Securitizing landing rights

Here is an interesting story a new intangible-asset-backed securitization: landing rights at Heathrow.
From International Financing Review

Not quite property
The other notable innovation last week came when British Airways (now part of International Airlines Group) sold a US$250m due 2016 bond backed by landing slots at Heathrow airport.
The Bealine securitisation deal, which pays a coupon of 7.25%, will finance the £172.5m acquisition of bmi, agreed late in 2011.
When IAG bought bmi from Lufthansa, it acquired only four aircraft (the other 23 in bmi’s fleet were leased), but also 42 daily landing slots at Heathrow, which were also used as security for the acquisition payment instalments. This collateral was therefore naturally available as security for the acquisition debt.
Landing slots function like property – but not quite. They can only be owned by airlines with valid operating licences, can be removed if not used 80% of the time, and are not always counted on corporate balance sheets.
Yet these slots have monetary value, and form the major part of the collateral that pushes the securitisation to an Aa3/BBB (Moody’s/S&P) rating, from IAG’s B2/BB- unsecured rating.
The unique nature of the asset class has dictated the structure that can be used – in effect, the deal is a sale-and-leaseback of the “properties” where BA does its business. But it is structured like a whole business deal referencing a BA subsidiary.
The slots will be operated as a joint venture between BA and its subsidiary, where the subsidiary owns the slots but BA flies the aircraft. BA does not rent or lease the slots, as this is not possible given the nature of slot collateral, but it guarantees to pay the liabilities of the securitisation. To establish the subsidiary as a real, operating airline, rather than simply a holding vehicle, BA is also giving it a route to run (with borrowed BA aircraft and crew).
As the biggest risk to BA’s control over the slots is how regularly they are used, this is the key credit metric apart from BA’s corporate credit. Using slot pairs at Heathrow – an airport operating close to full capacity – is meant to give investors confidence, despite the unusual collateral.

Just one note. In the U.S., when the Federal government tried to auction off landing rights in the New York city area at back in 2008, the Government Accountability Office (GAO) ruled (backed by case law) that only tangible property is property. Therefore, the FAA could not auction off those landing rights under laws governing the disposition of government property. [See earlier postings.] As I understand it, the FAA finally withdrew the proposal. But the episode highlights the need to have a better policy for managing government intangible assets. The airlines clearly understand that landing right slots are an asset. The government should be able to treat them as assets as well. How it manages those assets for the public benefit (monetize versus public use) is another question. But that is a question we can’t begin to address unless and until we understand that these are assets to be managed — just like any other asset (e.g. public lands).

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