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Corporate and Investment Banking. New Lisbon airport project. Conditions and possible structures for a successful airport privatisation Lisbon November 22 nd. Introduction Meeting public authorities and private investors objectives .

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Presentation Transcript
slide1

Corporate

and Investment

Banking

New Lisbon airport project

Conditions and possible structures for a successful airport privatisation

Lisbon November 22 nd

slide2

Introduction Meeting public authorities and private investors objectives

Section 1 Market conditions : a favourable environment reflected in high transaction prices

Section 2 Main structure issues and options for a successful privatisation

- capital and corporate governance

- perimeter of the transaction

- contractual framework

- investment obligations

- tariff regulation

- tender process

the conditions to a successful airport privatisation
The conditions to a successful airport privatisation

Meeting public authorities and private investors objectives

  • Public authorities often aim at several objectives when privatising airports, which can sometimes be conflicting :
    • choose the best operator able to implement an ambitious development for the privatised airport
    • optimise transaction price and fund new infrastructure developments
    • keep a degree of control over major issues having political implications : tariffs, employment, environment, safety and security…
    • preserve the financial robustness of the airport company
    • implement a rapid and transparent transaction
  • Equity investors and banks have quantitative objectives depending from market conditions but also qualitative requests regarding investment risk :
    • achieve a satisfactory return on equity, which usually requires the implementation of a high financial gearing
    • obtain an adequate level of control over their investment through a satisfactory transaction structure
    • benefit from a sufficient visibility over regulatory frameworks (tariffs, environmental and social constraints.. )
  • The transaction structure and the tender process should be designed to satisfy the objectives of both public authorities, private equity investors and lenders given current market conditions.
a favourable market environment equity investors
A favourable market environment : equity investors
  • Airport privatisations today usually trigger a fierce competition between bidders : typically 10 competitors participate to the 1st round (case of Brussels, Budapest, Malta..) which enables to select 4 to 5 bidders for the 2nd round
  • Competition has been reinforced by the arrival of new comers willing to build up rapidly credible positions in the sector :
    • Major airport operators looking for new sources of growth : BAA, Fraport, Copenhagen, Vienna Airport…
    • Secondary airports trying to reach a critical size : SAVE, Vancouver, TAV, Nice…
    • Financial investors dedicated to infrastructures andimplementing high debt leverage on investments providing a high visibility : Macquarie, IFM, Deutsche Bank, Hastings …
    • Construction groups interested in civil works fall-backs but now also willing to position themselves as concession groups : Hochtief, Ferrovial, Vinci, Abertis...
  • Consortiums are usually set up to combine competencies and increase available equity and are often complemented by :
    • Local partners attracted by low risk and high political visibility of the project
    • Pension funds interested by high returns / low risk over a long period : OTPP, CDPQ, OMERS…
  • Investors currently expect returns on equity between 10 % to 15 % for high leveraged transactions equivalent to 6 % to 9 % return on assets
a favourable market environment debt providers
A favourable market environment : debt providers
  • Low level of interest rates available on long term maturities
  • Strong appetite of banks for infrastructure projects :

Acceptance of high level of gearing if the airport is a quality asset and if the transaction is well structured :

    • Debt / Ebitda multiples up to an initial 12 to 15 X (Chicago motorway) to be decreased to lower level at project maturity
    • Debt Service CoverageRatios up to 1.5 X (Brussels airport) after the construction period
    • Maximum debt redemption period up to 20 to 30 years with a minmum 10 years «tail of concession»
  • Low interest margins for quality projects
  • Airport transactions are usually financed by senior bullet medium term debt (5 /7 years)

Projects can be later re-financed at better conditions after the implementation of the operator strategic plan and the opening of new infrastructures through the issuance of AAA rated long term bonds guaranteed by «monolines»

  • Additional sub-debt can be provided by banks and specialised institutions to decrease the amount of equity needed
a favourable market environment high transaction prices
A favourable market environment : high transaction prices

Transaction multiples for last significant airport acquisitions

Financing commitment for recent airport BOT projects

control and governance
Control and governance
  • Different structures are feasible as evidenced by past transactions :
    • full privatisations : Bristol, East Midlands, Sydney…
    • minority stake retained by the State : ex Brussels, Budapest, Malta…
    • majority stake controled by public authorities : Athens, Newcastle, Duseldorf, Hanover, Hambourg, Milan…
  • Public authorities often whish to retain a residual shareholder position :
    • to exercise control over major issues having political implications (tariffs, employment, environment..) : objective also achievable through an appropriate regulatory framework and obligations defined in the operating licence
    • to benefit from the valuation upside after the implementation of the operator strategic plan
  • Private investors require a sufficient control over operations, infrastructure development and major financial decisions :
    • approval of management nomination, budgets and dividends distribution
    • development plan agreed on before the transaction with a veto right from authorities over major decisions not included in the development plan.
  • Deals only offering a minority shareholding usually attract less interest
  • The possible evolution of the structure should be considered :
    • Put option negotiated before the transaction on the basis of the future profitability of the airport
    • Later IPO to preserve visibility and independence of the airport company after a decrease of the initial amount of debt linked to the transaction
perimeter of the transaction

Inclusion of regional airports ; small regional airports (below 1M pax) are often not profitable. The rare privatisations of regional airports packages were focused on knowledge transfer rather than financial proceeds (Mexico, Egypt…)

Their previous exit form the transaction perimeter can be coupled with a management contract to :

    • improve the profitability of the proposed airport company,
    • preserve synergies linked to a joint-management
    • enable public authorities to continue invest in regional airports strategic for the territory development
  • The inclusion of small secondary urban airports in the privatisation package can enable private operators to master competition and differentiate services for LCC airlines (ex Bergamo airport near Milan, Trevise near Venice...)

On the contrary, the co-existence of two large airports usually decreases profitability and airport connectivity: the closing of the old airport should therefore be considered in the case of greenfield projects

  • Service activities (such as handling, security, bussing..) provided by the airport company can be sold or out-sourced to a subsidiary, before or after the transaction

Handling activities are not considered strategic by most airport investors due to their difficulties to compete with independent players enjoying lower staff costs and higher labour flexibility

Perimeter of the transaction
contractual framework
Contractual framework
  • Asset ownership is not critical for investors; airport privatisations can be structured under two different forms :
    • full transfer of airport assets ownership associated with an operating licence (return of assets whent licence expires or due to the private investor default.
    • concession regime : long term lease of existing assets and transfer of new assets built by the concessionaire to the State at the end of the concession

Lenders should be granted «step-in-rights» in case of default from operators

A long term horizon should be given to investors compatible with required investments

  • Strong obligations can now be imposed to private operators regarding the quality of services provided at the airport :
    • Quality of airport services can today be precisely measured using standards established by international organisations (ICAO).
    • Penalties can be imposed to operators linked to :

- compliance with ICAO service levels

- availability of assets (closure of runways, terminal gates..)

- level of passengers satisfaction measured by regular IATA surveys

Payment of penalties are guaranteed by performance bonds delivered by the lenders or the shareholders

Early termination can be contractualised in case of major default; a fair indemnity should be provided to enable debt repayment

investment obligations
Investment obligations
  • Soft investment obligations enable equity investors to maximise value in the case of mature airports which do not require heavy investments in the short term :
    • submission of an indicative master plan
    • investment obligations only constrained by the respect of minimum service levels defined by ICAO
    • low level of minimal amount of investment with flexibility on timing depending on traffic evolution
  • A more constrained process can be implemented for airports with major infrastructure project developments :
    • submission by bidders of detailed projects on the basis of guidelines provided by Civil Aviation (terminal and RWY capacity …)
    • contractual commitment to execute the proposed project in a defined time-frame
    • signature of a «turn key» construction contract coupled with the airport privatisation

+ enables to obtain firm commitments from banks on the financing of new projects as well as better financial conditions as the risks taken by constructors are fully defined

+ provides a full visibility over the quality of new infrastructures and their implementation

- requires a longer tender process and can only be implemented if the period for infrastructure works is not too long

investment obligations1
Investment obligations
  • The contractual framework should clearly split project responsibilities and risks between the different parties according to their capabilities to manage them :
    • Public authorities responsible for :
      • planning consent and authorisations
      • acquisition of lands
      • construction of access infrastructures
      • providing adequate service regarding air traffic control, police and custom
      • closing of old airport infrastructure including manangement of its possible social and environmental consequences
    • Private Investor mainly responsible for the new airport conception and its operations
    • Civil contractor responsible for the completion of infrastructure works in time and for the contracted cost
  • Indemnities should be paid to the private investor if delays occur for completion due to the default of public authorities
tariff regulation
Tariff regulation
  • Tariff regulation should be precisely defined to grant sufficient visibility to lenders and equity investors : evolution of tariffs usually defined for the next five year period following the transaction
  • Tariff policy needs to balance commercial and financial objectives :
    • finance new infrastructure through tariff increases (ex: Athens tariff increase)
    • keep the airport competitive : potential competition of other airport in the catchment area, competition for hub and cargo traffic
    • enable the development of Low Cost traffic : ability to differentiate tariffs according to provided level of services
  • The regulatory framework should define guidelines respecting ICAO and IATA recommendations :
    • principle of fair return over investments
    • scope of regulated revenues : only aviation revenues derived from a monopoly position (dual till regulation system preferable to single till)
    • option choosen regarding the tariff setting process :
      • negotiations with airlines
      • application of a tariff formula by an independent regulatory body
      • discretionary appraisal by civil aviation based on general principles

A mixed approach combining the consultation of airlines with minimum tariff evolution guaranteed by a formula can provide both good visibility and acceptance from airlines

tender process
Tender process
  • Airport privatisations can last from 8 months (Brussels)…to 4 years (Cyprus): delays are mainly due to preferred bidder dismissals or litigations (from eliminated candidates, unions..)
  • Define transparent tender rules in line with Government objectives
    • qualitative offer separated from financial offer
    • individal weigthed qualitative objectives : proposed development plan, management team, experience in addressing the airport key issues, proposed investment commitments…
  • Define a clear legal framework for the transaction through a careful preparation and enable a possible feed-back from bidders
  • Maximise competition between bidders
    • adequate publicity of the deal evidencing a strong political willingness to implement the transaction (non deal road show)
    • respect time schedule and avoid slippage
    • provide feed back to bidders on their positioning
    • keep competitive pressure until signing
  • Airport is a complex business : a thorough due diligence is needed by bidders to elaborate the best business plan and raise a high level of debt which are keys to maximise price
    • second round with limited numbers of participants
    • large access to management and site visits
    • vendors due diligence on traffic forecasts, insurances, environment…