24.3.1 Compensation payments where there has been a voluntary termination (see Section 23.5.2 (Consequences of Voluntary Termination) and Section 23.5.4 (Compensation on Termination on an Authority Break Point Date)), a termination for Authority Default (see Section 23.1.3 (Compensation on Termination for Authority Default)), Force Majeure (see Section 23.3.2 (Compensation on Termination for Force Majeure)), corrupt gifts and fraud (see Section 23.4.3 (Compensation on Termination for Corrupt Gifts and Fraud)) or wilful breach of the refinancing provisions (see Section 23.6.2 (Compensation on Termination for Breach of the Refinancing Provisions)) are all calculated in whole or in part by reference to the level of the Contractor's Senior Debt outstanding at the time of the termination payment.
24.3.2 Authorities should be concerned to ensure that the level of Senior Debt outstanding at any time is not inflated in a way that will significantly and unexpectedly increase the Authority's liability on termination.2 The Contract should always ensure that the amount of Senior Debt and Junior Debt cannot be artificially inflated.
24.3.3 The Contractor may, during the course of the Contract, refinance or reschedule its debt obligations. This may be either to increase or accelerate its return (see Section 28 (Refinancing)) or to attempt to save the Project if it is in difficulties due to construction delays, cost overruns or temporary poor performance. In the latter case, it is in the interests of all parties to ensure that a rescheduling of debt can take place as quickly as possible, without the need for the Contractor and/or Senior Lenders to obtain consents from the Authority. To reflect this principle, Section 28 (Refinancing) states that any Refinancing that does not increase the Equity IRR above that projected in the Base Case shall not require the prior consent of the Authority (though the provisions of Clause 12.1.3 (Changes to Financing Agreements) may still apply).3 If the Project is in difficulty and in need of rescue, the Senior Lenders will also be reluctant to rescue the Project unless they know that any rescheduled or new Senior Debt required to rescue the Project will be compensated if the Authority chooses to terminate voluntarily or at an Authority Break Point Date, or termination occurs as a result of Authority Default, Force Majeure or Corrupt Gifts.
24.3.4 The Senior Lenders will only agree to reschedule or commit new Senior Debt to the Project as a last resort. In recognition of this and to protect the Authority from Senior Debt levels being artificially inflated, the amount of compensation payable by the Authority in respect of Senior Debt on early termination should only include additional Senior Debt if it was incurred either under a "standby" facility committed at financial close or alternatively if this constitutes Additional Permitted Borrowing. This provision does not preclude Senior Lenders otherwise relying upon compensation payable to equity investors upon early termination for recovery of rescheduled or increased levels of Senior Debt.
24.3.5 In certain termination scenarios, the amount payable will be adjusted for any Additional Permitted Borrowing advanced by Senior Lenders (on a rescue refinancing). See Section 23.1.3 and definitions in Schedule 1.
24.3.6 Following the making of any Additional Permitted Borrowing if the Project terminates early on the grounds of Authority Voluntary Termination or at an Authority Break Point Date or on Authority Default or Force Majeure, the Authority will pay to the Contractor:
• the Senior Debt, plus the Additional Permitted Borrowings less any Distribution made while the Additional Permitted Borrowing is outstanding (the "New Senior Debt Amount"). The Senior Lenders are protected even if the New Senior Debt Amount exceeds the aggregate amount which would have been payable (to both debt and equity) had no Additional Permitted Borrowing been made (the "Original Aggregate Compensation Amount");
• if the New Senior Debt Amount is greater than the Original Aggregate Compensation Amount, the Shareholders and Subordinated Lenders will receive no termination payment;
• if the Original Aggregate Compensation Amount is greater than the New Senior Debt Amount, the Shareholders and Subordinated Lenders will, broadly, be paid the excess.4
24.3.7 Distributions made while such Additional Permitted Borrowing is outstanding will reduce the amount payable to the Senior Lenders in various circumstances (and it may be that the Senior Lenders would therefore cash collateralise any such amount which would otherwise have been distributed until the Additional Permitted Borrowing is fully covered).5 The amount of the Additional Permitted Borrowing which may be lent in this way is 10% of the initial principal commitment, reducing to 5% at such time as the initial principal senior debt is 50% paid down. There is also a requirement in the Direct Agreement for the Authority to be notified of any such Additional Permitted Borrowing, and the reasons for it, and to be notified, on an ongoing basis, of Distributions then made.
24.3.8 Senior Lenders, of course, remain able to advance new monies to the Contractor with the express consent of the Authority, but this Additional Permitted Borrowing provision will offer the Senior Lenders flexibility to rescue projects in difficulty without (subject to Clause 12.1.3 (Changes to Financing Agreements) having to obtain the prior consent of the Authority and without having to step-in to the project. Authorities should not give their consent to other increases to their liabilities on termination until such time as the Contractor/Senior Lenders have exhausted their rights to put more money into the project by way of Permitted Borrowing. The Authority should also consider the relationship between these provisions and Section 28 (Refinancing) if a request is received to increase the Authority's termination liabilities beyond the extent permitted for Permitted Borrowings.
24.3.9 See Section 12 (Changes to Documents) for required drafting to be used where there are changes to Financing Agreements or Project Documents.
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2 Consequently the Authority should also be concerned to capture increases in the Senior Debt profile caused by rescheduling of the Senior Debt (which may not include the provision of additional Senior Debt).
3 If the Project is in difficulties and in need of rescue by the Senior Lenders, the Equity IRR should not increase above that projected in the Base Case.
4 However out of the total termination payment, the amount attributable to the Senior Lenders will be increased and the amount attributable to the equity will be decreased, in order to reflect the increased debt levels. This follows the logic that applies to ordinary monthly payments of Unitary Charge. These do not increase following any Permitted Borrowing (although, as between the Senior Lenders and the equity, the Equity's share of them may decrease).
5 If no distributions are made during this period but monies are kept in reserved accounts, the Permitted Borrowings will not be reduced, however the amount of the Senior Debt payable by the Authority on an early termination of the Project is reduced, under sub-paragraph (b) (i) of the definition of Base Senior Debt Termination Amount and Revised Senior Debt Termination Amount. It will be a matter for the Senior Lenders and the equity to decide whether surplus funds are used to repay Senior Debt, or are distributed or reserved.