The following guidance outlines the key issues that should be considered when consent of the Procuring Authority is required for a Project Company refinancing, or the Procuring Authority is otherwise involved.
A. When assessing a proposed refinancing, consider the interests of the Procuring Authority and broader government considerations
When a request for approval to refinance is received by the Procuring Authority, or if the Procuring Authority is considering directing the Project Company to instigate a refinancing, the main aim of the Procuring Authority should be to ensure any refinancing does not affect the financial integrity of the Project Company or the project and to ensure the Procuring Authority will not otherwise be adversely affected.
Refinancing can involve any or a combination of the following: a change to the debt pricing; a change of the debt maturity (its tenor); a change in the amount of debt; a change in the amount of debt relative to equity (i.e. the gearing ratio); changed reserve account requirements (e.g. debt service reserve account); the release of guarantees provided by the equity investors or third parties of the Project Company; a change in the security arrangements (e.g. share charges, project asset security, etc.); a change to the repayment terms (including when capital is required to be repaid); a change in the lenders or debt providers; or a change in other finance terms (e.g. loan covenants).
There are several issues that the Procuring Authority should take into account when assessing a refinancing and how it will affect the project, including those detailed below. The review of the proposed refinancing should be undertaken to ensure that value for money is not adversely affected and taking into account the benefits of the refinancing as well as the potential detriment to the Procuring Authority and the project.
- There may be additional costs where there are hedging or swap arrangements in place. For example, where interest rate hedging or currency exchange rate hedging arrangements need to be ended as part of the refinancing. These types of costs are typically called hedging break costs or swap break costs and may affect whether a refinancing is worthwhile. There may also be hedging gains payable to the Project Company.
- Where the hedging requirements have changed, this may increase the risk in the project. For example, if the Project Company has refinanced with foreign currency debt, that debt may increase the repayment risks for the Project Company in the absence of appropriate hedging.
- Where a refinancing would result in the Project Company taking on additional debt and/or an earlier repayment of equity, it may become highly leveraged (i.e. the percentage of debt in the Project Company would be high compared to the percentage of equity). As a result, there will be a smaller ‘equity buffer’, making the Project Company and the project more risky and less financially robust.
- The tenor of the refinanced debt may also impact the financial integrity of the Project Company, particularly where the new tenor of debt is shorter than what is required for the project.
- Any protections around cash flow. For example, a debt service reserve account or a contingency repayment period (debt tail) may be amended, leaving the Project Company in a less financially robust position.
- The quality and integrity of lenders providing debt finance may also adversely affect the Procuring Authority’s interests.
- A change in the financing arrangements may otherwise increase the contingent liabilities for the Procuring Authority in the case of termination. This needs to be calculated and taken into account when analysing a proposed refinancing.
Although the above list describes some aspects of what issues should be considered by the Procuring Authority, the project financing arrangements of a Project Company can be very complicated. When considering a refinancing, the Procuring Authority should make sure it fully assesses refinancing and engages adequate legal and financial expertise.
Example – Use of advisors
On the Brabo I Light Rail project in Belgium, the Project Company was not able to raise long-term debt financing at financial close due to the Global Financial Crisis. Refinancing was completed in 2016, with one of the Procuring Authorities taking the lead in arranging it. A working group was set up and external financial advisors were hired and the refinancing was completed in eight months.
For more information, see the Brabo I Light Rail Case Study.
B. Dedicate appropriate resources to assessing a potential refinancing, including external advisors as necessary
C. Be mindful of opportunities that may be available through refinancing
Questions & Answers
View our list of previous questions and answers or submit a question to our PPP Contract Management team.
