During my appearance before your Committee on 18 November 2002, there was some discussion of the revised financial arrangements for NATS which were being negotiated at that time. The deal was completed [today], and I thought the Committee would wish to know the details.
When the Public Private Partnership (PPP) for NATS was created in July 2001, the Airline Group acquired a 46% stake in the company. The Government retained a 49% holding, and the employees received 5% in the form of a share trust.
BAA plc have now invested £65 million in NATS, and the Government has invested a matching amount on identical terms. Each investment of £65 million is comprised as follows:
(a) £5 million as ordinary share capital in NATS Holdings Ltd, the parent company in the NATS Group;
(b) £27.5 million of new loan notes in NATS Ltd, a subsidiary of NATS Holdings Ltd;
(c) £32.5 million of new loan notes in NATS (En Route) Ltd, a subsidiary of NATS Ltd that provides en route air traffic services in the UK under licence.
The investment by BAA will have an effect on shareholding levels. In round figures, BAA itself will have a 4% holding, while the Airline Group's interest will be reduced to 42%. The Government's share will remain at 49%, and that of the employees at 5%.
The Airline Group will continue to be the controlling shareholder. BAA will have the right to appoint two non-executive directors to the board of NATS Holdings Ltd. Its consent will be required for a limited number of NATS Holdings Ltd shareholder matters, and the approval of the BAA Directors will be required for a limited number of matters relating to the affairs of NATS Holdings Ltd or other members of the NATS Group.
The proceeds from the new investment will be used by NATS to effect a £130 million reduction in NATS' senior debt provided by its current lending banks. Thus the effect of the composite solution will be to reduce NATS' present and future senior debt exposure.
The new investment is only one element of the financial package for NATS. There are two other elements- changes to the company's existing debt facilities and changes to the regulatory environment in which it is operating.
The existing loan facilities had effectively been suspended pending the resolution of NATS' financial difficulties. These suspensions have now been lifted and NATS is free to continue its operations on a normal basis. Critically, this will allow it to continue with its capital expenditure programme to the ultimate benefit of users and the travelling public. The solution also envisages a refinancing through the issue of long-term debt in the capital markets. A significant step on the way to such a refinancing has been achieved with NATS receiving an investment grade rating from Standard and Poors.
The second additional element involves changes in NATS' regulatory regime. In December last year the CM announced that, following consultation with interested parties, it was prepared to approve conditional modifications to NATS' charges, subject to the CM being satisfied with the eventual financial restructuring package for NATS. The Authority therefore provisionally modified its price control so that the cap on price increases is now set at RPI-2% for the years 2003-05, compared to the previous limits of RPI-4% in 2003 and RPI-5% in 2004 and 2005. This will result in prices in 2005 being roughly 8% higher than they otherwise would have been. The CM also provisionally allowed NATS a dilution of volume risk over 2003-05, with the company bearing only 50% of volume risk, rather than 100%. The deal now reached has enabled the CM to formally approve these two conditional modifications.
The solution represents many months' hard work on the part of all interested parties-the shareholders, the bankers, the CM as regulator, and the company itself. Each party has made its own contribution, and borne its share of the risk. The Department believes that the deal is fair to both the taxpayer and all the other parties concerned.
I am writing in similar terms to Mrs Gwyneth Dunwoody MP as Chairman of the Transport Select Committee.
Rachel Lomax Permanent Secretary
19 March 2003