European Infrastructure Finance Yearbook - Investing In Bonds ...

TRANSPORTATION INFRASTRUCTURE
60 ■ NOVEMBER 2007
depreciation of remunerated assets, and
required returns on the average value of
remunerated assets.
Although the CAA has demonstrated flexibility
by allowing BAA to offset revenue losses caused
by external events, such as the loss of duty free
revenues in 1999, BAA does not benefit from
regulatory protection in a situation of financial
distress caused by financing decisions.
Price control review: initial proposals.
The formal process for setting the charges for Q5
began in December 2005 when the CAA
published its policy issues paper for consultation.
BAA then rejected the CAA’s December 2006
initial regulatory proposals as failing to
incentivize the company to invest at its airports.
The next stage in the process sees a review by the
CC before the CAA sets prices in early 2008.
The CAA has proposed that the allowed
weighted average cost of capital (WACC) should
be cut to 5.90%-6.20% for Heathrow and
6.30%-6.70% for Gatwick, which would be a
marked reduction from the 7.75% allowed in
2003. This change could arguably prompt ADIL
to lower its intended capital program. Such large
movements between quinquennia may well result
in rating volatility for BAA in the future.
Significantly, the CAA has stated that it will not
reconsider the level of WACC in view of the tax
shield provided by the higher leverage ADIL
intends to implement, or adopt a higher
proportion of debt in the WACC calculation. This
is a credit positive for BAA.
The CAA has put forward indicative ranges for
caps on airport charges at Heathrow of the retail
price index (RPI) plus 4.0%-8.0%, compared
with the current rate of growth in price-caps of
RPI plus 6.5%. For Gatwick airport, the CAA has
proposed a price-cap ranging from RPI minus 2%
to RPI plus 2%, compared with the current rate
of growth of RPI plus 0%. Standard & Poor’s
does not consider that these changes will affect its
analysis. Importantly, Heathrow will be
authorized to continue implementing high fee
increases. This is a credit strength, given that
Heathrow remains the largest airport in the U.K.
in terms of passengers, and given the significant
capital expenditure plan underway.
The price control proposals suggested by the
CAA are now with the CC. Given the CC’s track
record, we expect it to continue the supportive
regulatory regime for investment that it delivered
STANDARD & POOR’S EUROPEAN INFRASTRUCTURE FINANCE YEARBOOK
in the fourth quinquennium.
Finally, the CAA has recommended that the
government should consider removing the
requirement for the CAA to set price controls at
Stansted, and instead dedesignate the airport. In
theory, BAA could therefore implement higher
charges, but this may prove difficult considering
the airport’s focus on low-cost carriers. This
decision reflects the CAA’s acknowledgement that
BAA currently charges below the regulator’s pricecap,
and the view that Stansted does not have
significant market power. The dedesignation is
viewed as mildly positive overall, depending on
the future competitive position of Stansted and
how “stranded asset risk” is mitigated. We
understand that ADIL continues to see Stansted
airport as a core asset.
The potential removal of Stansted from the
regulated asset base (RAB) is unlikely to affect the
proposed securitization of BAA, given that the
airport only accounts for about 9% of the
combined RAB of £11.3 billion (at March 2007).
About £10.3 billion of regulated assets will
remain to back the securitization financing, which
should ensure that the transaction goes forward.
Standard & Poor’s recognizes the importance of
the method by which Stansted’s potential
dedesignation will be accounted for within the
ring-fence structure.
Office of Fair Trading and Competition
Commission investigation.
The OFT launched an investigation into the U.K.
airports sector in 2006. In December 2006, it
reported its preliminary findings that BAA’s
ownership of its airports, the system of economic
regulation of airports in the U.K., and capacity
constraints combine to prevent, restrict, or distort
competition and referred the supply of airport
services by BAA within the U.K. to the CC. This
review is expected to take up to two years to
complete. On Aug. 9, 2007, the CC released a
statement of issues it would look at following the
reference made to it by the OFT in March 2007.
The CC declared it would now determine whether
there are any features of the market that prevent,
restrict, or distort competition, and, if so, what
remedial action might be taken. The CC expects
to publish for consultation in the early part of
2008 a document setting its “emerging thinking”
on all the key issues. It currently aims to publish
its provisional findings around this time
next year.