30.5.5.1.1 The effect of corporate finance on each of the scenarios set out in Section 23 (Early Termination), where the Authority is required to pay compensation on termination, is considered below.
(a) Compensation on Termination for Authority Default (Section 23.1.3) or Voluntary Termination (Section 23.5.3)
30.5.5.2 The provisions of Section 23.1.3 need to be adapted for corporate finance in two respects:
• deletion of references to debt repayments (Section 30.5.5.3); and
• adjustment of the equity compensation provisions (see Section 30.5.5.).
References to redundancy payments and Sub-Contractor Breakage Costs are not affected.
30.5.5.3 References to payment of senior debt, whether the Base Senior Debt Termination Amount or the Revised Senior Debt Termination Amount (i.e. including Additional Permitted Borrowings), should be deleted.
30.5.5.4 None of the options for payment of equity, namely: (i) Base Case Equity IRR to the Termination Date; (ii) market value of the Contractor's share capital; and (iii) present value of the Base Case equity return over the remainder of the Contract term (see Section 23.1 (Termination on Authority Default)), is directly applicable in the case of corporate finance, where the business of the Contractor may not be limited to the project, and its results can be distorted by internal group transfers.
30.5.5.5 The appropriate approach is therefore to use the value of the Contract as a basis for compensation. This can be calculated in one of two ways:
• open market value of the Contract. This parallels option (ii) above as applied to project-financed cases; or
• the net present value (discounted at the pre-tax Base Case project IRR) of future Unitary Charges5 as shown in the Base Case less future operating costs (including the provision for corporate overhead costs) and future capital expenditures as shown in the Base Case. This parallels payment option (iii) above as applied to project-financed cases. The pre-tax IRR should be used here as there is no allowance for tax in the calculation, and a nominal rate should be used on the assumption that the Base Case shows nominal cash flows.
As with project finance, bidders should bid which of the two approaches they prefer.
30.5.5.6 Required drafting is as follows:
[23.1.3] Compensation on Termination for Authority Default
On termination of the Contract under Clause [23.1.2] (Termination on Authority Default) the Authority shall pay the Contractor the "Authority Default Termination Sum" in accordance with [Section 24 (Calculation and Payment of Early Termination Payment)] on the Termination Date. The Authority Default Termination Sum shall be an amount equal to the aggregate of:
(i) redundancy payments for employees of the Contractor that have been or will be reasonably incurred by the Contractor as a direct result of termination of this Contract and any Sub-Contractor Breakage Costs; and
either
(ii) [the amount for which the Contract could have been sold on an open market basis assuming [that there is no default by the Authority but otherwise that the actual state of affairs of the Contractor and the Project is taken into account]]
or
(ii)
[(A) all amounts of Unitary Charge shown in the Base Case as payable by the Authority6 from the Termination Date, each amount discounted back at the nominal pre-tax Project IRR from the date on which it is shown to be payable in the Base Case to the Termination Date less
(B) the aggregate of all capital expenditure and operating costs shown in the Base Case to be incurred from the Termination Date discounted back at the nominal pre-tax Project IRR from the date on which such expenditure is shown to be incurred in the Base Case to the Termination Date.]
means [•]%.
30.5.5.7 Where provisions set out in Clauses 23.5.4 (Termination on an Authority Break Point Date) and 23.5.5 (Compensation on Termination on an Authority Break Point Date) are included, the reference to Clause 23.1.3 (a) (iii) should be amended to Clause 23.1.3 (ii).
(b) Compensation on Termination for Contractor Default (Sections 23.2.5-23.2.9)
30.5.5.8 The provisions relating to Contractor default do not require substantial amendment, because these are already based on the value of the Contract.
30.5.5.9 However where the Contract is being retendered, as set out in Sections 23.2.7 (Retendering Election and Liquid Market) and 23.2.8 (Retendering Procedure), it may be disadvantageous for both the Authority and the Contractor for this to be done on the basis of a corporate-financed Contract if bidders wish to use project finance. This may discourage bidders from bidding and so produce a lower winning bid price, or leave the Authority with a less beneficial Contract than it might have been had a project-finance structure been used.
30.5.5.10 The following amendment may be made to the definition of "New Contract" set out in Section 23 to deal with this:
Insert new paragraph (d), as follows (and change) the current (d) to (e):
"(d) any amendments which parties interested in entering into a New Contract propose as required in order for the arrangements to deliver the New Contract to be financed on a project finance basis, any such amendments to be considered at the Authority's discretion; and"
30.5.5.11 The standard definition of "Liquid Market" includes a reference to a vehicle controlled and established by the Senior Lenders specifically for the purposes of the project being excluded for the purposes of determining the existence of a "Liquid Market". Such a reference is redundant for a corporately-financed projects and should be deleted.
(c) Compensation on Termination for Force Majeure (Section 23.3.2)
30.5.5.12 Again references to debt repayment are not required, and compensation is thus calculated as:
Capital expenditure and operating expenditure (in nominal cash terms), to the Termination Date, to be no greater than the amounts for such expenditure shown in the Base Case
minus
total Unitary Charge paid to the Termination Date
plus
redundancy and Sub-Contractor breakage costs.
30.5.5.13 Required drafting is as follows:
21.3.2 Compensation on Termination for Force Majeure
(a) On termination of the Contract under Clause 23.3 (Termination on Force Majeure) the Authority shall pay to the Contractor the "Force Majeure Termination Sum" in accordance with [Section 24 (Calculation and Payment of Early Termination Payments].
(b) The Force Majeure Termination Sum shall be the amount equal to:
(i) the aggregate of capital expenditure and operating costs incurred as at the Termination Date, such expenditure in each case being no greater than the amounts shown for such expenditure in the Base Case less
(ii) total Unitary Charges paid to the Termination Date; plus
(iii) redundancy payments for employees of the Contractor that have been or will be reasonably incurred by the Contractor as a direct result of termination of the Contract and any Sub-Contractor Breakage Costs.
(c) If (i) less (ii) is less than zero then for the purposes of the calculation in paragraph (b) it shall be deemed to be zero.
(d) Such amount shall be determined and paid in accordance with Section 24 (Calculation and Payment of Early Termination Payments).
(d) Compensation on Termination for Corrupt Gifts and Fraud (Section 23.4.3)
30.5.5.14 No compensation is payable.
30.5.5.15 Required drafting is as follows:
21.4.4 Compensation on Termination for Corrupt Gifts and Fraud
On termination of the Contract in accordance with Clause 23.4.3 (Termination for Corrupt Gifts and Fraud), the Authority shall not be obliged to pay a Termination Sum to the Contractor.
(e) Termination for Breach of the Refinancing Provisions (Section 23.6)
30.5.5.16 If the Refinancing provisions do not apply, due to full satisfaction of the relevant corporate finance criteria (see Sections 30.2.5, 30.2.6 and 30.5.4), it follows that termination for breach of these provisions does not apply.
30.5.5.17 In such cases, Clauses 23.6.1 and 23.6.2 (Termination for Breach of the Refinancing Provisions) and 23.6.2 (Compensation on Termination for Breach of the Refinancing Provisions) can be deleted.
(f) Consequential changes
30.5.5.18 In addition to the changes to the calculation of compensation on termination discussed above, where corporate finance is used the required drafting contained in Section 24 (Calculation and Payment of Early Termination Payments) requires modification. Clause 24.3 (Changes to Financing Agreements and Project Documents) is not required where there are no Financing Agreements (but should be retained insofar as it applies to Project Documents), Clause 24.4 (Set-off on Termination) is not required as it serves only to protect Senior Lenders, and the drafting in Clause 25.5 (Method of Payment) will require an alternative source for an appropriate 'Senior Debt Rate' and references to Base Senior Debt Termination Amount, Revised Senior Debt Termination Amount, Outstanding Principal and Senior Credit Agreement should be removed.
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5 See also Section 19.4 (Usage Based Systems) regarding the implications of income sources other than the Unitary Charge for termination arrangements (and for other areas of the Contract).
6 Third party income as shown in the Base Case may also be referenced here.