1.15 FPSL told the Prison Service in 1998 that the refinancing would involve:
a) an extension to the repayment period of its bank loan;
b) a lower lending margin on that loan; and
c) a reduction in the level of cash held in reserve accounts.10
At this stage, FPSL did not mention a further feature of the eventual deal,
d) that it would put in place a new fixed interest rate on its bank loan covering the extended life. FPSL provided the Prison Service with legal advice to the effect that the refinancing would not require the Service's consent, but this advice did not cover the potential increase in the Service's termination liabilities resulting from the new fixed interest rate (d).
1.16 Based on the limited information provided by FPSL, the Prison Service's legal adviser, Freshfields, agreed that the Prison Service's consent was not required for the refinancing. The Prison Service had not, at this stage, fully appreciated the impact of the refinancing on its termination liabilities. It told FPSL in October 1998 that, subject to Freshfields reviewing the final details of the refinancing, it would permit FPSL to proceed.
1.17 FPSL subsequently asked the Prison Service to consent to its plans to put in place the new fixed interest rate covering the extended life of the bank loan. The Prison Service asked Freshfields whether Prison Service consent was required to this aspect of the refinancing. Freshfields advised the Prison Service that, under the terms of the PFI contract, it was uncertain whether such consent was required but that given there was uncertainty, FPSL's financiers were likely to require consent from the Prison Service before proceeding with the refinancing. Our legal advisers, Theodore Goddard, agree with Freshfield's advice that the position was unclear.
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10 Reserve accounts are funds which FPSL is required to maintain, and not to pay out as dividends, as part of its agreement with its lenders.