1.8.1 Set out below is required wording for the following general definitions which are used at various stages in the guidance:
In this Contract, unless the context otherwise requires:
"Additional Permitted Borrowing"
means on any date, the amount equal to any amount of principal outstanding under the Senior Financing Agreements (as the same may from time to time be amended, whether or not with the approval of the Authority) in excess of the amount of principal scheduled under the Senior Financing Agreements at Financial Close to be outstanding at that date,
but only to the extent that:
(a) this amount is less than or equal to the Additional Permitted Borrowings Limit; and
(b) in respect of any Additional Permitted Borrowing the Agent is not in material breach of its obligations under Clause 11(d)(iii) of the Direct Agreement as it applies to such Additional Permitted Borrowing
and provided further that any such excess amount of principal which is (i) invested as part of any Qualifying Variation or (ii) outstanding from time to time as a result of any drawing under the Senior Financing Agreements as entered into at the date of this Contract, disregarding any subsequent amendment or (iii) outstanding from time to time as a result of any amendment to the Senior Financing Agreements in respect of which the Authority has agreed that its liabilities on a termination may be increased pursuant to Clause 22.3(a), shall not be counted as Additional Permitted Borrowing;
"Additional Permitted Borrowings Limit"
means an amount equal to:
(a) 10% of the Original Senior Commitment for any Additional Permitted Borrowing subsisting in the period from the date of Financial Close to the date on which the amount outstanding under the Senior Financing Agreements is reduced to 50% or less of the Original Senior Commitment, and thereafter;
(b) the higher of:
(i) 5% of the Original Senior Commitment; and
(ii) the amount of any Additional Permitted Borrowing outstanding on the last day of the period referred to in (a);
means in relation to any person, any holding company or subsidiary of that person or any subsidiary of such holding company and "holding company" and "subsidiary" shall have the meaning given to them in Article 4 of the Companies (Northern Ireland) Order 1986 as amended by Article 62(1) of the Companies (No. 2) (Northern Ireland) Order 1990;
means [ ] in its capacity as agent for the Senior Lenders under the Senior Financing Agreements;
means, for the period during which the Additional Permitted Borrowing subsists, an amount equal to the aggregate of all Distributions made during that period up to an amount equal to the principal of the Additional Permitted Borrowing on the first day of that period;
means all assets and rights to enable the Authority or a successor contractor to own, operate and maintain the Project in accordance with this Contract, including:
(a) any land or buildings;
(b) any equipment;
(c) any books and records (including operating and maintenance manuals, health and safety manuals and other know-how);
(d) any spare parts, tools and other assets (together with any warranties in respect of assets being transferred);
(e) any revenues and any other contractual rights; and
(f) any intellectual property rights,
but excluding any assets and rights in respect of which the Authority is full legal and beneficial owner;
means in respect of a relevant company, a company which is a subsidiary, a Holding Company or a company that is a subsidiary of the ultimate Holding Company of that relevant company, and in the case of the Contractor shall include [Holdco and] each of the Shareholders;
[N.B. If a fund or limited partnership or "50:50" owned vehicle (which is not a "subsidiary") or similar is in the relevant ownership chain of the Contractor, this definition will need to be expanded to cover it. See further footnote 2 and Section 34]
means the financial model agreed between the parties prior to the date of this Contract (as updated from time to time in accordance with the terms of this Contract7) for the purpose of, amongst other things, calculating the Unitary Charge;
"Base Senior Debt Termination Amount"
means subject to Clause 22.3 (Changes to Financing Agreements and Project Documents):
(a) all amounts outstanding at the Termination Date, including interest and Default Interest accrued as at that date, from the Contractor to the Senior Lenders in respect of Permitted Borrowing8 (other than in respect of Additional Permitted Borrowing); and
(b) all amounts including costs of early termination of interest rate hedging arrangements and other breakage costs,9 payable by the Contractor to the Senior Lenders10 as a result of a prepayment in respect of Permitted Borrowing (other than in respect of Additional Permitted Borrowing), or, in the case of early termination of interest rate hedging arrangements only, as a result of termination of this Contract, subject to the Contractor and the Senior Lenders mitigating all such costs to the extent reasonably possible;
less, to the extent it is a positive amount, the aggregate of (without double counting in relation to the calculation of the Base Senior Debt Termination Amount or the amounts below):
(i) all credit balances11 on any bank accounts (but excluding the Joint Insurance Account)12 held by or on behalf of the Contractor13 on the Termination Date;
(ii) any amounts claimable on or after the Termination Date in respect of Contingent Funding Liabilities;
(iii) all amounts, including costs of early termination of interest rate hedging arrangements and other breakage costs, payable by the Senior Lenders to the Contractor as a result of prepayment of amounts outstanding14 in respect of Permitted Borrowing (other than in respect of Additional Permitted Borrowing), or, in the case of early termination of interest rate hedging arrangements only, as a result of termination of this Contract; and
(iv) all other amounts received by the Senior Lenders on or after the Termination Date and before the date on which any compensation is payable by the Authority to the Contractor as a result of enforcing any other rights they may have;
means a day (other than a Saturday or Sunday) on which banks are open for domestic business in Northern Ireland;
means any expenditure which falls to be treated as capital expenditure in accordance with generally accepted accounting principles in the United Kingdom from time to time;15
"Consents"
means all permissions, consents, approvals, certificates, permits, licenses and authorisations of a Relevant Authority required for the performance of any of the Contractor's obligations under this Contract;16
means the [person performing the construction or development obligations];17
"Contingent Funding Liabilities"
means [ ];18
means any increased margin that is payable to the Senior Lenders or which accrues as a result of any payment due to the Senior Lenders not being made on the date on which it is due;
means the direct agreement dated on or about the date of this Contract and made between the Authority, the Contractor and the Agent;
means [the date on which any conditions precedent have been satisfied];20
"Estimated Change in Project Costs"
means in relation to Clause 5.2 (Compensation Events), and Clause 14 (Change in Law), the aggregate of any estimated increase in construction costs, operating costs and financing costs less the aggregate of any estimated reduction in construction costs, operating costs and financing costs;
means the [xth] anniversary of [the Effective Date] [the date of this Contract];
has the meaning given to it in the Senior Financing Agreements;
means all or any of the agreements or instruments entered into or to be entered into by the Contractor or any of its Associated Companies relating to the financing of the Project (including the Initial Financing Agreements and any agreements or instruments to be entered into by the Contractor or any of its Associated Companies relating to the rescheduling of their indebtedness or any Refinancing);
"Guidance"
means any applicable guidance or directions with which the Contractor is bound to comply;22
has the meaning given to it in Article 4 of the Companies (Northern Ireland) Order1986, as amended by Article 62 (1) of the Companies (No. 2) (Northern Ireland) Order 1990;
"Holdco"
means [insert details of the Contractor's 100% holding company] if any;23
"Initial Financing Agreements"
means the Financing Agreements put in place upon signature of this Contract as follows:
[ ]
copies of which have been initialled by the parties for the purposes of identification;
means the joint bank account in the names of the Authority and the Contractor,
having account number [ ] and held with [ ];
means all amounts outstanding at the Termination Date under the Subordinated Financing Agreements;
means [the person performing obligations to provide the Service during the Service Period];24
means the amount committed under the Senior Financing Agreements as at Financial Close (as adjusted to take into account any Qualifying Variation);
means, without double counting, any:
(a) advance to the Contractor under the Senior Financing Agreements,25 provided that such advance is not made under any Committed Standby Facility;
(b) Additional Permitted Borrowing;
(c) advance to the Contractor under any Committed Standby Facility which is made solely for the purpose of funding any cost overruns, increased expenses or loss of revenue which the Contractor incurs, provided that such funds are not used in substitution for other sources of committed funding designated for those purposes; and26
(d) interest and, in respect of the original Senior Financing Agreements only (as entered into at the date of this Contract, prior to any subsequent amendment), other amounts27 accrued or payable under the terms of such original Senior Financing Agreements,
except where the amount referred to in paragraphs (a) to (d) above is or is being used to fund a payment of Default Interest on any Additional Permitted Borrowing;
"PFI"
means the Government's Private Finance Initiative or any similar or replacement initiative;
means a person that has contracted with the Government, a public sector authority or other public or statutory body to provide services under the PFI;
"Planned Service Commencement Date"28
means [fixed date by [on] which Service Commencement is planned to occur] or such other date as the parties may agree;
"Project"
means [ ]29;
means the agreements entered into by the Contractor for the performance of the obligations under this Contract which are listed in [ ] copies of which have been initialled by the parties for the purposes of identification;30
means either:
(a) a change in [the Works and/or]32 the Service in respect of which either an [Authority Notice of Change] or a [Contractor Notice of Change] has been served and, in the case of:
(i) an [Authority Notice of Change], the Authority has confirmed the [Estimate] and, where the Contractor is not funding all or part of the required Capital Expenditure, the Authority has agreed to meet all or the remaining part (as appropriate) of such Capital Expenditure; and
(ii) a [Contractor Notice of Change], the change has been accepted by the Authority; or
(b) a Qualifying Change in Law
and in respect of which any documents or amendments to the Project Documents which are required to give effect to such change in [the Works and/or] Service or Qualifying Change in Law have become unconditional in all respects;
means any court with the relevant jurisdiction and any local, national or supra-national agency, inspectorate, minister, ministry, official or public or statutory person of the government of Northern Ireland or the United Kingdom or of the European Union;
"Revised Senior Debt Termination Amount"
means, subject to Clause 22.3 (Changes to Financing Agreements and Project Documents)
(a) all amounts outstanding at the Termination Date, including interest and (other than in respect of Additional Permitted Borrowing) Default Interest accrued as at that date, from the Contractor to the Senior Lenders in respect of Permitted Borrowing; and
(b) all amounts including costs of early termination of interest rate hedging arrangements and other breakage costs,33 payable by the Contractor to the Senior Lenders as a result of a prepayment in respect of Permitted Borrowing, or, in the case of early termination or interest rate hedging arrangements only, as a result of termination of this Contract, subject to the Contractor and the Senior Lenders mitigating all such costs to the extent reasonably possible,
less, to the extent it is a positive amount, the aggregate of (without double counting in relation to the calculation of the Revised Senior Debt Termination Amount or the amounts below):
(i) all credit balances on any bank accounts (but excluding the Joint Insurance Account) held by or on behalf of the Contractor34 on the Termination Date;
(ii) any amounts claimable on or after the Termination Date in respect of Contingent Funding Liabilities;
(iii) all amounts, including costs of early termination of interest rate hedging arrangements and other breakage costs, payable by the Senior Lenders to the Contractor as a result of prepayment of amounts outstanding in respect of Permitted Borrowing, or, in the case of early termination or interest rate hedging arrangements only, as a result of termination of this Contract;
(iv) all other amounts received by the Senior Lenders on or after the Termination Date and before the date on which any compensation is payable by the Authority to the Contractor as a result of enforcing any other rights they may have; and
(v) all APB Distributions;
means the financing provided by the Senior Lenders under the Senior Financing Agreements;
means [ ]35 as at the date of this Contract or as amended with the prior written approval of the Authority pursuant to Clause 22.3(a);36
means a person providing finance to the Contractor under the Senior Financing Agreements;37
"Service"
means [the services required to satisfy the services specification of the Authority contained in Schedule [ ]];
means the commencement of the Service;
means the date38 on which Service Commencement occurs in accordance with [Section 3 (Service Commencement)];
means the period specified in Clause 2(b)39
means any person from time to time holding share capital in the Contractor or its Holding Company;
means each of the counterparties of the Contractor to the Project Documents or any person engaged by the Contractor from time to time as may be permitted by this Contract to procure the provision of the Works and/or the Services (or any of them). References to sub-contractors means sub-contractors (of any tier) of the Contractor;
means the contracts entered into between the Contractor and the Sub-Contractors;
"Subordinated Financing Agreements"
means [ ]40 as at the date of this Contract or as amended with the prior written approval of the Authority;
means a person providing finance under a Subordinated Financing Agreement;
"Suitable Substitute Contractor"
means a person approved by the Authority (such approval not to be unreasonably withheld or delayed) as:
(a) having the legal capacity, power and authority to become a party to and perform the obligations of the Contractor under the Contract; and
(b) employing persons having the appropriate qualifications, experience and technical competence and having the resources available to it (including committed financial resources and sub-contracts) which are sufficient to enable it to perform the obligations of the Contractor under the Contract;
"Tax"
means any kind of tax, duty, levy or other charge (other than VAT) whether or not similar to any in force at the date of the Contract and whether imposed by a local, governmental or other Relevant Authority in the United Kingdom or elsewhere;
means any date of early termination of this Contract in accordance with Section 21 (Early Termination);
means the payment calculated in accordance with Section 7 (Price and Payment Mechanism);
"VAT"
means any value added taxes.
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4 Certain definitions exclusive to the Direct agreement between the Authority and the Senior Lenders are contained in Section 31 (Direct Agreement and Senior Lenders).
5 In the context of a bond financing, this definition may be substituted by a definition of "Credit Provider" (or similar), being the finance party that controls the rights of the financiers.
6 The precise nature of the assets involved and any exclusions will, of course, depend on the project concerned.
7 For example, following a benchmarking or market testing exercise, a Qualifying Change in Law or an Authority Change. The model should cover payments in respect of the Contractor and any other relevant company (e.g. Holdco).
8 This assumes a check has been made by the Authority's advisers that the provisions of the Senior Financing Agreements do not include unusual provisions that could artificially inflate amounts beyond those provisions that are market standard (such as specific pre-payment fees). A judgement will have to be made, for example, on whether prepayment fees (in excess of market standard breakage costs) should be included. In most cases it is recommended that they should not be. See Section 33 (Due Diligence over Sub-Contracts and Financing Documents) and see also footnote 27 below.
9 This is intended to cover net breakage costs if the compensation is not paid on an interest payment date. Authorities may consider whether they should exclude any future profit element from the calculation of costs of early termination of interest hedging arrangements where the termination is for force majeure, breach of refinancing, corrupt gifts and uninsurability. See also HMT Guidance "Interest rate and Inflation risks in PFI Transactions" of April 2006.
10 This assumes the Senior Lenders are the only parties to any interest rate hedging agreements (this will not necessarily be the case) and are compliant with the agreed hedging policy. See footnote 35 below.
11 Such references should also cover such credit balances whether they are held as cash (as with revenue accounts) or in the form of investments (as with reserve accounts) and should extend to letters of credit or other instruments if these are used instead of cash.
12 Any proceeds standing to the credit of the Joint Insurance Account will continue to be used for reinstatement after the Termination Date. See Section 25.6.4 (Reinstatement and Change of Requirement after Insured Event).
13 This recognises that these balances will, in the ordinary course, be charged to the Senior Lenders as security and so on a termination can be set off by them against outstandings. It is sensible, therefore, not to pay such amounts, rather than to pay and subsequently recover such amounts. To the extent any such accounts are not charged to Senior Lenders, they may be excluded from (i). If a Holdco is used and the Senior Lenders have security over Holdco's bank accounts, then Holdco should also be referenced here.
14 See footnote 27.
15 For "composite trader" projects this definition may be amended to read "Works Expenditure" or "Relevant Expenditure". See Section 19.5 (Composite Trader).
16 These will include, for example, planning consents.
17 In transactions that do not involve construction work (for example, some defence contracts) other terminology will be required.
18 These will be any contingent liabilities of the shareholders in respect of financial obligations owed to the Contractor and/or lenders under the Financing Agreements in relation to the Project which are triggered as a result of or in relation to the termination of the Contract (see Section 33.2 in relation to due diligence). For example, guarantees or letters of credit in respect of deferred equity, subordinated debt or equity bridge loans or obligations to fund reserve accounts. This will not include any guarantees or letters of credit issued in support of the Sub-Contractors' obligations under the relevant Sub-Contracts.
19 The form of direct agreement that should be used is set out in Section 31 (Direct Agreement and Senior Lenders).
20 Conditions precedent will often not be necessary in a Contract. They can be used as a checklist of what needs to be delivered on or prior to signing (e.g. the Senior Financing Agreements). Such issues can be dealt with in separate ways, for example, by having a checklist of tasks that must be completed or documents signed prior to the Contract being signed. Conditions precedent are strictly only needed if they relate to things which must be done after signing. One example would be planning consents in projects in which it is necessary to have a signed document prior to a planning application being made. See also Clause 2(a).
21 This definition assumes that the project is being financed using Senior Debt and equity and would cover subordinated debt and any mezzanine debt. This definition is used in Section 22.3 (Certainty of Compensation Payment Amounts and Changes to Financing Agreements) and 16.11 (Changes to Financing Agreements and section 34 (Refinancing)). This guidance does not deal specifically with the provision of mezzanine debt to a project and its treatment (e.g. in terms of the compensation payable on termination for Authority Default, refinancing and force majeure), although this has been used in some PFI projects. How mezzanine financing is treated is an issue for specific projects, although this will naturally depend upon the particular funding structure, the rate of return on the mezzanine and the nature of the project concerned. Where mezzanine finance is used, it should be determined whether it has more the nature of senior debt or equity and treated accordingly, and advice should be sought from SIB to ensure that it is classified correctly.
22 Whether this definition is needed will depend on the sector (i.e. whether the introduction of Guidance can have the same effect as a change in law (see Section 14 (Change in Law)).
23 If there is no 100% holding company used as part of the project structure then this definition should not be used and reference to Holdco in the definition of the "Associated Company" or elsewhere should be deleted. References to "Holding Company" however must remain.
24 In the absence of a single Service provider assuming all such obligations, this definition should be amended to refer to persons contracting directly with the Contractor to provide the constituent elements of the Service.
25 If the Senior Lenders are not committing a Committed Standby Facility at Financial Close, the Authority should conduct due diligence over the sizing of the facilities that are committed, so as to ensure that they have not been inflated in such a way that the effect is to create a facility which by its very nature, also acts as a "Committed Standby Facility".
26 This will need to be defined and will be any standby facility that is committed by the Senior Lenders at Financial Close for the purposes of funding any unforeseen cost overruns, increased expenses or loss of revenues incurred by the Contractor, and the Authority should conduct due diligence over the size and terms of the facility prior to Financial Close to evaluate its potential liability under Clause 22.3. The protection given to the Contractor under Clause 22.3 (Changes to Financing Agreements and Project Documents) should only take effect if the purpose of the advance under the Committed Standby Facility is to fund genuine unforeseen costs and not, for example, to prepay amounts owed by the Contractor under the Subordinated Financing Agreements.
27 It is vital that the Authority's advisers satisfy themselves as to the appropriateness of the senior finance terms (especially any possibly unusual fees or indemnities) in the light of this potential liability. If the Authority is not so satisfied, it should either ask the Senior Lenders to revise their terms or alternatively restrict the Authority's exposure under Sub Clause (d) of Permitted Borrowings above to those fees which it is willing to pay on a relevant termination.
28 Whether this concept (and definition) is required will depend on:
(a) the attitude taken to early Service Commencement (See Sections 3.7 (Existing Services) and 4.6 (Bonus Payments for Early Service Commencement)); and
(b) whether any dates need to refer to the date on which the Service is due to commence (for example, a default long-stop date or liquidated damages for failure to complete on time).
29 This term should be defined on a project-specific basis.
30 These will usually be listed in a schedule and include contracts the Contractor has with its main sub-contractors, usually:
(a) the Construction Sub-Contractor; and
(b) the Operating Sub-Contractor.
The definition should not, however, be extended to include contracts between the main Sub-Contractors and their sub-contractors (i.e. those without a direct contractual relationship with the Contractor) or Finance Documents.
31 See definition of Original Senior Commitment.
32 References to Works should only be included if variations in the build phase are to be allowed and an appropriate definition should be used. Definitions of "Authority Notice of Change", "Contractor Notice of Change" and "Estimate" should all relate to the relevant drafting in the Change Protocol developed pursuant to Section 13 (Change in Service).
33 See footnote 27 above.
34 See footnote 13 above.
35 These are all documents relating to the Senior Debt and may include:
(a) a credit agreement;
(b) interest rate hedging agreements; and
(c) security documents.
Where bond financing is used the definition will include the bond trust deed, the terms and conditions of the bond, as well as security documents. A monoline insured deal will also include reference to the monoline's Policy and Endorsement and its Insurance and Indemnity Agreement (each of which will be defined in the Contract). See Section 36 (Bond Finance). Since this guidance was last updated, bond finance has become an accepted funding option for certain deals in Northern Ireland, for example, on roads. Other financing structures will require reference to other documents. See Section 37 (Corporate Finance). As regards mezzanine finance, see footnote 36 below.
The Authority should place limits on hedging agreements to allow only those agreements that comply with an agreed hedging policy and details of which have been notified to and acknowledged by the Authority to be included in the definition of Senior Debt (Base Senior Debt Termination Amount or Revised Senior Debt Termination Amount, as appropriate). The hedging policy may, of course, change over time, which the parties should agree to as necessary.
36 Where referred to in the Contract, Senior Financing Agreements should mean those agreements as at the date of the Contract as they may be amended with the approval of the Authority pursuant to Clause 22.3(a). This is particularly important if Senior Debt is paid on early termination of the Contract. On signature of the Contract, the Authority has an assumed exposure to termination liabilities (based on the financing structure in place at financial close); the Authority should therefore have the right to approve any amendments to its termination liability (see Section 22.3 (Certainty of Compensation Payment Amounts and Changes to Financing Agreements). If the Contractor makes changes to the Senior Financing Agreements which have not been approved by the Authority for the purposes of Clause 22.3 they will be disregarded for the purposes of calculating termination sums unless they qualify as Additional Permitted Borrowing.
37 Reference may be made to approved hedge counter-parties if relevant. This and related definitions will need to be carefully reviewed for projects whose financial structures include a mixture of Senior Debt and mezzanine debt in addition to subordinated debt and equity.
38 This assumes a single Service Commencement Date. To the extent a project has more than one Service Commencement Date (see Section 3.6 (Acceptance and Service Commencement)), this will need amendment to recognise that partial provision of the Service may commence prior to the main Service Commencement Date. See Section 3 (Service Commencement).
39 That is the period from the Service Commencement Date to the Expiry Date, unless the Contract is terminated early (see Sections 2 (Duration of Contract) and 21 (Early Termination)).
40 These are the debt financing documents signed at Financial Close, through which the equity investors will often invest 'equity' in the Project in the form of subordinated debt.