Outlook: BAe

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The Independent Online
FROM DAVID BOWIE with his royalties to Newcastle United with its gate receipts, everyone, it seemed, was just dying to securitise their future earnings streams. Securitisation was one of those clever investment banking brainwaves, a form of alchemy that suited all. The securitiser got his money up front and risk free, rather than spread over future years, the market got a ready supply of high-yield bonds, and the investment banker got his fee.

Then along came the credit crunch and, for the time being at least, there seem to be no buyers for all these sellers.

British Aerospace has therefore come up with novel way of doing what amounts to much the same thing. BAe has some pounds 2.4bn of contingent liabilities sitting in its balance sheet relating to past sales of regional aircraft, a business the company is now largely out of. These liabilities relate to sales already booked, but not yet paid for since the sale was on the basis of a lease or the assumption of a residual value not yet realised.

What BAe has done is persuade the insurance market to acquire the great bulk of the potential risk that this money will not be paid. The cost is to be about pounds 38m as a one-off charge against profits. It is impossible to tell whether this is a good deal for the company or not, as the risk of this money not being paid may be quite small, but BAe does have a point when it says a manufacturing company is involved in quite enough economic and product risk as it is without having a big chunk of financial risk hanging around on its balance sheet as well.

The exercise also cleans up the balance sheet ahead of whatever merger permutation - European, American or British - happens this morning to have taken Sir Dick Evans' fancy. Sir Dick wants to be in a position to announce his retirement as chief executive by the time of the annual meeting in April. This little bit of balance-sheet housekeeping brings the big consolidation he is determined to pull off before then a stage closer.