A Risk Too Far?

In the world of company finance, The Debt Ratio indicates the percentage of a company’s assets that are provided via debt. It is the ratio of total debts against total assets.

Debt Ratio = total debts /total assets.

In other words, this shows the proportion of a company’s assets which are financed through debt. If the ratio is less than 0.5, or 50%, most of the company’s assets are financed through equity. Equity is the share stock of a company. If the ratio is greater than 0.5, 50%, most of the company’s assets are financed through debt.  Companies with high debt ratios are said to be highly leveraged. The higher the ratio, the greater risk associated with the firm’s operations.   In addition, high debt to asset ratio may indicate low borrowing capacity of a firm, which will in turn lower that firm’s financial flexibility.    

The latest accounts available for London Luton Airport Ltd (LLAL), 2018/19, allow us to see what sort of figures apply to current airport expansion plans.

The loans shown stand at £137.2 million as of March 2019. We think that it is fair to add the £164 million outstanding on the DART project to this figure, as it is an LLAL project funded by Luton Borough Council, and paid for from the concession income LLAL receives from the airport operator, which otherwise would be used to fill Council service budgets. The accounts list a figure of £61 million in assets under construction on that project. This gives us a total of £301.2 million in debts.  The accounts show £493.1 million as the total shareholders’ funds, otherwise called equity.

301.2 divided by 493.1 gives a Debt Ratio of 0.61 or 61%

The recent collapse of the INTU retail centre group was attributed in many financial circles, not purely due to the effects of Covid-19 on closing those centres, but on the company’s way of financing and its debt/asset ratio of 68%. This company owned or part owned 17 centres in major cities; it didn’t just operate a small regional airport.

We can see that the Debt Ratio is already at alarming levels for LLAL, but when you add the figures mentioned in the details from LBC’s emergency budget Executive Meeting from early July, it sky rockets. LBC intend to borrow another £102.3 million to keep LLAL financially solvent, to fund the continuation of the Development Consent Order Process and other current projects, and to fill an £18 million DART over run costs.

The document also shows that in 2021 it is their intention to borrow another £124 million to build the Century Park Access Road.  This is another LLAL project, as in reality it is the sole deliverer of Terminal 2 and airport expansion. When we add these figures the equation gets even more alarming.

527.5 divided by 493.1 gives a new Debt Ratio of 1.06 or 106%.

We say once again this proves that the reckless pursuit of airport expansion has already gone past the point of no return, and the town is now paying the price.

Stop Luton Airport Expansion

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