Table 1.J: Key Variables for Senior Debt

Variables	Description	Factors Determining VfM Impact
Initial facility size	The quantum and timing of draw-down is a function of Transaction Costs and Capital Expenditure.	This is not an input variable. It is determined by other factors such as the quantum and profile of Capital Expenditure.
Tail for bank debt	The represents the length of time between the final repayment of the term loan and expiry of the Project Agreement.	This is an input variable, expressed in years. The length of this period is a function of senior lender requirements. The longer this period the greater the lender's protection. Authorities should be mindful of maximum debt tenors.
Availability period	Maximum drawdown period.	This is not an input variable and the Spreadsheet assumes that this corresponds to the construction period.
Grace period	This represents the period (if any) after the senior debt has been drawn down but before repayments of principal have commenced. In effect, therefore, it represents a period of interest-only repayments to senior lenders.	This is an input value, expressed in (whole) years. The length of this period is a function of senior lender requirements. Can be zero.
Sterling swap rate	The swap rate corresponds to the gilt rate plus a swap spread. The swap spread represents the cost of converting floating rate debt into a fixed rate. For most bank-funded PFI projects a swap will be put in place in order to transfer interest rate risk.	This is an input variable, expressed in percentage terms. The prevailing swap rates can be found under the "Market Data" section of the Financial Times FT or on Bloomberg / Reuters. The assumed swap rate should be the one that corresponds closest to the average life of the debt, typically, for PFI transactions, the 20 or 25-year swap rate. For the avoidance of doubt, the rate entered here should include the public sector interest rate buffer The swap rate is a financial markets variable, which at any one time, will be the same across all projects of the same average debt life.
Bank Margin	This represents the margin on top of the reference rate (i.e. LIBOR) charged by senior lenders for providing senior debt. In effect, this margin should reflect the ongoing bank fees and cover both the level of perceived risk in the project and the year-on-year fees incurred in administering the loan.	This is an input variable, expressed in basis points. The margin assumed should be determined by sector-specific experience. Procuring Authorities should substantiate the basis of their assumptions. Professional financial advice is likely to be required. Where margins step up over time, use a suitable average.
Swap credit spread	The swap credit spread reflects the lower credit strength of the PFI project company relative to the assumed counterparty credit strength underlying generic swap rate quotes.	This is an input variable, expressed in basis points. An SPV will generally have a rating of in the order of BB / BBB rather than AA. The size of this spread is a function of swap provider requirements.
Upfront Fee	This represents the initial fee charged by lenders for providing the senior debt. It is typically payable on the date of the first draw-down.	This is an input variable, expressed in basis points. The size of this fee is a function of lender requirements.
Commitment Fee	This represents the fee payable to lenders on the amount of senior debt that they have committed to the project but which at, any point in time, has not been drawn down. The Commitment Fee is payable only until all of the senior debt has been drawn down.	This is an input variable, expressed in basis points. The Spreadsheet applies the Commitment Fee converted to a percentage to the amount of senior debt not drawn down at the end of each year during the construction period. The size of this fee is a function of lender requirements. It is often priced as a proportion of bank margin.
Percentage Capital Contribution	This represents the proportion of PFI Capex that is to be paid by way of a capital contribution at completion of construction and not by way of Unitary Charge	This is input as a percentage and would not normally be greater than 30%. If a higher figure is considered appropriate, IUK should be consulted.