Could the regulatory burden push BAA over the edge?
The long-term future of UK airport operator BAA has today been called into question with suggestions that the current economic climate is not conducive to a realisation of "real asset values" for regulator instructed asset sales. The company has been under pressure for some time to release its stranglehold on the UK airport sector with the suggestion that the company must sell Gatwick, Stansted and either Glasgow or Edinburgh airport within the next two years.
However, under the terms of various debt financing contracts which the company entered into some time ago, if any assets are sold for less than 85% of their regulated value this could force a technical breach of the company's banking covenants and allow lenders to call in their debts. While the sale of Gatwick would appear to be in line to raise around £1.6 billion, which is the regulated value for the asset, there are concerns that other forced asset sales may not be so lucky.
The onus is now on the UK regulator to loosen the regulatory strings which are being attached to the company and perhaps offer some more leeway for the proposed asset sales. While any potential bankruptcy threat to the company would appear to be highly unlikely, there is the option for lenders to call in their debts if the company does technically breach its banking covenants. Whether this is a high-risk strategy to buy more time from the regulator or a real fear from within the market remains to be seen.
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