The Ferrovial-led consortium which bought the UK airports operator BAA in June 2006 took more than two years to refinance the almost £9 billion it took on in acquisition debt.

Those two years saw the advent of the credit crunch, and also a report from the UK's competition commission which - while yet to make its final rulings - BAA is already conceding will mean it needs to sell one or more of its airports.

Hindsight is always 20-20 - but how much is Ferrovial now ruing the delay, and what effect did it have on how the refi was eventually accomplished?

The acquisition - recap

The £10.3 billion paid by Ferrovial and its partners - Caisse de Dépôt et Placement du Québec (CDP) and Singapore sovereign wealth fund manager GIC Special Investments - did not include BAA's existing debt facilities, which took the consortium's investment up to around £16 billion.

Ferrovial's share in the consortium - known as Airport Development and Investment (ADI) - was 61 per cent.

The acquisition was financed by £8.97 billion in debt, broken down as follows:

• £4.72 billion senior term loan facilities
• £2.25 billion senior capex and revolving credit facilities
• £2 billion junior facility

All of the facilities came with a five-year tenor, and were provided by a group of five MLAs:

• Citigroup
• RBS
• Banco Santander
• Calyon
• HSBC

Citigroup, RBS and Banco Santander acted as bookrunners for the senior facilities, and all five acted as bookrunners for the junior facility. RBS was the agent bank for the facilities.

The debt facilities represented the largest ever infrastructure transaction and the largest subordinated tranche ever syndicated in the European market. They were launched to sub-underwriters on 12 July 2006. The syndication was oversubscribed, with support from 50 international investors including institutional funds.

The refinance package

By the beginning of 2008, details had emerged about just how much the acquisition debt was costing ADI. Interest on the senior debt was reported to have reached 212.5 basis points above LIBOR - though the debt had been reduced by the £1.3 billion sale of Budapest airport. Nevertheless, the refinancing was getting urgent.

Key to the deal that eventually got away in August 2008 was dividing BAA's assets into two, ring-fenced groups.

In one group - the 'designated' group - were the regulated assets of the three London airports, at Heathrow, Gatwick and Stansted.

The other, less valuable group, contained the deregulated assets: three Scottish airports - Edinburgh, Glasgow and Aberdeen - and Southampton airport, on England's south coast.

The adoption of this approach - taking advantage of the regulated nature of the assets in the designated group - is in line with ADI's publicity at the time of the acquisition, which said:

"Shortly after the completion of the acquisition of BAA, ADI intends to refinance the senior acquisition facilities with a longer term financing structure based upon proven techniques adopted by other regulated companies."

The designated assets group was able to support £12.1 billion in debt, of which £4.4 billion was new bank debt. BAA also managed to persuade more than 99 per cent of its bondholders - across nine separate bond issues - to migrate their holdings across to new bonds securitised against the designated assets.

£4.5 billion in bonds made the switch. The vehicle issuing the new bonds was called BAA Funding Ltd, invented for the purpose.

The bonds had varying maturation dates - from 2012 to 2031. Those maturation dates have stayed the same on the new bonds which replaced them. Bond holders were persuaded to take the offer thanks to a step-up in their coupon, as well as an improvement in credit quality for voting across, and a 'fee for their time'.

The £4.4 billion in senior debt included £1 billion in class B debt. The class B debt is rated by S&P and Fitch at BBB, compared with A- for the £3.3 billion class A debt. The exact tenor on the debt has not been made public, but is known to be medium term.

On top of that £8.9 billion, £440 million in lending came from the EIB which represented a small increase in the multilateral's exposure.

£2.75 billion was also raised in new working capital facilities, bringing the total facilities to £7.15 billion.

Nine banks acted as MLA for the total new debt on the designated assets:

• BBVA
• BNP Paribas
• Caja Madrid
• Calyon
• Citi
• HSBC
• RBC
• RBS
• Santander

A further £1.56 billion in junior debt was carried over into the new package, which has a second-ranking charge over the designated assets.

A separate £1.255 billion bank financing was arranged for the non-designated airports. The facilities consist of £1 billion in term loans and a £255 million capex and working capital facility.

The MLAs were:

• Citi
• Export Development Canada
• HSH Nordbank
• ICO (Instituto de Crédito Oficial)
• ING
• La Caixa
• RBS

Clifford Chance was legal counsel to the various arranger and creditor parties. BAA was advised on the transaction by Macquarie Capital and Freshfields Bruckhaus Deringer.

How different could it have been?

Taking two years to refinance acquisition debt is an awfully long time - and, though no one was to know at the time, took the process into the middle of the credit crunch.

Why did it take so long? One interpretation is that there were issues around BAA's management and decision-making structure, meaning that all decisions had to be agreed upon at a number of different levels which slowed the whole process down.

Another is that once the credit crunch began to bite, ADI had to go back to the drawing board and redesign its refi strategy.

Richard Bartlett, head of corporate debt for western Europe at RBS, offers an alternative explanation. He says it was "more to do with the inter-relationship between the funding of the company and the regulatory rate-setting process which BAA was involved in."

"As a practical matter, the rate-setting process needed to take priority, and it would have been substantially harder to put the financing in structure while the regulatory process was ongoing."

Accepted wisdom around the refi is that had ADI refinanced back in '06, it would have tapped the bond market for the majority of its refinancing - a plan that was derailed by the credit crunch and the death of the monoline industry.

That is something of an oversimplification, though, according to Bartlett.

"Looking back at one of the information memos to a loan investor at the beginning, what we actually implemented, and what we said we were going to implement at the beginning, are pretty much identical," he says.

"It is true to say that we had originally anticipated that we would also have tapped the bond markets for some additional financing at that stage. In the end, we concluded that with the large re-structuring of the existing bonds, with the complexity of raising the bank financing, to try and tap bond market for additional financing in the market conditions that were persisting in the middle of August was just going to be too complex.

"Because the structure was so flexible, we were able to fund it entirely through the bank market. I suspect we would have reached that conclusion no matter what the market state was, just because of the complexity of closing so many transactions simultaneously on a single day."

Having said all that, BAA's own press release about the refi contains the following revealing passage:

"The funding programme established by BAA for the designated airports allows access to both the bank and bond markets in a range of maturities and currencies to maximise financing flexibility for BAA's ambitious investment programme. BAA's intention is to issue bonds in the capital markets to refinance its bank facilities over time and the company looks forward to the continued support of the European and US bond markets."

Put differently: yes, we were able to refinance via a bank debt route; and yes, ideally we'd like to refinance that through bonds as and when the climate is more favourable. What would have been done had the refi been accomplished in a more receptive bond market remains open to debate.

The various parties are keen to stress the flexibility of the refi arrangement, though, and with the impending sell-off of at least Gatwick airport, perhaps Stansted and almost certainly one or more of the non-regulated airports, arguably it is simpler in the medium term to retire bank debt than bond debt with the proceeds of those sales.

Conclusion

A refinancing on this scale was never going to be straightforward. It is telling, though, that no new bonds were issued in the refi - and though that would have added to the complexity of the deal, a new bond issue was effectively done as part of the refi for the purposes of migrating existing bonds.

The credit crunch undoubtedly played its part, and it is hard to imagine that the debt - bank or bond - that ADI has now taken on is as cheap as it would have got 18 months previously.

Having said all that, BAA is now in a place of some uncertainty regarding the integrity of its portfolio - and it will no doubt welcome the flexibility inherent in its new financing package as it comes to sorting out various divestments which we are likely to see over the coming months.