August 18th is a date etched indelibly in Nicolás Villén Jiménez’s memory. The CFO of Ferrovial will always remember it as the day earlier this year when he finally proved sceptics wrong. Announcing the completion of the Spanish construction-to-tollroad firm’s massive £13.3 billion (€17.1 billion) debt refinancing — the largest ever of its kind, the company claims — he closed the book on a gruelling two-year saga, with twists and turns that regularly threw his plans into disarray. The CFO concedes that the credit crisis made this summer an unusual time to make a transaction such as this, but a lot about the refinancing of its takeover of UK airport operator BAA could be called unusual.
Involving more than a dozen banks, the transaction “ring-fenced” BAA’s three regulated airports — Heathrow, Gatwick and Stansted — and migrated £4.5 billion of BAA’s unsecured bonds and set up some £7 billion of loan and capex facilities to the new securitised structure. Secured against its unregulated airports — Edinburgh, Glasgow, Aberdeen and Southampton — were £1.3 billion of facilities. Other “positive outcomes,” according to a report by Exane BNP Paribas, were £2.7 billion of undrawn capex credit lines, a £600m liquidity facility and, perhaps most important in today’s tough funding conditions, a 30-basis-point reduction of the average cost of the refinancing, to 7.5%
A successful refinancing was never assured. As one follower of the deal quips, “If there was banana skin to slip on, they’d find it.”
So how did Ferrovial, founded in the 1950s to serve Spain’s national railway system, avoid becoming one of the biggest victims of the credit crisis? Was it confidence or bravado that led it to pile up so much debt? Some sceptics believe that executives at the €14.6 billion Madrid-based firm simply didn’t know what they were getting into, and were swept up with the deal-making fever and cheap money of the time. Always keen to diversify globally and distance itself from highly cyclical construction markets in Spain, the company assured investors when it launched a hostile bid for BAA in early 2006 that the acquisition would provide solid, cash-generating assets. But soon after closing the deal, Ferrovial was reeling from terrorist threats at its new airports on the one side and fast-deteriorating credit conditions on the other, leaving the highly leveraged, £10 billion takeover — a price nearly 20% higher than its initial offer and at an EV/Ebitda multiple of some 16 times — under attack on numerous fronts, from regulators and bondholders to ratings agencies and, of course, the press.
“We were sailing in very volatile conditions, with the wind increasing and changing directions,” is how Villén puts it. Though BAA and its new parent needed to replace expensive bridge financing — paying an initial margin of 100bp on the senior acquisition debt, with step-ups over time, and 400bp on the junior debt — action in the bond markets was “non-existent,” Villén recalls. The company was also not helped by the subprime-related turmoil in financial institutions such as the monoline bond insurers, which would have been used more extensively to guarantee some new debt against default under normal circumstances.