The circumstances in which a refinancing of the PPP Project may be sought by the Private Partner are described below and the differing grounds are likely to necessitate different treatment under the PPP Contract.
Rescue Refinancing - In adverse circumstances a refinancing may be sought to rescue the PPP Project from default. The Private Partner may be in a distressed situation requiring an increase and/or a rescheduling of their debt repayment obligations. Generally, it will be in the Contracting Authority's and the Private Partner's interests for this form of refinancing to be implemented so that service provision under the PPP Contract can continue and default termination consequences avoided. The Contracting Authority will want to ensure any changes to the financing terms do not adversely affect its contractual position but it should not anticipate any immediate financial benefit.
Mini perm refinancing - In markets where it is not possible (or desirable) to obtain long term financing, the Private Partner may put in place what is sometimes known as a "mini perm" financing. The loan will have a short tenor (e.g. five or seven years), and there is an incentive on the Private Partner and its Shareholders to refinance because the loan terms may provide that the Lenders will sweep all available cash (after reserve account funding) if no refinancing has occurred by the relevant maturity date (and the Lenders may require gradually increasing cost sweeps (e.g. 25%, 50%, 75%) in the years prior to maturity), or (in the case of a "hard" mini perm) that there will be an event of default44. The market standard position in Australia, for example, is to put in place five to seven-year debt funding, with assumed refinancings every five years thorough the life of the PPP Project. Given the nature of this financing and that replacement will be a necessity envisaged at the start of the PPP Contract, it will be in both Parties' interests to facilitate a refinancing on acceptable terms and it is unlikely to be driven by or to deliver any significant additional financial benefit.
Bridge to bond financing - Where it is envisaged that initial bank debt financing will be replaced by bond finance, normally after completion of the construction or development phase, this is known as 'bridge to bond' financing. Generally, the bridge financing will contain incentives to refinance, such as progressive increases to the margin and a relatively short tenor. See Section 9 Bond Financing.
Realising Value Refinancing - In other circumstances (which are the focus of this Section 5), the effect of changed market conditions and PPP Project developments may be positive and the Private Partner may seek to obtain more favourable financing terms to realise more equity return for its Shareholders. Such terms may be available for a number of reasons, such as:
• the market may have greater liquidity and the price of debt may have declined (e.g. after a period of financial crisis or where new lenders want to enter the PPP market);
• as significant risks are considered to arise during the construction period, once the income-generating asset is built and the PPP Project is successfully operational, the risk profile is reduced and the corresponding risk of inability to service debt repayment obligation is perceived to be lower;
• general market conditions have improved (e.g. the jurisdiction concerned may have established a good track record in successful PPP Projects and/or the regulatory and political framework may be considered more stable); and
• for "user pays" PPP Projects (see Section G, PPP Contracts in Context), demand may be stronger than anticipated and revenues therefore higher, resulting in an opportunity to increase leverage.
It is this type of refinancing which is more likely to yield a financial benefit for the Contracting Authority if the PPP Contract is correctly drafted and the Contracting Authority will also want to ensure any changes to the documentation do not adversely affect its contractual position.45
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44 "Hard" mini perm financing structures are not permitted by Contracting Authorities in the Netherlands on the basis that they effectively introduce refinancing risk.
45 It is also possible to include a provision entitling the Contracting Authority to request the Private Partner to seek terms for a potential refinancing if it feels better financing terms are available (see the Infra Australia Guidelines).