18 The only remaining source of finance for NATS is equity. In concluding that NATS' initial financial structure was adequate, despite the relatively high level of debt, CSFB considered that building up NATS' equity capital would be an inefficient way of protecting the company from the risk of financial stress, and that it would be better for the shareholders to respond to the company's needs if and when risks transpired.
19 But there are constraints on NATS' ability to look to its existing shareholders at times of stress. The Airline Group, as a consortium of airlines necessarily exposed to the risks of air traffic being lower than expected, is likely to be subject to financial stress at the same time as NATS. The other shareholder, the Government, is unlikely to be willing to put up extra equity capital without considerable investigation and debate.
20 That leaves new equity investors. It is a far from straightforward matter to find new equity investors for a business in financial difficulty, and once found, far from straightforward to negotiate the terms on which they will invest, as these will affect the interests of the existing shareholders as well as the company.
21 The constraints on NATS' ability to finance itself are illustrated by its response to the downturn in airline business since 11th September. NATS' en route revenue was around 14 per cent below forecast in the six months following the attacks. Costs are being cut but other expenditure has been postponed, for example a new control centre in Scotland, and redundancy packages for staff no longer required. Creditors are being paid more slowly.
22 In March 2002, the Government and NATS' lending banks made available a £60 million short term loan facility, to enable it to function effectively until September 2002. By this time NATS hopes to have obtained a new equity partner, putting its finances on a sounder footing. By careful management and rationing of its cash, NATS has not needed to draw on this facility to date. However there are continuing risks to NATS' finances. These risks are principally:
■ If NATS income does not recover. There remains considerable uncertainty as to how quickly traffic, particularly more profitable North Atlantic flights, will recover. This is a normal business risk that cannot be removed.
■ If a new equity investor is not forthcoming, or if the Airline Group objects to a new shareholder. Whilst declining to provide more equity, the Airline Group have undertaken to offer all reasonable co-operation in finding a new investor. The Department has said that it will act as a responsible shareholder and is willing in principle, to match an appropriate injection of new capital from the private sector.
■ If the Economic Regulator continues to be unconvinced by NATS' proposals for an increase in prices. In May 2002 the Regulator, when replying to NATS' request made in February, stated that its final response will depend in part on users' views on a price increase and on financial strengthening of NATS. In practice strengthening will require more equity or an easing of debt repayment terms.
■ If the banks were to withdraw their support from NATS. The Banks have an interest in avoiding the Company going into administration because this would place their existing loans at risk. They still retain rights to alter the structure, terms and pricing of their loans to NATS.
■ If the Government is obliged to apply for an administration order. This is a last resort which the Government wishes to avoid. But it has said that it would take such action if necessary.