Idea of the week: Short-dated GBP bonds of 6+% funded by Heathrow Airport

Data as of 30 June 2026
Source: Company Data, iFAST Compilations.

1H26 recap: record passengers, thinner margins

Heathrow carried a record 40.0m passengers for 1HFY26, up 0.2% YoY. While traffic to the Middle East fell 25.1% YoY, removing roughly a million passengers, the total still rose because the network reallocated: Asia Pacific grew 7.9%, Africa 7.2% and Europe 2.7%, while connecting passengers rose 5.4%. This is the defining characteristic of a capacity-constrained hub. This reallocation is possible as more airlines want slots at Heathrow than there are available slots, so capacity freed on one route is quickly taken up for another. In our view, this makes demand more resilient than at an airport catering mostly to local traffic.

Revenue was broadly flat at £1,729m, across three reported segments. Aeronautical revenue — the charges airlines pay per passenger and per aircraft movement, which the Civil Aviation Authority (CAA) caps — fell 3.5% YoY to £1,041m on fewer air transport movements. The regulator sets that cap for five years at a time; the current period, H7, runs to December 2026, and H8 (January 2027) covers 2027 to 2031. Retail revenue (Heathrow’s cut of what passengers spend inside the terminals) rose 2.2% YoY to £373m, as premium services, catering and car parking offset weaker luxury and currency exchange. Other revenue — rental income from property and hangars, regulated charges for check-in desks and baggage systems, and the Heathrow Express rail service — grew 12.5% YoY to £315m.

Overall costs rose 6.4% YoY (+£49m) to £814m. About £15m of that was imposed rather than chosen. Business rates (a UK property tax on commercial premises, and Heathrow's estate is vast) added £10m after a change in government policy, with higher employer National Insurance inside a £5m rise in payroll. The largest single item was £28m of operational cost growth (+12.4% YoY), split between legally required support for passengers with reduced mobility and digitalisation that management expects to lower costs later. Because airport costs are fixed within a price control period, none of it can be recovered until H8 begins in January 2027. Consequently, adjusted EBITDA softened 4.6% YoY to £915m. As seen in Chart 2 below, this continues the recent trend of modest softening in Heathrow’s adjusted EBITDA and adjusted EBITDA margin. Do note that adjusted EBITDA in the second half tends to be stronger on summer traffic.

Cash generation held up better than earnings. Cash from operations (OCF) was £880m in the half, up 2.0%. After £9m of corporation tax, down from £35m a year earlier and capital spending (capex) of £605m, free cash flow was £266m against £314m a year earlier. The three-year picture is starker: free cash flow has fallen from £1,487m in FY23 to £689m in FY25 as capex more than doubled, driving net debt higher in every period.

Looking forward, margins should stay pressured through 2026 with charges fixed until December, though the underlying business remains resilient – record traffic through a regional shock, operating cash still growing and a regulated asset base that compounds regardless of the earnings cycle. H8 takes effect in January 2027 and offers scope for earnings and cash generation to improve, with the extent resting on the CAA's final decision in April 2027.

Chart 2: Adjusted EBITDA has compressed for three years, with 1H26 the weakest half on margin

Data as of 30 June 2026.
Source: Company Data, iFAST Compilations.

Table 1: Financials Summary

Regulated asset base anchors earnings and cash generation

We highlight a key supportive feature of this credit: Heathrow’s debt is measured against an asset base that keeps growing while earnings fall. The regulated asset base (RAB), as seen in Table 1 above, has risen from £19,804m to £21,662m over three years. Because the group’s gearing covenant is struck against the RAB rather than against adjusted EBITDA, rising debt has been largely absorbed by a rising asset base.

The RAB growth is structural, not incidental. The CAA allows Heathrow to earn a return on the RAB: the asset base multiplied by a regulated cost of capital. That was set at 3.53% CPIH*-real for H7 and is proposed at 4.63% for H8, or roughly £765m rising to £1,003m a year on the current base. Two features compound it. The return is real, applied to a RAB that inflation itself uplifts, so inflation raises both the asset base and the cash return earned on it.

Looking forward, the RAB should keep growing on inflation indexation and continued capital spending. That supports both earnings and cash generation: a larger RAB earns a larger allowed return while the regulator separately allows Heathrow to recover the capital it has invested.

*: CPIH refers to the UK’s headline inflation measure

How cash generated by Heathrow (SP) reaches Heathrow Finance

The regulated framework sets what the airport earns. What decides the serviceability of Heathrow Finance’s bonds is narrower: can Heathrow Finance meet its obligations from cash it is contractually entitled to receive, rather than cash the ring-fence chooses to release?

The airport generated £266m in free cash flow for 1HFY26. Against that, £494m was paid out of the ring-fence to Heathrow Finance, with the £228m difference funded by borrowing, which is why Heathrow (SP) net debt rose from £15.7b to £16.4b. We regard this as the weakest single fact in the credit.

What matters is the composition of that £494m: £75m of interest on the intercompany loan, which the operating group is contractually obliged to pay; £119m repaying principal on that loan; and a £300m entirely discretionary dividend. Heathrow Finance's own interest cost £59m (1HFY26)— covered by the contractual interest alone, with the rest available to pass on to shareholders. Over the twelve months to June 2026, the pattern is the same: £118m of interest paid against £151m received, a surplus of £33m. That interest bill is equivalent to roughly 6% of the cash the airport generates.

Chart 3: £494m left the ring-fence, but Heathrow Finance needed only £59m of it

Data as of 30 June 2026. 
Source: Company Data, iFAST Compilations.

Decent credit profile with sufficient covenant headroom and liquidity, though coverage has weakened

Heathrow Finance has two covenants, both measured across the consolidated group so that they capture the holding company's £2.0b of debt. The Group Regulatory Asset Ratio (RAR), consolidated nominal net debt divided by the RAB, must stay below 92.5%, and the Group Interest Cover Ratio¹ must remain above 1.00x. A third measure, the junior RAR² carries an 82.0% trigger which, if breached, restricts Heathrow Finance’s ability to pay dividends upward, though it could continue to service these notes. We note that this trigger works in a bondholder's favour, since it traps cash at precisely the level where the bonds sit.

¹ Interest coverage ratio = Operating cash flow, after tax and a deduction of 2% of the RAB for maintenance spending / total group interest paid

² Junior RAR = (Senior net debt + Junior debt) / RAB

Looking at Chart 4 below, Group RAR stood at 83.2% on 30 June 2026, leaving 9.3 percentage points (ppt) of headroom worth roughly £2.0b of additional debt capacity. Growth in the asset base does much of the work here: net debt has risen in every period, but so has the RAB, which is why the ratio has improved from 84.9% in FY23 to 83.2% today. On coverage, Group ICR was 2.44x at the last annual test against the 1.00x covenant, having eased from 2.86x in FY23. Part of that decline is the EBITDA pressure described earlier. Part is structural: the covenant definition deducts 2% of the RAB from the cash flow numerator (around £433m at the current asset base), so a growing RAB mechanically tightens the ratio even when operating conditions are stable.

On liquidity, Heathrow Finance carries £2,004m of total debt as of 30 June 2026. This consists of £975m of bonds maturing in 2027, 2029 and 2031, alongside £1,029m of term loans and private placements. Against a cash position of £329m, net debt stands at £1,675m. On our estimates, only £275m is current, being the 2027 bond – Heathrow Finance’s cash covers its entire current debt outright, without needing a further distribution from the ring-fence.

On balance, while we expect gearing to drift higher as capital spending outpaces cash generation, we do not expect Heathrow Finance to breach its covenants within the life of the two bonds we highlight below.

Chart 4: Both covenant tests retain substantial headroom

Data as of 30 June 2026. Interest Cover Ratios are tested annually at 31 December and are not reported at the half-year
Source: Company Data, iFAST Compilations.

Structural and regulatory risks investors should weigh

The H8 price review is the dominant near-term risk. The CAA's Initial Proposals and Heathrow's own plan remain some distance apart, principally on the size of the capital programme and the allowed cost of capital, with the company arguing the proposals do not yet support an investable pathway. Final Proposals are due in November 2026 and a binding decision in April 2027. Opening positions in price reviews of this kind typically narrow, and the CAA has already proposed lifting the allowed return from H7 levels, so we would expect a settlement somewhere above the Initial Proposals. We are nonetheless mindful of the risk: an outcome at the low end would compress interest cover and slow RAB growth at once, with the pressure landing on the junior and holding company tranches first.

Expansion is the larger question but a materially later one. Planning consultation closed on 1 September 2026 and now requires a Parliamentary vote, with an application expected in 2028 and a decision targeted for 2029. A programme costed at £33b to £49b would inevitably reshape the capital structure, though the bulk of that spending — and the debt raised against it — is expected to fall well beyond both bonds. The 2027 matures before the process reaches any decision point. The 2029 matures around the planning decision itself, so while we consider repayment risk limited, holders should expect spread volatility around that outcome.

About the bonds

Table 2: Bond recommendations

Overall, we think Heathrow Finance has a decent credit profile, backed by a world-class asset base that cannot be replicated. The regulator continues to allow a return on an expanding capital base, while the group retains substantial headroom in its covenant thresholds. Adjusted EBITDA and cash flows have been declining over the past three years. But we see this as a function of where Heathrow sits in the regulatory cycle rather than of the business itself. Costs have risen against a price fixed until December 2026, which resets from January 2027. Moving forward, we think there is scope for both earnings and cash generation to recover, which should modestly improve Heathrow Finance’s credit profile.

In Table 2 above, we highlight the 2027 and 2029 GBP bonds available on our platform. Do note that these bonds are secured on substantially all the assets of Heathrow Finance and its immediate parent, including the share capital of both Heathrow Finance and Heathrow (SP) – not the airport. That equity has value only once the £16.4b inside the ring-fence is repaid, so we treat these bonds as structurally subordinated: Class A first, Class B second, Heathrow Finance third.

Reflecting that subordination, both issues are rated sub-investment-grade at BB+ (Fitch) and B1 by Moody’s. HTHROW 3.875% 01Mar2027 Corp (GBP) offers a yield to worst of 5.94% with 0.40 years to maturity, while HTHROW 4.125% 01Sep2029 Corp (GBP) offers a yield to worst of 6.60% with 2.90 years to maturity.

Against comparable UK gilts, the 2027 bond offers a higher yield spread of 178+bps compared to the latter’s 172+bps. Furthermore, the 2027 bond matures before the CAA’s binding H8 decision, meaning the repayment does not depend on the regulatory outcome.

Investors who are comfortable with structural subordination and lower reporting frequency over the year can consider these two bonds (the 2027 one in particular) for their attractive yield.

Declaration: For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds NIL positions. The analyst who produced this report hold NIL positions in the abovementioned securities. This research report was prepared with the assistance of artificial intelligence (AI) tools. iFAST Financial Pte Ltd does not rely exclusively on AI for content generation; the content of this report – including all investment theses, ratings, price targets and conclusions – has been independently reviewed and verified by the research analyst(s) to ensure accuracy and professional integrity.