An increase in the project's debt could result in an increase in termination liabilities for the government party. This is one of the main reasons that the private party requires consent from the government party in advance of refinancing.
Termination liabilities are the amount of compensation payable by the government party to the private party if the project deed is terminated early. The actual amount payable depends on the circumstances giving rise to termination. However, apart from termination following private party default, the size of the termination liabilities is usually linked to the amount of the senior debt outstanding at the time of termination. Even if at the date of the refinancing the nominal termination liabilities are unchanged, changes in amounts of debt or debt profiling may result in higher termination liabilities over time (due to reduced or delayed repayments of debt).
A change in the size of the senior debt is not the only factor that may lead to an increase in termination liabilities. For example, refinancing that allows the private party to release cash reserves may also increase termination liabilities. Changing hedging arrangements as part of the refinancing can increase termination liabilities if higher hedge break-costs apply under the new arrangements.
Of primary concern is termination due to force majeure. In such an event, the government party is likely to be required to pay off the outstanding senior debt and other costs resulting from early termination. The government party will not be required to compensate equity holders (or subordinated debt in the nature of equity). While termination of a project for force majeure is extremely rare, the termination payment is a contingent liability of the State, and as such, the State should be compensated for any increase in this liability as a result of a refinancing so that it is no worse off.