28.1.1 The key principles underlying the Government's approach to Refinancing are as follows:
• Refinancings carried out in accordance with this guidance can be of benefit to both the Contractor and the Authority; accordingly, proposals for refinancings made by the Contractor should be welcomed and considered positively by the Authority.
• A refinancing will normally constitute a material change to the financial and economic structure of a PF2 project as originally agreed at Financial Close between the Authority and the Contractor. An Authority should therefore have the right to be fully informed of any refinancing, and have approval rights over refinancings other than those which were part of the original Financial Close Base Case financing plan or do not lead to a gain for investors compared to the original Base Case.
• A long term contractual commitment by an Authority to purchase a service, at a pre-determined price, with contractual certainty for financiers through, for example, the operation of termination provisions, is likely to be central to the original financing of the Project and to any refinancing gain arising. The Contractor could not itself achieve such fine terms of finance, particularly as regards gearing and pricing, without such Contract terms. The Authority has a natural right to share in gains which are made possible by the strength of this contractual credit.
• An increase in returns to investors in the Contractor due to improved efficiency or performance, over and above what was anticipated when the Contract was awarded should be for the investors' account unless it falls within any, upside sharing or similar provisions of the Contract (see, for example, Section 7.19 (Continuous Improvement and Efficiency Reviews). However, improvements to loan margins, and beneficial changes to the term and leverage of any debt finance raised to fund the project are not viewed as mainly due to efficiency improvements and, consequently, any benefits that arise from such changes should be shared between the Authority and investors.
• Through refinancings, projects are able to gain access to these finer terms as they become available and, given their joint contribution to this state of affairs, both the public sector (in this case the Authority) and the private sector (in this case investors in the Contractor) should share in the benefits arising. The Public Accounts Committee has highlighted the importance of the public sector sharing equitably in "windfall gains" associated with a PF2 project. This has particular relevance to changes in available terms of finance which are often heavily influenced by factors external to the Project. Under the PF2 model the CGU, as the public sector equity holder, will take a share of Refinancing Gains, like any other shareholder.
• Refinancing gains should be measured by reference to the Project as it is performing at the time of refinancing, to enable the investors to benefit from improvements in efficiencies achieved by the Contractor to date and forecast to be achieved in the future; but if the Project is performing below the levels projected in the original Financial Close Base Case financial model, the investors are entitled to apply the benefits of refinancing to restore this Base Case projected performance prior to sharing with the Authority.
• In this Section 28 references to subordinated debt, Subordinated Financing Agreements, Subordinated Lender, Subordinated Refinancing Agreements, or junior lender, are presumed to relate to loans provided by the Contractor's shareholders. Any other facilities ranking senior to shareholder subordinated debt should be considered, for classification, with IUK. If such debt's characteristics are more similar to Senior Debt, then it should be regarded as Senior Debt (for all purposes of the Contract - including termination and refinancing). If its characteristics are more similar to sub-debt, then it should be regarded as sub-debt (for all purposes of the Contract).