BAe faces pounds 30m bill for early payment of loans

BRITISH AEROSPACE faces a pounds 30m bill for paying off a portion of its pounds 1.7bn borrowings with the pounds 800m cash raised by selling Rover to BMW. This bill, together with an adjustment for accrued tax and the costs of the Rover deal, will reduce the net proceeds of the 31 January sale to pounds 710m.

The pounds 30m is the amount BAe must pay to some of its lenders as an up- front cost to compensate them for early repayment of long-term loans.

A proportion of BAe's long-term debt is at rates of 10 per cent or more so lenders who are repaid early need to be compensated for the loss of income.

But with interest rates now much lower BAe's profits would benefit from repaying high-interest, long- term loans rather than holding the Rover proceeds on deposit.

The pounds 30m bill is explained in a letter from BAe to shareholders, explaining the Rover sale and convening a 15 March meeting to approve the deal.

Since Rover is being sold for less than its net assets of pounds 1.4bn, a pro forma balance sheet in the circular shows that BAe's shareholders' funds would fall from pounds 1.5bn to pounds 941m as a result of the Rover sale, while net debt of pounds 165m would be transformed into cash balances of pounds 364m.

The low price of pounds 150m BAe paid the Government for Rover in 1988 means BAe is believed to have made an underlying capital profit of about pounds 350m to pounds 400m on the sale.