1.13 Figure 2 shows the advisers appointed by the various parties for the funding competition. The Treasury received financial advice from Dresdner Kleinwort Benson3 and legal advice from Berwin Leighton4.
1.14 Exchequer Partnership appointed Société Générale, their existing financial adviser for the project, to run the funding competition, with the active participation of the Treasury and Dresdner Kleinwort Benson. In their roles as financial advisers to the Treasury and Exchequer Partnership both Dresdner Kleinwort Benson and Société Générale were excluded from bidding to provide the senior debt funding5. The Treasury and Exchequer Partnership decided that Société Générale should be allowed to provide mezzanine debt funding at an agreed rate of interest, but only if the agreed rate of interest was market tested during the funding competition. In the event that a third party offered to provide the mezzanine funding at a better rate, Société Générale would be paid £100,000 for having committed to provide such funding.
1.15 Funders undertake what is known as due diligence work6 to satisfy themselves that a project is commercially viable before agreeing to lend money. However, for a funding competition with a large number of potential financiers, allowing each of them to undertake due diligence would have increased costs to the preferred bidder, which are ultimately passed onto the contractor and the department, either in the project under negotiation or in future projects. Such a process would also have been unwieldy to manage, probably increasing the length of the competition and the final cost of finance for the Treasury.
1.16 To counter this situation Exchequer Partnership, in consultation with the Treasury, appointed one set of due diligence advisers to act on behalf of all of the potential funders. The cost of these advisers was no greater than the costs already included in the Exchequer Partnership bid for financier due diligence advisers. Due diligence costs are always included in budgets when third party finance is to be arranged, whether through a separate funding competition or otherwise (and so are ultimately reflected in the unitary payment). These technical, legal and insurance advisers were appointed after a competitive process. All of the funding institutions involved in the competition agreed to use this one set of advisers. Their appointment streamlined the due diligence process and was regarded as a success by the Treasury, Exchequer Partnership and the funders themselves.
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3 now Dresdner Kleinwort Wasserstein
4 now Berwin Leighton Paisner
5 Different types of funding are identified by their ranking in terms of repayment rights. Senior debt is ranked highest and therefore is paid first. Mezzanine (often called subordinated) debt ranks below senior debt and therefore is only paid after senior debt has been paid. It should be noted that there can be several levels of subordinated debt, e.g. shareholders' subordinated debt will probably rank below subordinated debt provided by a third party. The lowest financing, in rank, is equity. Equity providers make returns in the form of dividends which will only be paid once all other forms of financing have received their payments. As such it is the riskiest form of funding and receives the highest returns if a project is successful.
6 The analysis and appraisal of a project, especially any risks, undertaken prior to making an investment decision.