3.36 NATS has three main options when it requires additional external finance:
■ To request additional equity or loans from its two main shareholders; the Government and the Airline Group;
■ To seek additional equity or loans from a new investor; and
■ To request finance from its banks, (Abbey National, Barclays, Bank of America and Halifax Bank of Scotland).
3.37 The Department found during the contract completion stage between March and July 2001 (Paragraphs 1.20 to 1.22), that the Airline Group were constrained in the additional equity they could provide. The Group had been constituted with equal shares for each of the seven Airlines, and smaller members were not as able or willing to provide additional equity as the larger companies. When the Airline Group had to provide additional capital to ensure that the deal could be signed this came in the form of a £15 million loan from the largest airline of the seven, British Airways. The global scale of the post 11th September downturn has added to the difficulty of raising extra financing from the airlines, which are themselves affected to varying degrees by the same downturn as NATS.
3.38 Though the members of the Airline Group have declined to produce additional equity for NATS themselves, we understand that, through the forum of the NATS Chairman's Committee, they are discussing the scope for investment with potential new equity partners. At the time of this report the outcome of these discussions is unclear, but the Chairman of NATS has told the House of Commons Transport Sub Committee that the aim is to obtain an injection in excess of £50m from a new private sector partner, either in the form of equity or subordinate debt. An appropriate injection would be matched by the Government, and would significantly reduce the company's reliance on bank debt. The identity of the proposed equity partners is unknown, although press speculation has centred on Serco and the airport operator BAA plc. It has been reported that Serco has withdrawn and BAA announced in June 2002 that talks were in progress with a view to their participation in the financing of NATS.
3.39 In March 2002 the Department and Treasury were advised by CSFB that NATS was in a serious financial position and was at risk of defaulting on the terms of its loan agreement with the banks. Without short-term support, the NATS Board would have to consider whether the company should apply to be taken into administration. To relieve the financial pressures on NATS the Government agreed to make available a further £30 million, linked to another £30 million from the lending banks, as short-term loan facilities, which would be repayable by 30th September 2002. This facility was designed to protect NATS' cashflow while a longer term solution is developed. NATS has not yet drawn on these facilities and we have not examined their terms. But, these funds are available on broadly equal terms with the bank's existing senior debt. This is consistent with the principles of acting in partnership with the private sector.
3.40 There remain inherent risks that NATS may have to request further financial support from the Government, although it is the Government's intention that the solution currently being devised for NATS should be sufficient to enable NATS to prosper in the future without further financial support. 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.
■ If the Economic Regulator continues to be unconvinced by NATS' proposals for an increase in prices. On 21st May 2002 the Civil Aviation Authority announced that it was minded not to grant NATS' request for an increase in prices in full. However, it would consider allowing a limited rise in charges, conditional on (or following) a financial restructuring of the Company. The Regulator has 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. The Banks still retain a right to alter the structure, terms and pricing of their loans to NATS if the Banks consider it necessary in order to syndicate their loans to NATS to other financial institutions.
■ 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.