2.23 At Further Best and Final Offers, bidders were required to give bid quotes based on both bond and bank financing. The prices provided by the AGP and CASL consortia at that stage both suggested that a bond financed solution for the deal was going to be the cheapest option. On selection as preferred bidder, AGP continued to research both bond and bank options before firmly deciding on a bond financing solution in October 2000. The Home Office's financial advisers then continued to periodically monitor potential differences in price between bond finance and bank finance. At financial close, bond finance was estimated to be some £6 million cheaper than bank finance.
2.24 The bond issue proceeds were reinvested in a Guaranteed Investment Contract (GIC)9. Three bidders competed for the GIC and the winning bidder (Ambac) was selected on 19 March 2002 (the day before financial close) and undertook to maintain its discount against market rates overnight. The Home Office's financial advisers benchmarked the price against the market rates on the day of the bond launch (20 March 2002) to ensure that the rate continued to be competitive: their conclusion was that the rates quoted by the GIC provider were the best available market rates. The Home Office negotiated a 50 per cent share of any financial gains made by AGP should the assumed rate of inflation in the construction price during the development phase that is required by the bond insurers (also Ambac) exceed the actual rate of inflation. The Home Office will receive 50 per cent of any gains arising but has no downside risk.
2.25 AGP, as part of its internal funding arrangements, competed the subordinated debt financing for the consortium. CCF Charterhouse plc (subsequently taken over by HSBC Project Equity Investment) won the competition.
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9 In a project involving a prolonged construction period, the borrower will be disbursing funds on project costs over a number of years. Since the proceeds from a public bond issue are normally received in a single tranche soon after financial close, any funds not immediately required by the borrower should be invested in a deposit instrument and released as and when required so as to minimise the overall cost of financing. A Guaranteed Investment Contract is one such instrument: it provides a single fixed rate of interest on a reducing deposit balance for a given period.