29.3.17 Terms and conditions in the long-term sterling market for most borrowers (corporate as well as project-related) typically contain break-cost provisions, applicable in the event of early repayment or acceleration of the bonds (known as the "Spens" or "Make-Whole" formula). In the long-term sterling market, the Spens formula has historically operated such that on an early redemption of the bonds, the bondholders are broadly paid an amount equal to the higher of the outstanding principal on the bond and the foregone coupon (interest and principal) on the bonds, discounted at a rate equal to the gross redemption yield on a Treasury Gilt of comparable weighted average life to the bond. This level of compensation is set to allow the bondholder to attain the same return by reinvesting in risk free gilts.
29.3.18 In the PF2 context HMT's April 2006 "Guidance on the Application of Spens clauses in PFI transactions" must be followed, according to which the Authority may pay the full amount due under a Spens formula as above on an Authority Default, a modified Spens formula on an Authority Voluntary Termination (including termination on an Authority Break Point Date), and no Spens formula payment on any other termination. Required drafting for bond-financed projects is set out below:
means:
(a) in relation to termination of the Contract under Clause [ ] (Termination on Authority Default), the Make-Whole payment to be made pursuant to and in accordance with Condition [ ] of the Bonds;
(b) in relation to termination of the Contract under Clause [ ] (Voluntary Termination by the Authority) [or Clause [ ] (Termination on an Authority Break Point Date)], the modified Make-Whole payment to be made pursuant to and in accordance with Condition [ ] of the Bonds; and
(c) in relation to termination of the Contract in any other circumstances, zero.
29.3.19 The Authority's financial and legal advisers must do a due diligence review of the bond arrangements and, in particular, their Spens provisions and the discount rate used.4 The contingent liabilities inherent in the Spens clause should be taken into account in the Authority's overall assessment of value for money.
29.3.20 Where a monoline guarantee is in place, Authorities should note that the full guarantee fee will usually be due to the monoline in the event of early termination of the project for whatever reason. If the Contractor has already paid the full fee to the monoline, it will not be repayable. Further, if the full fee was to be paid in instalments over the life of the bonds, on early termination the compensation payable by the Authority may include any fee unpaid to the monoline insurer. This is an important difference of practice between bond and bank markets, as bank borrowers are generally not expected to pay future risk margins foregone to banks whose loans are repaid early.
29.3.21 The definitions of "Base Senior Debt Termination Amount" and "Revised Senior Debt Termination Amount" should be revised specifically to refer to the Make-Whole Payment. Suggested changes are outlined below, with additions underlined.
"Base Senior Debt Termination Amount"
means, subject to Clause 12.2 (No increased Liability from Changes to Project Documents or Financing Agreements):
(a) all amounts outstanding at the Termination Date, including interest and Default Interest accrued5 as at that date, from the [Contractor and/or the] Issuer6 to the Senior Lenders in respect of Permitted Borrowing7 (other than in respect of Additional Permitted Borrowing) and
(b) all amounts including costs of early termination of interest rate hedging arrangements and other breakage costs8 (including for the avoidance of doubt any Make-Whole Payment), payable by the [Contractor and/or the] Issuer to the Senior Lenders9 as a result of a prepayment in respect of Permitted Borrowing (other than in respect of Additional Permitted Borrowing), or, in the case of early termination of interest rate hedging arrangements only, as a result of termination of this Contract, subject to the [Contractor, the] Issuer and the Senior Lenders mitigating all such costs to the extent reasonably possible [(unless the amount, or the formula for determining the amount, of such costs is fixed in advance under the terms of the relevant Senior Financing Agreements)],10
less, to the extent it is a positive amount, the aggregate of (without double counting in relation to the calculation of the Base Senior Debt Termination Amount or the amounts below):
(i) all credit balances on any bank accounts (but excluding the Joint Insurance Account) held by or on behalf of the Contractor and/or the Issuer [and/or Holdco]11 on the Termination Date;
(ii) any amounts claimable on or after the Termination Date in respect of Contingent Funding Liabilities;
(iii) all amounts, including costs of early termination of interest rate hedging arrangements and other breakage costs, payable by the Senior Lenders to the [Contractor and/or the] Issuer as a result of prepayment of amounts outstanding in respect of Permitted Borrowing (other than in respect of Additional Permitted Borrowing), or, in the case of early termination of interest rate hedging arrangements only, as a result of termination of this Contract; and
(iv) all other amounts received by the Senior Lenders on or after the Termination Date and before the date on which any compensation is payable by the Authority to the Contractor as a result of enforcing any other rights they may have;
"Revised Senior Debt Termination Amount"
means, subject to Clause 12.2 (No increased Liability from Changes to Project Documents and Financing Agreements):
(a) all amounts outstanding at the Termination Date, including interest and (other than in respect of Additional Permitted Borrowing) Default Interest accrued12 as at that date, from the [Contractor and/or the] Issuer13 to the Senior Lenders in respect of Permitted Borrowing; and
(b) all amounts including costs of early termination of interest rate hedging arrangements and other breakage costs (including for the avoidance of doubt any Make-Whole Payment), payable by the [Contractor and/or the] Issuer to the Senior Lenders as a result of a prepayment in respect of Permitted Borrowing, or, in the case of early termination of interest rate hedging arrangements only, as a result of termination of this Contract, subject to the [Contractor, the] Issuer and the Senior Lenders mitigating all such costs to the extent reasonably possible [(unless the amount, or the formula for determining the amount, of such costs is fixed in advance under the terms of the relevant Senior Financing Agreements)]14,
less, to the extent it is a positive amount, the aggregate of (without double counting in relation to the calculation of the Revised Senior Debt Termination Amount or the amounts below) :
(i) all credit balances on any bank accounts (but excluding the Joint Insurance Account) held by or on behalf of the Contractor and/or the Issuer [and/or Holdco] on the Termination Date;
(ii) any amounts claimable on or after the Termination Date in respect of Contingent Funding Liabilities;
(iii) all amounts, including costs of early termination of interest rate hedging arrangements and other breakage costs, payable by the Senior Lenders to the [Contractor and/or the] Issuer as a result of prepayment of amounts outstanding in respect of Permitted Borrowing), or, in the case of early termination of interest rate hedging arrangements only, as a result of termination of this Contract;
(iv) all other amounts received by the Senior Lenders on or after the Termination Date and before the date on which any compensation is payable by the Authority to the Contractor as a result of enforcing any other rights they may have; and
(v) all Additional Permitted Borrowing Distributions;
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4 HMT's April 2006 "Guidance on the Application of Spens clauses in PFI transactions" and May 2006 "Interest-rate and inflation risks in PFI Contracts" should be followed. For both see HMT web site at www.hm-treasury.gov.uk.
5 Consideration may be given as to whether some specific reference to an indexation amount/ bond condition is appropriate here for an indexed bond.
6 Inclusion of the Contractor will depend on whether the Contractor is a party to any Senior Financing Agreements but see Section 29.3.6.
7 This assumes a check has been made by the Authority's advisers that the provisions of the Senior Financing Agreements do not include unusual provisions that could artificially inflate amounts advances beyond those provisions that are market standard. See Section 27 (Due Diligence over Sub-Contracts and Financing Agreements).
8 This is intended to cover net breakage costs if the compensation is not paid on an interest payment date. Authorities may consider whether they should exclude any future profit element from the calculation of costs of early termination of interest hedging arrangements where the termination is for force majeure, breach of refinancing, corrupt gifts and uninsurability.
9 This assumes the Senior Lenders are the only parties to any interest rate hedging agreements (this will not necessarily be the case) and are compliant with the agreed hedging policy.
10 Authorities should consider whether it would be appropriate in the context of the Project to include this language. Advisers should check any such terms in the Senior Finance Agreements carefully.
11 If the Senior Lenders have security over bank accounts in Holdco (or any other company), then Holdco (or such other company) needs to be referenced here.
12 Consideration may be given as to whether some specific reference to an indexation amount/or related bond condition is appropriate here for an indexed bond.
13 Inclusion of the Contractor will depend on whether the Contractor is a party to any Senior Financing Agreements, but see Section 29.3.6.
14 Authorities should consider whether it would be appropriate in the context of the project to include this language. Advisers should check any such term in the Senior Finance Agreements carefully.