Travel chaos fails to dent BAA credit rating

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Credit rating agencies poured cold water yesterday on suggestions that they are poised to downgrade BAA's bonds in the wake of last week's alleged terrorist plot to down transatlantic flights.

The three major agencies - Fitch Ratings, Standard & Poor's and Moody's - all put their assessment of the airports operator's credit- worthiness under review after its £10bn takeover of Ferrovial last month.

They took this step because the Spanish construction group borrowed just shy of £9bn to finance the deal, most of which it wants to place on BAA's balance sheet alongside £5.3bn of existing net debt.

Higher debts carry greater risk for creditors (bondholders), and ratings are expected to be changed to reflect this only after Ferrovial unveils BAA's new capital structure early next year.

Airports were not downgraded in the wake of the 11 September attacks, and rating agencies stressed that BAA's new debt structure, not last week's events, would drive any change to their bond classification.

John Hatton, the managing director of Fitch, said: "There has to be a significant reason for changing the rating, particularly if the new capital structure has not been defined yet. We don't know the longer-term effects on BAA's profits of higher security costs and lost duty-free sales. That's going to take months."

Moody's said the latest crisis has no immediate direct impact on the credit quality of European airports. The terror factor has been embedded in credit ratings since the September 2001 attacks in the US, it added.

At present, BAA commands ratings comfortably within investment grade. The agencies do not rate the debt raised by Ferrovial to finance the takeover.

The lower a company's creditworthiness the more it is forced to pay to borrow, typically by a higher coupon on bonds.

Ferrovial is unlikely to unveil BAA's new capital structure until early 2007 when it refinances the £9bn it borrowed for the acquisition. Of that, some £7bn was less risky "senior" debt and £2bn lower-rated "junior" debt.

Financing was provided largely by Royal Bank of Scotland, Citigroup and Spain's Banco Santander, and to a lesser degree by HSBC and France's Calyon. The five banks have already sold on almost all of that debt to other financial institutions.

Until a decision has been taken about how much of the £9bn will be refinanced, or how much extra debt will be heaped on BAA, the agencies cannot settle the extent of any resultant downgrade.