1.3 During the negotiations that led to the original PPP, the Department for Transport and their advisers, Credit Suisse First Boston, as well as the Banks proposing to lend to NATS and the Airline Group, all tested the robustness of the financial structure for NATS proposed by the Airline Group. This took place in the context of a commercially confidential competition between the Airline Group and two other bidders. Other interested parties, such as NATS itself, and its economic regulator, the Civil Aviation Authority, were not involved in testing. In contrast, during the refinancing of NATS, both these important stakeholders were closely involved, supported by their own specialist advisers. In addition, the new investor in NATS, BAA plc, participated in testing the robustness of the new financial structure (Figure 1), as did independent credit rating agencies. The extent and nature of scenario testing has been agreed between all the parties, and the results were shared. The robustness of the Composite Solution financial structure was tested against more than 80 downside scenarios.
1.4 In the aftermath of September 11th, which focused attention on NATS' exposure to severe downturns in aviation traffic, a wider range of adverse traffic scenarios was used to test the robustness of the new financial structure. Figure 2 compares the extent of scenario testing, when designing the refinancing, with the testing that was performed under the original PPP. The banks also tested the robustness of the new financial structure.
1.5 NATS regards the combination tests, which combined possible traffic shocks with adverse trends on costs, as particularly severe scenarios which provide strong assurance of robustness. They also told us that they took care to update their tests in the light of slower than expected recovery in the number of flights during 2002.
2 |
| Testing the financial robustness of the PPP | |||
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| Against the background of events following September 11th, the refinancing has been tested with a greater emphasis on traffic risks. | |||
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| Key scenarios that were tested | Number of scenarios tested in the original PPP1 | Number of scenarios tested in the Composite Solution2 | |
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| Initially | Before Completion of the solution |
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| NATS costs higher than expected | 14 | 85 | 0 |
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| Adverse Actions by the Company's Regulator | 2 | 1 | 0 |
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| Alternative Financing | 0 | 1 | 0 |
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| Adverse trends in NATS' Traffic and Revenue | 23 | 54,5 | 185 |
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| Various combinations of the above adverse scenarios | 2 | 6 | 21 |
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| Totals | 20 | 21 | 39 |
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| NOTES 1 These are described in greater detail in our previous report, The Public Private Partnership for NATS, Figure 21 page 38. 2 The final composite solution model contained 60 scenarios: Initial scenarios were those requested by the Banks, BAA, and CAA. These scenarios were tested in order to satisfy the parties that the proposed structure was robust and viable and was a pre-requisite for signing the term sheet. These were subject to audit and shared between the parties. Completion scenarios were run for (1) Rating Agencies - to ensure the structure would receive an investment grade rating to enable it to be refinanced in the capital markets and syndicated. An investment grade rating was also required by the CAA before they consented to the solution. Also (2) for NATS - to ensure appropriate internal due diligence and as part of good corporate governance; and (3) for NATS' Auditors - to ensure the structure was robust enough to meet Going Concern tests. In addition to the 60 scenarios above, NATS and its advisors analysed more than 20 other scenarios throughout the Composite solution process to varying degrees. 3 One scenario based on continuing low growth at 3.5 per cent a year. One scenario based on the 1991 Gulf War, in which growth returned to the original trend line after one year of decline. 4 The five scenarios tested included; one of slow recovery from the post September 11th crisis, two based on longer and shorter Wars in Iraq, and two based on shocks to traffic in the second and third regulatory control periods, (2006-2010 and 2011-2015 respectively). 5 Scenarios include unfavourable regulatory outcomes. Source: National Audit Office and NATS | |||