Future refinancing

2.11 Based on a survey we commissioned with market participants, the consensus view was that they expected margins in three to five years time to be in the range of 1.25 per cent to 1.75 per cent. As such, we have assumed the new debt margin on the refinanced debt to be 1.5 per cent. The potential effect on a typical project is set out in Figure 12.

2.12 Refinancings will only occur if market conditions improve and if the private sector can be motivated to refinance the projects with revised arrangements that now give most of the refinancing benefit (70 per cent of typical refinancings) to the public sector. Since October 2008, the public authority has a contract right to request a refinancing, which is exercisable once in any two year period.5 Until that time is judged to be right, the Government is locked into substantially higher financing costs that we estimate to be between £500 million and around £1 billion.

2.13 Taking the illustrated level of refinancing gain, at the four year stage, an aggregate recovery of £400 million might be obtained across the basket of deals concluded in 2009. Although there are some technical factors that could increase the refinancing gain, these are likely to be offset by the private sector's share of the gain and by transaction costs.

Figure 11

Change in notional unitary charge on large, complex projects

Term	FSTA March 2008	GMW April 2009	M25 May 2009
Level of project risk	High/ medium	High	Medium
Total interest cost (%)	5.9 - 6.1	7.7 - 8.9	6.9 - 7.9
Final repayment (months before end of concession)	24 months	18 months	42 months
Debt finance proportion (%)	86.2	85.2	84.7
Unitary charge increase compared to FSTA (%)	-	12	6

NOTE

1 Although the projects differ, and each has different proportions of operating costs, the unitary charge has been re-scaled, for comparison with the typical £190 million base case in Appendix Two.

Source: KPMG and National Audit Office

Figure 12

Potential refinancing gains on a project with £190 million senior debt and an estimated 'locked-in' cost of £8.6 million

Refinancing date (years after start of operations)	potential Gain (net present value £m)
Three years	3.52
Four years	3.45
Five years	3.37

NOTE

1 The gain is calculated gross (before sharing) on an original capital investment of £170 million.

Source: National Audit Office

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5 Refinancing gains are shared on a sliding scale basis: Up to £1 million - 50 per cent; between £1-3 million - 60 per cent and greater than £3 million - 70 per cent. Both Greater Manchester Waste and the M25 achieved higher shares.