10.5 Bank financing comprises debt that is issued by commercial banks. Once the funding has been agreed the money is committed but will only be drawn down as it is required during construction. Bank debt is also called senior debt and is the first form of funding to be repaid during the contract period. Senior debt bears the lowest risk of any finance in a bank financed PPP scheme and will therefore earn the lowest rate of return. If risks crystallise during the repayment period of the PPP contract, the banks will be able to take security over the PPP contract and will require rights to take over the contract if the project company fails to complete its obligations. Senior debt will typically comprise the bulk of funds on bank financed schemes (typically 90%).
10.6 Senior debt is provided at variable interest rates and the project company will usually be required by financiers to purchase an interest rate management tool that will provide a fixed rate for some or all of the debt term. NHS bodies are not expected to take the risk of variable interest rates from financial close as payments to the project company will be fixed (depending on the acceptable provision of facilities and services), subject only to indexation. Bank debt is often flexible and allows restructuring and early repayment in a way that many other forms of funding do not.