BUD gets innovative refinancing
Budapest Airport successfully completed a comprehensive €1.4bn debt refinancing and €1.1bn swap restructuring on September 25 2014, averting a potentially highly disruptive debt restructuring. By Tom Smyth, managing director and co-head of European Debt Advisory, Rothschild.
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One of the largest ever refinancings to take place in Hungary, the Budapest Airport (BUD) deal required financial adviser Rothschild to approach 65 lenders to achieve oversubscription, involving a club of 19 lenders and nine swap counterparties. The transaction included the first significant pay-if-you-can payment-in-kind notes ever to be issued in Hungary.
Highly linked to the development of the Hungarian economy in the post-Soviet era, Budapest Airport had humble beginnings in 1950 with just a single runway and terminal building. By 1989, annual passenger numbers had reached around 2.5m, doubling to circa 4.5m by 2003 following the country’s transition to a market-based economy.
Over the following five years, spurred by Hungary’s admission to the European Union in 2004, annual passenger numbers doubled again, to 8.5m, and it was during this period that the financing arrangements addressed by the refinancing and swap restructuring were put in place.
In 2005, the airport was privatised under a 75-year concession agreement signed by the Hungarian government and BAA, the UK airport operator. Two years later the concession was sold to a consortium of investors including airport management company AviAlliance (then owned by the construction giant Hochtief but since acquired by the Canadian pension investment manager PSP Investments); Caisse de dépot et placement de Québec, the public sector pensions operator in the Canadian province of Québec; the Singaporean sovereign wealth fund GIC; a fund managed by Goldman Sachs and German development bank KfW.
That acquisition was financed with a debt package worth around 14x Ebitda, including a structured €770m 14-year 5.771% interest rate swap and two other shorter-dated swaps.
After reaching a peak in terms of passenger traffic in 2008, the financial crisis affected passenger numbers globally, but the airport managed to recover substantially in 2011, reaching a new passenger record of 8.9m. However, in February 2012 the collapse of Hungarian airline Malev severely reduced traffic through Budapest: the airport lost circa 35% of its passengers overnight.
BUD’s management was able to end 2012 on-budget and replace the lost traffic by bringing in Ryanair and in parallel stepping up Wizzair’s presence at the airport, but a funding cliff was looming: it needed to refinance €1.4bn of debt in less than two years and remained around 11x leveraged. This included a mark-to-market liability of €280m on its swap commitments, or around 2.2x Ebitda.
With the Malev collapse and challenging Central and Eastern European debt markets weighing on the company, it appointed Rothschild at the end of 2012 to conduct a strategic review of capital structure options. The overriding objective was to secure a stable capital structure on optimal financing terms. This was to be achieved while maintaining the Hungarian government agreements, in particular the debt guarantee; satisfying all requirements under existing documentation; and minimising any potential equity injection by the sponsors.
By summer 2013 the same challenging conditions remained in place. Passenger numbers had recovered to pre-crisis levels but BUD needed another year of growth to be able to refinance. Local debt markets remained out of favour with investors, with Hungarian government bond spreads out to 3.5%, and the additional complication of a parliamentary election in 2014.
Preparing a solution
Soundings showed that appetite for new equity investment behind the existing debt structure was extremely limited, so Rothschild took a dual-track approach – taking early precautions to prepare for prolonged amend/extend discussions while maintaining flexibility for a refinancing should trading and market conditions improve.
The sponsors reviewed their options during the first half of the year, with extensive due diligence and lender education undertaken during the summer. Discussions began with the existing lenders in the third quarter of 2013 and an initial amend and extend proposal was scheduled with the lenders’ co-ordinating committee for the fourth quarter.
As discussions ensued with existing stakeholders, it became clear that any restructuring solution would be lengthy and disruptive to the business, given the polarisation of the lending syndicate between exiting and extending members, and the complexity of the sponsors’, lenders’ and government’s negotiating positions.
As negotiations continued into late 2013, BUD’s trading continued to improve. Over that period, Rothschild’s debt team noted the development of the junior and mezzanine components of the debt market, enabling it to consider them as part of a potential solution to BUD’s requirements.
With the potential offered by that market in mind, Rothschild proposed a structured solution introducing junior debt as a means of satisfying all stakeholders’ objectives as far as possible. The structure was designed to achieve five key aims:
* Provide an exit for some existing senior lenders, while allowing others to roll into new senior debt;
* Provide a significant deleveraging of the senior debt, allowing BUD to achieve an on-market senior refinancing;
* Limit the need for a fresh equity injection from existing sponsors;
* Retain a government guarantee, both for existing senior lenders and for the incoming junior investors;
* Restructure, roll and partially break the existing swaps.
The new junior/senior structure was launched in January 2014 and required nine months to complete, from pre-sounding to closing. Pre-sounding was complete by March 2014; the negotiation of terms took place between the April and June; and documentation, implementation and closing were achieved between July and September.
All parties agree this was a great success for such a large and complex infrastructure deal, involving multiple facilities, swap restructuring, an innovative implementation process and a large number of parties with conflicting objectives.
Innovating to refinance
Rothschild had to approach 65 potential counterparties across the capital structure of the new deal in the market-testing phase, to achieve oversubscription across both senior and junior tranches and minimise the requirement for an equity injection by the sponsors.
The junior notes were the first significant pay-if-you-can notes issued in Hungary. Rothschild approached more than 20 institutions to act as anchor investors in a large market-testing process.
Rothschild led the co-ordination of a club of 19 lenders and nine swap counterparties to complete the deal, with the stretched nature of the refinancing and limited oversubscription necessitating a highly co-ordinated and carefully prepared execution.
The Hungarian government extended its guarantee of the previous financing should the concession agreement be terminated – a vital feature to attract new lenders. The deal was therefore subject to government approval and Rothschild was central to BUD’s discussions with the government and MNV, the Hungarian state body managing state assets.
Headline terms included:
* €1.1bn of five-year senior bank facilities, priced at Euribor plus 300bp, ratcheting up to a maximum of 375bp. This to be amortised through a cash sweep ranging from 30% to 75% of free cashflows;
* Junior debt comprising €300m of pay-if-you-can notes priced at 13.5%;
* €1.1bn of swap arrangements, including: €770m of existing 5.771% interest rate swaps extended to match the maturities of the new facilities; a €132m 5.771% reverse interest rate swap; and a €142m new five-year on-market swap paying 0.6185% to ensure that 75% of the facilities was hedged;
* The stretched leverage refinancing represented senior leverage of 7x Ebitda; 9.2x incorporating the junior debt; and 11 times including the mark-to-market of the swaps.
The unique financing structure optimised headroom against financial ratios relating to the concession agreement through both the structuring of the junior notes and the swap restructuring.
Of the junior debt, €50m was used for the reverse swap to offset part of the extended €770m existing interest rate swap. The €770m interest rate swap featured a break clause at the option of the swap counterparties in December 2014, obliging BUD to repay the mark-to-market liability of around €290m if exercised. The other two IRS arrangements of €300m and €60m were closed out.
Rothschild led a complicated process to maintain asset security and the government guarantee of debt granted under the previous financing. This included the sale of debt exposures from exiting lenders to new ones, in concert with an amend and extend of the facilities for remaining lenders to reflect the new terms. The debt sale and swap execution had to be completed on the same day, requiring a pre-funded escrow account.
The investor club comprised:
*Senior lenders– BBVA, BNP Paribas, Crédit Agricole, Deutsche Bank, EDC, HSH-Nordbank, ING, K&H, KBC, Natixis, RBC, Siemens, SMBC, Société Générale, UniCredit Hungary
* Junior lenders– Deutsche Bank, Macquarie, Park Square, Credit Suisse. Plus a €50m participation by core sponsors CDPQ, GIC and PSP Investments
* Swap counterparties– BBVA, BNP Paribas, Crédit Agricole, Deutsche Bank, K&H, RBC, SMBC, Société Générale, UniCredit
The refinancing involved a large and diverse group of participants, including around 30 existing lenders, 15 refinancing senior investors, four junior investors, 12 new and existing swap providers and five shareholders.
As the company’s adviser, Rothschild co-ordinated the transaction, involving its infrastructure, restructuring and hedging teams as well as their local expertise. Rothschild worked alongside Mayer Brown and White and Case as the company’s counsels.
Other parties making significant contributions included Deutsche Bank, which participated across the capital structure; Société Générale and SMBC, which acted as senior documentation banks; UniCredit and K&H, which acted as key local banks; Park Square and Macquarie, anchor investors in the junior tranche; BNP Paribas, which co-ordinated the swap execution process; and Linklaters and Clifford Chance, which advised the senior banks and junior investors respectively.