BAA owner to sell duty-free business to cut debts

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The Independent Online

BAA could be forced to sell one of its airports as Ferrovial, its Spanish owner, admitted that it is at least three to four months away from completing the refinancing of the enormous debts incurred when it purchased the UK airports operator. Ferrovial is increasingly desperate to cut debt interest costs, a significant factor in the almost halving of profits it unveiled yesterday.

According to reports last night, Stephen Nelson, the chief executive of BAA, is to step down, after much criticism of falling service standards at Heathrow, Gatwick and Stansted. Mr Nelson is to be replaced on 1 April by Colin Matthews, a former chief executive of Severn Trent.

The dramatic move is the first big change since Sir Nigel Rudd was appointed chairman last summer with a brief to improve BAA's tarnished image.

Ferrovial first attempted to refinance the £10bn debt it took on to buy BAA in 2006, more than a year ago, and had promised to complete the work by the end of last year, but its efforts have repeatedly been stymied by the crisis in the credit markets. It has also had to cope with a series of run-ins with regulators.

Yesterday, the company said it hoped to sell off BAA's duty-free business and a property portfolio owned by the company during the first half of the year, though the proceeds would account for only a tenth or so of the debt.

In addition, the company is still working on the details of a new bond issue, backed by assets including Heathrow, Gatwick and Stansted, which could raise as much as £8bn to repay existing debt facilities. However, Ferrovial has been told by advisers that the issue of this debt is not possible until the Civil Aviation Authority has concluded a review of the fees it charges airlines – preliminary verdicts suggested that BAA's income could be reduced by £150m after the review.

A spokesman for Ferrovial said it remained confident that a refinancing was possible. "We are preparing to conclude [the refinancing} within three to four months."

Nicolas Villen, the company's finance director, added: "The capital markets are very complicated; we are working on the refinancing – we think it's possible, but we have to study alternatives."

Those alternatives include the sale of one of BAA's airports in the UK, an outcome that could in any case be forced on the company by a review of its business being undertaken by the Competition Commission.

Ferrovial has also appointed bankers to study the potential for using BAA's regional airports, including Southampton, Glasgow, Edinburgh and Aberdeen, as asset-backing for a new £1bn loan. The company is working hard to reduce the cost of servicing its massive debts, which are taking an increasing toll on its bottom line. Ferrovial said yesterday that its profits in 2007 were €733.7m (£552m), 49 per cent lower than in 2006. While the previous year's figures were artificially inflated by one-off asset sales, the Spanish company said the cost of servicing its entire €30bn debt last year had risen from €1.23bn to €1.9bn.

The pressure on Ferrovial to complete the refinancing of BAA is particularly acute because credit rating agencies have threatened to downgrade the status of its existing bonds unless a deal is secured. BAA's own credit rating was lowered to junk bond status in November, while its asset-backed bonds are now at the lower end of the investment-grade ratings.

Ferrovial's 2007 results were the first full-year set of figures to include BAA's trading. The airports operator, under fire for delays and lack of investment in Heathrow in particular, handled 155.7 million passengers last year, up 2 per cent. Heathrow and Gatwick accounted for two-thirds of the $3.82m in revenues generated for Ferrovial by BAA.

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