26.1.1 A Funders' Direct Agreement referred to in this guidance is an agreement between the Authority and Senior Lenders that deals with the relationship between these interested parties following a termination or threatened termination for Contractor Default (see Section 23.2 (Termination on Contractor Default)). As stated in Section 18 (Authority Step-In), it is entirely different to the rights described in that Section.
26.1.2 The concern of the Senior Lenders is that they have financed the Project on the basis of projected cash flows and if the Contract (under which these cash flows are agreed to be paid) is terminated, they will only have rights against the Sub-Contractors and to amounts in the bank accounts of the Contractor as security for their financing. They will not, typically, have any rights to sell the Assets, as would be the case in many types of secured financings. In many projects, recovery of amounts by the Senior Lenders making claims under the Project Documents will not lead to full repayment. Typically the Senior Lenders will only recover the amount invested after acceptance of the facility by the Authority, and through the successful operation of the project and the payment of Unitary Charge over the life of the project. The Senior Lenders, and their technical advisers, will closely monitor the Works to ensure they are built on time and to specification, and will monitor the delivery of Services, to ensure the Unitary Charge is paid without deductions. In this way the interests of the Senior Lenders, to ensure that the Contractor performs its obligations, are broadly aligned with those of the Authority.
26.1.3 Direct Agreements should be used for project financed projects (but should not be needed for corporately financed projects) and such documents can be seen as advantageous to the public sector, in that they give Senior Lenders an opportunity to "revive" the Project and, therefore, to avoid the disruption that invariably follows termination. If the Project can be restored with minimal disruption to the Service and there is no need for the Authority to get involved to ensure that this occurs, then both the Authority and the Senior Lenders benefit.
26.1.4 The key issues are: when the Senior Lenders should be permitted to step-in, the extent to which the Senior Lenders should be obliged to assume liabilities that have been or are being incurred by the Contractor and the extent to which they are given the opportunity to rectify a breach on behalf of the Contractor. The approach taken in this guidance is very closely related to the approach taken in Section 23.2 (Termination on Contractor Default).
26.1.5 Other issues relating to this arise, such as for how long any liability of the Senior Lenders should continue, what rights of termination exist on a step-in and what rights of "sale" or replacement of Sub-Contractors the Senior Lenders should have.
26.1.6 Under the new PF2 model it is likely that a new class of subordinated debt providers (separate from the sponsor equity) will invest in Projects. The provisions of the Funders Direct Agreement will then need to be developed to deal with intercreditor issues arising such as enabling sub-debt providers to step-in to the Project if Senior Lenders do not. Separately, the different classes of lender will need their own intercreditor agreement. See further "A New Approach To Public Private Partnerships." on the HM Treasury website at www.hm-treasury.gov.uk.