Whitehall demanded BAA probe

5.4.2009   (Sunday Times)

Papers show government asked Merrill Lynch to look into the airport operator’s


WHITEHALL OFFICIALS asked Merrill Lynch, the investment bank, to investigate
the "robustness" of BAA’s finances before Christmas after a slump in the the airport
operator’s bonds.

The Merrill Lynch report, revealed in papers released to The Sunday Times under
the Freedom of Information Act, also covered Ferrovial, the Spanish group that
is BAA’s controlling shareholder.

Notes of government meetings called to discuss BAA’s sale of Gatwick show the
Competition Commission separately asked BAA to provide a "review of their financial
profile", a request that left the company "surprised and concerned".

Disclosure of official concern over BAA’s finances will add to City fears over
the company and increase speculation that it may need to raise fresh debt or equity.
Some transport experts believe the group may struggle with the billions in capital
spending that are planned for Heathrow, including funds for a controversial third

London mayor Boris Johnson will begin a legal challenge to the third runway this week.   Kulveer Ranger, Johnson’s head of transport policy, said the business case
did not outweigh "environmental concerns in terms of noise and air quality".

A Ferrovial-led consortium bought BAA three years ago for £10.3 billion.     Last
year it completed a delayed refinancing in a complex £13.4 billion deal.

Analysts think BAA’s finances will be stretched by a decline in traffic – it
fell in the UK last year for the first time since 1991 – and by lower-than-expected
receipts from the sale of Gatwick and Stansted.

Robert Crimes, analyst at Credit Suisse, recently estimated that BAA faced a
shortfall of about £500m ahead of a deadline to repay £1.5 billion of junior debt
in 2011. Crimes thinks the company will need to issue about £1 billion of new
bonds, and would face a greater cash shortfall if it could not.

Suspicions that BAA might look at a new fundraising have been deepened by its
hiring of Fred Maroudas, Network Rail’s director of funding, as director of treasury.  
Maroudas oversaw Network Rail’s £21 billion bond programme.

BAA declined to comment yesterday on the disclosures. Ferrovial has played down
speculation over its indebtedness, telling investors it was in no danger of default,
and that its UK airports were "resilient".

Merrill Lynch was asked to investigate on December 17. A note of the meeting
said: "We discussed the way BAA’s bonds were trading, which was partly as a result
of broader concerns in the market around utility bonds. There was a risk, for
example of [passage deleted].     It was agreed that Merrill Lynch colleagues should prepare a paper on the
robustness of BAA’s finances for discussion . . . the paper should also cover
similar ground for Ferrovial."

At a meeting in February, officials discussed "Ferrovial’s commitment to delivering
the new runway at Heathrow".