FGP Topco Limited - is Heathrow's owner

British Airports Authority was privatised in 1987 as BAA plc. In 2006 it succumbed to a hostile takeover bid and was acquired by a consortium led by Spanish Ferrovial (62%) as FGP Topco Limited, the current owner of Heathrow. The sale price of 10.1 billion was raised by Ferrovial's cash of just 456 million which, with the consortium's loans, raised 4.3 billion of "equity" for control of the company. By the end of 2006 FGP Topco Limited had borrowed the other 5.8 billion needed to complete its takeover.

In June 2006 FGP Topco had acquired BAA's debt of 2.9 billion, while by the end of December 2006 it had debts of 13.5 billion, with the difference of 10.6 billion paying off the "equity" and borrowings used for the acquisition of BAA, thus getting it for free. It owned seven major UK airports, until by 2014 those other than Heathrow were sold, raising 4 billion. Ferrovial's stake is now reduced to 25% as one of the 90% foreign shareholders. FGP Topco's financial statements are signed off by Ferrovial's Jorge Gil.

As the "top company" in which the accounts of it and the other 12 major subsidiaries are consolidated, it owns Heathrow Airport Limited (number 12 in the chain) which is licensed to operate and be regulated by CAA. BAA plc was delisted as BAA Limited and renamed Heathrow Airport Holdings Limited (number 4 in the chain).

It has 4 finance companies. ADI Finance 1 and 2, (2 and 3 in the chain), Heathrow Finance plc (8 in the chain) and Heathrow Funding in Jersey (joint 10 with Heathrow (AH) Limited). FGP Topco's current debt of 14 billion is raised by issuing bonds, 20% in the UK by Heathrow Finance plc and 80% offshore by Heathrow Funding Limited. In the prospectuses it states that withholding tax on interest payments will not be payable and if it is the bondholder will be compensated.

In each of the 13 main companies there are Profit and Loss reserves, the aggregate of which is 22 billion. Rather than spend this on capital expenditure it borrowed 14 billion, the financial costs of which were set against the operating profits, producing losses for six of the ten years from 2007 to 2016.

Over this decade, instead of paying corporation tax, it has gained 860 million in tax credits and it has paid its bondholders around 6 billion in interest, saving them perhaps 1 billion in withholding tax. It paid its shareholders (90% foreign owned) 2.5 billion in dividends.

It was able to raise its debt as the CAA regulator sets its allowable airport charges at a "price cap" in accordance with 7 Regulatory Asset Base (RAB) "building blocks" including capital invested. From 2007 to 2016 the airport charges have risen from 8 to 23, bringing them up to 65% more than competitive hubs in Europe.

The airlines have refused to pay additional charges to fund the airport expansion, so the automatic regulatory raising of the price cap will not transpire. The issuing of the bonds by the finance companies depends on the agency ratings, which in turn depend on the maintenance of the "regulatory environment" which cannot continue, if as promised by Heathrow and demanded by the airlines, its charges will not rise.

The capital costs of the expansion are ill defined as 17.6 billion, but the Airports Commission added 13.4 billion of "core capital" and 16.5 billion for asset replacement. Instead of the 5 billion for surface access costs TfL reckon it to be 18.6 billion. With interest payments on contractors' progress payments, the 66.1 billion could easily rise to 70 to 80 billion.

Heathrow's traffic is expanding without the runway with the deployment of bigger aircraft and the 50% extra traffic claimed by the building of the runway will be achieved instead by raising the average number of passengers per flight to 255, while the ultimate 130 million passengers per year can be achieved with 290.

The reluctance of the airlines to pay additional charges will mean that the current financing entirely by debt cannot continue. While capital spent on improving the handling of more passengers arriving and departing per flight is recommended, capital spending on a runway that is not needed cannot be justified, nor can it be raised without raising of airport charges.

FGP Topco's paid up shares total only 13.1 million for which investment they have "earned" 3.02 billion in dividends (with 525 million paid in 2017). It is unlikely that they will raise the 20 to 30 billion of equity needed to finance costs of 70 to 80 billion from such a low base and for a runway which is not needed.

John Busby 17 June 2018