The Minister for Transport, Mr Brennan, should clear the latest hurdle in his bid to break up State-owned Aer Rianta, write Barry O'Halloran and John McManus, but more pitfalls are likely on the road ahead

Early this week it looked like the plan of the Minister for Transport, Mr Brennan, to break up State airports operator Aer Rianta was about to fall at the final hurdle.

The latest Exocet to be fired at the proposal came in the shape of a warning that splitting Aer Rianta into three airport authorities for Dublin, Cork and Shannon could trigger the repayment of all or part of the company's debt, variously estimated at €479 million and €484 million and effectively bankrupt it.

The Labour Party had already raised the question in the Dáil, but it emerged that Aer Rianta chief executive Ms Margaret Sweeney had written to the Department of Transport, giving details of legal advice that appeared to make it clear that the plan could trigger a partial or complete repayment of the debt if it went ahead without the banks' agreement.

The news broke on Monday, the day that Mr Brennan was due to debate the State Airports Bill, 2004, the legislation needed to facilitate the break-up in the Seanad. This meant that he would have to run the gauntlet of a House led by party colleague Ms Mary O'Rourke, who had publicly criticised the legislation at the weekend.

The advice was given to Aer Rianta by its lawyers, Dublin commercial firm Arthur Cox. In a three-page letter written on June 30th, the State company's solicitors pinpointed a number of areas where they believed the restructuring plan ran the risk of breaking the terms and conditions of the various loans.

Aer Rianta's debt falls into two categories: there are "bilateral facilities", which are loans from the European Investment Bank (EIB), among others; and €250 million in bonds, which mature in 2011 and pay a rate of 6.15 per cent. The bonds are listed on the Dublin and London stock exchanges and their trustee is Deutsche Bank Trustee Company Ltd.

The Arthur Cox letter points out that the terms and conditions of the loans to Aer Rianta restrict it from taking any steps towards reducing its capital, ceasing to carry on substantial parts of its business or selling assets above a certain value.

But the central point it makes is that the loans have a bar on "Aer Rianta ceasing to retain ownership of, and to conduct operations from, Cork and Shannon.

"Breach of these provisions would, in the absence of an express waiver to the contrary from the relevant lenders, constitute an event of default (essentially a breach of the loan's terms and conditions)."

In the solicitors' opinion, lenders could take the position that the "event of default" would occur if any steps were taken to implement the State Airports Bill.

Arthur Cox states the "occurrence of an event of default would entitle the relevant lenders to accelerate and demand immediate repayment of their loans, together with accrued interest".

The lawyers then argue that Aer Rianta would be in breach of the terms of its bonds if it had to repay €32 million or more as a result of defaulting on its other loans. Thus, an accelerated repayment of its bilateral facilities could trigger the automatic repayment of the bonds and the accrued interest.

Independently of this, there is the question of whether the break-up will, of itself, result in a breach of the bonds' terms. Aer Rianta told Deutsche Bank last year that it did not believe it would, as it would be a "restructuring while solvent", which is specifically permitted under the bonds' terms.

But Ms Sweeney's letter to the Department suggests there is a risk to the bonds. This is based on Arthur Cox's assessment that the term "restructuring while solvent" is open to interpretation. The solicitors' letter states that after taking legal advice and consulting with bond-holders, the trustee would ultimately decide on whether the restructuring would breach the terms.

Aer Rianta has not sought a waiver of any terms and conditions of any of its loans or debt facilities. The Department of Transport says it would not be appropriate for it to do this.

Despite the warnings, Mr Brennan was having none of it when he brought the State Airports Bill to the Seanad this week. He said he had not received a fax, telephone call or even a text message from Aer Rianta's bankers, and made it clear that loaning money to State organisations was generally a good thing from the banks' point of view.

This leaves two possibilities. The first is that he and his Department have made a proverbial pig's ear of the whole thing by overlooking the ramifications of restructuring for Aer Rianta's loans and bonds.

The second is that those who have raised the issue, namely management and unions, have raised a red herring, or have at least overestimated the risk that restructuring poses to the loan and bond agreements.

Yesterday it looked like the latter was the most likely scenario. Credit ratings agency Standard and Poor's (S&P) announced that it was maintaining its rating of "A long term" and "A minus-1 short term" for Aer Rianta, and said it did not expect the restructuring to trigger immediate repayments of the bonds or loans.

S&P essentially assesses the creditworthiness of companies, their ability to repay loans and how much of a risk they constitute for their lenders. AAA is the best rating, so on that basis its assessment of Aer Rianta is reasonably positive. It regularly reassesses its ratings as various factors affecting the companies involved change and in the light of shake-ups like the proposed restructuring of Aer Rianta.

Mr Jan Willem Plantagie, director and head of project finance and transport at S&P, said he did not believe that the plan would have a big impact on the company. "Standard & Poor's does not expect the restructuring to result in an immediate requirement to repay the Eurobond and/ or the EIB loans," he said.

"The way we see it, there is only a default if the company is restructured while insolvent. We assume the Government does not intend for the company to become insolvent," Mr Plantagie told The Irish Times yesterday.

He said that S&P had looked beyond the narrow issue of the legal opinion of Aer Rianta's lawyers to the wider issue of what the holders of Aer Rianta's €250 million in bonds and over €200 million in loans might actually do.

"We don't see what is the incentive for bondholders. They are not interested in premature payments," he said.

His assessment was largely based on the fact that the "new Aer Rianta" (which will be called the Dublin Airport Authority once restructuring is complete) will maintain ownership of Dublin Airport, the critical asset. He argued that this was the most important element of the restructuring from the bond holders' point of view.

"We see the company in the future as still having the material assets," he said. S&P also points out that Cork and Shannon airports - which are to be established as separate companies - contribute little to cashflow at present.

"The continuing State ownership of Dublin Airport . . . is positive and the business position of the new company is expected to remain very strong."

Whatever the S&P assessment, it is thought unlikely that the State Airports Bill will be implemented before next year. Given the level of opposition to the plan, and the fact that one director has threatened to go to court to stop it, there is still some way to go before a break-up of Aer Rianta would be possible.

The debt issue could still turn out to be just the first "final hurdle" for Mr Brennan's plan.