1.141 Senior debt is the cheapest form of long-term private finance and therefore, can prove to be very efficient. However, it is also the least flexible source of funds. The rights of the senior lenders are quite restrictive and can crystallise at a relatively low levels of project stress. The costs of "breaking" the terms on which senior debt is introduced can also be very high.
1.142 Heavy reliance on senior debt suggests that, once completed, the asset and/or associated service is likely to be substantially stable throughout the Contract Period, subject only to occasional, minor changes that can be absorbed easily and without disturbing the rights of senior lenders. Where, however, Procuring Authorities can predict that the nature and scope of the asset and/or service being procured is likely to be subject to frequent and material change (as may be the case with equipment or information and communications technology), then funding provided on the project finance model may not be wholly appropriate.
1.143 The Spreadsheet assumes that senior debt is introduced into the project by way of bank debt. Whilst bonds remain an important source of senior lending for many PFI projects, particularly the very large, the impact that different senior debt structures will have on the VfM appraisal at this stage is likely to be marginal and should be dealt with through sensitivity analysis, if judged necessary, by amending the cost of funding in the "PFI Funding" box and assuming different margins and gearing.
1.144 The Spreadsheet assumes that senior debt is drawn down during the construction period in instalments that match the requirement to fund the project's initial Capital Expenditure and PFI partner's Transaction Costs for the project. Table A1.J sets out the key variables that determine the impact that senior debt has on the Spreadsheet.