5.2.2  Refinancing gain

The question for the Contracting Authority is what qualifies as refinancing gain and whether all refinancing gain should be shared. As with defining "Refinancing", care needs to be taken in drafting gain calculation and sharing provisions to minimize the Private Partner's ability to circumvent the provisions. It is increasingly common, particularly in developed PPP markets, for a Private Partner to factor in the benefit of a future refinancing into its Original Base Case so that it can offer a more competitive price to the Contracting Authority in its bid. In this instance, the Private Partner would argue that the Contracting Authority is already benefiting from any potential refinancing gain and should therefore not be entitled to a further share of such gain when the refinancing actually happens. While this argument has some merit, the precise basis of any refinancing envisaged by the Original Base Case would need to be clearly agreed upfront to limit the risk of disputes. See Section 5.3, Sample Drafting 5, Required Definitions, definition of "Refinancing Gain".

Similarly, in a rescue or mini perm refinancing the overall effect may not lead to any increase in equity return compared to the Base Case Equity IRR.

In all cases it is generally considered to be fair for the Contracting Authority only to share in gain over and above the Original Base Case. The rationale in a rescue refinancing is that due to the distressed scenario, Lenders are unlikely to agree to any refinancing debt being paid to the Contracting Authority. However, this may not always be justifiable where the Contracting Authority has concerns that the Base Case Equity IRR may have been artificially inflated (e.g. due to weak competition during the bidding process).