Partnerships Victoria projects are financed by Project Co through a mix of debt provided by lenders and equity provided by sponsors. The term 'Refinancing' refers to changes in the debt finance arrangements.
As Refinancings have the potential to change a Project's risk allocation as agreed at Financial Close, the State requires the right to be fully informed of any Refinancing, as well as to approve Refinancings other than those which were part of the original Financial Close plan (e.g. derivatives or syndication contemplated at Financial Close).
The Financial Close Financial Model contains assumed credit margins and fees for the entire Term, including at refinancing points. To the extent that credit margins and fees proposed as part of a Refinancing are lower or higher than those forecast in the Financial Close Financial Model, there will be a respective Refinancing Gain or loss. Whilst there may be savings or costs accruing to or payable by the State as a result of the base interest rate being reset as part of a Refinancing Event, it is only the difference in margins and fees which is taken into consideration when calculating a Refinancing Gain or loss to be allocated between the State and Project Co.
The PV Standard Project Deeds provide for the State to share in 50 per cent of Refinancing Gains, after allowing Project Co to recoup any prior Refinancing losses. The sharing regime is based on the principle that the State should share in gains arising from improvements in financing terms that were originally made possible by the State's long-term contractual commitment to the Project, and secured by Project Co. Further, beneficial changes in financing terms are often influenced by factors external to the Project. This is considered to be different to an improvement in Project Co's equity return due to efficiency improvements in delivering the Project, which accrue to Project Co.
Generally, a 50:50 share of Refinancing Gains gives a reasonable balance between the above factors. However, where the Refinancing Gain arises from a change in the manner or timing of a State Contribution, it is appropriate for 100 per cent of the Refinancing Gain to be paid to the State.