Changed market conditions and the development of a project can lead to a situation where more favourable financing terms become available (e.g. interest rates become lower). This can be due to improvements in the market itself (e.g. a financial crisis recedes), or changes in the PPP project (for example, construction has completed and the project has established a pattern of successful operations). In these situations, the more favourable financing terms may result in lower debt service payments and higher profits for the Project Company. The Project Company will typically seek to take advantage of this. Where refinancing gains are agreed to be shared with the Procuring Authority, the Procuring Authority may be entitled to some portion of the ‘financial gain’.
There are other types of refinancing that may occur, not all of which will result in a financial gain:
- Rescue refinancing: The Project Company may need to refinance to avoid insolvency if it is financially distressed. This is typically managed on the private sector side and the Procuring Authority’s involvement is limited to approvals of the changes made. It may also involve the contribution of new equity financing.
- ‘Mini-perm’ refinancing or bridge loan refinancing: In some markets, or during a financial crisis, it is not possible to obtain long-term financing, and loans will be limited to a period much shorter than the contract duration (e.g. five or seven years). Refinancing in this situation is both necessary and envisaged at the time of financial close and may also deliver financial gains. In some markets, bridge financing is provided at financial close that will only take the Project Company a few years into construction. At that stage, the Project Company may seek to refinance with long-term financing to finance the entire duration of the project.
There may also be circumstances where a Project Company is required to refinance due to its tenor not aligning with the period of the PPP contract and where the market conditions are less favourable meaning that finance becomes more expensive. This will create additional risks for the project.
Some PPP contracts allow for the Procuring Authority to request refinancing but the research suggests that this does not happen often in practice. However, the Procuring Authority on the InterCity Express Programme project in the UK did request a refinancing and the financial gains available were shared between the parties.
Example – Benefits of refinancing
The second phase of the InterCity Express Programme project in the UK reached financial close in 2014 and the financing terms were better than those offered for the financing of the first phase in 2012. The opportunity for refinancing was identified by Her Majesty’s Treasury with the Procuring Authority issuing a Refinancing Notice to request that the Project Company take advantage of the financing opportunity available. The refinancing was completed in a relatively short period of time with financial gains shared with the Procuring Authority.
For more information, see the InterCity Express Programme Case Study.
