KEY POINTS:
Debt levels will be unsustainable if Canada Pension Plan Investment Board's bid for Auckland International Airport succeeds and the restructured company will face bankruptcy unless interest costs or capital spending are cut, an analyst says.
On the eve of the company's vote on a new board, head of research at Goldman Sachs JBWere, Marcus Curley, said analysis showed interest payments on shareholders' convertible notes would not be sufficiently covered by operating revenue.
Capital spending plus distribution to shareholders increased the company's debt levels by around $230 million a year.
"Eventually we believe AIA would face bankruptcy unless interest payments on convertibles notes are reduced, borrowing rates have fallen or capital expenditure is reduced," Curley said in a report for shareholders released yesterday.
Last night he said: "If you said to interested parties that we were going to gear Auckland Airport to the maximum and if anything went wrong then this company would have to cut back capex money or effectively face bankruptcy, then a lot of those vested interests would say maybe they're taking things too far."
CPPIB vice-president for infrastructure Graeme Bevans said the company could issue more shares if it struck problems.
"The company is more than capable of meeting its obligations that would be put in front of it, given that payments to noteholders are an equity distribution in the form of interest and that it doesn't get paid if the company doesn't have the cash to pay it."
Curley said he had difficulties with this approach, given the strategic importance of the airport.
"They've said if the company needs more capital then we'll raise it _ while that's an approach that's used in some cases I don't know how acceptable it would be with Auckland Airport."
Modelling by CPPIB assumed interest rates would come down.
"If interest rates go up you put the company at more risk. If you look at the proposal they are very quickly through a distribution policy then you're very quickly into maximum gearing," Curley said.
"If the company performs in line with our expectations then it's not sustainable. I personally think they have overstepped the mark."
Another analyst, ABN Amro, had a similarly gloomy prognosis for the airport under the Canadians' amalgamation proposal. In its analysis titled "CPPIB proposal; money or the bag", analyst Geoff Zame says the Canadian's aggressive financing structure left little margin for error.
"We are not convinced CPPIB can significantly improve AIA's operating earnings to offset some of those risks."
The report set out the options facing shareholders at today's annual meeting regarding Infratil managing director Lloyd Morrison's bid for a board seat.
Voting for him would indicate opposition to the takeover offer, retaining control of the company, long-term growth and eventually a long-term minority strategic shareholder.
Last week ABN Amro Craigs came under fire from within the financial community for publicly supporting Morrison and recommending shareholders turn down the Canadian offer before seeing details.
Auckland Airport did not want to comment on the analysts' reports but has expressed concern about the debt risks associated with the CPPIB offer.
Chairman John Maasland's speech to shareholders today is likely to touch on this.
Another analyst said there was no need to dismiss the Canadians so hastily. Investors were not disadvantaged by waiting and the airport had good underlying growth, a very low cost base and any global shocks tended to pass within six months.
"It is an asset that can take some gearing. I do think the debt levels are very high but I'm happy to wait," said the analyst, who did not want to be named.
The airport would have an investment-grade rating which should provide some comfort.
Today's vote could see three new directors on the board, including Morrison, an Auckland City Council nominee Richard Didsbury and Manukau City Council nominee John Brabazon.
ARRIVALS
* Three new directors could be voted on to Auckland Airport's board today.
* They include Infratil chief Lloyd Morrison and council nominees Richard Didsbury and John Brabazon.
* Board member Joan Withers is up for re-election.
