5.23 There is a direct interaction between the type of senior debt finance and contract flexibility. This relates to the use of long-term fixed rate debt and the type of debt raised (bank debt or bond finance, fixed rate or index-linked). Whilst fixing an interest rate on a loan, or a bond, may appear costless to a procuring authority in cash terms at the time it enters the contract, there may be high exit costs incurred if it ever becomes necessary for the procuring authority to break the contract through Authority Voluntary Termination.
5.24 Bank finance is typically more flexible in accommodating changes than bond finance but inevitably this greater flexibility comes at a price and bond finance is often cheaper than bank debt. However, the cost of prepaying a bond will typically be greater than prepaying an equivalent bank loan, including the breakage cost of any interest rate hedging. There are very limited instances of procuring authorities encouraging bidders to use more expensive but more flexible finance over cheaper but less flexible finance. Procuring authorities and their advisers should compare and price financial flexibility as between funding solutions when determining the most appropriate financial structure for a PFI project.
5.25 Separate more detailed guidance will be issued to assist procuring authorities in considering the effect of various financial structures on flexibility.