2.37 Treasury guidance on refinancing (published in July 2002) was available at the time the refinancing of the Trust's PFI contract was being negotiated. At the time the Trust was negotiating the refinancing it was, however, one of the first authorities to be completing a refinancing using the code and new guidance. The Trust and its financial advisers Ernst & Young carried out, whilst negotiating the refinancing, certain financial analysis of THC Dartford's proposal that the Trust's termination liabilities should increase. We have been informed that this analysis included a consideration by Ernst & Young, the Trust's financial advisers, of whether the refinancing proposals would be value for money for the Trust taking account of the probability of the contract being terminated following the refinancing in situations where the Trust's termination liabilities may have increased as a result of the refinancing. This approach was consistent with that undertaken by the
16 | Comparison of the Trust's termination liabilities for THC Dartford default before and after the refinancing |
Original Termination Provisions | Post-refinancing Termination Provisions |
The Trust's termination liabilities will be the lower of: | The Trust's termination liabilities will be the lower of: |
■ The net present value (NPV)18 of the remaining contractual payments for making the hospital available less certain allowable deductions including planned preventive maintenance and rectification costs to make the building fit for use. | ■ As per the original contract but with the NPV discounted at a rate of interest related to bond rather than bank finance. |
■ 120% of THC Dartford's debt at contract letting, paid up equity and subordinated debt (excluding Carillion's and UME's share). | ■ 102% (rather than 120%) of scheduled debt following the refinancing with no repayment of paid up equity or subordinated debt. |
■ The aggregate of THC Dartford's outstanding debt, paid up equity and subordinated debt (excluding Carillion and UME's share) less amounts due to the Trust | ■ As per the original contract but with no repayment of paid up equity or subordinated debt. |
Method of payment: By lump sum or, in the case of the amount relating to availability payments, at the Trust's option, over the term of THC Dartford's bank loan. | Method of payment: By lump sum or, at the Trust's option, over the term of THC Dartford's bond finance. |
Source: THC Dartford |
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Prison Service in connection with the refinancing of the Fazakerley prison PFI contract.19 The Trust expected a low probability of contract termination and concluded, based on advice from Ernst & Young, that the refinancing would be value for money despite the risk of higher termination liabilities.The Department believes that the Trust's analysis was consistent with the manner in which the Treasury guidance was generally understood at the time.
2.38 In support of this report, the Trust and Ernst & Young carried out further detailed analysis in 2004, replicating the Prison Service's methodology, to support the conclusion previously drawn that the refinancing represented value for money for the Trust despite the risk of higher termination liabilities. In the light of the experience of this refinancing the Department and the Treasury agree that current best practice is that more detailed analysis than that undertaken by the Trust at the time of the refinancing would be undertaken before agreeing to a refinancing in order to fully comply with the Treasury guidance on assessing the value for money of refinancing proposals.
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18 Discounted at a rate equal to the London Interbank Offer Rate (LIBOR) plus the interest margin on THC Dartford’s senior debt.
19 See NAO report: The refinancing of the Fazakerley PFI prison contract (HC 584 1999/2000).