NATS-Annual-Report-2015

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Annual Report and Accounts 2015 | NATS Holdings Limited Financial Statements 126 Notes forming part of the consolidated accounts (continued) 19. Financial instruments (continued) Inflation rate risk The regulatory charge control conditions that apply to NERL‘s UK en route and North Atlantic services determines a revenue allowance for financing charges that is linked to inflation (now CPI but previously RPI). To achieve an economic hedge of part of this income, in August 2003 coincident with the issue of its £600m 5.25% fixed rate bond, NERL entered into an amortising index-linked swap with a notional principal of £200m for the period up to March 2017 reducing semi-annually thereafter and expiring in March 2026. Under the terms of this swap, NERL receives fixed interest at 5.25% and pays interest at a rate of 3.43% adjusted for the movement in RPI. The index-linked swap cannot be designated as a cash flow hedge under IFRS, although it provides an economic hedge of certain of NERL‘s inflation-linked revenues. The value of the notional principal of £200m of the index-linked swap is also linked to movements in RPI. Commencing on 31 March 2017, semi-annual payments will be made relating to the inflation uplift on the amortisation of the notional principal. Inflation rate sensitivity analysis The sensitivity analysis below has been determined based on the exposure to breakeven inflation arising from the index-linked swap. The difference between fixed rate and index-linked gilts reflects the market‘s expectations of future RPI and is a proxy for the breakeven inflation rate. The analysis is prepared assuming that the index-linked swap at the balance sheet date was in place for the whole year. A 1% increase or decrease in breakeven inflation is considered to represent a reasonably possible change in inflation. An increase in the rate of RPI will increase the future index-linked payments that NERL is required to make under the swap contract and so impacts its mark to market value. The following table shows the effect of a 1% increase in breakeven inflation on the amount of interest payable in respect of this swap and the impact on its value when marked to market. A positive number indicates an increase in profit and equity and a negative number a reduction in profit and equity. There would be an equal and opposite impact on profit and equity if breakeven inflation falls by 1%. 2015 Impact 2014 Impact £m £m Change in swap interest and mark to market value (21.4) (23.2) The mark to market value of the index-linked swap is also sensitive to the discount rates that are used to determine the net present value of the cash flows under the swap agreement. The discount rate is determined by reference to market yields on interest rate swaps. The effect of a 1% increase in the discount rate would be to increase profit and equity by £9.5m (2014: £10.9m). There would be an equal and opposite impact on profit and equity if discount rates decreased by 1%. Financial Statements
Annual Report and Accounts 2015 | NATS Holdings Limited Financial Statements 127 Notes forming part of the consolidated accounts (continued) 19. Financial instruments (continued) Credit risk management Credit risk refers to the risk that a counterparty will default on its contractual obligations resulting in financial loss to the group. The group’s exposure to credit risk arises from the risk of default by customers on settlement of trade receivables and from the risk of a failure of a financial institution in which funds are invested for return or held for trading purposes or with whom derivative contracts are entered into. The risk of loss from default by customers and the mitigations against this risk are explained in note 16. With regard to funds or contracts held with financial institutions, the group’s policy is to transact with counterparties that hold a minimum credit rating as supplied by independent rating agencies, Standard & Poor’s, Moody’s and Fitch Ratings. The group’s policy is to allocate limits to the value of investments, foreign exchange transactions and interest rate hedging transactions that may be entered into with a bank or financial institution and to allocate an aggregate credit risk limit. The limits are based upon the institution’s credit rating with Standard & Poor’s and Moody’s; the Fitch rating is only used if one of these agencies does not provide a rating. Where there is a difference in the rating then the lowest rating is applied. Currently, the group’s investments take the form of bank time deposits and money market fund investments. Investments in bank time deposits with maturities up to three months and between three and six months are only entered into with institutions holding a long term minimum credit rating of A- and A+ respectively from Standard & Poor’s or Fitch Ratings and A3 and A1 respectively from Moody’s. However, dependent on market conditions, tighter restrictions on rating requirements and lower limits maybe placed on the duration of deposits. Money market fund investments are restricted to AAA-rated liquidity funds. The table below sets out the investment limits that are applied to each institution based on its credit rating: Rating (Standard & Poor’s) Limit per institution £m AAA 50.0 AA+ 40.0 AA 30.0 AA- 20.0 A+ 15.0 A 10.0 A- 7.5 The following table shows the distribution of the group’s deposits at 31 March by credit rating (Standard & Poor’s): Rating (Standard & Poor’s) Number of institutions £m 2015 2014 By credit rating % Number of institutions £m By credit rating % AAA 5 107.5 40.3 4 55.3 22.9 AA- 3 46.8 17.5 4 80.0 33.2 A+ 5 60.9 22.8 3 42.4 17.6 A 6 47.5 17.8 7 54.2 22.4 A- 1 4.3 1.6 2 9.4 3.9 267.0 100.0 241.3 100.0 Financial Statements
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NATS-Annual-Report-2015

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