28.3.1 An Authority should have approval rights for refinancings other than those which were part of the original Financial Close Base Case financing plan or which do not lead to a gain for investors compared to the original Base Case. The latter will include refinancings undertaken to rescue a Contractor from financial difficulty - so called "rescue refinancings".
28.3.2 Refinancing of PF2 projects is one way in which both the Authority and investors in the Contractor can share in the benefits of a successful project. Accordingly, Authorities should be receptive to proposals from the Contractor to refinance, and are encouraged to consent to such proposals. However, when evaluating a refinancing proposed by the Contractor, an Authority should consider carefully whether the effects of such proposal could:
• increase the risk facing the Authority without conferring on it commensurate reward;
• reduce incentives for the Contractor to achieve sustained service standards, particularly in later years; and / or
• undermine the financial stability of the Contractor, thereby endangering the provision of services.
28.3.3 When considering a request for consent to a refinancing the Authority should assess the Contractors' proposals objectively. There may be occasions where, for good reasons, the Authority refuses to consent to a refinancing, despite the Contractor offering to share the gain arising in line with the principles set out above. In this situation, the Authority should be prepared to give its reasons to the Contractor for not consenting in a transparent manner. The Authority should also not unduly delay its response to any proposal.
28.3.4 A refusal to consent might arise, for example, where the Contractor proposes a new financing structure that the Authority perceives to be inherently much less flexible than the structure it replaces and the Authority places a high value on flexibility.
28.3.5 Generally, refinancings which increase the risks borne by the Authority (for instance, by replacing equity with debt) will also result in greater gains for sharing. The Authority's consent to a refinancing should be forthcoming if its share of the gain arising from the refinancing is reasonable compensation for the increased risks it is being asked to bear as a result of the new financing structure, for example through contracting with a more highly geared counterparty.
28.3.6 Where a proposed refinancing involves an increase in termination liabilities, Contractors will need to secure the Authority's consent both to the refinancing itself and to the change in termination liabilities as these rights are separate and distinct.1 In practice, many Authorities are likely to consider the Contractor's proposals on both a refinancing and any changes in termination liabilities concurrently. An Authority should not use its separate approval rights over increases in termination liabilities to agree a greater share of the refinancing gain than that specified in Clause 28.5. In consequence, an Authority will be unlikely to agree to a refinancing that increases its termination liabilities unless the additional refinancing gain available to be shared, relative to a refinancing which does not involve such increase in termination liabilities, is judged to represent better value. See generally HMT's application note dated 9 February 2005 entitled "Value for Money in Refinancing" on the HMT website.
28.3.7 Increases in Senior Debt arranged for a PF2 project, whether through the Contractor or otherwise having security (or other rights) over and/or recourse to the assets, contracts or cash-flow of the Contractor, beyond the original capital value of the Project should not be approved by the Authority without it first seeking appropriate professional advice.
______________________________________________________________________________________________________________
1 See Section 24.3 (Certainty of Compensation Payment Amounts and Changes to Financing Agreements).