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Auckland Airport expects no credit rating impact from raising debt to return capital

Auckland International Airport [NZX: AIA], the second largest company on the NZX 50 Index by market value, expects to maintain its credit rating while taking on debt to part fund a $454 million capital return to shareholders, says chief financial officer Simon Robertson.

The nation's busiest gateway plans to shrink its shares on issue to 1.19 billion from 1.32 billion via a one-in 10 share cancellation at $3.43 a share. At that price, the company's ratio of debt to enterprise value would rise to 28.1 percent from 20.1 percent, it said. The shares rose 1.3 percent to $3.46 on the NZX today and have climbed 28 percent this year.

Auckland Airport's A-minus rating with Standard & Poor's is the highest for any airport in Australasia, alongside Melbourne Airport. The rating has been on positive outlook since September last year and Robertson said he expects that to be reviewed back to neutral, given the transaction.

"We have significant headroom for what is appropriate for a rating of A-minus," he told BusinessDesk.

The airport had looked hard at its future capital spending requirements, including up to $130 million in the 2014 financial year, and was satisfied the capital return wouldn't harm its growth aspirations, he said.

The company had $69 million of cash and cash equivalents on its balance sheet as at June 30, though since then has paid out a final dividend. Cash will have built up again by April next year, when the capital return is planned, though funding will be predominantly from new debt, Robertson said.

The return is effectively tax free, subject to a shareholder's personal circumstances, because the Inland Revenue Department is satisfied that an amount equal to its available subscribed capital, or $181.6 million, isn't in lieu of a dividend, and the remaining $272.4 million will be deemed a dividend for tax purposes and fully imputed at the 28 percent company tax rate.

Because of the capital return, the airport won't pay an interim dividend for the 2014 year. To fund the bulk of the return, the airport will put in place new short-term bank facilities, which will later be replaced by long-term funding.

Robertson said the final refinancing would be targeting an average maturity of more than seven years, pushing out the overall weighted average maturity profile of the company's debt, which stood at 4.21 years as at June 30. Net cash flow from operating activities was $207.8 million last year.

The transaction requires approval of at least 75 percent of voting shareholders and the company would then seek final High Court clearance in March, with the return of capital aimed for mid-April, it said in a statement.


Comments and questions

Whats the difference between cancelling shares and AIA doing a buyback with the 454 mio.

Why on Earth would they want to do that?? if they have that much spare cash, why don't they upgrade the wearing out Airport, buy a few more wheelchairs as there is nowhere near enough of them, give the Taxi drivers a decent area to operate from, put a second story on the overstressed car parks, they could even contemplate installing a mini monorail from domestic to International, there are a million things they can spend their surpluses on, but whatever you do, don't even contemplate mirroring the Dubai airport.

Interesting to see that they have nothing better to spend their money on and so are giving it back to shareholders. I would have thought that the decrepit domestic terminal and terrible connection between it and international could have been a great place to spend it - but obviously the returns from the actual airport operations aren't good enough to justify the cost.

What kind of a shabby deal is this to offer to shareholders? In effect, they're going to compulsorily acquire 10% of their shares, some time about the middle of next year, but not at the market price at that time - at today's price!

It isn't actually that bad - every shareholder will still have the same percentage stake in the company so they haven't actually lost anything - they have simply gained cash. The price of their remaining shares will adjust to reflect their share of the market capitalisation of the business.

But its the same for everyone Pete, so no-one is disadvantaged, don't know what your problem is?

Well, they are all disadvantaged, because they all have to hand over 10% of their shares at what will very likely be a below-market price. And their remaining shares won't be any more valuable, because the net worth of the company will be $454m less.

Pete, if they paid more for the shares that are being cancelled (say $600 million) then the shareholders still will own the same proportion of the net wealth, but at $600 million less than at present. So, it doesn't make much difference how much is paid for each of the cancelled shares, the shareholders still own the present proportions, each, of today's net wealth either paid-out or retained.

And if the shares are lower at the time of settlement - will you be complaining then?

My prediction on the growing dominance and accompanying arrogance of AIAL.....perpetrators of the noisy, polluting low-flying jets all over the Eastern Suburbs they will become the Telecom of yesterday and tomorrow, if we aren't careful.
Interesting they are already swapping executives. Mmmmm.

Sell, sell, sell AIA....and perhaps the Auckland Council should be doing just this selling.

the deal should be the greater of either todays price or the price at the time the shares are cancelled. If the share price rises then todays s/hers should be rewarded for having shares at the time of the announcement.