17 Compensation on Termination
| Schedule Part | Comment |
| 17 | Compensation on Termination |
| Consistency of approach to compensation on Authority Default and Authority Voluntary termination avoids any incentive on the part of the Authority to default. Paragraph 1.2.3 (hub projects only) The SPV should be required to state its preferred method of calculation of equity return in its bid (for NPD projects this will have been agreed in the Territory Partnering Agreement). It should choose between the level set out in the original base case, the market value at the time of termination and the original base case return from the Termination Date. Paragraph 1.2.3 (NPD projects only) This assumes that the SPV share capital and subordinated debt are stapled. In addition to a general right to terminate at any time, the Authority may consider it would be beneficial to have the option to terminate the Agreement on specified dates ("Authority Break Point Dates") for a specified compensation amount for equity and Subordinated or Debt. Any Authority wishing to include this drafting must consult the SFT. | |
| Unless agreed by the parties, a novation to a vehicle controlled by the Senior Funders under the Funders' Direct Agreement should not on its own be sufficient to constitute a Liquid Market Negative Post Termination Service Amounts will always be taken into account in reducing the Adjusted Highest Compliant Tender Price irrespective of whether or not they have been set off against Positive Termination Service Amount. The effect of setting off is merely to reduce the sums payable by the Authority during the re-tendering period. A methodology can be agreed in advance for agreeing what constitutes a reasonable risk assessment. This includes both the everyday running costs and the costs of the service and life cycle maintenance costs. Forecasts are determined by agreement or, in the event of disputes, by an expert. | |
| | This excludes interest accrued but unpaid but the Subordinated Debt documentation should, of course, be checked to ensure this is the way it works. Repayment of principal is caught through the definition of Subordinated Debt. |
| This Section 5 replicates (with some minor amendments) the standard form approach taken to payment of compensation on health projects to date. Authorities may wish to use the alternative drafting set out in Form 13 in Appendix 2 in relation to the arrangements for paying compensation on termination. Where the Authority elects to pay in instalments interest shall be calculated on outstanding amounts at a rate between the gilt rate and the senior debt rate The Authority should review the tax implications of the payment passing through Authority's' control and grossing up provisions may be required as appropriate. This right is granted to give the Authority a claim as an unsecured creditor of the SPV and is not likely to result in any significant recovery for the Authority Where the Authority elects to pay in instalments interest shall be calculated on outstanding amounts at a rate between the gilt rate and the senior debt rate | |
| | Adjusted Estimated Fair Value of the Agreement There will only be any Post Termination Service Amounts here to the extent that the Authority starts the retendering process, but then decides to follow the non retendering approach These amounts are not deducted to the extent paragraph (c) of the definition of "New Contract" is a period from the date of the New Contract to the original Expiry Date (rather than the Termination Date to the original Expiry Date). Adjusted Highest Compliant Tender Price Negative Post Termination Service Amounts ("PTSA") represent an out of pocket cost to the Authority and will therefore need to be deducted from any payment of compensation due to the SPV. Positive PTSA, on the other hand, are regarded as a form of prepayment - the benefit of reduced service costs is also reflected in the tender price, which is likely to be higher. To avoid double counting, any PTSA actually paid to the SPV need to be deducted from the tender price. The effect of set-off of negative PTSA under paragraph 3.8 of Section 2 (Compensation for the SPV Default) of Schedule Part 17 (Compensation on Termination) simply reduces the amount of any prepayment and is therefore neutral. In reality on the SPV Default (d) and (e) are likely to be the same amounts. Base Senior Debt Termination Amount This definition assumes debt finance. In practice the definition is project specific and, in the case of bond finance will need to refer to the principal outstanding amount (indexed or otherwise and/or the early redemption price mechanism by reference to the terms and conditions of the bonds and will need to be approved by SFT. Spens will be payable only on Authority Default, as will the Spens calculation methodology. For the sake of simplicity, consider including a separate definition of Base Authority Default Senior Debt Amount which is identical save for the inclusion of Spens. 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 Contingent Funding Liabilities This is intended to be an exhaustive list of all such arrangements put in place at financial close Deemed New Agreement The Termination Date here is the relevant date as no new contract is actually being entered into Maximum Termination Amount (NPD projects only) In line with NPD principles, this ensures that Project Co does not make any windfall gain from compensation on termination for Project Co default. New Agreement This should also include other documents entered into between the parties, where appropriate. In projects in which the Service ceases to be required on or shortly after the original expiry Date, then the term of the New Contract will be reduced and so Post Termination Service Amounts will not be deducted (or added back). Post Termination Service Amount This payment is made both to ensure that the Authority is incentivised to expedite the retender and that any value received by the Authority is reflected post termination. Usage based payments will need to be addressed specifically. It is recommended that their effects are, where possible, stripped out. A positive Post Termination Service Amount will occur where the cost incurred by the Authority in procuring the Service itself (including rectification costs) is less than the Monthly Service Payment. A negative Post Termination Service Amount will arise if the costs incurred in procuring the Service (including rectification costs) are greater than the Annual Service Payment. Qualification Criteria If tenderers are not required to bid on the basis of a single capital payment then the Authority would have to fund the delay in payment of the compensation amount which is not recommended. Revised Senior Debt Termination Amount This definition assumes debt finance. In practice the definition is project specific and, in the case of bond finance will need to refer to the principal outstanding amount (indexed or otherwise) and/or the early redemption price mechanism by reference to the terms and conditions of the bonds and will need to be approved by the SFT. Spens will be payable only on Authority Default and Authority Termination, as will the Spens calculation methodology. 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. Senior Debt Amount This definition assumes debt finance. In practice the definition is project specific and, in the case of bond finance will need to refer to the principal outstanding amount (indexed or otherwise) and/or the early redemption price mechanism by reference to the terms and conditions of the bonds and will need to be approved by the SFT. Sub-Contractor Losses The Authority must review sub-contracts to ensure that payments due on early termination are not excessive e.g. operational subcontracts where operational phase has not yet started. |