Ferrovial S.A. – Annual report – 31 December 2017
Industry: construction, transport
Brexit: after the United Kingdom Government submitted its formal intention to leave the European Union on June 19, 2016, the exit process was formally initiated and a two-year negotiation period began to determine the new terms of the UK’s relationship with the European Union.
The final result of this negotiation process is subject to a high level of uncertainty that could adversely affect economic conditions in the United Kingdom and/or in the European market as a whole, as well as contributing to instability in financial markets and global currencies, including volatility in the value of the euro.
Ferrovial’s assets in the United Kingdom (16% of the value of assets according to analysts’ estimates), could affect its profitability and its ability to create value.
However, these estimates have been tweaked toward a more optimistic outlook. Heathrow airport is the largest asset in which Ferrovial participates in the United Kingdom but the forecast for a potential slowdown or standstill in the British economy is not expected to significantly affect its activity when compared to similar situations in the past in light of the relevance of the asset and its current full-capacity status. In addition, the decision of the British Government to move forward with the third runway project, pending final parliamentary approval, highlights the importance that the airport has for this country and, therefore, its lower exposure to this risk.
In the case of the Services business, which operates through Amey, the impact of budgetary restrictions of Public Administrations may continue to affect the business, although both Services and Construction may be positively impacted by the need to improve the transport network that entails more investment and maintenance tenders in the medium-term. Section 5.4 h of the Consolidated Annual Accounts shows how the Brexit has impacted on the main financial figures, contrasting the negative effect of the performance of the exchange rate with the positive effect of the increase in the inflation rate and the reduction of interest rates, and therefore, of the discount rate on the regulated assets of Heathrow airport.
Regulated assets indexed at inflation increase their value as inflation increases. In response to the risks that could emerge from Brexit, Ferrovial will continue monitoring the developments in negotiations between the United Kingdom and the European Union, foster operating efficiency measures across its diverse business areas to adapt to arising market circumstances, and continue tracking the trends in the financial markets to take the appropriate coverage measures.
To hedge the foreign currency risk, Ferrovial has arranged hedges to cover the amount equivalent to approximately the dividends it expects to receive from UK assets over the next three years. See Note 5.4 of the Consolidated Financial Statements.
F. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (extract)
5.4. Management of financial risks and capital (extract)
h. Impact of Brexit on financial risks
This section includes an analysis of the impact that Brexit is having for Ferrovial with respect to financial risks and how these risks are being managed. The risk section of the directors’ report contains a comprehensive analysis of Brexit and how it may affect the Group’s various business areas.
Ferrovial’s UK exposure on the basis of the different financial and business variables is detailed in the following table.
In 2017 and in the midst of the negotiations between the UK and the European Union, the pound sterling continued its trend of weakness against the euro, although to a much lesser extent than in 2016
when Brexit was announced. At 31 December 2017, the pound sterling had fallen by 4% compared with the year-ago exchange rate. In order to hedge its foreign currency risk, Ferrovial has arranged hedges with a notional amount of GBP 437 million, which approximately cover the dividends it expects to receive on its UK assets over the next three years.
Inflation and interest rates
The market has lowered its expectations with respect to the future RPI Retail Price Index by an average of 0.20%, with a level of 3.3% and a lower actual rate, with interest rates remaining at similar levels.
Once again the market expectation is for current levels to be maintained, although a negative impact on Brexit would push inflation up and adversely affect the value of pension las obligations and the nominal interest rate, increasing the cost of financing.