2.16 In the refinancing of the Fazakerley prison project, FPSL approached its original arrangers, (ABN Amro and Bank of America) along with other providers of finance (including an existing lender, new banks and bond arrangers). FPSL asked them to bid either to renegotiate the terms of the existing loan facility on a more advantageous basis, or to arrange a bond issue as a competitive alternative. One of the original lenders, ABN Amro, was successful in this bidding process and underwrote the whole new loan on improved terms. Any of the other original lenders that were not prepared to continue lending on these new terms received a small payment to compensate them for being repaid earlier than expected.
2.17 Where other PFI projects have been funded through the issue of bonds to a wide variety of investors, opportunities for refinancings are less likely. This is mainly because there are often penalties for making an early repayment on a bond issue.17 These penalties may serve to reduce or eliminate any benefits from refinancing therefore rendering the whole exercise of limited value. In addition, the project company may find it more difficult to renegotiate the terms of finance. This is because, rather than dealing with a small number of banks, it would need to approach all the investors who hold the bonds. This presents practical problems, particularly if the bonds are bearer instruments meaning that the holders can remain anonymous. Moreover, investors in bonds tend not to be as close to the project as a lending bank, and may not therefore appreciate the reasons why they are being asked for improved terms.
2.18 If the bonds have been sold instead to one or a limited number of select investors through a mechanism known as a private placement, there may be more scope for a refinancing because there are fewer logistical problems in negotiating with investors.
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17 The penalties compensate investors for loss of future interest. The basis for calculating the penalties is set out in the listing prospectus for the bond issue.