15. Where it has been established that the MoD is entitled to a share of a refinancing gain it is necessary to calculate how much the gain will be. Put simply this is: the distributions projected to take place after the refinancing less the distributions projected to take place before the refinancing. This is calculated using the base case financial model and comparing it with a post-refinancing model. The differences in cash flow for each period are calculated and then discounted to produce a net present value. This is the refinancing gain.
16. However, the MOD is only entitled to a share of this gain if the Contractor is projected to achieve its equity (or threshold) IRR. If the updated Equity IRR is above the threshold then the MOD is entitled to a percentage of the gain. However, where the updated Equity IRR does not breach the threshold then the Contractor is entitled to keep that proportion of the gain to bring it up to the Threshold Equity IRR. Any monies remaining thereafter will be split.
17. The discount rate to be used to calculate the NPV should be agreed between the Contractor and the MOD. Generally speaking, this is normally the original base case equity IRR since this is the percentage used for calculating the gain and it is the rate of return that equity holders would expect on the original capital invested.
18. The sharing of the gain will depend on when the contract was signed. Deals signed before 30 September 2002 are governed by the Code of Conduct and as such, the MOD is entitled to 30% of any gain. Later deals are governed by SoPC and under its terms, the MoD is entitled to 50% of any gain.
19. It should be remembered that the Department provides consent prior to the actual refinancing. The final calculation cannot be completed until the refinancing date and the gain may go up or down as a result of changes in interest rates or advisors fees incurred in bringing the deal to a close.