30.6.2.1 This is a scenario which may arise because the bidder is prepared to finance construction of the Project using its own balance sheet, but may then wish to have the option to switch to more cost-effective project finance once the Project is completed and operating successfully, perhaps also selling a share of the equity at that time in order to take the project off its balance sheet as well. If not envisaged as part of the documentation at Financial Close, the introduction of limited recourse (i.e. project-specific) funding is likely to require Authority consent, as the new lenders may require a direct agreement and changes to the Contract, such as in relation to termination. In any event, a change from corporate finance to project finance is de facto a refinancing albeit not one addressed specifically by the standard drafting of Section 28 (Refinancing) and so will be subject to negotiation as to Contract amendments and the sharing of the benefits between Authority and Contractor at the time. In order to help ensure that a project financing may not be effected without Authority consent, Authorities might consider including arrangements such as an absolute prohibition on charging the Contract or any of the Project Assets or project revenues.
30.6.2.2 If the Contractor builds-in a post-completion refinancing on a project finance basis (on reasonable market terms) as part of the Base Case (in accordance with 28.4.2 (Base Case Refinancings)), the financing package may offer the Authority good value for money (for example because the Contractor takes the Refinancing risk, while offering the full benefit of the Refinancing to the Authority rather than a share). However, the Authority should compare such proposals with the alternative of using a standard project-finance structure from Financial Close.
30.6.2.3 If a specific project-finance Refinancing is not built into the Base Case, the Authority should not agree in advance to such a Refinancing.
30.6.2.4 If a Base Case project-finance Refinancing is agreed as part of the Contract structure, the original Contract should reflect the amendments to standard drafting set out in Section 30.5, and a 'Conversion Schedule' should be added to the Contract, reflecting the changes which will be needed when the switch to project finance takes place. This Conversion Schedule should:
• restore the standard Contract Clauses in lieu of the provisions set out in Section 30.5;
• require the Authority to sign a Direct Agreement as set out in Section 26 (Funders' Direct Agreement);
• require Authority consent to be obtained for any project finance refinancing which is on terms different to agreed minimum / maximum parameters, e.g. as to debt: equity ratio, lenders' cover ratios and reserve accounts, and credit margin;
• require that the maximum Compensation on Termination at any time shall not exceed amounts in a schedule agreed at Financial Close, i.e. based on the original Base Case (unless the Authority agrees otherwise at the time of the Refinancing);
• ensure that other than as set out in the Conversion Schedule, the Authority shall have no additional liabilities other than those set out in the original Contract; and
• provide the Authority with a share of any net Refinancing Gain resulting from the terms of the project-finance Refinancing being better than the Base Case.
The normal refinancing provisions should apply to any subsequent refinancing.
30.6.2.5 When considering the scenarios the Contractor should contact IUK to agree how the requirements of Section 5 (Public Sector Equity) can be incorporated.