NAER

1. NAER 22 November 2005 Effective Ways of Financing New Airports

2. Table of Contents Section 1 Airports: A Very Financeable Asset Section 2 Equity Financing Considerations Section 3 Debt Financing Considerations Section 4 Recent Examples

3. ALFREDO ZAMARRIEGO Co-Head of European Transportation and Infrastructure Team 1

4. Section 1 Airports: A Very Financeable Asset

5. Airports: A Very Financeable Asset A Very Financeable Asset + = 2

6. Heathrow(1) Revenue (£ MM) PAX (MM) Airports: A Very Financeable Asset Strong Proven Resilience • Interesting Asset for Debt Providers… • Monopolistic characteristics • Regulated source of income • Diversified revenue streams 9/11 Removal of Duty Free • …And Also for Equity Providers • Potential growth of non-aeronautical activities • Room for operational and financial leverage Source BAA Annual Report 3 • Note • Figures calendarised to December year end from March year end

7. Airport Refinancings Net Debt / EBITDA Multiple (x) 1999 BBB BBB+ 2003 BBB+ 2005 2005 NR Airports: A Very Financeable Asset Increasing Accepted Levels of Debt Source Company Information, S&P 4

8. Airport Credit Ratios vs. Current Credit Rating Last Fiscal Year FFO / Total Debt (%) Airports: A Very Financeable Asset Significant Room for Manoeuvre (1) Rating Source Credit Ratios and Ratings for all except ANA from S&P Airport Report, 29-Jun-05; ANA Credit Ratio from 2004 Annual, Rating from Moody’s 5 • Note • AdP actual rating of AA (negative outlook) due to implicit Government support. According to S&P this rating would not fall below A+ on IPO hence A+ used as indicative rating

9. Section 2 Equity Financing Considerations

10. Equity Financing Considerations “Public” Market Gaining Momentum Superior Performance From Airports Last 12 Months Potential Forthcoming IPOs Source FactSet as of 14-Oct-05 6

11. Market Cap by Quoted Company - Europe As of October 2005 Average Public Valuations “On the Way Up” (AV / 2006E EBITDA) Equity Financing Considerations …Although Still Not Fully Developed Total: €17.1 Bn Source Morgan Stanley as of 14-Oct-05 Source Bloomberg as of 14-Oct-05 7

12. Equity Values of Selected European Airport Deals - 2000 to Date $ MM Equity Financing Considerations “Private” Market Also Growing… AdR Hamburg BIAC TBI Newcastle Luton East Midlands Birmingham Bristol Hochtief CPH AdR Belfast Source Thomson Financial; Based on announced equity value of transaction adjusted for stake acquired 8

13. Acquisition Multiples EV / EBITDA (x) Equity Financing Considerations …With a Significant Valuation Premium Potential Forthcoming Trades …And Growing Source Morgan Stanley 9

14. Equity Financing Considerations What Do the Key Buyers Look For? 10

15. Equity Financing Considerations What Are the Key Messages? • Airports are increasingly attractive assets for equity capital markets; unique combination of stability and potential for growth • Increasing pipeline of airport IPOs and capital markets readiness to finance significant expansion programmes (i.e. Fraport IPO, AdP expected IPO) • Private market is also a very attractive option to maximise value, with a number of strategic partners being very interested in the construction angle • Strategic partners will likely demand a controlling stake. However, they could also accept the Government to keep significant minority positions (e.g. BIAC) 11

16. Section 3 Debt Financing Considerations

17. European Government Rates Yield (%) – Since 2000 Credit Spreads Spread over Libor (Bps) – Since 2000 Debt Financing Considerations Very Good Current Market Conditions Credit spreads between rating categories have compressed dramatically Yields at historical lows Source Bloomberg as of 14-Oct-05 Source Bloomberg as of 14-Oct-05 12

18. Debt Financing Considerations All Financing Alternatives Are Available             13

19. Debt Financing Considerations Unsecured Corporate Debt: Bond • Possible to use as an ongoing source of financing for corporate purposes • Flexibility (limited covenants) • Currently very supportive market conditions • Range of maturities available • Large market capacity • May not allow maximisation of debt quantum • Prepayment difficult Pros European Airport Examples Cons 14

20. Composition of Corporate Eurobond Market Issuance Volumes (€ Bn) – 1998 to Date Debt Financing Considerations How Have the Bond Markets Changed? • From 1998 to 1999 (date of introduction of the Euro), issuance volumes quadrupled have from c.€30 Bn to c.€120 Bn • Market more receptive to issuance from lower down in the rating spectrum • Proportion of issuance from A and BBB corporates now the largest segment • Larger number of sectors being represented • Average size larger • Range of available maturities increasing Source Bondware as of 14-Oct-05 15

21. Debt Financing Considerations Capital Market Structured Debt • Typically higher leverage and lower cost of funds achievable thanks to • Security package granted to investors • Longer bond maturities matching life of concession / asset vs. traditional financing • Complexity of structuring • Limits flexibility going forward • Best suited for individual projects /assets Pros European Airport Examples Cons 16

22. Current Swap Spread of Relevant Airport Bonds Spread over Swap Rate Debt Financing Considerations Spreads for Different Airport Bonds (1) FFO / Gross Interest Source Bloomberg for spreads as of 14-Oct-05; FFO / Interest from S&P Airport Report, 29-Jun-05 17 • Note • AdP actual rating of AA (negative outlook) due to implicit Government support. According to S&P this rating would not fall below A+ on IPO hence A+ used as indicative rating

23. Wide Exposure to Airlines • Low dependence on single airline ? Exposure to LCC: “Double-edged sword” Stable Passenger Mix • High O&D base • Balanced tourism/ business • Stable and growing Stable Revenue Mix • Exposure to non-aeronautical activities • Airport portfolio vs single asset • Strong liquidity position Favourable Regulation • “S&P views the various frameworks as benign” … • ….. however, RAB frameworks perceived positively in the context of major expansion programmes Debt Financing Considerations What Do Debt Providers Like? Competitive Positioning • Large catchment area • High Barriers to entry / local monopolistic characteristics 18

24. Debt Financing Considerations New Instruments? Hybrid Capital • Security with fixed income characteristics which is: • Equity accounting treatment • Long dated (sometimes perpetual); • Deeply subordinated • Can allow cumulative and non-cumulative distributions Examples • ‘Equity credit’ from agencies (25 – 100%) • Tax deductibility of distributions • Non-dilutive financing • Can optimise cost of capital • Increasingly favourable Issuing conditions in Europe: • Recently revised rating agency guidelines • Greater clarity on accounting treatment • Favourable pricing conditions • Significant investor appetite in the European institutional markets What is it? Pros 19

25. Debt Financing Considerations Case Study: Dong Hybrid Financing • Transaction Summary • 50% equity credit from both agencies • 100% equity treatment under IFRS • Tax deductible coupons • Non dilutive fixed income financing • Highly successful transaction in the market • Three day road-show with two teams • 2.8x oversubscribed • Over €3.1 Bn of orders • Representation of over 200 ‘quality’ accounts • Strong aftermarket performance Transaction Rationale: • DONG used the instrument to strengthen its balance sheet in light of its M&A activities and capital management objectives Other 6% Fund Managers 41% Banks 23% Pension/Insurance 16% Alternative Managers 14% 20

26. Debt Financing Considerations New Instruments? Inflation Linked Bond What is it? Pros • Provides a natural hedge to regulated revenue and cost bases • Especially valuable to public / semi-public entities • Also acts as a natural hedge to company’s business risk Examples • A bond which has either its principal or its coupon with an explicit link to a price inflation measure • Effectively the Issuer pays a real rate plus a measure of inflation over the life of the bond • Inflation linked market has significantly developed in recent years as inflation linked Government transactions have built the curve • Main types are: • Capital Indexed Bonds • Interest Indexed Bonds • Main issuers of these securities are entities who have revenues linked to inflation 21

27. Debt Financing Considerations Case Study: National Grid Transaction Rationale: • NG wanted inflation linked debt to provide a natural hedge to their regulated revenue and cost base and also to take advantage of the technical supply / demand imbalance that existed in the market • Transaction Summary • Largest ever pure corporate index-linked issue to be launched in the primary markets • All tranches priced at the tight end of spread talk • Morgan Stanley proposed and negotiated an unprecedented use of the monoline insurance wrap (Ambac), rating bulk of issuance AAA • Single order of £120MM from one institution highlighted depth of index-linked demand amongst the UK pension funds • Morgan Stanley hedged the entire £300MM 2018 tranche on a sole basis • Morgan Stanley acted as Gilt manager at the time of pricing, facilitating the closing out of the entire hedge position, across all tranches, and facilitated the entire flow of Gilts out of the investor base, ensuring seamless execution Other 5% Pension Funds 12% IMG’s 21% IMG’s 44% Insurance Co’s 39% Insurance Co’s 79% 22

28. Debt Financing Considerations What Are the Key Messages? • In general, airports are increasingly attractive assets for debt capital markets due to the stability of their cash flows • Conditions in the debt markets are currently very attractive (liquidity, interest rates, credit spreads) • Major airport expansion plans can be addressed with a combination of bank (loans) and capital market solutions (longer term bonds) • More sophisticated debt products can also offer very attractive financing solutions (e.g. hybrid capital and inflation-linked bonds) 23

29. Section 4 Recent Examples

30. Recent Examples BAA Terminal 5 Expansion 24

31. Recent Examples BAA Terminal 5 Expansion – Some Facts • Construction of T5: a £4.2 Bn development project • Planning Permission applied in 1993, approved in 1999 • Work on-site began in 2002, scheduled for completion in 2008 • Heathrow Capex of £3 Bn since 2003, of which c £2.4 Bn on T5, accounting for c. 90% of Heathrow's annual capex spend and c. 80% of BAA's group capex each year since the project began • In addition to investing approx. £4.2 Bn to build T5: • £450 MM being spent on airfield and related improvements to prepare for the A380 • £95 MM being spent on extension to T1 international departure lounge to double seating and space • £300 MM already spent on Flightswitch to enable T1 to accommodate long-haul and short-haul (new immigration hall, premium check-in facility) • £100 MM already spent on refurbishment of T3 departures lounge 25

32. BAA Gross Debt Forecast Mar Y/E Value (£ Bn) Gross Debt / EBITDA (x) BAA Corporate Bonds – Total: £3.6 Bn Issues Outstanding by Maturity (£ MM) Recent Examples BAA Expected Debt Evolution (1) (1) Spread over Swaps (bps): (2) +19 +15 +25 +43 +68 +60 +39(3) +45 +56 Opening of T5 Source Morgan Stanley Equity Research Source BAA Annual Report 26 • Note • Convertible bonds • Spread vs. £ Libor swap spreads • Spread vs Euro swap rate

33. Questions ? 27