BAA on the defensive

The airports operator says a proposed special insolvency regime would be bad news for investors.

Amid the ongoing uncertainty over the auction of London’s Gatwick Airport and BAA’s continued attempts to avoid further forced divestments, the beleaguered airports operator is also fighting a regulatory battle on a different front.

BAA is potentially facing a dramatic shift in regulation which could have wide-ranging consequences for its lenders. The proposed changes, put forward by the UK’s Department for Transport (DfT), would allow government ministers to assume control of BAA should it go bankrupt in order to keep its key hubs up and running.

Under the planned new special insolvency regime, the government’s right to take charge of the airports would supersede the rights of BAA’s creditors to appoint an administrator – a point which the airport operator says would adversely impact its cost of debt.

BAA has publicly urged the government to alter the plans, claiming that it would impact its creditors’ risk-reward profile from that upon which they invested. Ratings agency Standard & Poor’s has also said the plans would directly cause financial difficulties at BAA.

One key driver of the proposed change in legislation is that some ministerial circles are thought to harbour concerns over the precariousness of BAA’s financial position. The main cause of these concerns is the estimated £13 billion ($21.5 billion; €15.17 billion) of debt, accumulated partly as a result of the Ferrovial-led acquisition of BAA in 2006. What ministers fear most is that if BAA’s bondholders make a claim on their lending, the company could capitulate, with its airport infrastructure – especially Heathrow, Gatwick and Stansted – subsequently grinding to a halt. The impact of such an event on the UK economy would be catastrophic.

The proposals are in some respects similar to state regulation already governing UK utilities. However, opponents of the plans argue that as airport investment is an inherently riskier proposition than utilities, the regulation should reflect this.

One airport expert Infrastructure Investor spoke to said that the DfT’s proposals could in fact have the opposite of its desired impact: if BAA were to fail, it would be in nobody’s interest – especially bondholders – for its airports to shut down. Even UK airports regulator the Civil Aviation Authority, often a thorn in BAA’s side, has come out in defence of the group, claiming that the DfT’s plans are excessive. The regulator has cited Eurotunnel as evidence that financially distressed companies can continue to operate and generate cashflows.

In their current form the DfT’s plans are unlikely to become effective for some time yet, if at all. Significant lender consent would be required for them to come into force and, given the strong reaction to the proposals so far, this may prove to be an uphill struggle for the government.