Heathrow6.45% S Regulatory News (88BX)

10 December 2021

Heathrow Funding Limited

Heathrow Finance plc

Publication of December 2021 Investor Report

On behalf of Heathrow Airport Limited, Heathrow Express Operating Company Limited, Heathrow (AH) Limited and Heathrow (SP) Limited, LHR Airports Limited (as Security Group Agent) is today distributing its semi-annual Investor Report to various parties pursuant to the terms of the Common Terms Agreement entered into on 18 August 2008 (the CTA).

The Investor Report is also being distributed by Heathrow Finance plc to various parties pursuant to Heathrow Finance plc £250 million 5.75% Senior Secured Notes dated 13 October 2014 and due 2025, £275 million 3.875% Senior Secured Notes dated 5 June 2017 and due 2027, £300 million 4.75% Senior Secured Notes dated 31 October 2018 and due 2024 and the £300 million 4.125% Senior Secured Notes dated 12 November 2019 and due 2029 (the Heathrow Finance Bonds), a note purchase agreement dated 14 September 2018 (the Note Purchase Agreement) and pursuant to Heathrow Finance plc facilities agreements dated 6 July 2017, 22 November 2018, 23 November 2018, 1 February 2019, 8 May 2019, 16 August 2019 and 2 December 2019.

The Investor Report contains information relevant to creditors of both Heathrow (SP) Limited (and its subsidiaries) and Heathrow Finance plc.

The attention of potential readers of the Investor Report is drawn to page 2 of the document which contains an Important Notice, including in relation to certain forward-looking statements included in the Investor Report, and contains a description of the basis on which the operational and financial information included in the document has been prepared.

The Investor Report includes an updated forecast for 2021 and 2022 for the financial performance of Heathrow (SP) Limited prepared on a consolidated basis, forecast nominal debt and financial ratios for Heathrow (SP) Limited and Heathrow Finance plc. Heathrow (SP) Limited, through its indirect subsidiary, Heathrow Airport Limited, owns Heathrow airport.

This report sets out the forecast financial performance and ratios for Heathrow (SP) in 2021 and 2022, together with key business updates. Additional information specific to Heathrow Finance is set out in Appendix 6.

Given the resumption of international travel and the gradual reopening of borders, we have seen a steady build in traffic from May to November. Whilst this recovery in traffic is encouraging and should allow us to look forward with more confidence, recent developments with the Omicron ‘variant of concern’ highlight that the pandemic is far from over. The reintroduction of the red list arrivals facility, pre departure testing before arrival into the UK and a PCR test by Day 2 are expected to have an impact on demand. However, we will continue to support temporary measures which protect public health as we learn more about this new variant.

For 2021, we anticipate traffic to be 20 million, which is down 1.5 million on our June forecast and reflects the slower reopening of borders over the Summer. This remains 75% down compared to 2019. The 20 million forecast remains uncertain as the reintroduction of border restrictions is leading to cancellations and a reduction in flight schedules. Despite a lower traffic outturn, adjusted EBITDA is forecast to be £412 million, an increase of £80 million versus the June forecast. This reflects lower operating costs versus forecast as recruitment has been slower than planned. Our liquidity position remains strong with £4 billion of cash and committed facilities available as at 30 November 2021, sufficient to meet all obligations until 2025 under our traffic forecasts.

We have also set out our financial forecast for 2022. This is underpinned by a traffic forecast of 45.5 million passengers which represents further recovery across 2022 but remains 44% below 2019. Adjusted EBITDA is forecast to increase by 227% to £1,347 million. In respect of the 2022 aeronautical charge, we have responded to the CAA's recent consultation. However, at the time of publication of this Investor Report, we await a decision from the CAA, in the absence of which we have prepared our 2022 financial forecast based on the tariffs set out in our aeronautical charges consultation document on 31 August 2021, which we were required to publish under the Airport Charges Regulations 2011. We expect a decision from the CAA in December and will review whether an update to the Investor Report is required if there are material differences to our financial forecast resulting from this.

Our RAB is forecast to be £17.2 billion at the end of 2021 and £21.3 billion at the end of 2022. Our 2022 RAB forecast assumes we receive a full RAB adjustment of £2.5 billion (2018p) as set out in our Revised Business Plan (RBP) Update in June 2021.

In October 2021 we received the CAA's Initial Proposals for the H7 period. The CAA has recognised that lower passenger numbers until full recovery must mean a higher charge per passenger. The CAA also needs to recognise the critical role of private investment which will enable sustainable levels of passenger service and resilience, building confidence that investors will earn a fair return in H7 and have a fair bet of recovering their efficiently incurred investment. Equally, from a debt financing perspective, initial assessments based on our business plan show that charges in the lower half of the CAA's range put our credit rating at risk. Further credit rating downgrades would impact our ability to access the debt capital markets efficiently.

Our response to the CAA will also set out numerous errors in their proposals. These include how their traffic forecast is not deliverable within our ATM cap, unrealistic assumptions on operating costs and commercial revenue growth and expectations that we can improve services in numerous areas with no capital investment. Alongside our response, we will submit the second update to our December 2020 RBP.

No covenant breaches are forecast in 2021 or 2022 at Heathrow (SP) or Heathrow Finance. As at the date of this report, a Forecasting Event and a Trigger Event have occurred and are continuing in relation to the historic ICR for senior and junior debt for the year ended 31 December 2020. We expect the Trigger Event to be remedied by mid 2022 under our base case scenario. 

To reflect the uncertainty on traffic, 2022 charges and quantum of RAB adjustment, we have also tested financial covenants based on a combined revenue reduction of 15% versus our base case and the interim RAB adjustment of £300m only. In this scenario, no covenant breaches occur in 2022 at Heathrow (SP) or Heathrow Finance although credit rating metrics are likely to be compromised. Please refer to appendices 2, 3 and 6 for more details

The December 2021 Investor Report document is available in pdf format at the following link:

http://www.rns-pdf.londonstockexchange.com/rns/2052V_1-2021-12-9.pdf

The Investor Report is available from today via the Heathrow Investor Centre at https://www.heathrow.com/company/investor-centre/reports/investor-reports

By way of reminder, pursuant to the CTA, the Heathrow Finance Bonds, Note Purchase Agreement and the Heathrow Finance Facilities Agreements (as appropriate), the following is available on the Heathrow Investor Centre:

- consolidated financial information of Heathrow (SP) Limited for the six months ended 30 June 2021

- consolidated financial statements of Heathrow Finance plc for the six months ended 30 June 2021

For investor enquiries please contact Tim Allen, Head of Debt Investor Relations and Corporate Finance, +44 7568 604 873

(1) Adjusted EBITDA is earnings before interest, tax, depreciation and amortisation and exceptional items