Bottom Line: Revived BAe takes initiative

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THE REVIVAL in the credibility of British Aerospace since the dark days of last September, when it had to apply to the courts for a capital reduction in order to pay a dividend, is nothing short of remarkable.

Not only does the company, although only a sixth of its size in terms of market capitalisation, feel strong enough now to shrug its shoulders at GEC in discussions over the future of its missile business.

It is also confident enough to take the initiative with its bankers over debt. Yesterday it announced that it was refinancing existing bank lines and extending debt maturity with a pounds 1.4bn, five-year revolving credit facility.

It has managed, in addition, to negotiate a major change in the nature of the covenants attached to its debts. Instead of being based on net worth the restrictions imposed by the covenants will be related largely to interest cover and gearing.

Last month the company revealed plans to create separate subsidiaries for its principal business activities.

Aside from tax efficiency considerations, this will in effect serve to protect the new holding company, BAe, from unexpectedly severe losses in any of its operations.

A prime example of this was the pounds 750m provision, net of tax, made last September to cover the reorganisation of regional aircraft operations which forced BAe into the courts to sanction a dividend.

The two moves - legal reorganisation and change in loan covenants - are linked together and provide BAe with much greater flexibility in day- to-day operations and strategic decisions.

Despite the company's insistence that the changes are not 'disposal-driven', many outsiders suspect that they will help to smooth the path towards a major restructuring of BAe, in particular by removing the constraints imposed by the net worth covenant.

BAe may, for example, draw on some of the pounds 750m provision to meet the revenue costs of putting its Jetstream advanced turboprop activities into a joint venture with another manufacturer. But it will no longer feel constrained by the need to make asset write- downs.

Property and contracting are pointely excluded from BAe's definition yesterday of its core businesses of defence and aerostructures and, interestingly enough, motor vehicles.

So even if Rover, whose balance sheet value is probably some way ahead of trading reality, is to stay part of the family, withdrawal from property and contracting remain on the cards.

Few believe further provisions will be needed on property, but the new net worth covenant certainly makes it much less of a worry.

Having recovered from fears that the regional aircraft deal with Taiwan was collapsing BAe shares at 402p, up 3p, look even better placed.