City Council steps in with £18.5million loan for Birmingham Airport

Birmingham City Council have agreed a loan deal to put up to £18.5million into the fund for Birmingham Airport as it faces “the worst year in its history”.

The new loan agreement, which is to be confirmed by the City Cabinet next Tuesday, comes as the airport battles to tackle the impact of passenger numbers down 91%, with no end in sight and new quarantine rules set to further restrict air travel.

The council’s money will be made available to the airport for it to draw on if needed, amid fears it will struggle to meet legally binding covenants linked to its growing external debt facilities. of £500 million.

Details of the deal are being kept under wraps due to commercial sensitivity, but a report to the consultancy firm next week says it is a loan facility earmarked to be repaid at commercial rates.

The council – which along with six other local authorities owns 49% of the airport’s holding company, BAHL – said it was acting to “help maintain sufficient levels of cash to support BAHL in the future as a as a key strategic regeneration catalyst, while ensuring it is ready to return to full capacity as soon as travel restrictions are lifted.”

In a statement welcoming the agreement, an airport spokesperson said: “The pandemic has led to Birmingham Airport worst slowdown in its history, with passenger numbers from April to December last year down 91%.

Birmingham Airport

“To limit the impact of a significant reduction in passenger numbers, the airport has taken a series of measures to preserve cash and manage costs, including limiting expenses, suspending capital projects and maximizing the use of the retention program.

“These actions have been designed to protect the long-term interests of the airport and ensure that it is well placed to respond to the recovery when passengers resume their flights.

“Any support is welcome as the airport copes with the continued impact of Covid-19 and rebuilds, post-pandemic, to support the region’s economic recovery and air travel needs.”

Passengers wearing protective masks walk out of the arrivals terminal at Birmingham Airport

In her report to cabinet, the City Council’s finance director, Rebecca Hellard, said Birmingham Airport “makes a very significant contribution to the regional economy, contributing directly and indirectly to growth and employment” – estimated to have an aggregate value of £1.5 billion. and more than 30,000 jobs”.

She said the council, as an investor, had received “significant return” in previous years – including more than £5million in 2018 and 2019.

But everything had changed in the last 12 months.

“The Covid-19 pandemic has resulted in the worst decline in traffic and revenue in BAHL’s history. In response, BAHL has reduced costs where possible, without affecting the ability to resume normal operations when restrictions of travel are lifted.

“This includes a two-phase restructuring that resulted in a reduction of approximately 43% of roles across the workforce.”

She outlined the extreme challenge ahead – with BAHL operating with external debt facilities “in the form of a £105m corporate bond, £371m private placement loan notes and a bank loan of £25 million”.

The debt agreements provide that BAHL must comply with strict covenant tests twice a year, which assures the guarantors of its viability. The last two have been canceled due to the Covid pandemic – but the next one is due in June.

The report adds, “BAHL will not be able to meet commitment ratios unless passenger volumes and revenues recover quickly.”

As a result, they will push for a new waiver and have asked for shareholder support.

Cabinet is being asked to approve a loan facility “on commercial market terms” of up to £18.5million.

Birmingham Airport is not alone in facing financial difficulties in light of the impact of the pandemic, with both Heathrow and Manchester having raised additional capital in recent months.

In November 2020, credit specialists Moody’s downgraded Birmingham Airport on its risk rating scale of Baa2 to Baa3, meaning it was rated at the high end of its average rating, having “moderate credit risk and as such may possess certain speculative characteristics “.

Announcing the downgrade, Moody’s said: “The airport sector is one of the sectors most affected by the shock given its exposure to travel restrictions and its sensitivity to consumer demand and sentiment.

“Today’s action reflects the impact on Birmingham Airport of the scale and severity of the shock, and the broad deterioration in credit quality it has triggered.”

Prior to the pandemic, Birmingham Airport was considering a £500million expansion as part of plans to increase its passenger numbers by 40% over the next 15 years, partly linked to High Speed ​​2 ( HS2), with a station connecting with the airport and the NEC.

It would have included a larger departures hall, a new baggage sorting area, improved arrivals and more aircraft stands.

The plans have been suspended indefinitely.

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