26.3.1  Voluntary Termination Payment Amount

On termination of the project agreement resulting from a government Voluntary Termination, government must, subject to section 26.3.3, pay to the private party an amount equal to the aggregate of:

(a)  where the senior debt amount has been financed by bank debt, the lower of senior debt owing to financiers at the Termination Date and the amount forecast in the Base Case Financial Model (as varied from time to time in accordance with section 14.5 of Chapter 14 (Payment provisions)) to be owing to financiers as at the Termination Date;

(b)  where the senior debt amount has been financed by capital market instruments (bonds), the lower of the present value of the:

(i)  future cash flows under the outstanding bonds; and

(ii)  the future cash flows under the bonds forecast to be outstanding at the Termination Date in the Base Case Financial Model (adjusted for any Re-financing pursuant to which government is paid a Re-financing Gain),129

calculated at the Termination Date and, in some jurisdictions, having regard to the yield at which the underlying capital market instruments are priced in the market at the Termination Date, using standard market conventions for each relevant instrument,130 on the basis that the project agreement and the other Project Contracts immediately prior to the Termination Date continue to operate to the expiry date;

(c)  an amount which gives an equity return, being on both any share capital subscribed at Financial Close and any shareholder subordinated debt not taken into account as debt above, (taking into account distributions already paid to shareholders) equal to:

(i)  in some jurisdictions, the real blended equity internal rate of return in the Base Case Financial Model, as varied from time to time in accordance with section 14.5 of Chapter 14 (Payment provisions); or

(ii)  in other jurisdictions, the greater of:

(A)  the real blended equity internal rate of return in the Base Case Financial Model, as varied from time to time in accordance with section 14.5 of Chapter 14 (Payment provisions); and

(B)  the market rate of equity return, having regard to market rates of return, for the project cash flows taking into account the independent valuer's reasonable assessment of forecast cash flows to equity from the date of termination to expiry of the project agreement, in each case:

•  assuming the Contracted Services will be delivered in accordance with the performance standards set out in the project agreements;

•  assuming the service fee provisions will continue to apply as set out in the project agreement;

•  taking into account deductions for forecast costs (including everyday operating costs, finance costs and life cycle maintenance costs) required to enable the delivery of all the contractual services to specifications for the un-expired term; and

•  taking into account the net present value of the projected distributions to equity for the unexpired contract term;

(d)  the break costs and all other reasonable costs incurred by the private party as a direct result of terminating a finance agreement, including hedging arrangements and with any break gains deducted; and

(e)  redundancy payments for employees of the private party and amounts owing to the sub-contractors, which are, in each case, reasonably and properly incurred and arise as a direct result of the termination,

less the deductions in section 26.3.2 below, ("Voluntary Termination Payment Amount").

In regard to paragraph (a) above, mezzanine and other subordinated debt will be afforded the same protection as senior debt for purposes of the Voluntary Termination Payment Amount, but only to the extent that such debt has the essential characteristics of senior debt (other than to the extent that it is subordinated to pure senior debt).  This will be determined on a project-specific basis depending on the debt structure of the private party. However, government will not compensate subordinated debt which is effectively equity.

In regard to paragraph (d) above, government will not compensate the private party for redundancy amounts and sub-contractor costs arising from arrangements not entered into in connection with the project, or in the ordinary course of business and on commercial arm's length terms. In addition, government will not compensate sub-contractor loss of profit for work not performed or indirect, or consequential, loss.

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129  In both paragraphs (i) and (ii), the future cash flows must exclude any 'bond payout amount' or the like payable under the bond terms on default or early repayment of the bonds.

130  The determined yields should each comprise a market reference (base) interest rate plus the lower of the issue margin as set out in the Base Case Financial Model and the trading margin derived from the average offer rate as quoted by a panel of leading dealers in the Australian bond market over five trading days preceding the date the government gives notice of the Voluntary Termination. The precise calculation of any bond payout will depend on the terms of the specific funding proposal.