This can be done as the contractor can obtain lower rates of interest on loans once the high risk construction phase of projects is completed.
The source said Balfour is planning to refinance debt once it has finished construction on all its PFI schemes. It uses the new, cheaper loan to pay off the previous one.
One analyst reckoned the savings could be worth up to £5m over the period of a major 30-year PFI project.
Chief executive Mike Welton and finance director Ian Tyler, of Balfour-parent BICC, were unavailable for comment. But a spokesperson for BICC said: “Although none of our projects are currently refinanced, it is something we look at in each individual case.”
Balfour has already taken out a cheaper loan for its PFI-style Barking Power Station project finished in 1994. But no UK contractor has yet cashed in on the refinancing concept for PFI contracts. Likely contenders for refinancing by Balfour include the £34m A50 road project finished in February 1998 and the £234m A1/M1 project, which has been fully operational since February this year. Analysts and bankers say other contractors are likely to follow suit once their PFI schemes have been built.
A spokesperson for Laing said the company intended to refinance its debt on projects, including the £25m Enfield School, due for completion next September. “Once the project is completed we will look to get a better package that reflects the changes in risk profile,” he said. One corporate banker said that banks are now prepared to offer cheaper rates to contractors as competition to supply long-term loans has grown strongly since the PFI started in the early 1990s.
He said this was an additional incentive for contractors. “Whereas the first PFI projects could earn the bank margins of 1.4% above the base lending rate, it is now more like 1% because of the competition.
“With the first tranche of PFI deals either built or coming up for completion, all the major contractors involved will be considering either selling their equity – as Kvaerner has done – or remortgaging their debt. It also brings an opportunity to renegotiate the balance of debt and equity in the project.”
The savings on interest payments from refinancing will help increase the returns from PFI contracts. This should make contractors who refinance more attractive to investors.
“Balfour, among others, has felt that the City undervalues its PFI contracts because it cannot see beyond the high upfront costs of PFI deals,” said one analyst. “But by refinancing they can show they are realising some of the value of the contracts straight away, before they are 20 years into the contract.”
However, one banker warned that contractors could come into conflict with the government over refinancing. Under some PFI deals, the Treasury has a right to claw back or share any benefits accrued from refinancing by the project sponsors. “This will depend on what kind of project it is,” he said. “But there may well need to be a tripartite negotiation with government, the PFI consortium and the bank to decide who benefits from the refinancing.”
