3.90 It may be that an authority is considering a measure that is not covered in this guidance. In this case, advice should be sought from departmental PFUs on the appropriateness of the measure prior to implementation. In particular, earlier projects tend to be more bespoke and may offer greater scope for operational savings.
3.91 Authorities considering a refinancing should understand the relationship between the existing financing terms of the project and those available in the current market. Many projects will have existing terms that are below current market pricing and therefore do not present opportunities for VfM refinancing gains. If authorities are contemplating refinancing, it is requested that they contact their departmental PFU and the Treasury to enable consideration of how the best outcomes can be achieved, taking account of other refinancing opportunities that may be being considered elsewhere.
3.92 Some authorities may be considering the potential to terminate PFI contracts and prepay or buy out the related Project Co debt. The VfM of any such options will need to be considered carefully on a case by case basis. The analysis should take account of:
• contracted costs of voluntary termination, including any market value payments due to investors and the effective sunk cost of any breakage costs due on fixed rate bank borrowing (or Spens payments on capital markets funding);
• any premiums or discounts that may be proposed by the Project Co and its lenders;
• the project risk being transferred back to the authority as a result of the contract termination and/or debt buy out; and
• transaction costs.
3.93 For projects where the borrowing rate being paid by the PFI Contractor is below current market levels (likely to be the case for some pre-credit crisis transactions), then some lenders may be willing to sell' the loan asset (i.e. permit the authority to buy out project borrowing) at a discount in order to reallocate capital more profitably (although we believe that some lenders may not have booked the trading loss and would be unwilling to trade out of the asset and force crystallisation of the loss). It is recommended that authorities contemplating debt prepayment or buy-out seek commercial and financial advice to assist with the evaluation of Project Co and lender proposals, including reviewing the Financial Model and contracted termination costs and any discounts that may be proposed, and in each case the affordability and VfM of proposals (calculated on a Treasury Green Book basis) compared with continuing with the contract and leaving Project borrowing arrangements in place.
3.94 Some savings measures that involve changes to the contract or asset financing arrangements without increasing value or risk transfer may effectively represent additional borrowing, and would not be recommended on VfM grounds. Examples could include sale and leasebacks of equipment or property, debt service holidays and concession extensions. Further detail is set out in Annex A.