Impact of COVID – 19, results, going concern, asset values, individual businesses, in line with ESMA recommendations

Ferrovial S.A. – Annual report – 31 December 2020

Industry: construction; transportation


The World Health Organization declared a global pandemic caused by COVID-19 in March 2020. Most of Ferrovial’s business is conducted in countries that are exposed to a greater or lesser extent to COVID-19 outbreaks and have implemented drastic measures such as states of emergency, border closures to international travellers and restrictions on the movements of their own citizens.

These measures have caused a reduction in consumption, commercial activities and industrial production, seriously affecting the countries’ economies and pushing down demand for Ferrovial’s services. This has impacted mobility services in particular, though not exclusively.

With the aim of presenting the global impact of the pandemic and in line with ESMA’s recommendations, this note provides an explanation of the impact of the pandemic on the financial statements for 2020, description of the analysis performed to conclude that the Company can continue to do business under the going concern principle, analysis of the possible impact of COVID-19 on the impairment of assets and assessment of the potential impact on the main financial risks, including an analysis of the risk of breach of covenants included in financing agreements.

1.2.1. Impact on the financial statements for 2020 and mitigating measures adopted

The effects of COVID-19 on Ferrovial’s business results are described below:

Airports Division

The pandemic has led to a drastic reduction in the number of passengers both at Heathrow and at AGS (the holding company of Aberdeen, Glasgow and Southampton airports), both of which are equity-accounted companies.

This explains the net loss posted by Ferrovial, since the Airports business contributed EUR -466 million of the total losses for the year of EUR -410 million, Heathrow Airport and AGS contributing EUR – 396 and EUR -51 million, respectively.

Passenger trends in the months following the outbreak of the pandemic were as follows.

Due to the impact of COVID-19, the reduction in investment projects and the delay in the expansion process, Heathrow airport undertook a detailed review of its organisational structure to simplify operations and cut costs. As a result, an extraordinary expense of GBP -92 million (EUR -21 million for Ferrovial’s % shareholding) was recognised in connection with staff cost reduction measures, which will be a cost saving in the future. Heathrow also reviewed the asset portfolio, particularly assets under construction. Some projects have been put on hold, while others are not expected to restart in the near future. This led to the recognition of a fixed asset impairment loss of GBP -92 million (EUR -21 million for Ferrovial’s % shareholding). AGS recognised an extraordinary expense of GBP 7 million (EUR 3 million for Ferrovial’s % shareholding) relating to organisational restructuring.

At Heathrow airport, there was also an adverse effect on the income statement due to the variation in derivatives for a total amount of GBP -202 million (EUR -46 million for Ferrovial’s % shareholding), the negative value of which increased mainly as a result of decreasing interest rate expectations due to the global economic crisis and an average reduction of 60 basis points in the 6-month LIBOR curve.

At Heathrow and at AGS, measures were taken to cushion the impact on the income statements and preserve the cash resources available. The following measures are particularly worthy of mention:

  • Reduction in Heathrow’s and AGS’ operating expenditure in 2020 by GBP 303 million and GBP 37 million, respectively, compared with the figures budgeted for 2020. These measures include an organisational restructuring and other temporary measures (furlough and wage cuts), renegotiation of supplier contracts, interruption of non-essential activities and consolidation of operations.
  • Revenue maximisation, taking advantage of the capacity at Heathrow to increase London market share, as well as cargo flights.
  • Reduction of GBP 700 million in fixed asset investments at Heathrow and GBP 25 million at AGS.
  • Dividend reduction. No dividend distributions have been carried out in 2020, other than those carried out prior to the start of the pandemic.

Toll Roads Division

Traffic was severely affected in April, followed by a gradual recovery in the following months that slowed in the second half. Traffic trends on the main toll roads in North America are analysed below:

The decline in traffic caused the Toll Roads Division’s EBITDA to fall to EUR 251 million, as compared with a figure of EUR 436 million for the same period of the previous year. Similarly, the contribution by equity-accounted businesses, particularly 407 ETR, was also considerably lower (EUR 33 million as compared with EUR 153 million in 2019).

The toll roads are adapting to the new situation by taking certain mitigating measures that include:

  • Reduction in operating expenditure: lower toll collection costs, reduction in communication and marketing campaigns, and temporary staff lay-offs.
  • Postponement of fixed asset investments. The combined effect of these measures is estimated at EUR 41 million (in proportional terms).
  • Dividend reduction. 407 ETR did not pay the dividend for the second or final quarters of the year, entailing a fall of EUR 160 million in dividends received by Ferrovial from this asset, as compared with the amount of EUR 309 million received in 2019.

Construction Division

Unlike Airports and Toll Roads, the impact on this division was less significant and distributed unevenly from region to region. Spain and South America were the most affected due to the lower rates of production in construction work with fixed costs, delays in the arrival of personnel and supplies, acceleration costs and additional health and safety materials. The total impact on operating results amounted to EUR -49 million.

Mitigating measures were also implemented in this business area in order to cut costs (estimated at EUR 3 million), as well as compensation claims due to the delays and/or the costs of project execution under contracts including force majeure or similar clauses.

Services Division (discontinued operation)

COVID-19 also had an adverse effect on the Services Division, particularly during the lockdown months (April and May in Spain; a longer period in the United Kingdom, to the end of June), which was then followed by less severe mobility restrictions, as well as second and third waves.

The pandemic has affected the Services business across all geographies: In Spain traffic-related revenues have been particularly impacted, such as train on-board services and road maintenance in shadow toll concessions, cost overruns, delays and reduction of non-essential work in industrial maintenance and support activities.

In the UK, water and electricity transmission and infrastructure maintenance activities have been impacted. Also, of note is the considerable decrease in oil & gas activities in the United States due to the sharp fall in demand for petroleum derivatives. The impact on this division’s EBITDA amounted to EUR -102 million.

As regards the mitigating measures implemented, Ferrovial Servicios availed itself of temporary lay-off proceedings (ERTEs) applicable to certain contracts in Spain, which affected 4,500 employees, leading to a positive impact of EUR 41.5 million. In the United Kingdom, Amey applied a number of initiatives promoted by the British Government to support the economy, such as:

  • 80% subsidy for salaries of furloughed employees up to the limit of GBP 2,500 per employee, which came to an end in the fourth quarter and lead to aid amounting to EUR 7.9 million.
  • Advance receipts from public customers in order to bolster the liquidity of public service providers, accompanied by higher payments to suppliers and subcontractors to assure supply chain liquidity.
  • Deferral of VAT payments for March and April 2020 until the period April 2021 to March 2022.

In addition to the measures described, the Services Division has implemented cost-cutting initiatives to adapt to the new market circumstances totalling approximately EUR 110 million (in proportional terms), including delay savings on investments in Spain amounting to EUR 15 million, as well as savings brought about by temporary working hour reductions: EUR 42 million from ERTEs in Spain and EUR 7 million from the furlough scheme in the UK).

Impact on cash flows

The impact of the pandemic on cash flows in the infrastructure businesses is quantified in terms of the reduction in dividends received (mainly due to the cancellation of 407 ETR’s second and fourth quarter dividends and all of the Heathrow dividends following the start of the pandemic). Dividend trends with respect to the previous year are as follows:

In the Construction Division, cash flow impacts are largely in line with the trend in results (EUR -59 million). On the other hand, the Services division has experienced a temporary positive impact in working capital derived from the Spanish and UK initiatives stated above. This positive impact is expected to gradually reverse in the following months.

1.2.2. Going concern assessment

As indicated in the previous paragraph, losses for the year of EUR – 410 million are explained by the impact of the COVID-19 pandemic, particularly on the Airports business. The pandemic also caused a significant cut in dividends received from the main infrastructure projects.

Bearing in mind this situation and in order to draw conclusions on the application of the going concern principle to these financial statements, an analysis of the Group’s cash requirements up to 2022 has been made based on its current cash position.

In this regard, Ferrovial ended the year with an all-time high position of liquidity. In December 2020, ex-infrastructure projects liquidity amounted to EUR 7,964 million (cash and cash equivalents + undrawn credit lines) and the ex-infrastructure projects net cash position amounted to EUR 1,991 million. It should also be noted that the Group’s short-term assets and liabilities, including cash and debt position, show a positive balance at end-December 2020.

Beginning with this liquidity position, Ferrovial updated its business plan for the coming five years to include the estimated impact of COVID-19 on each business area, assuming a gradual recovery of business levels in the second half of 2021, once progress has been made in the vaccination process, achieving herd immunity and allowing an economic bounce back. In that scenario, although no dividends distributions are expected from Airports assets, it is assumed a gradual recovery from Toll Roads assets dividends since 2021 second half and 2022. In the Construction division, no significant impacts related to Covid-19 have been considered, and regarding the open divestments processes they are expected to be signed off within 2021, with cash collections to be received within 2021-2022. This baseline scenario would have no material impact on the company’s current liquidity position.

A stress scenario was added to this baseline scenario to include a number of assumptions regarding the Company’s cash resources in 2021 and 2022 if there is no recovery from the effects of the pandemic. The impacts considered in this stress scenario are as follows:

a. No dividends from infrastructure projects are expected to be received in 2021 and 2022.

b. Worsening of cash projections in the Construction business.

c. Delay in sale processes currently under way, until after 2022

d. Specific recapitalisation needs in certain projects due to the breach of the financing agreements (covenants).

The conclusion drawn from the analysis is that, although this stress scenario would entail a very significant deterioration of the Company’s cash position, cash resources would continue to be

sufficient to meet commitments. Therefore, based on the available information at the reporting date of these financial statements, Ferrovial’s financial position, the diversity of Ferrovial’s assets portfolio that could be eligible for divestments or refinancing processes, as well as the measures adopted to offset the effects of the pandemic on its business activities, Ferrovial’s finances are sufficient to guarantee the capacity of the Group to continue operating under the going concern principle during the years 2021 and 2022, with no material uncertainties having been identified to doubt this conclusion.

1.2.3. Impact on asset impairment

As indicated previously, the main uncertainties caused by COVID-19 relate to infrastructure projects (tolls roads and airports), due to the drastic reduction in toll road traffic caused by the restrictions imposed on mobility and in the number of airport passengers.

Future trends relating to these assets are subject to a series of uncertainties such as the impact on traffic of the economic freeze, promotion of working from home and electronic commerce (in this case, the impact is positive due to the increase in heavy goods and commercial vehicle traffic related to distribution/logistics activities) or the social distancing measures, which will change mobility habits, at least temporarily.

This situation and the uncertainties as to future trends are relevant when analysing possible impairment loss on the assets used in these activities. Impairment tests were carried out on the main assets (all toll roads and airports, Webber, Budimex, Transchile and service companies classified as discontinued operations) using projections discounted based on the estimated evolution of the pandemic and adjusting upwards the discount rates applied.

As regards the short- and medium-term impact of COVID-19 on the main toll road assets, provided that herd immunity is achieved and that there is a economic bounce back in 2021, we expect a quicker traffic recovery to take place.

In the case of airports, in the base case recovery of traffic levels is expected to be slower than in toll roads, in view of the uncertainty generated by COVID-19. AGS traffic levels are not expected to return to 2019 levels before 2025 and HAH traffic levels are not expected to recover over the course of H7, which completes in 2026. There is considerable uncertainty due to the impact on traffic of government or international decisions restricting or preventing passenger flows, so any estimate will have to be reviewed periodically.

The discount rates used in the impairment testing were determined by analysing trends in the main market parameters, the Company having decided to increase the discount rate by between 25 and 50 basis points with respect to pre-COVID levels. Despite the fall in the risk-free rate in Ferrovial’s main markets, the recent increase in risk perception and in returns expected by investors, caused by the pandemic, justify raising cost of capital. It should be noted that the Company uses conservative parameters in order to arrive at a normalised risk-free rate (normalised risk-free rates are between 100 and 200 basis points above the spot rate).

As described in more detail in Note 3.1.2., the conclusion drawn from the exercise carried out, and with the information available to date, is that the assets analysed are not expected to become impaired.

Finally, in respect of the Services business, as these assets continue to be classified as discontinued operations, a fair value restatement has been performed

1.2.4. Impact on financial risks


The most relevant covenants in the Group’s financing agreements relate to default ratios (breaches) in the infrastructure areas (toll roads and airports).

Toll roads

The financing agreements for the main toll road projects contain no default ratios that might entail the early repayment of the debt. They only contain lock-up ratios, which can prevent dividend distribution by the toll road companies.

The decision taken by 407 ETR not to pay out the second and fourth quarter dividend is presented as a prudent measure in view of the uncertainty, rather than as a contractual impediment.


In July 2020, approval was received from Heathrow Finance PLC’s creditors (over 95% support) a waiver of the ICR (Interest Coverage Ratio): Cash flows from operating activities divided by interest of above 1x) for 2020 and a modification of the RAR covenant (Regulatory Asset Ratio: Net debt divided by the RAB or regulatory asset base of below 92.5%) increasing the current limit of 92.5% to 95% in 2020 and 93.5% in 2021, so that no default is expected in June 2021 under the current traffic scenario.

This waiver temporarily imposes a number of conditions on the payment of dividends and a minimum liquidity of GBP 200 million. Heathrow also granted bondholders an additional yield increase of up to 0.75%, 0.25% as from the day the waiver comes into effect, a further two 0.25% increases if the RAR is above 92.5% and the remainder if the rating for any bond falls below Ba3 or BB-.

In AGS, the Net borrowings/ EBITDA ratio <9.5x and the debt service coverage ratio (DSCR) >1.1x were expected to breach in 2020. On 15 June a waiver was obtained for both June and December 2020 covenants. The December waiver successfully overcame a liquidity test at 30 November 2020.

Corporate debt:

Corporate date consists primarily of the following debt instruments: corporate bonds, Euro Commercial Paper (ECP) and corporate liquidity lines. None of the instruments includes default ratios, so there is no risk of default on this type of obligations.

Measurement of derivatives

The coronavirus pandemic and related economic consequences have triggered major upheavals in financial markets having a direct impact on the value of the Ferrovial Group’s portfolio of derivatives.

The fall in interests rates affecting certain currencies and the generalised increase in credit risk are particularly significant.

Interest rates

In some regions, the pandemic has forced central banks to apply emergency interest rate cuts and extraordinary liquidity measures that have caused interest rates to fall across the board.

The interest rate cuts affecting the GBP, EUR and USD have directly affected the valuation of Ferrovial’s Interest Rate Swaps (IRS) in the period January-December 2020 (GBP -28 million (ex- Heathrow), EUR -14 million and USD -6 million, with balancing items in reserves). In the case of Heathrow an impact of EUR -15 million (net profit/(loss) attributable to Ferrovial) has been registered in this regard in the income statement for 2020.

Credit risk

The increase in credit risk due to the economic consequences of the pandemic has caused a sharp widening of credit spreads and of Credit Default Swaps (CDS), as well as deterioration in the credit worthiness of some of the projects and counterparties. This has had a direct impact on the calculation of credit risk adjustments for derivatives. In general, the widening of credit risk has a positive impact on liability derivatives (negative valuation) and a negative effect on asset derivatives (positive valuation). Specifically, it had an impact between January and December 2020 of EUR +11 million on IRS in Euros and EUR -1.4 million in the Autema index-linked swap. These impacts have been reflected in reserves and in the income statement based on the accounting treatment of each derivative.

This credit risk rise could lead to hedge ineffectiveness, although there has been no significant decline in the effectiveness of any of the Ferrovial Group’s derivatives according to the tests performed to date, except for Heathrow cross-currency swaps (CCS), which had a net impact of EUR -15 million in the Ferrovial income statement as at December 2020, of which EUR -4 million relate to those generated by the CVA impact.

UK inflation (Retail Price Index, RPI)

Although expected inflation in the United Kingdom (RPI) is at slightly lower levels than at the start of the pandemic, which is beneficial for Heathrow’s index-linked swap (ILS) portfolio, the sharp fall in GBP nominal interest rates had a broader adverse impact due to the negative effect of discount factors and variable interest rate (LIBOR) receipts for a part of the portfolio (a net amount of EUR -16 million for Ferrovial’s % shareholding, impacting the income statement).

Impairment of financial assets

The Group applies the IFRS 9 expected credit loss approach to the impairment of receivables. The Group reviews the ratings of customers (or awarding entities in the case of financial assets under IFRIC 12) annually and calculates a percentage reflecting the probability of default and the percentage loss that this would entail. This credit review exercise revealed losses of EUR 9 million, primarily related to the AGS airports project (Note 3.6.1).