https://www.ft.com/content/98e6b128-...1-31da4279a601
Fears mount that taxpayers and passengers will be landed with big chunk of bill - leveraged structure seen as inappropriate for such a large project
The contentious Heathrow Northwest Runway scheme is by a factor of 2 the most expensive option of the three considered.It involves lavishing £14bn or more on a third runway that will have to bridge 12 lanes of the nation’s busiest motorway. It will also entail further billions in spending to upgrade train and road access links to what is already a highly-congested airport.
What puzzles onlookers is how these astronomical sums will be paid for.
If you have a lot of debt on your balance sheet you are less able to absorb any shocks.
Since 2006, when Heathrow’s then-listed owner BAA was removed from the stock market, the airport has been owned by a consortium led by the listed but family-controlled Spanish construction company Ferrovial. This has steadily expanded and now includes sovereign wealth funds from Singapore, Qatar and China, and the UK’s own Universities Superannuation Scheme Pension Fund. The regulatory system surrounding airports allows owners to collect a return based on the regulatory value of their assets — inadvertently encouraging them to expand regardless of whether it makes sense. This stable framework has allowed Heathrow to operate with almost no equity capital.
According to Heathrow Airport Holdings’ 2017 accounts, borrowings stand at £13.4bn — not far shy of the £15bn value of its regulatory asset base. Equity stood at just £703m.Indeed, investors have been pulling out more in dividends than Heathrow has been earning. Last year they received a payout of £847m even though post tax profits were just £516m, implying that the corporate debt was used, in part, to fund these returns.
Most agree that this leveraged structure is wholly inappropriate to support a project as large as the third runway. It offers no leeway for construction risk on what will be a highly complex engineering challenge. Willie Walsh, the chief executive of IAG, has fiercely opposed the runway and has said he has “zero confidence” that it will be built on time and on budget.
Martin Blaiklock, an infrastructure consultant and former project banker, believes that Heathrow needs substantially more equity capital. He accuses investors of “gradually stripping the company of assets, so that the company is close to being “bust”. “The current (unsecured) creditors could bring LHR to its knees by demanding immediate repayment,” he said.“If you have a lot of debt on your balance sheet you are less able to absorb any shocks such as cost overruns because you still have to keep paying the interest, whereas, if such costs are funded by shareholder equity, you can just stop paying distributions.”Heathrow already needs to raise a lot of debt simply to stand still. Around a third of its borrowings — some £4.5bn — will fall due within the next five years. And while the rating agency Moody’s has given the company a stable rating, it noted that “this high level of maturities and the company’s high leverage limit its ability to withstand unexpected external shocks.”
According to the UK Airports Commission, an independent body set up in 2012 to consider how the UK can “maintain its status as an international hub for aviation”, the new runway could saddle Heathrow with as much as £27bn of debt.
Critics also question the propriety of Heathrow’s complex and opaque structure given its privileged status as an infrastructure asset of national importance, first built by the state. There are at least 10 corporate layers between Heathrow Airport Limited — which is licensed by the aviation regulator, the Civil Aviation Authority — and shareholders. “If you’ve stripped out all the profits and dividends, and then you get a regulatory settlement that supports your new capital structures that really is having your cake and eating it,” he said. “Taxpayers are not funding them directly, but ultimately we will end up paying whether it’s through the price of a beer in the airport or the cost of the ticket."