Monday, 10 March 2008

Bumpy Landing Ahead in the UK for the Caisse de Dépôt?

Our massive Canadian pension funds like the Ontario Teachers, the Ontario Municipal Employees and the Caisse de Dépôt nowadays routinely look beyond the public equity markets to invest Canadians' pension savings. They get into private equity deals and buyouts, such as the current hot item, the takeover of BCE by the Ontario Teachers.

Back in 2006, the Caisse was a minority partner (a 29% stake) in the buyout of BAA plc, which runs a bunch of UK airports, including Heathrow, Gatwick and Stanstead around London and Glasgow, Edinburgh and Aberdeen in Scotland. The deal was led by an ambitiously expanding Spanish company Ferrovial. The words "ambitiously expanding" should give you the clue to what comes next and what explains the looming problem. Yup, you guessed right, the deal was largely financed with the cheap debt available at the time, about £9 billion worth, or $18 billion CAD (give or take a few hundred million depending on the exchange rate). The buyout consortium is snowed under by debt! Unfortunately, debt doesn't eventually melt like snow does.

Now the new owners are finding out that leverage is risky, as the bursting of the credit bubble means they cannot find cheap financing, their borrowing costs are going up and there is no prospect of reasonable terms in the next few years when the bulk of the refinancing will need to happen. The gory details are well laid out in this posting on the Aviation blog. (I love the posting's likening of Heathrow to "the only building site in Britain with its own airport" - amusing and all too true.) As the article relates, BAA's debt rating is now at junk level. How the debt problem will get resolved is not yet clear amongst the possibilities of sale of some airports, cuts in the capital expenditures, or new equity injections. Whatever the way out, the original partners, the Caisse among them, will end up losing. How much of a hit the Caisse ends up taking is an open question. BBC economics editor Robert Peston speculates that the buyout consortium's equity stake could even get wiped out. So far, nothing on the Caisse website or in the annual report even mentions BAA apart from the original announcement of the deal; maybe they aren't worried about the c.$5 billion at stake given their $155 billion in assets, or maybe they haven't noticed BAA among the 3000 companies it boasts of having invested in around the world.

In aviation terms, the Caisse is on a plane bound for the UK. There is very bad weather awaiting at destination but the plane must land eventually and it hasn't enough fuel to divert to another airport.

I'd guess the bottom line for air travellers will be slower construction and continued chaos that causes so much discomfort and delay. The presence of regulators to limit BAA's charges to customers (like airlines) will hopefully prevent the costs from being passed too quickly to consumers but eventually we end up carrying the can when such essential facilities run into trouble.

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