Banks are shunning the acquisition financing for London City Airport amid fears over increasing debt levels and inflated prices in the global infrastructure market.

At least three banks have opted against taking part in the £405m ($519m) loan syndication backing the airport acquisition, scared off by growth plans they regard as overly ambitious as well as high leverage ratios. A banker said: "The leverage level is high, the projections are ambitious and people are struggling to understand how the bidders got to that acquisition price. How on earth can they make their money back?" Michael Wilkins, head of infrastructure finance at Standard & Poor's, said: "It is one of the most highly leveraged infrastructure acquisitions yet and it is hard to see how they can justify it. The price is a reflection of the bubble caused by infrastructure funds chasing limited assets." There is no suggestion that the loan, which is being sold by Credit Suisse and Royal Bank of Scotland, will fail in syndication and bankers close to the deal remain confident it will succeed. One said: "It is a challenging deal, it is highly levered and the deadline is tight but to suggest the growth story is based on heroic assumptions is fundamentally wrong. We have three or four banks asking to put forward bigger debt tickets than requested in syndication and we went into this knowing there would be a high attrition rate. We're confident." A consortium of AIG, a US insurance company, financial services group GE Capital and Credit Suisse bought the airport last month for about £750m (€1.1bn) from Irish entrepreneur Dermot Desmond. When a sale of the company was first rumoured in May, analysts estimated a sale value of about €500m (£338m). Desmond paid £23.5m for the airport in 1995. With an enterprise value to earnings before interest, tax, depreciation and amortisation ratio in the high 20s, the acquisition is one of Europe's most highly leveraged, according to analysts. London City's ebitda last year was £19m on post-tax profits of £6m and is forecast to grow 40% to about £27m this year. Price inflation has been a feature of the infrastructure market, say analysts. According to a Goldman Sachs report in March, infrastructure assets were being sold with an enterprise value/ebitda of between five and 15 but that ratio has since been smashed. Wilkins said UK airport operator BAA's acquisition of Budapest airport at a ratio of 23 was one of Europe's highest multiples in recent memory. The debt to ebitda on London City is also high, at 14 times, although bankers stressed it was manageable. A loans banker said: "It's a solid asset so leverage is not the focus. Rather it's a question of whether lenders buy into the growth story." The source close to the deal said the equity participation of the buyout consortium proves the growth plans are realistic. He said: "There is a lot of debt in this deal but there is also a big chunk of equity at nearly 50%. In the leveraged finance market equity participations have fallen to about 20% so this shows the faith the sponsors have in the airport growth story." Soaring leverage multiples have been driven by the availability of cheap debt and the ferocious pace at which infrastructure funds have raised capital. More than $500bn of infrastructure deals have been completed globally this year, more than the total for the past four years, according to data provider Thomson Financial.
Loan syndication is due to close on Friday.