and £625 million in class A and class B bond debt, respectively, and £100 million from the sale of Airport Property Partnerships.

But, the remainder of BAA’s refinancing requirements were met with £650 million in bank and bond debt at the holding company level, split equally between the two. The ease with which BAA was able to issue bonds at the holdco level is impressive, given their subordination to the opco debt.

A bustle in Heathrow

Most of BAA’s debt is held at its operating companies, and their lenders benefit from security packages that bring lenders closer to the underlying assets. BAA has been fairly successful at issuing bonds at the opco level and in March this year returned to the market with a £400 million 8 year issue for Heathrow, priced at 425bp over gilts.

The existing regulatory framework for Heathrow, which in its current incarnation dates to 2009, has placed some pressure on BAA, since the effects of the economic downturn were not factored in when the current tariffs were set. But BAA has continued to enjoy fairly favourable access to the capital markets in relation to other airports, in spite of its high leverage, primarily because of its standing as the operator of London’s largest airport.

In March 2011, though, it was GIP, the owner of Gatwick, London’s second largest airport, which impressed market observers with its refinancing of £1.65 billion of acquisition debt. The deal was the first whole business securitisation in the transport sector since the crisis and was split between £1.05 billion in commercial bank debt and £600 million in class A bonds, which in turn spilt into two equal-sized tranches, with maturities of 15 and 30 years.

The bond issue was oversubscribed, which meant that the issuer was able to increase the size of tranches to the top of their ranges. In fact, the healthy levels of investor appetite meant that Gatwick was even able to return to the market in January 2012 with another £600 million in bonds to refinance some of the bank debt. Gatwick achieved these levels of support despite suffering from a fairly substantial drop in traffic volumes during the early phase of the recession.

This fall mostly resulted from its subordinate position to Heathrow, which the implementation of the Open Skies agreement exacerbated. But the size of the airport was still sufficient to support a capital markets structure. “Gatwick had everything going for it” says one lender. “Sterling revenue, a large quantum of debt, an investment grade rating. It is a liquid well-known name with a good, very transparent asset base.”

Roman holidays

The UK’s transparent regulatory regime and London’s fortuitous position as one of Europe’s major intercontinental hubs has meant that UK airports have been at the forefront of capital markets activity in recent years. But, for Europe’s other major privately-owned airports, accessing the bond markets has proven more difficult.

Aeroporti di Roma (AdR), the owner of the concession to exclusively operate Rome’s two main airports, Flumicino-Leonard da Vinci and Ciampino, is a good example. AdR was one of the first airport operators rebound from the recession, posting fairly robust traffic increases of 5.9% for 2010, but is still frozen out of the capital markets. In February 2003, its shareholders, which include the Bennetton family, UniCredit, Singapore’s Changi Airport, Mediobanca, Generali and Fondiari closed a Eu1.8 billion ($2.3 billion) refinancing, which marked the second refinancing of its original acquisition debt since the shareholders’ purchase of AdR. The deal was split between Eu490 million in bank debt and Eu1.2 billion of Ambac-wrapped bonds of varying maturities.

But part of the debt, tranche A1 of the bond issued by Romulus Finance, the securitisation vehicle, is coming up to maturity and AdR is unable to access the capital markets because of downward pressure on its credit rating. In December 2011, Moody’s downgraded the debt ratings for AdR from Ba1 to Ba2 and in March this year, Standard & Poor’s placed its BB rating on credit watch.

Although the rating agencies view AdR as having the risk profile of an investment grade borrower, their concern hinges mostly on the tariffs AdR is able to levy on airlines, which, unlike other European airports, have been fixed since 2003, excepting some minimal increases to keep pace with inflation. The concessionaire is still holding talks with the government about a potential tariff increase.

The sponsors have had to rely on several relationship banks to refinance the Eu600 million of outstanding debt. Eight banks – Barclays, BNP Paribas, Credit Agricole, Mediobanca, Natixis, RBS, Societe Generale and UniCredit – have signed commitment letters and should close the refinancing by June. The debt has a tenor of 3 years and a bullet repayment so the sponsors are hopeful of a capital markets exit at a later, point, when the borrower has a little more certainty about its tariffs.

Bonding with loans

Although European airports experienced some contraction, traffic volumes bounced back fairly quickly, and from January 2010 market participants believe that the aggregate trend for the sector was that revenues were recovering. In fact, even though some airports experienced significant falls in revenue, airports have generally weathered the recession better than other financial or industrial companies, mostly by realising operating efficiencies and rescheduling capital expenditure.

But this recent growth is measured against a very weak base. Austerity and high fuel prices could well act as a drag on passenger numbers, particularly in Eurozone countries undergoing fiscal retrenchment. The recent introduction of an air passenger tax in countries like Austria and Germany is expected to inhibit growth. “At an aggregate level, the traffic volumes for 2012 could go up or down. But overall it’s a split outlook” says one analyst. “Those core hubs with a strong demographic hinterland and therefore a strong origin and destination market, we see as being pretty stable, pretty resilient. The more regional airports are expected to struggle a bit.” Most of the upcoming financings for European airports are concentrated among the regional airports.

Moreover, even for some of Europe’s larger hub airports a bond financing remains unlikely. Brussels Airport, owned by Ontario Teachers’ Pension Plan, Societe Federale de Participants et d’Investissement and Macquarie, has recently been testing the market for a refinancing of its Eu1.2 billion debt, due to mature in 2015.

In May this year, S&P revised the outlook on the group from stable to positive, citing a recent improvement in the airport’s credit metrics. This improvement was a result of tariff increases, which were implemented in April 2011, and some debt repayment. But the company’s existing rating, BB+, does not allow for easy capital markets exit and most participants expect that the sponsors will turn to bank lenders for its refinancing requirements.

Both Heathrow and Gatwick have significant advantages over their peers in mainland Europe, including the UK’s transparent regulatory regime, access to the sterling bond market and their large size. For other European airports, short-term bank debt and its inevitable refinancing risk are expected to persist for the time being.