Project Co is generally required to hedge the base interest rate risk on its original debt financing from Financial Close until the first Refinancing, after which the State takes back (for the remainder of the contract term) the risk of interest rate movements. The State may choose to leave the residual exposure unhedged or it can manage the interest rate risk, either by entering into interest rate swaps itself, or requiring Project Co to do so on the State's behalf.
The Floating Rate Component is paid in addition to the Service Payment. It is not subject to Abatement, but may be subject to set-off by the State where it is an amount payable by Project Co.
The Floating Rate Component is calculated in accordance with the Payment Schedule for each Interest Period from the first Refinancing. For each Interest Period, the calculation will produce a Floating Rate Component amount that is a positive or a negative number, depending on which way interest rates have moved relative to the base interest rate agreed in the Model Output Schedule in the financial model.
Should the State require Project Co to hedge the interest rate exposure beyond the first refinancing, the Floating Rate Component will be a fixed payment each Interest Period comprising the difference between the hedged rate and the base interest rate. Alternatively, where the State hedges the interest rate exposure via the Treasury Corporation of Victoria (TCV), the State manages the Floating Rate Component payments to Project Co by entering into a back to back interest rate swap with TCV (outside of the Project Deed).
Clause 34.8 sets out the mechanics which will apply for each Interest Period, and for each Floating Rate Component calculated. This provides that:
• if the Floating Rate Component is negative, the State must invoice, and Project Co must pay, that amount on or before the last day of the applicable Interest Period; or
• if the Floating Rate Component is positive, Project Co must invoice, and the State must pay, that amount on or before the last day of the applicable Interest Period.