1.7 Our previous report demonstrated the critical importance to NATS of its inability to maintain healthy financial ratios in the aftermath of September 11th. Even before September 11th, both NATS itself and the Civil Aviation Authority had warned the Department that the capital structure of the PPP was, in their view, insufficiently robust. Though the Department for Transport had agreed to reductions in the indebtedness of the Company before completing the deal in July 2001, NATS and the Authority still remained concerned before September 11th. The Company estimated before September 11th that, in the event of significantly reduced traffic, it may not be able to generate enough cash to service its increased debts. After September 11th the Company initially estimated that it would run out of money by February 2002. However, this proved to be overly pessimistic.
1.8 Figure 3 illustrates that the refinancing has restored the Company's finances to a level that should avoid the Company moving into a position of default even under severe scenarios.
3 |
| Testing the robustness of NATS' finances | |||||
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| The refinancing has been fundamental to restoring NATS' ability to service its debts, even in adverse scenarios. | |||||
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| Illustrative Scenarios | Average traffic reduction1 | Scenario Outcome in each control period | |||
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| CP1 | CP2 | CP3 | |
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| NATS Base Case | 0% | Ok | Ok | Ok | |
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| The Company does not default under any of these scenarios and therefore retains access to its banking facilities These scenarios are "worse case" in that they assume no management action or allowable use of loans or accounts to cure potential trigger events General traffic shock scenarios on the NATS Base Case | |||||
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| 1 Low Traffic AND a 3 per cent reduction continuing through 2006-2010 | 12.2% | Ok | Ok | Ok | |
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| 2 A Traffic Shock equivalent to Sept 11 2001 in 2006-20102 | 0% | Ok | Ok | Ok | |
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| 3 A Traffic Shock equivalent to Sept 11 2001 in 2011-20152 | 0% | Ok | Ok | Ok | |
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| Scenarios based on a 2 month War in Iraq in 2003 |
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| 4 Short Iraq War PLUS a 5 per cent reduction throughout 2006-2010 | 14.3% | Ok | Ok | Ok | |
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| 5 Scenario 4 PLUS a further 15 per cent reduction in traffic | 27.1% | Trigger | Trigger | Ok | |
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| 6 Scenario 4 PLUS a further 10 per cent reduction in traffic AND Cost shocks3 | 22.8% | Trigger | Trigger | Ok | |
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| Scenarios based on a 6 month War in Iraq in 2003 |
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| 7 Long Iraq War PLUS a 5 per cent reduction throughout 2006-2010 | 16.3% | Ok | Ok | Ok | |
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| 8 Scenario 7 PLUS a further 10 per cent reduction in traffic | 24.7% | Trigger | Trigger | Ok | |
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| 9 Scenario 7 PLUS a further 5 per cent reduction in traffic AND Cost shocks3 | 20.50% | Trigger | Trigger | Trigger | |
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| Scenario outcomes and notes | |||||
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| Ok | No restrictions placed on Company other than those negotiated in the facilities agreement | ||||
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| Trigger | Allows greater monitoring by lenders including a block on dividends, and the ability to review loan drawdown requests. Otherwise the Company is allowed to operate normally with full access to facilities. | ||||
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| NOTES 1 Traffic Reductions are expressed as annual percentage reductions against base case traffic forecasts for the first control period 2001-2005. Traffic is defined in terms of Chargeable Service Units, equivalent to a 50 tonne aircraft flying 100 kilometres. 2 Traffic reduces in the period following a Sept 11th profile with a peak annual reduction of 12 per cent in the second year. 3 Cost shocks consist of operating cost increases above base of £12 million in the year ending 31/3/04 and and £10 million in 31/3/05. Source: NATS | |||||