siaro2t Ferrovial Mage a Clever Move With Financing for BAA Buyout - WS ‘Tas copys for your personal non-commercial use only. To order presentatlan-ready copes for distribution to your oleagues clients or customers visit tiosihawnsireprints.com, tpsdwwvnsiconvartcles/SB15456667932225256 Ferrovial Made a Clever Move With Financing for BAA Buyout Aug. 3, 2006 12:01 am ET Ferrovial’s executives are noted for their financial, as well as civil, engineering skills. Nowhere is this more apparent than in the Spanish construction group's recent takeover of BAA. Ferrovial injected just £600 million ($1.1 billion) in cash for a controlling stake in the UX. airports operator, which had a total value, of equity plus debt, less cash, of £16 billion. How did it do that? To start with, Ferrovial didn’t buy all the equity in the bidding vehicle. Itjust bought a 62% stake, worth £2.6 billion. The rest was put up by fellow consortium, members Caisse de Quebec and GIC Special Investments. What's more, of Ferrovial’s £2.6 billion investment, £2 billion was financed with debt. So the Spanish company has contributed only £600 million in cash --a tiny sliver to buy control of BAA. But how on earth were the banks persuaded to lend Ferrovial £2 billion? After all, the target company, BAA, is already loaded with debt. The answer is that most of the Ferrovial debt is backed by fairly hard assets. The biggest chunk -- a £1.85 billion, eight-year loan -- is backed by Ferrovial's own airport assets and its stake in its publicly listed construction arm, Cintra. The other £168 million is backed by shares in the bidding vehicle that controls BAA. But Ferrovial plans to reduce its stake in BAA to just above 50%. Then it will pay back that part of the loan. Further, there should be more equity coming later. Part of the debt is effectively a bridge loan, pending the planned sale of Ferrovial's stakes in the Bristol and Sydney airports back to Macquarie for an estimated £500 million. That would bump Ferrovial’s actual cash contribution up to £1.1 billion. The rest of the debt would be repaid eventually with dividends from Cintra and BAA, covenants permitting. (WSJ NEWSLETTER Notes on the News itpssiwww.ws).convanilas/SB115456667832225266 4siaro2t Ferrovial Mage a Clever Move With Financing for BAA Buyout - WS The news of the week in context, with Tyler Blint-Welsh, | would also lke to receive updates and special offers from Dow Jones and affiliates, Ican unsubscribe at any time, J agree tothe Privacy Policy and Cookie Notice Enter your email SIGNUP This sort of highly leveraged financial structure certainly jacks up the potential return on the BAA investment. Crue, that extra return isn’t entirely risk-free. Ina doomsday scenario, where the BAA investment goes badly wrong, Ferrovial could potentially have to sacrifice assets worth some £2.5 billion. But the risk looks fairly remote. And crucially, the BAA acquisition debt is ring-fenced from the rest of the group, freeing up debt capacity at the holding company to finance other acquisitions. Ferrovial has cleverly exploited an accommodating bank market. This sort of ring-fencing has allowed the company to fund its extraordinary spending spree in recent years. And there is no sign of it stopping. Credit Suisse Credit Suisse, the Swiss bank, has missed a chance to shake off its reputation for inconsistency. It was never likely that its traders would repeat their stellar first-quarter performance, when they raised revenue by nearly 90%. But the 36% slip in the second quarter was worse than expected -- and worse than rivals. Trading revenue at Citigroup, Merrill Lynch and J.P. Morgan Chase shrank by an average of only 12% in the quarter. Credit Suisse even failed to keep pace with Deutsche Bank, which was saved to some extent by its fixed-income traders when its proprietary-trading desk for stocks stumbled. itpssiwww.ws).convanilas/SB115456667832225266 26svaroas Ferrovial Made a Clover Move With Financing or BAA Buyout - WS) True, Credit Suisse’s slip-up needs to be seen in perspective. The bank's traders have come a long way in the past year. For the first half, they managed to inerease revenue 46%, better than Deutsche and the U.S. peers. But the volatility in the quarterly performance may make the group's reputation for inconsistency more difficult to erase. After all, even ina poorer quarter, trading accounted for 35% of group revenue. More importantly, the trading performance may overshadow the progress Oswald Grübel, Credit Suisse’s chief executive, appears to be making elsewhere in the group. The private bank had a strong quarter, attracting stacks of cash despite the market downturn. The group also got a firmer grip on costs. After the sale of Winterthur, the group's insurance arm, Credit Suisse looks like a mirror image of UBS, but the shares sell at a hefty discount. That gap may be hard to close until Mr. Griibel’s investment bank can prove definitively that it is a match for UBS in all types of market conditions. U.S. rates/stock prices Many equity investors believe the good times will really roll when the Federal Reserve stops raising rates. They even cheer otherwise bad news, like last Friday’s disappointing figures on gross domestic product. As far as they’re concerned, it’s not the economy, but the cost of money that counts. It’s easy to see why investors want rates to stop rising. When the cost of borrowing. climbs, the discount rate applied to the future earnings of long-term assets, such as equities, also rises. Higher rates hurt stocks in other ways: leverage becomes less attractive; household consumption is restrained; and corporate profits, especially for highly-indebted companies, are hit. The imminent end to the current tightening cycle comes at a time when the real cost of overnight money remains very low in the U.S. -- at 0.7%, based on trailing CPI. That is less than half the average over the past 10 years. Furthermore, over the past 25 years, the stock market has climbed four out of five times after rates stopped rising. But it’s not a simple matter of cause and effect. For instance, the interest-rate peak of 1982 marked the end of a great equity bear market and the beginning of a lengthy period of falling inflation. Stocks rose 60% over the following year. Compare that with the last time rates peaked, in 2000. Then the top of the interest-rate cycle coincided with the end of a itpssiwww.ws).convanilas/SB115456667832225266 38siaa0at Ferrovial Made a Clover Move With Financing or BAA Buyout - WS) prolonged period of irrational exuberance on Wall Street. The S&P 500 dropped by 20% during the next year, In some ways, the current situation looks more like 2000 than 1982. True, the stock market is not egregiously overvalued. But financial excesses abound elsewhere -- for example, mountains of household mortgage debt and some leveraged-up financial investors in hedge funds and private-equity firms. The Fed will stop tightening when it believes animal spirits have been tamed. But achieving this aim might not be the boon for share prices that many investors expect. Copyright© 2021 Dow Jones & Company, Ine. A Rights Reserved ‘Tis copys for your personal non-commercial use only. 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