2.43 Prior to the refinancing Ernst & Young assisted the Trust in considering the effect of the increased termination liabilities. Ernst & Young's analysis showed that, on a worse case scenario,22 if the contract was terminated before 2019 the increase in the Trust's termination liabilities as a result of the refinancing (assuming the liabilities were paid as a lump sum) would exceed the Trust's benefits from the refinancing but there would be net benefits to the Trust from the refinancing if the contract was terminated after 2019.
2.44 As noted above, prior to the refinancing, Ernst & Young also considered the Trust's termination liabilities, taking account of the probability of the contract being terminated, and, for the purposes of this report, undertook further detailed analysis to support the conclusions previously drawn. The consideration at the time of the refinancing, and the further analysis, took account of the Department's view that, although the Trust has accepted the risk of increased termination liabilities, there will be a low probability of the contract being terminated. In forming this view they have taken account of the investment grade rating that was given to the bond issue which implies a very low risk of project failure together with controls, such as the THC Dartford's funders' right to appoint new contractors, which are likely to overcome project difficulties without recourse to contract termination.
2.45 Ernst & Young concluded that despite the risk of significantly increased termination liabilities, the refinancing, after taking account of the Trust's expectation of a low probability of contract termination, is expected to produce value for money for the Trust. This analysis shows that value for money from these arrangements will be achieved whether the Trust elects for its termination liabilities to be paid over time or as a lump sum (Figure 17).
17 | Ernst & Young's analysis of the value for money case for the Trust's agreement to the risk of increased termination liabilities for THC default based on the maximum capped amount payable |
| If termination liabilities paid over time | If termination liabilities paid as a lump sum |
The maximum amount of the Trust's termination liabilities following the refinancing1 | If termination occurs in 2003: In NPV terms: £105 million | If termination occurs in 2003: In NPV terms: £135 million |
The maximum increase in the Trust's termination liabilities as a result of the refinancing | If termination occurs in 2018: In NPV terms: £21 million | If termination occurs in 2018: In NPV terms: £89 million2 |
The NPV of the increase in the Trust's termination liabilities following the refinancing based on a conservative assumption that there will be a 10 per cent probability of the contract being terminated in any year during the contract period3 |
| £1.8 million |
The NPV of the Trust's refinancing benefit |
| £11.7 million |
The NPV of the expected net refinancing benefit to the Trust after taking account of the increased termination liabilities and the probability of the contract being terminated4 |
| £9.9 million |
Source : Ernst & Young | ||
NOTES 1 The capitol value of the project is £96 million. The value of termination liabilities paid over time in the original project was £114 million. The lump sum value represents 102% of senior debt less receivables. The value of termination liabilities following the refinancing could include some or all of the £46 million additional debt THC Dartford took on to generate the refinancing gains. 2 The maximum increase in the Trust's termination liabilities would have been £116 million had the Trust not renegotiated aspects of its termination liabilities prior to the refinancing to limit the increase in termination liabilities that would arise as a result of the refinancing. 3 The Trust expects the probability of the contract being terminated to be much lower than 10 per cent (in line with the judgement of the Prison Service in connection with the Fazakerley Prison refinancing), based on the independent assessment of the project default risk undertaken for THC at the time of the refinancing. 4 Ernst & Young also calculated that there would be a net benefit to the Trust from the refinancing in whatever year a termination of the contract might take place. This was based on the Trust's expectation that, following contract termination, it would pay the termination liabilities over time and not as a lump sum. Ernst & Young also calculated that, were the termination liabilities to be paid as a lump sum, unless there was a probability of more than 70 per cent, over the life of the contract, that the contract would be terminated, there would be an expected net benefit to the Trust from the refinancing. | ||
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22 Assuming no rectification costs which could be deducted by the Trust.