NAER

22 November 2005

Effective Ways of Financing New Airports

Table of Contents

Section 1 Airports: A Very Financeable Asset

Section 2 Equity Financing Considerations

Section 3 Debt Financing Considerations

Section 4 Recent Examples

1

ALFREDO ZAMARRIEGO

Co-Head of European Transportation and Infrastructure Team

Airports: A Very Financeable AssetSection 1

A Very Financeable AssetAirports: A Very Financeable Asset

2

+ =

Strong Proven ResilienceAirports: A Very Financeable Asset

3

200

400

600

800

1,000

95 96 97 98 99 00 01 02 03 04 0540

50

60

70

80

Total Revenue Aero Revenue PAX

Heathrow(1)

Revenue (£ MM) PAX (MM)

9/11

Interesting Asset for Debt Providers…

Monopolistic characteristics

Regulated source of income

Diversified revenue streams

…And Also for Equity Providers

Potential growth of non-aeronautical activities

Room for operational and financial leverage

Note1. Figures calendarised to December year end from March year end

Source BAA Annual Report

Removal of Duty Free

Increasing Accepted Levels of DebtAirports: A Very Financeable Asset

4

10x

8x9x9x

0

2

4

6

8

10

12

London City Airport AdR BIAC Bristol Airport

Airport RefinancingsNet Debt / EBITDA Multiple (x)

1999 2003 2005 2005

BBB BBB+ BBB+ NR

Source Company Information, S&P

Significant Room for ManoeuvreAirports: A Very Financeable Asset

5

Schiphol

AdP Dublin

Birmingham

AdRoma

Zurich

BAA

CPH

BIAC

Newcastle

ManchesterANA

0

5

10

15

20

25

30

35

AA- A+ A A- BBB+ BBB

Airport Credit Ratios vs. Current Credit RatingLast Fiscal Year FFO / Total Debt (%)

Rating

Source Credit Ratios and Ratings for all except ANA from S&P Airport Report, 29-Jun-05; ANA Credit Ratio from 2004 Annual, Rating from Moody’sNote1. AdP actual rating of AA (negative outlook) due to implicit Government support. According to S&P this rating would not

fall below A+ on IPO hence A+ used as indicative rating

(1)

Equity Financing ConsiderationsSection 2

19%

29%

72%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Airports Toll Roads MSCI Europe

Superior Performance From AirportsLast 12 Months

“Public” Market Gaining MomentumEquity Financing Considerations

6

Potential Forthcoming IPOs

Source FactSet as of 14-Oct-05

…Although Still Not Fully DevelopedEquity Financing Considerations

7

BAA55%

Fraport22%

Copenhagen9%

Vienna7%

Zurich4%

Venice3%

Market Cap by Quoted Company - EuropeAs of October 2005

Total: €17.1 Bn

9.7x

8.4x

7.0x

Low(Vienna)

Average High(CPH)

Average Public Valuations“On the Way Up” (AV / 2006E EBITDA)

Source Bloomberg as of 14-Oct-05 Source Morgan Stanley as of 14-Oct-05

“Private” Market Also Growing…Equity Financing Considerations

8

629

2,167

57

476

1,126

2,221

0

500

1,000

1,500

2,000

2,500

3,000

2000 2001 2002 2003 2004 2005

Equity Values of Selected European Airport Deals - 2000 to Date$ MM

Source Thomson Financial; Based on announced equity value of transaction adjusted for stake acquired

AdRHamburg

NewcastleLuton

East MidlandsBirmingham

Bristol

AdR

Belfast

BIACTBI

HochtiefCPH

…With a Significant Valuation PremiumEquity Financing Considerations

9

> 20x

12x - 14x

Avg. PrecedentTransactions

Budapest ExpectedMultiple

Acquisition MultiplesEV / EBITDA (x)

Potential Forthcoming Trades…

And G

rowin

g

Source Morgan Stanley

What Do the Key Buyers Look For?Equity Financing Considerations

10

Size Traffic

Complementarity Operational

Leverage Financial Leverage

Construction Potential Example

Traditional Airport Operators

Construction Players

Toll-road Operators

Infrastructure Funds

• Airports are increasingly attractive assets for equity capital markets; unique combination of stability and potential for growth

• Increasing pipeline of airport IPOs and capital markets readiness to finance significant expansion programmes (i.e. Fraport IPO, AdP expected IPO)

• Private market is also a very attractive option to maximise value, with a number of strategic partners being very interested in the construction angle

• Strategic partners will likely demand a controlling stake. However, they could also accept the Government to keep significant minority positions (e.g. BIAC)

What Are the Key Messages?Equity Financing Considerations

11

Debt Financing ConsiderationsSection 3

Very Good Current Market ConditionsDebt Financing Considerations

12

2.5

3.5

4.5

5.5

6.5

Jan-

00

Feb-0

1

Apr-0

2

Jun-

03

Aug-0

4

Oct-05

10yr German Bund Yield

European Government RatesYield (%) – Since 2000

Source Bloomberg as of 14-Oct-05 Source Bloomberg as of 14-Oct-05

0

50

100

150

200

250

Jan-

00

Feb-0

1

Apr-0

2

Jun-

03

Aug-0

4

Oct-05

AAA A BBBAA

Credit SpreadsSpread over Libor (Bps) – Since 2000

Yields at historical

lows

Credit spreads between rating categories have compressed dramatically

All Financing Alternatives Are AvailableDebt Financing Considerations

13

Unsecured Corporate Debt Structured Key Objective Bank Financing Corporate Bond Finance

Long Tenure

Reduced Level of Covenants

Ability to Pre-pay

Leverage Potential

Unsecured Corporate Debt: BondDebt Financing Considerations

14

•

• Possible to use as an ongoing source of financing for corporate purposes

• Flexibility (limited covenants)

• Currently very supportive market conditions

• Range of maturities available

• Large market capacity

• May not allow maximisation of debt quantum

• Prepayment difficult

Cons

Pros European Airport Examples

How Have the Bond Markets Changed?Debt Financing Considerations

15

• From 1998 to 1999 (date of introduction of the Euro), issuance volumes quadrupled have from c.€30 Bn to c.€120 Bn

• Market more receptive to issuance from lower down in the rating spectrum

– Proportion of issuance from A and BBB corporates now the largest segment

• Larger number of sectors being represented

• Average size larger

• Range of available maturities increasing

33

123 119

186

132

160

107

75

47%

38%

43%44%

61%

47%48%

37%

33%

41%

38%

33%

24%

19%

8%

12%

0

20

40

60

80

100

120

140

160

180

200

AAA AA A BBB

Composition of Corporate Eurobond MarketIssuance Volumes (€ Bn) – 1998 to Date

Source Bondware as of 14-Oct-05

Capital Market Structured DebtDebt Financing Considerations

16

•

• Typically higher leverage and lower cost of funds achievable thanks to

– Security package granted to investors

– Longer bond maturities matching life of concession / asset vs. traditional financing

• Complexity of structuring

• Limits flexibility going forward

• Best suited for individual projects /assets

Cons

Pros European Airport Examples

Spreads for Different Airport BondsDebt Financing Considerations

17

SchipholAA-2013

AdPA+ (AA)

2012

ADR AAA2013

ADR AAA2023

ADRBBB+2010

NewcastleBBB+2021 Birmingham

A-2021

BAAA+

2013

BAAA+

2028BAAA+

2021

AucklandA+

2009

DublinA

2011

0

20

40

60

80

100

120

140

0.0 2.5 5.0 7.5 10.0

Current Swap Spread of Relevant Airport BondsSpread over Swap Rate

Source Bloomberg for spreads as of 14-Oct-05; FFO / Interest from S&P Airport Report, 29-Jun-05

FFO / Gross Interest

Note1. AdP actual rating of AA (negative outlook) due to implicit Government support. According to S&P this rating would not

fall below A+ on IPO hence A+ used as indicative rating

(1)

What Do Debt Providers Like?Debt Financing Considerations

18

Large catchment area High Barriers to entry / local monopolistic characteristics

Competitive Positioning

Wide Exposure to Airlines

Low dependence on single airline? Exposure to LCC: “Double-edged sword”

Stable Passenger Mix High O&D base Balanced tourism/ business Stable and growing

Stable Revenue Mix Exposure to non-aeronautical activities Airport portfolio vs single asset Strong liquidity position

Favourable Regulation

• “S&P views the various frameworks as benign” …• ….. however, RAB frameworks perceived positively in

the context of major expansion programmes

• Security with fixed income characteristics which is:

– Equity accounting treatment

– Long dated (sometimes perpetual);

– Deeply subordinated

– Can allow cumulative and non-cumulative distributions

Examples

New Instruments? Hybrid CapitalDebt Financing Considerations

19

What is it? Pros

• ‘Equity credit’ from agencies (25 – 100%)

• Tax deductibility of distributions

• Non-dilutive financing

• Can optimise cost of capital

• Increasingly favourable Issuing conditions in Europe:

– Recently revised rating agency guidelines

– Greater clarity on accounting treatment

– Favourable pricing conditions

– Significant investor appetite in the European institutional markets

Case Study: Dong Hybrid FinancingDebt Financing Considerations

20

Transaction Summary• 50% equity credit from both agencies

• 100% equity treatment under IFRS

• Tax deductible coupons

• Non dilutive fixed income financing

• Highly successful transaction in the market– Three day road-show with two teams– 2.8x oversubscribed– Over €3.1 Bn of orders– Representation of over 200 ‘quality’ accounts– Strong aftermarket performance

Transaction Rationale:• DONG used the instrument to strengthen its balance

sheet in light of its M&A activities and capital management objectives

Summary Terms & Conditions

Issuer: DONG A/S

Maturity: 1,000 Yrs

Amount: € 1.1 bn

Ranking: Junior subordinated

Coupon: Yrs 1-10: 5.5% thereafter 3mE+320 bps

Coupon Deferral: At issuer’s option-cumulative through ACSM

Market: European Institutional

Structuring Advisor: Morgan Stanley

Investor Profile

Hybrid Transaction

Fund Managers 41%

Alternative Managers 14%

Pension/Insurance 16%

Banks 23%

Other 6%

• A bond which has either its principal or its coupon with an explicit link to a price inflation measure

– Effectively the Issuer pays a real rate plus a measure of inflation over the life of the bond

• Inflation linked market has significantly developed in recent years as inflation linked Government transactions have built the curve

• Main types are:

– Capital Indexed Bonds

– Interest Indexed Bonds

• Main issuers of these securities are entities who have revenues linked to inflation

New Instruments? Inflation Linked BondDebt Financing Considerations

21

What is it? Pros

• Provides a natural hedge to regulated revenue and cost bases

– Especially valuable to public / semi-public entities

• Also acts as a natural hedge to company’s business risk

Examples

Case Study: National GridDebt Financing Considerations

22

Transaction Rationale:• NG wanted inflation linked debt to provide a natural

hedge to their regulated revenue and cost base and also to take advantage of the technical supply / demand imbalance that existed in the market

Transaction Summary• Largest ever pure corporate index-linked issue to be

launched in the primary markets• All tranches priced at the tight end of spread talk• Morgan Stanley proposed and negotiated an

unprecedented use of the monoline insurance wrap (Ambac), rating bulk of issuance AAA

• Single order of £120MM from one institution highlighted depth of index-linked demand amongst the UK pension funds

• Morgan Stanley hedged the entire £300MM 2018 tranche on a sole basis

• Morgan Stanley acted as Gilt manager at the time of pricing, facilitating the closing out of the entire hedge position, across all tranches, and facilitated the entire flow of Gilts out of the investor base, ensuring seamless execution

Summary Terms & Conditions

Issuer: National Grid

Type RPI-Linked / LPI-Linked

Maturity: 18 Years / 28 Years

Amount: £200 MM / £40 M

Ranking: Senior

Coupon: 3.806% / 3.589%

Market: UK Institutional and Selected Europe Institutional

Structuring Advisor: Morgan Stanley

Investor Profile

RPI Tranche LPI Tranche

Insurance Co’s39%

PensionFunds12%

IMG’s44%

Other 5% IMG’s

21%

Insurance Co’s79%

• In general, airports are increasingly attractive assets for debt capital markets due to the stability of their cash flows

• Conditions in the debt markets are currently very attractive (liquidity, interest rates, credit spreads)

• Major airport expansion plans can be addressed with a combination of bank (loans) and capital market solutions (longer term bonds)

• More sophisticated debt products can also offer very attractive financing solutions (e.g. hybrid capital and inflation-linked bonds)

What Are the Key Messages?Debt Financing Considerations

23

Recent ExamplesSection 4

BAA Terminal 5 ExpansionRecent Examples

24

BAA Terminal 5 Expansion – Some FactsRecent Examples

25

• Construction of T5: a £4.2 Bn development project

– Planning Permission applied in 1993, approved in 1999

– Work on-site began in 2002, scheduled for completion in 2008

• Heathrow Capex of £3 Bn since 2003, of which c £2.4 Bn on T5, accounting for c. 90% of Heathrow's annual capex spend and c. 80% of BAA's group capex each year since the project began

• In addition to investing approx. £4.2 Bn to build T5:

– £450 MM being spent on airfield and related improvements to prepare for the A380

– £95 MM being spent on extension to T1 international departure lounge to double seating and space

– £300 MM already spent on Flightswitch to enable T1 to accommodate long-haul and short-haul (new immigration hall, premium check-in facility)

– £100 MM already spent on refurbishment of T3 departures lounge

BAA Expected Debt EvolutionRecent Examples

26

5.2

4.6

3.9

5.55.65.75.75.3

4.8

4.24.6

4.74.9 4.9

4.4

3.9

3.4

2.7

2.1

4.3

0.0

1.5

3.0

4.5

6.0

05 06E 07E 08E 09E 10E 11E 12E 13E 14E2.0

3.0

4.0

5.0

6.0

BAA Gross Debt ForecastMar Y/E Value (£ Bn) Gross Debt / EBITDA (x)

Source Morgan Stanley Equity Research

300250

200

900

513

400425424

200

0

100

200

300

400

500

600

700

800

900

1,000

'07 '08 '09 '13 '14 '16 '21 '28 '31

BAA Corporate Bonds – Total: £3.6 BnIssues Outstanding by Maturity (£ MM)

Opening of T5

Source BAA Annual ReportNote1. Convertible bonds2. Spread vs. £ Libor swap spreads3. Spread vs Euro swap rate

(1) (1)

+19 +43 +39(3) +45 +56 +68 +60Spread over

Swaps (bps): (2)+15 +25

27

Questions ?