2.27 A residual value element to the financing structure was incorporated in the deal to bring down the annual cost of the Home Office s payment to AGP: a £100 million fixed rate bond will be repaid as a bullet payment at the end of the contract. The Home Office has the option at the end of the contract to buy the remaining leasehold on the office building at the lower of market value or £137.5 million (a bid item from AGP) or to vacate the site11. The Home Office will not have to pay more than £137 million to buy the building and so could, in a buoyant property market, achieve a substantial value for money gain. AGP had initially offered a £90 million residual value bond but agreed to increase it to £100 million during preferred bidder negotiations.
2.28 If the Home Office chooses to vacate the site, AGP would have to find new tenants and refinance the fixed rate bond. If the Home Office decides to buy the building, the proceeds received from the Home Office would be used to pay off the fixed rate bondholders. There is a speculative risk for AGP's shareholders associated with this fixed rate bond if the market value of the offices is less than the value of the outstanding bonds. To mitigate this risk, and ensure that fixed rate bondholders are compensated in full at the end of the contract, a cash trap mechanism has been put in place. From 2022 onwards there will be a monitoring of the potential residual value of the site at the end of the contract. Any assessment of value being less than £100 million will lead to money being set aside into a residual value fund to ensure that bondholders are compensated in full. Shareholder returns will, as a result, be reduced.
2.29 In the event of termination of the contract by the Home Office, bondholders would normally receive the capital outstanding on the bonds or, if higher, their market value at the time. On this deal, the Home Office and its advisers negotiated an option whereby, in certain termination circumstances, the Home Office could elect to pay over time. This would mean that if the Home Office needs to terminate the contract, it would avoid an immediate cash call on its budget. Instead, the interest and capital re-payment profile for the bonds would be maintained.
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11 The Home Office must decide whether or not to buy or vacate the site two years and nine months before the contract ends.