Corporate Issuer
The journey: BAA has emerged phoenix-like from the depths of investor disdain to become a new darling of the markets. Against the background of a regulatory minefield and the worst conditions the aviation industry has ever seen, the company sold seven landmark transactions that transformed its standing. BAA is IFR’s Corporate Issuer of the Year.
BAA has had a transformational 12 months. After a 3-1/2-year absence, it made a remarkable return to the bond markets in 2010, issuing £2.3bn-equivalent of notes across seven landmark transactions.
“The [bond] deals fully validated the funding platform, giving a remarkable breadth of access,” said Andrew Paulson, executive director of corporate securitisation at RBS, which acted as lead adviser to BAA.
In bonds, the company accessed diverse pockets of demand, having tapped both euros and sterling, in fixed-rate and index-linked formats, in both investment grade and non-investment grade format. In loans, it negotiated a new loan facility and secured a new subordinated debt facility.
By issuing such a broad range of assets, the firm was able to build a very diverse investor base, attracting as many 350 different institutions. That is a strong endorsement of the performance of its assets and the extensive investor relations work it has done, genuinely setting it apart from its peers.
The glue that brought everything together was BAA’s approach to investor relations. BAA consistently communicated its strategy throughout the year, and not just ahead of issuance, giving a strong signal of its future issuance plans.
It provided investors with regular access to the CEO, CFO and director of treasury. And it is one of the few British issuers to hold quarterly results presentations for investors. In the past year it has held in excess of 90 one-on-one meetings with European investors, and more than 10 group investor meetings.
“We developed a culture of openness, giving a very clear signal of our financing plans as they developed, and then we followed through on our promises. We say what we are going to do, then we do what we say,” said Fred Maroudas, BAA’s director of treasury.
The bond issues were, in themselves, nothing less than ground-breaking. BAA’s subordinated debt refinancing, for example, was the first by a utility holdco to access the high-yield market, uniquely combining high-grade secured corporate covenants and high-yield covenants, while its index-linked issue remains the largest since the start of the global financial crisis.
It never rains but it pours
What is all the more noteworthy is that these achievements were executed against a backdrop of extremely adverse conditions: the Dubai crisis; the sovereign debt crisis; the closure of UK airspace due to volcanic ash; BA strikes; and the impact of the UK coalition government’s decision to review airport regulation.
The backdrop to BAA’s epic journey began as long ago as summer 2008, when the Ferrovial-led consortium’s original acquisition financing was refinanced into a new ring-fenced, secured debt funding platform. At that time BAA’s £4.5bn of existing bonds were migrated into a whole business securitisation structure. Due to deteriorating market conditions, bridge bank funding was required to complete the £13.3bn refinancing.
After the stable financing structure was put in place “we were hit with the worst conditions the aviation industry had seen”, said Maroudas. A month after the WBS structure was put in place, Lehman Brothers collapsed. Passenger demand for the full year fell 3.5%, in effect wiping out the equivalent of 2.5 years of passenger growth, according to the International Air Transport Association.
On top of that, BAA faced two significant regulatory challenges. A Department for Transport consultation on reform to the 1986 Airports Act concluded that a special administration regime should be introduced, in effect removing security from lenders. Meanwhile, the Competition Commission’s enquiry into the firm’s ownership of three London airports ruled it must sell a number of airports, including Gatwick and Stansted, both of which were originally conceived as a part of the WBS structure.
The firm’s ratings were then put on negative outlook by both Fitch and S&P. Its CDS plunged – to 1,400bp at the widest. “We faced a quadruple whammy and a potential crisis of confidence,” said Maroudas. But even then, “the building blocks” to recovery “had been put in place”, he said.
“We began to focus investors’ minds on the robustness of the company and we engaged with government to resolve regulatory issues around special administration,” said Maroudas. An eventual resolution of the regulatory uncertainty was followed by a confirmation from S&P and Fitch of BAA’s stable A– ratings for its Class A debt.
This facilitated a return to the capital markets for first time since 2006 with the launch of its £700m Class A bond, maturing in 2026, which was launched in November 2009. The deal was increased in size and priced inside the tight end of guidance – all against the backdrop of the Dubai crisis.
A month later it issued £235m of 2039 index-linked bonds, the largest corporate linker bond since the onset of the crisis. The deal was issued at only a small discount to nominal bonds on a book of more £360m. Throughout 2010 it has regularly issued off its index-linked programme.
“We believe this is the biggest corporate index-linked programme in the UK,” said Maroudas. A measured execution strategy has allowed BAA to deal at credit margins that Maroudas said were “materially tighter than those achieved by its peers”. This was achieved without moving the market against it.
Reaching a new audience
As it looked ahead to 2010, the firm’s primary focus was on the refinancing of £1.56bn subordinated debt due in April 2011. It also wanted to access investors away from its traditional sterling investment grade space, extend its maturity profile and optimise its cost of debt. All these objectives were realised by Autumn.
In August, BAA worked with RBS to get existing bank lenders to consent to the removal of an existing distribution block. This prompted it to upstream £1bn of cash from the operating company to the holding company. By paying down subordinated holdco debt, it significantly reduced its debt servicing charge which, on the most junior tranches, stood at 12%–13% annually.
It then negotiated an increased, £625m four-year term loan facility at the junior (Class B) level. This financing was the first European Class B loan issuance since 2008 and was enlarged from a £300m target, boosted by improved demand following the introduction of three new lenders.
This loan, plus £375m of drawings from its revolving credit facilities and a further £100m from a non-core sale disposal, paid the subordinated debt facility down to £466m.
BAA then secured a new £250m subordinated debt facility, the first non-investment grade sub-holdco loan issuance since 2008, of which £175m refinanced the remaining £466m of its existing subordinated debt facility, alongside the £325m of proceeds from the non-IG bond. That completed the subordinated debt refinancing.
In September BAA issued £400m of Class B bonds due 2018 achieving a stunning order book of more than £1.2bn, the biggest ever for a Class B deal at the time.
The transaction opened a new investor base and saw as many as 102 in the final allocation, a breadth of demand for Triple B rated paper that was unmatched. It priced only 140bp wide of Class As, well inside the 175bp–200bp discount that many assumed would be needed. The transaction paved the way for a successful Thames Water WBS.
In the same month, it returned to the market with €500m of 2016 Class A bonds, achieving an order book of more than €2bn from 200 accounts, of which two-thirds were from outside the UK. This significantly diversified its investor base away from its traditional UK buyers. The deal priced at the tight end of guidance and inside the price whisper.
In October it issued a £500m dual-tranche holdco loan and high-yield bond. Of all its deals, this was probably the most ground-breaking. Not only was it the first time that a regulated utility had been able to access the bond market for its holdco debt, but it was the first transaction specifically structured to appeal to each of four different investor groups: traditional high-yield investors, investment grade investors, institutional infrastructure investors and banks. It provided a platform upon which future debt will be raised in a variety of currencies and formats.
As a result, BAA diversified its investor base and delivered highly attractive pricing relative to its senior and junior bonds. The successful offering was increased from £250m to £325m and priced at par to yield 7.125%, at the tight end of the price talk of the 7.25% area.
William Thornhill
