Rating Action: Moody’s assigns A2 ratings to NATS (En Route) PLC’s proposed new issuance, negative outlookGlobal Credit Research – 26 Apr 2021London, 26 April 2021 — Moody’s Investors Service, (“Moody’s”) has today assigned an A2 rating to the proposed new fixed-rate senior unsecured bonds with an aggregate amount of GBP750 million to be issued by NATS (En Route) PLC (NATS). Concurrently, the rating agency also assigned an A2 issuer rating to the company. The outlook on all ratings is negative.Today’s action follows NATS’s announcement that it intends to raise new debt in the bond market to refinance its existing debt as well as bolster its liquidity position as the coronavirus pandemic continues to severely affect air traffic.  The A2 rating of the senior secured and amortising 5.25% notes with an original issue amount of GBP600 million and final maturity in March 2026 remains unaffected. Moody’s understands that part of the proceeds from the new bonds will be used to pre-pay the ca. GBP252 million of principal that remains outstanding as at 31 March 2021. Holders of the existing bonds also benefit from an unconditional irrevocable financial guaranty policy from Assured Guaranty UK Limited (originally MBIA UK Insurance Limited), and the guaranteed rating of the existing bonds is also unaffected by today’s rating action. A full list of affected ratings is provided towards the end of this press release.RATINGS RATIONALE Today’s assignment of the A2 senior unsecured debt and issuer ratings, which is in line with the existing debt ratings, positively reflects NATS’s typically stable cash flow generation from its essential monopoly air traffic services, provided under a somewhat well-established and predictable regulatory regime, and the company’s moderate financial leverage and solid liquidity position. However, the A2 rating also takes into account the challenges related to the future of the aviation sector, with traffic volumes materially reduced amid coronavirus-related restrictions and recovery expected to take several years, and an element of regulatory uncertainty as the existing traffic risk sharing mechanism evolves and a new charging regime is due to start from 1 January 2023. NATS is the monopoly provider of en-route air navigation services through the UK airspace and the airspace that covers part of the North Atlantic Ocean that is delegated to the UK for air traffic control purposes. This makes the company a provider of a critical aviation service not just for the UK but also for transatlantic flights to and from Europe and North America. NATS provides its services in accordance with a licence granted by the UK Government. The provisions of the regulatory framework, as set out in the licence, include a requirement for the financial ring-fencing of the regulated entity from the remainder of the wider NATS group.In particular, NATS is subject to a regulatory gearing cap, whereby the company would be prohibited from paying dividends or making any cash payments to affiliates if its ratio of net debt to regulated asset base (RAB) exceeded 65%. In addition, in each year, in which gearing is expected to exceed a 60% monitoring threshold, NATS would have to provide an explanation for such increase in leverage to the regulator. These metrics also provide the framework for management’s financial and dividend policies and enable the company to maintain a more balanced financial profile than exhibited by some of its more highly leveraged UK regulated utility peers in the water and energy sector. However, over the last 13 months, NATS’s operating environment has been significantly affected by the coronavirus pandemic and a weakened global economic outlook, with the aviation sector one of the most exposed to travel restrictions and sensitivity to consumer demand and sentiment. Moody´s regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety that has led to severe restrictions on air travel, cancellation of airline routes and closing of borders, as well as enhanced health and safety standards in airport operations. Over the calendar year 2020, UK air traffic was roughly 60% below 2019 levels, with most recent data for the first quarter of 2021 showing total chargeable service units (which take into account the weight of an aircraft and the distance flown) remaining at only around 30% of 2019 levels in the same months.  Moody’s currently estimates that UK air traffic volumes may remain approximately 55-65% below 2019 levels for the full calendar year 2021. This reflects that the company’s cash flow generation is more closely linked to number of flights than passengers. For example, its chargeable service units remain supported by long- and short-distance cargo flights, which somewhat softened the impact compared with some airlines and airports.While Moody’s expects overall air traffic to pick up slowly in the second half of 2021, the timing and profile of any recovery remains highly uncertain because (1) travel restrictions in some form may continue for some time even if the spread of the virus seems contained in some areas; (2) there is evidence of a lack of international coordination over travel restrictions and quarantine measures; (3) the deteriorating global economic outlook would likely slow the recovery in traffic and consumer spending, even if travel restrictions are eased; (4) there is uncertainty around the availability and benefits of any medical solutions; and (5) the coronavirus outbreak is also weakening the credit profile of airlines. Traffic risk is somewhat mitigated by the regulated nature of NATS’s services, in particular a volume risk sharing mechanism, which allows the company to recover cash flow lost due to lower traffic volumes. While the time horizon for monetary recovery will be affected by the shape of air traffic recovery, Moody’s currently expects that the vast majority of cash flows lost during the coronavirus pandemic may be recouped over a five- to seven-year period, starting from 2023. The Civil Aviation Authority (CAA), the economic regulator for the UK’s regulated monopoly aviation services said in a March 2021 consultation paper  that it will provide further guidance on the cash flow reconciliation and associated licence modifications later this year. The regulator considers a five- to seven-year recovery period as the current base case but will further assess airlines’ ability to afford increasing charges over time. This affordability assessment will have to be balanced with the regulator’s duty to ensure that NATS can finance its functions. The CAA indicated that the company’s financeability may ultimately have to be supported through additional equity if airline affordability required a recovery trajectory that exceeds the current base case assumption. The A2 ratings and, in particular, the negative outlook, also consider a degree of uncertainty regarding the future shape of the regulatory framework. The current price control, which was set by the Competition and Markets Authority (CMA) after NATS had rejected the original settlement by the CAA, covers the three-year period from 1 January 2020 to 31 December 2022. The CMA had deliberately chosen a shorter period to allow the CAA to renew the settlement and reset airline charges from 2023 which would then reflect the most up-to-date view around the expected recovery of air traffic. Based on an indicative timetable outlined by the CAA, Moody’s expects that NATS will use the remainder of 2021 to negotiate an updated business plan with the its users, the airlines. This will then allow the CAA to review and provide draft and final determinations during the course of 2022.Finally, under Moody’s methodology for government-related issuers, NATS’s A2 ratings reflect the company’s standalone credit quality, expressed as a baseline credit assessment (BCA) of a3 and a one-notch uplift based on an assumption of a moderate support from the government of the United Kingdom (Aa3 stable) and moderate default dependence. Moody’s assessment of moderate support reflects (1) the 49% ownership of the wider NATS group by the UK Government but the lack of any evidence of formal or informal tangible credit support; (2) the high economic importance of the services provided by the company in the UK but probably minimal impact on the credit profile and standing of the government if NATS were to default on its debt obligations; and (3) the modest propensity for government bailouts in the UK in general terms. Moderate dependence recognises that a modest percentage of NERL’s revenues are received from the UK Government (from the provision of support services to the UK Ministry of Defence), and that factors other than domestic economic performance could have a material impact on NERL, such as the propensity for international travellers to visit UK by air, and the substantial amount of non-UK air traffic that transits through the UK airspace.LIQUIDITY AND DEBT COVENANTSNERL’s liquidity remains strong, acting as a key mitigant against current risks. In August 2020, the company had entered into a new GBP380 million two-year syndicated bank facility, ranking pari passu alongside the existing GBP400 million revolving credit facilities and the 2026 5.25% amortising fixed rate bonds. In addition, NATS received GBP102 million of funding arranged through Eurocontrol, the intergovernmental organisation that collects and disburses air traffic charges across Europe, which was paid in several instalments over the period of July to October 2020, to compensate for the deferral in airline charging and associated cash flow losses.The company had also secured a waiver from its senior secured creditors for certain forward-looking financial ratio tests at 30 September 2020 and 31 March 2021 as well as the historical cash interest cover calculation up to an including 31 March 2022, effectively covering the entire period over which the current bank facilities remain available.The proceeds of the proposed new GBP750 million bonds will be applied to repay all of the existing debt. The new notes will be senior unsecured obligations and not include any financial covenants. In addition to the notes, the company also entered into a new GBP450 million two-year syndicated bridge loan facility to facilitate funding of necessary future investments as well as a new GBP400 million three-year (plus two one-year extension options) revolving credit facility. These funds will provide ample liquidity over the next 18-24 months.RATING OUTLOOK The rating outlook is negative, reflecting the uncertainty around (1) the evolution of traffic volumes in light of ongoing coronavirus restrictions; (2) the process and timing for the recovery of lost cash flow under the traffic risk sharing mechanism; and (3) the new regulatory settlement for the five-year period staring on 1 January 2023, which will reset allowances for returns and costs as well as updated traffic assumptions. FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSGiven the negative rating outlook, upward rating pressure is unlikely in the near term. The outlook could be stabilised if (1) traffic recovery looked more certain; (2) it appeared likely that the company would be able to maintain a financial profile in line with levels commensurate with the current rating in light of ongoing regulatory developments; (3) any new approach to the traffic risk sharing mechanism as well as the parameters of the new regulatory settlement did not increase NATS’s business risk profile; and (4) the company continued to maintain a solid liquidity profile.Conversely, the ratings could be downgraded if (1) NATS failed to maintain an adequate liquidity profile; (2) it appeared likely that the coronavirus outbreak had a significant negative medium to longer term impact on air traffic, either because of travel restrictions or failures of major airlines; (3) regulatory changes to the traffic risk sharing mechanism or as part of the new settlement from 2023 resulted in higher business risk for the company; or (4) the company’s credit metrics were to weaken on a sustained basis. Specifically, downward pressure could result from a material deterioration in NATS’s financial profile, such that Moody’s adjusted net debt to RAB was to increase to persistently above 65% excluding any accounting pension deficit or 70% including such obligations. In addition, albeit currently not expected, (1) a shift towards a less prudent financial policy through increasing distributions in a period of macroeconomic uncertainty; (2) a significant downward adjustment to the credit quality of the UK Government; or (3) a reduction in Moody’s assumed extraordinary support by the UK Government, inter alia, through a significant decrease in its shareholdings in NATS Holdings Limited, NATS’s immediate parent, (and NATS itself) at any point in the future, could also exert downward rating pressure. The methodologies used in these ratings were Privately Managed Airports and Related Issuers published in September 2017 and available at https://ift.tt/31q77YO, and Government-Related Issuers Methodology published in February 2020 and available at https://ift.tt/2Jxb1d7. Alternatively, please see the Rating Methodologies page on http://www.moodys.com for a copy of these methodologies. NATS (En Route) PLC is the monopoly-provider of en-route air traffic services in the UK airspace. The company is a wholly owned subsidiary of NATS Holdings Limited, which also provides unregulated air traffic management services — via its indirect subsidiary NATS (Services) Limited — to the majority of the UK’s key airports. NATS Holdings is currently owned 48.9% by the UK Government (Aa3 stable), 41.9% by the Airline Group Limited (AGL), 4.2% by LHR Airports Limited and 5% by an employee share trust. On top of the ordinary share in NATS, the UK Government also maintains a special share, providing it with certain defensive rights, including a limitation on shareholdings of 15% or more of the shares which carry voting rights should NATS shares become listed. NATS’s second largest shareholder AGL is owned 49.9% by the Universities Superannuation Scheme, one of the largest pension schemes in the UK, 16.6% by British Airways, Plc (Ba2 negative), 13.2% by easyJet Plc (Baa3 negative), 13.2% by the Pension Protection Fund and 7.1% by other airlines. LIST OF AFFECTED RATINGS Assignments: ..Issuer: NATS (En Route) PLC….LT Issuer Rating, Assigned A2….Senior Unsecured Regular Bond/Debenture, Assigned A2 Outlook Actions: ..Issuer: NATS (En Route) PLC ….Outlook, Remains Negative REGULATORY DISCLOSURES For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found at: https://ift.tt/1m2F3St. For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on http://www.moodys.com. For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody’s Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ift.tt/349xDIr disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://ift.tt/3pzscdC least one ESG consideration was material to the credit rating action(s) announced and described above.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody’s affiliates outside the EU and is endorsed by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody’s office that issued the credit rating is available on http://www.moodys.com.REFERENCES/CITATIONS%5B1%5Dhttps://www.londonstockexchange.com/news-article/89DG/new-bonds-issuance-escrow-redemption/14951021%5B2%5Dhttps://www.eurocontrol.int/publication/en-route-service-units-monitoring%5B3%5Dhttps://publicapps.caa.co.uk/docs/33/CAP%202119%20Update%20on%20approach%20to%20the%20next%20NERL%20price%20control%20review.pdfPlease see http://www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on http://www.moodys.com for additional regulatory disclosures for each credit rating. Stefanie Voelz VP – Senior Credit Officer Infrastructure Finance Group Moody’s Investors Service Ltd. 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