Insights from the corporate front line: Brisbane Airport and the COVID-19 crisis
Airports around the world have gone quiet as result of COVID-19, bringing corporate liquidity to the fore. Brisbane Airport Corporation was able to re-engage the Australian domestic market in late June for a deal it was looking to execute prior to the crisis. The airport’s head of corporate finance, Warren Briggs, speaks with KangaNews about the deal process and crisis management.
Brisbane Airport’s A$850 million (US$584 million) deal comprised A$250 million of six-year and A$600 million of 10.5-year notes. Commonwealth Bank of Australia, MUFG Securities and National Australia Bank led.
The last few months have obviously been fairly tumultuous for the travel industry, including airports. What challenges has Brisbane Airport faced from a funding and liquidity perspective?
We had scheduled a roadshow in early March off the back of our annual EMTN programme update and elected to proceed despite the backdrop of an escalating situation with COVID-19. This was done as a combination of physical meetings complemented by telephone and video conference as new social-distancing measures were beginning to be implemented.
We had a good response from investors about the underlying airport credit. However, markets were displaying heightened volatility so we decided to put the process on hold.
The focus then turned to our liquidity position. Both Moody’s Investors Service (Moody’s) and S&P Global Ratings (S&P) published reviews of the airport sector, and Moody’s in particular focused on Brisbane Airport’s liquidity position in light of our upcoming maturities.
We had more than A$450 million of undrawn bank lines at the time but there was clearly a level of concern about how we would manage our liquidity requirements over the next 6-12 months.
In response we went to our existing bank groups and within 2-3 weeks we had put in place a new, A$840 million, 18-month bank facility. This ensured we had a strong liquidity buffer to get through whatever would come out of the pandemic.
In April and May, we saw 95-98 per cent less passenger traffic as international and state borders were closed. This meant collapsing revenues in parking and transport, retail, and duty free.
Responding to the crisis, we took a hard look at costs and cut expenditure wherever we could. We dropped our capital expenditure plans for financial year 2021 to A$90 million from A$470 million, for example. We also implemented a restructure of our hedge book to realise A$75 million of interest savings over each of the 2021 and 2022 financial years.
Moody’s had put us on review for downgrade when the rest of the sector was on negative outlook. But addressing our liquidity position resulted in our rating being moved back into line with our peers. S&P also had the sector on negative credit watch.
What eventually gave you confidence to execute the deal?
We had to update our disclosures, and this gave us the opportunity to re-engage with investors. Our performance has been tracking above our projected base case, which were able to share with investors, and this combined with a positive market backdrop gave us the confidence to push ahead with the deal. The trigger for us to proceed was the release of an S&P report reaffirming our credit rating at triple-B.
In light of the uncertain backdrop, we adopted a more cautious stance in approaching the market. This involved taking a couple of days of additional informal feedback from investors prior to launching an official indications of interest (IOI) process on 22 June. The response to this was very encouraging and we received more than A$1.5 billion of indicative interest.
This gave us the confidence to move forward with a formal transaction launch the next day. We were overwhelmed with the response and a diverse orderbook that reached around A$1.75 billion, providing us with good price leverage while allowing us to print our full volume requirement.
Why did Brisbane Airport opt to stay domestic with this deal? Were other options ever on the table?
Price discovery was an issue in euros – but it was in Australian dollars as well, so this was not necessarily the deciding factor. What it came down to was execution certainty, which we felt was greater in the Australian market.
There is a lot of optimism around the domestic travel market, as well as the potential for a trans-Tasman bubble to open. We felt this story resonated more with the domestic investor base than European investors, which would not have as much visibility or understanding of the local circumstances.
Are investors looking for tangible signs of recovery, such as the prospect of interstate borders opening in the coming months?
Also, the potential for a trans-Tasman bubble is important for us. In normal times New Zealand represents a good portion of our international traffic so the reopening of these routes would be a positive development.
How much engagement did you have with domestic and offshore investors in the last couple of months?
In the background, we have been running covenant waiver requests for our bank facilities and US private placement deal, so we have been keeping investors informed on this and providing regular business updates to show the work we are doing to manage the crisis. This includes securing liquidity, revising capital expenditure and engaging with the rating agencies. We have also been sharing our views on the medium- and long-term outlook.
What have the main themes been in investor conversations?
There has also been a lot of interest in the actions of various airlines, specifically their ability to scale down and now restart passenger routes. Virgin Australia is obviously a key customer of ours and investors have been eager to know how we view the voluntary administration process and how we have factored this into our forecast.
They have also been interested in the additional levers we can pull if the recovery does not continue as expected – if there is a second wave or another unforeseen event and we need to take additional liquidity or expenses measures.
"The big question mark was over the 10.5-year tranche. In early conversations there was a large range, of around 100 basis points, for where investors saw fair value. This is quite unusual in normal times, but it is where we started and is why we took a more considered approach with the interim step of IOIs to formalise demand and sharpen pricing."
What insights can you share around demand for this deal, by investor type, geography and by tranche?
On the long-dated tranche, more than 90 per cent was allocated to asset managers and other real-money accounts. Around three-quarters of the six-year tranche was allocated to these investors with a higher proportion of private banks and other investors.
There has obviously been a lot of pricing movement in the last couple of months. How did you go about re-establishing price guidance for this deal?
This gave some guidance for the six-year tranche, but the big question mark was over the 10.5-year tranche. In early conversations there was a large range, of around 100 basis points, for where investors saw fair value.
This is quite unusual in normal times, but it is where we started and is why we took a more considered approach with the interim step of IOIs to formalise demand and sharpen pricing. We had offshore markets in the back of our minds and were confident that where we would print in Australian dollars would be competitive if not better.
Finally, it was about pushing go on the process, building the book, and achieving the best pricing outcome we could. The focus was around execution certainty and getting a strong trade away for the volume we wanted. We always want the best price we can get but this time around it was slightly less of a focus.
Prior to COVID-19, airports would be considered by most to be critical infrastructure. Is this still the case, and how do you see Brisbane Airport’s role in the economy evolving as this crisis plays out?
The role we have played in recent months has changed with the sharp fall in passenger flights. But there has been a large step up in freight and we have maintained operations to manage this. We have also been integral for FIFO workers and the ongoing operation of the mining industry, and for critical community services such as the Royal Flying Doctors Service.
As we move into recovery, we are working closely with the Queensland government to put the message out that Queensland is open for business and Brisbane Airport, along with the airlines, is ramping up again. We want people around Australia and across the ditch to come to Queensland to holiday and we want to see businesses up and running again. Brisbane Airport is a critical link in this chain and we are happy to be a part of it.
KangaNews is your source for the latest on the COVID-19 pandemic’s impact on Australasian debt capital markets. For complete coverage, click here.
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