1.3.1 Two calculations have to be carried out-before and after the Refinancing is taken into account-covering the period from the Refinancing date to the end of the Contract term. The two new financial models required for this purpose (which form part of the information package set out in Section 1.2 above) are referred to herein as the pre-refinancing and post-refinancing models.
1.3.2 Apart from the effect of the Refinancing itself, all other assumptions and formulæ used in these two models should be identical.3 The original base case financial model-as updated for any changes in the Project since then (such as Authority Changes or Changes in Law)-can be used, with appropriate structural adaptation,4 for this purpose. However the assumptions in the new projections should be updated from the base case, based on the actual performance of the project to date, and macroeconomic assumptions such as inflation 5 and interest rates will also need to be updated.6
1.3.3 The Refinancing Gain is then calculated as:
• The Net Present Value (NPV) of the Distributions shown in the post-refinancing model 7
minus
• The NPV of the Distributions shown in the pre-refinancing model
1.3.4 The calculations of Distributions in the financial models should be consistent with the definition in the Contract-i.e. including not just dividends or junior debt service, but also any other element falling into the definition of Distributions.
1.3.5 The NPV calculation is carried out on the cash flows each period 8 from the Refinancing date to the final date of the Contract, which are then discounted at the Threshold Equity IRR 9 to produce the NPV.10
1.3.6 The difference between the NPV of the pre- and post-Refinancing cash flows is the Refinancing Gain, subject to any deduction needed to meet the Threshold Equity IRR.
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3 The Authority and its financial advisers should review the assumptions carefully to ensure that projected Distributions are not being reduced or slowed down unnecessarily.
4 As the calculation only covers the cash flow from the date of the Refinancing, historical figures are irrelevant for this calculation; however they are needed to check that the Threshold Equity IRR has been exceeded.
5 It is usually preferable to use nominal figures (i.e. including projected inflation) rather than real figures (i.e. ignoring inflation) for these projections, as there are likely to be items in the projections such as debt service, tax depreciation, etc. which are not
affected by inflation.
6 One simple way of doing this is to use the same assumptions as the lenders providing the refinanced Senior Debt; however care should be taken to ensure that these assumptions are not unduly conservative, and therefore show an unduly low rate of
Distributions.
7 Typical patterns of changes in Distributions are:
• a single increased Distribution immediately after the Refinancing, because additional Senior Debt has been raised which is used to prepay shareholder subordinated debt, followed by decreases in Distributions as more cash flow is required to service the higher level of Senior Debt;
• a series of increased Distributions in the early years after the Refinancing because debt repayments have been delayed by lengthening the term of the Senior Debt, followed by later decreases in Distributions as more cash flow is required to service the higher level of Senior Debt outstanding;
• a series of increased Distributions because the Senior Debt interest rate is reduced;
(Obviously several of these effects may be combined together in a single Refinancing).