Heathrow has given notice that it may wish to seek taxpayer assistance. But is it entitled to such support?
With a chain of subsidiaries as long as a runway, and thirteen sets of accounts, getting one’s head around Heathrow’s finances can be — as if by design — quite a challenge. But, once undertaken, it reveals a company that has sold assets and borrowed against those that remain, in order to finance enormous dividend payments to shareholders (92% of which do not pay UK tax), while avoiding corporate taxes.
Moreover, it reveals an eye watering level of debt, which looms in stark relief to some of the recent, rather boastful statements made by its CEO (John Holland-Kaye) and attributed to the company’s “Chairman” (Lord Deighton).
In both the recent Accounts of Heathrow Airport Holdings Limited and the accompanying Press Release, the company’s Chairman, Lord Deighton, is said to claim that the airport had received “over £12 billion of private investment” from its shareholders over the last decade. This is more than misleading. It is fallacious.
When BAA plc’s stable of airports was forcibly broken up in 2009, under monopoly rules, the investment of FGP Topco (Heathrow’s holding company) was a mere £13.1 million. The rest of the £10.7 billion was all paid with debt. And since then, money has been generated first from the sale of assets, and then from a thorough recapitalisation of remaining assets, to keep the operation in place and pay large dividends to the shareholders.
Along with Heathrow, the initial investment also bought 4 other airports (Stansted, Glasgow, Aberdeen and Southampton). The sale of these produced £8 billion, which was used to pay significant dividends to shareholders; since when loans have been secured against the remaining fixed assets.
By the end of 2019, Heathrow had increased its borrowing against these assets to £15.449 billion; meaning that with an assets value of £15.8 billion, it is now so highly geared with debt, that it has reached a leverage ratio of 97% — higher than any comparable UK infrastructure or utility operation.
Of this borrowing, £1.389 billion was actually added in 2019; from which £500 million was paid in dividends. Additionally, and despite a £14 million loss in the final quarter of 2019, the holding company paid its shareholders an interim dividend of £100 million this year, on 20 February 2020. So, even after the money which could have been put away for a rainy day (such as now) had already been disbursed in dividends to Heathrow’s mainly foreign investors, every asset has been mortgaged up to the hilt, to release yet more cash — with significant portions being directed towards shareholders’ bank accounts.
Heathrow has had 538 Charges (a borrower’s right to seize assets, in the event of non-payment of a loan) listed against it at Companies House. “£12 Billion of investment” has not come from shareholders, as claimed in the statement attributed to the company’s “Chairman”, Lord Deighton. Money has come from the divestment of company assets, through secured borrowing (recapitalisation) — and significant portions of this have gone to shareholders.
The recent boasts from the company’s CEO, John Holland-Kaye, started in April, just as surprise was being expressed at the fragility of aviation sector players, under Covid-19 pressures. And he has continued to speak of the business’s “current financial strength”.
Yet in an internal email of 6 April, the CEO explained to staff that whilst the airport’s pre-crisis revenue was £250 million per month, and its operating and maintenance costs were only £190 million, its monthly debt repayment bill was (and remains) a staggering £75 million per month — meaning that Heathrow’s indebtedness has the airport’s core business running at a £15 million monthly loss, even in good times.
To compound this state of affairs, Heathrow already runs a large current account overdraft which, because it is unsecured debt (that could be called in at any point), renders Heathrow technically bankrupt. Tellingly, within the company accounts, Heathrow now admits that it is run as a “going concern” (accountancy jargon to indicate that a business may wish to defer some of its prepaid expenses to a future accounting period).
On BBC’s Newsnight (28th May 2020), Holland-Kaye repeated the earlier public brag, telling the programme “we’re very well funded so we can survive with no passengers for the next 12 months, so our’s is a very good position to be in”. But such a public suggestion of “financial strength” must be delusory. For he has had to admit to staff (email of 6 April) that the publicised “£3.2 billion war chest” is merely the liquidity that can be mustered when “we have drawn down all the cash and credit facilities at our disposal”. So, yet more borrowing to be repaid in the future — presumably by passengers (if the current account creditors have not already called in the overdrafts, tipping Heathrow into Administration).
In fact, Heathrow’s financial frailty was recognised several months ago, leading to Heathrow having to file a “Section 642 Notice” in November 2019 — so as to reassure the markets and financial regulatory authorities that it believed it could fulfil its massive debt obligations. Yet, on 2 June 2020 the ratings agency, Standards & Poor’s, put the debt of Heathrow Airport’s principal funding vehicle (Heathrow Funding Ltd) on “credit watch with negative implications” — a second credit downgrade in just two months. And on 16th June 2020, it was announced that Heathrow is seeking waivers on covenants from holders of £1.1 billion of bonds.
The boast that Heathrow can somehow find a way to stand on its own two feet for “12 months” is pertinent however. For it is equally (as may have been the intention) an indication that, without any revenue to pay interest on its bonds, and with the threat of bankruptcy, Heathrow will be looking to the taxpayer for assistance at the end of this period — despite its notorious record for avoiding corporate tax on previous large profits, through its carefully designed, multi-layered, debt-ridden, labyrinthine corporate structure.
In 2019 alone, Heathrow may have felt able to pay £500 million to shareholders, out of the £1.89 million of additional borrowing; but by setting off the financing of their massive debt against tax (notwithstanding the avoidance of £110m withholding tax on the interest paid on bonds), Heathrow managed to keep their corporate tax contribution to just £28 million. Extraordinarily, by historical standards, this is a large payment of corporate tax by Heathrow. Research by The Times (published 10th January 2016) found that “HEATHROW has handed its owners £2.1bn in dividends over the past four years — but paid only £24m corporation tax in almost a decade”.
It is usually expected that companies pay dividends on profits. But because of the enormous interest payments it has to make to its creditors, Heathrow minimises it taxable profit. So their shareholders simply receive their dividends from this borrowing, which is secured by mortgaging its assets to lenders. And, then, the enormous cost of interest payments to creditors is used to generate tax credits to minimise its corporate taxes.
The Treasury and the Bank of England are demanding certain conditions of those companies who receive corporate “bailouts” from taxpayer funds, under the Covid Corporate Financing Facility: there must be neither staff bonuses, nor dividend payments to shareholders, whilst the company is in receipt of taxpayer support. But, with Heathrow having all but given notice that it is anticipating a need to seek government assistance, should it not be asked to adhere to those conditions, now?
For just as it siphoned off £100 million of dividends on 20 February (as it simultaneously slashed the wages of those who operate the airport and protect our borders), would it not be entirely characteristic of Heathrow to make yet another large dividend payment just before it calls the Treasury for a lifeline? And most reasonable individuals on the “Clapham Omnibus” would surely think that this indebted company, that has enriched its shareholders through recapitalisation, and hardly paid any corporation tax, should not be permitted to get away with any such thing.
On an entirely different note, does it not seem absurd that this company was claiming that it could fund a 3rd Runway? They always knew that they could never get back the billions that they have paid out to shareholders, on the back of debt. The plan was simply to mortgage every newly built asset to the eaves; using passenger charges to finance the debt and pay dividends to shareholders who, themselves, would not contribute a penny. Hence Heathrow’s spat with the CAA over raising passenger charges: because rather than taking the upfront capital risk, as responsible corporations do, they planned all along to transfer the risk onto their customers, and away from themselves and shareholders — as corporate pygmies might.
Heathrow’s financial history appears to show that every sinew has been stretched to guarantee returns to shareholders and avoid the payment of corporate taxes. Assets have been secured against prodigal levels of debt, only to the advantage of overseas shareholders. And, with there being no chance of these enormous dividend payments being returned, this type of tax avoiding recapitalisation may well look, to some, like asset stripping.
It is possible that Heathrow’s current campaign of boasting is spawned — just like the sort of bragging one finds in a school playground — from a growing sense of weakness.
But such weakness is self-inflicted. And it would be quite wrong for a company that has pauperised itself through such irresponsible financial engineering to be bailed out by those who have acted responsibly and properly paid their tax.
Paul McGuinness, Chair, No 3rd Runway Coalition