10. Despite the Government's commitment to repay 95% of the debt in the event of termination and limited project risks, the debt was given a BBB grade rating by the rating agencies. Perceived risks leading to this low rating included potential disagreements about the appropriate level of funding between central and local government, and uncertainty around what might happen at the end of each 7½ year periodic review. Under a BBB rating, the lenders are charging about £450 million more in interest on the amount borrowed than they would charge on some £3.8 billion of direct Government loans with AAA rating.15
11. On the basis of the Infracos meeting their performance targets, London Underground will be likely to pay nominal post tax equity returns to investors of 18 to 20%, a premium of about 15% above the risk free rate of return of 4.5% at deal close. These returns are some 50% more than most deals with an established PFI structure. Investors may receive lower returns if the Infracos use all their standby funding or fail to achieve upgrades through inefficient and uneconomic behaviour.16
12. The Tube Lines deal was refinanced very early in the life of the PPP, in May 2004. The refinancing was in contemplation when the contracts were finalised, suggesting that a better deal for the public sector might have been possible. Refinancing reduces borrowing costs and the gains are shared between the public and private partners. Tube Lines has refinanced £1.8 billion of debt. TfL receives £50.4 million of the benefit initially, which represents a 60% share of the total £84 million gain. Its share rises over time to £58.8 million (70% of the total). This percentage is higher than that suggested in Treasury guidance on the sharing of refinancing gains, which calls for a 50-50 split. The public sector share is paid over to TfL, is not subtracted from the grant provided to it by the Department, and may be used in any part of London's transport network.
13. There is some scope for Metronet also to carry out a refinancing to achieve lower interest payments on its debt, which is held mostly in bonds. The amount of any such refinancing benefit will only be determinable at the time of refinancing and would be dependent on factors such as the underlying interest rates, the financing structure available at that time and the level of pre-payment penalties to its existing bondholders.17
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16 Qq 13-14, 182-184; C&AG's Report (HC 645), para 2.32
17 Qq 136, 174-181, 185-186; C&AG's Report (HC 645), para 2.38; Treasury guidance on refinancing is available at: http://www.hm-treasury.gov.uk/media//FB2F8/PPP_Refinancing_Guidance_Note.pdf