GLOSSARY OF COMMONLY USED FINANCIAL TERMS IN PFI

AGENT BANK:
When more than one lender is involved in providing the senior or junior debt to the
project company, typically the lenders co-ordinate their actions through one of their
number, designated the Agent Bank. This enables the project company to deal with
only one party thus reducing administration and possible confusion. In particular,
payments to and repayments from the Project Company are made via the Agent
Bank. The Agent Bank receives an annual fee for this role.
ANNUAL DEBT SERVICE COVER RATIO (COVER RATIOS):
Usually refer to the ratio of free cash flow to scheduled repayments and interest over
a period of time (e.g. a given year, the term of the debt, the term of the Concession
Agreement etc).
The Cover Ratios provide an indication of the project company's ability to meet its
loan repayments in any year over the term of the loan, or over the life of the
corresponding contract or concession. Hence they are a guide to the performance
and "creditworthiness" of the project company. They are used to determine whether,
for example, the project company may make dividend payments to shareholders, or
whether an Event of Default has occurred. The most commonly used ratios are:
Annual Debt Service Cover Ratio - in any given year the ratio of cash flow available
to repay debt and interest to the total of debt repayments and interest payments due
in that year. Loan Life Cover Ratio - the ratio of the net present value of available
cash flow protected to be received over the remaining life of the loan to the loan
outstanding at the start of the period. Project Life Cover Ratio - the ratio of the net
present value of available cashflow projected to be received over the life of the
Contract/Concession to the loan outstanding at the start of the period.
ARRANGER:
The lender or lenders arranging the senior and / or junior debt for the project
company. The Arrangers will negotiate documentation and carry out due diligence on
behalf of all the lenders.
ASSIGNMENT AND TRANSFERS:
Lenders may wish to assign or transfer all or part of their participation in a loan
transaction to another lender. New lenders would have the same obligations and
rights as the previous ones.
AVAILABILITY PERIOD:
The period during which the loan facility is available to be drawn down by the project
company. Usually this is during the construction period.
BALANCE SHEET
A snap-shot of the assets owned and liabilities owed by a business at a point in time.
Also see Off Balance Sheet.

Partnerships UK plc, January 2006

Page1

BASE CASE
The assumptions and projections set out in the financial model and upon which the
contract prices are based which provides the basis for agreeing the financial impact
of changes to the project including refinancing.
BASIS POINTS
Each one hundredth of one percent (0.01%). Basis points are often used to measure
changes in or differences between yields on fixed income securities, since these
often change by very small amounts.
BEST AND FINAL OFFER
During procurement, if the negotiated procedure is followed, bidders are often invited
to submit a Best and Final Offer following negotiations on the original tender
BONDS
A form of funding for project companies using capital markets rather than bank debt
CASH CASCADE
Prioritisation of cash flow. The order in which the project's cash flow is used to meet
operating costs, debt repayments, interest payments, reserve retentions and
shareholder distributions. Also sometimes termed Cash Waterfall.
CREDIT GUARANTEE FINANCE (CGF)
The Governments proposals for a new way to finance certain PFI projects. The key
elements of a CGF transaction will be:

the Government will provide funds to the PFI project by means of cash
advances under the terms of a loan agreement to be entered into between
the Government and the private sector;
these loans will be repaid after completion of the project, in accordance with a
loan repayment schedule and financial model as agreed with the project
company, procuring authority and guarantor; and
in consideration for providing this loan facility, the Government will receive an
unconditional repayment guarantee from the guarantor, and will issue a letter
of awareness to the shareholders of the PFI project, the guarantors and the
public sector counterparty to the PFI project.

The primary financial benefit of CGF to the public sector arises from the fact that the
component of the unitary charge that relates to the private sector funding premium
will now accrue to the public sector under the CGF loan.

CHANGE OF LAW PROVISIONS

The provisions in a contract which specify the party to the contract who will pay the
cost of any change to an existing law or the introduction of a new law.

Partnerships UK plc, January 2006

Page2

COMMERCIAL CLOSE
The date upon which all contract documentation is signed but usually a date before
financing agreements are fully effective
COMMITMENT FEE
A fee payable usually quarterly or semi-annually in advance on the amount of the
loan not drawn down but committed by the lenders. Once construction of a project is
completed or the loan is fully drawn down, these are no longer payable and any
undrawn debt is cancelled.
CONCESSION AGREEMENT
Some PFI contracts between a public sector body and a project company setting out
the terms under which assets (often buildings) and services are to be provided are
termed Concessions if a particular form of procurement is used.
CONDITIONS PRECEDENT
Conditions that have to be met before an event can take place. Included in key
project documents as a means of enabling signature when some conditions remain
outstanding (e.g. planning). The project documents only become effective when all
conditions precedent have been satisfied or waived.
COST OF CAPITAL
See Weighted Average Cost of Capital.
COUPON
The interest rate on a bond that the issuer promises to pay the investor until maturity,
expressed as an annual percentage of the face value of the bond.
COVENANTS
The project company promises (covenants) to the lenders in the Credit Agreement
that it will (positive covenant) or will not (negative covenant) do certain things.
CREDIT AGREEMENT
The agreement between the project company and the lenders governing the terms of
the loan. Also known as a Facility Agreement.
CREDIT APPROVAL
The agreement by the lenders' internal credit authorities to provide the loan to the
project company subject to suitable documentation.
CREDIT COMMITTEE
Typically a committee of senior managers within a bank which has the authority to
approve the granting of finance ("credit") to the project company.

Partnerships UK plc, January 2006

Page3

CREDIT RATING
An indication by a Credit Rating Agency of an entity's long term or short term
creditworthiness. A long term rating of Aaa/AAA is the most credit worthy (e.g. The
UK Government). A long term rating of C/D means that an entity is most probably in
default of its obligations. BBB represents the minimum investment grade rating and is
usually what is given to PFI companies, prior to any wrapping.
CREDIT RATING AGENCY
An agency which independently assesses the short or long term creditworthiness of
entities including countries, companies and some municipalities. The best known
agencies are Moodys and Standard and Poors.
DATA BOOK
Contains the assumptions, including financial and activity projections, and an
explanation of the key calculations found in the Base Case.
DEBENTURE
A charge over a project company's assets. This is normally in favour of the lenders to
the Project Company and will take precedence over equity.
DEBT SERIVCE RESERVE
A cash reserve maintained by the project company, usually as a requirement of the
lenders, to meet future debt service costs (principal and interest) in the event that
there is a shortfall in revenue. There may be both a senior and subordinated debt
service reserve. The reserve is normally kept in an account over which the lenders
have control and security.
DEBT SERVICE COVERAGE RATIOS
See Annual Debt Service Cover Ratios
DIRECT AGREEMENTS
These are agreements entered into by the senior debt providers, [typically in the case
of a hospital, with the building contractor, the provider of facilities management
services and the Trust] too specific. They allow in certain circumstances, the senior
lenders to "step in" or appoint a third party to perform the obligations under a
contract. (For example, if the building contractor becomes insolvent then the senior
debt providers are able to appoint another contractor to fulfil the contract).
DISCOUNT RATE
Discount Rates are percentage rates used to 'discount' or deflate the value of cash
flows occurring in the future based on the principle that cash in the present is more
valuable than cash in the future because of the time value of money.
In addition to time value, cash flows in the future are worth less because of inflation.
If we ignore inflation, and cash flows are measured in constant year prices, a real
discount rate must be applied.

Partnerships UK plc, January 2006

Page4

Cash flows which reflect the effect of inflation are called nominal cash flows, and the
discount rate used to deflate nominal cash flows must incorporate the impact of
inflation.
DRAWDOWN
A loan payment made by the lenders to the project company in accordance with the
terms of the senior or junior debt facilities.
DUE DILIGENCE
The process of investigation, performed by investors, into the details of a potential
investment. Due diligence is likely to be carried out on the legal, technical, insurance
and financial aspects of a project).
ECONOMIC ASSUMPTIONS
These are the assumptions of inflation, interest, taxation etc. used in the financial
model.
EQUITY
Ordinary share capital invested in the project company by the sponsors and any third
party investor. A wider definition of Equity includes loan stock or loans made by
shareholders. Typically equity has the last claim upon the project's income, hence
the highest risk and is therefore is the most expensive source of finance
ESCROW ACCOUNT
IN PFI transactions, this usually means a bank account held by a third party in which
funds are lodged until certain conditions have been satisfied. More generally, it
refers to a bank account in which the control of the account is with a party other than
the account holder.
EVENTS OF DEFAULT
Events which allow one party to terminate a contract. The right to terminate a PFI
contract is often subject to: 1) allowing parties time to rectify the event of default; 2)
the lenders' step in rights.
FACILITIES:
The agreement by lenders to provide senior or junior debt or other credit instruments
(eg letters of credit)
FACILITIES MANAGEMENT (FM)

The FM industry covers a very wide spectrum of activity. It has grown substantially
on the back of increased outsourcing of non-core activities by both public and private
sectors. The term facilities management and support services are often interchanged.
On top of the typical accommodation FM services such as maintenance, catering,
cleaning, security, etc.

Partnerships UK plc, January 2006

Page5

These historically have been considered in two categories - hard and soft.
1. Hard FM generally relates to the physical building and will include fabric
maintenance, M&E maintenance, and grounds maintenance.
2. Soft FM generally encompasses services such as cleaning, catering, window
cleaning, laundry, etc.
Services such as portering or janitorial are hard/soft services depending on how
active they are in maintaining/operating the building.
FM also encompasses task management in almost every industry. For instance a
leading FM provider, in addition to property based FM services, carries out tasks
such as providing air traffic control services, rail maintenance, providing MoD
refuelling facilities, manages prisons, etc.
FINANCIAL CLOSE
The time when the credit agreement is signed by all parties concerned. First
drawdown of funds follows financial close and the satisfaction of any conditions
precedent specified in the credit agreement.
FINANCIAL MODEL
A computer model which projects the financial performance of the project company,
including cash flow, profit and loss account and balance sheet. It also includes
calculations of the cover ratios and is used to prepare the Base Case.
FINANCIAL MODEL AUDIT
An audit of the financial model by an independent consultant, appointed by the lender
or lenders for example to ensure that the financial model has been prepared within
accepted accountancy standards and that the calculations have been accurately
formulated and are fully consistent with the assumptions specified in the project
documents.
FM
See Facilities Management
FORCE MAJEURE EVENT
Generally defined as event beyond the reasonable control of the party experiencing
the event which directly causes the party to be unable to comply with all or a material
part of its obligation in the contract. The Standardisation of PFI Contracts
recommends a narrow definition of Force Majeure events (war/terrorism; nuclear,
chemical or biological contamination; pressure waves caused by devices travelling at
supersonic speeds).
GEARING
The ratio of debt to equity in the project company
GOVERNING LAW & JURISDICTION
For the ease of resolving any future disputes it is important to agree at the outset the
law and jurisdiction that will govern the documentation. (English Law and the Courts

Partnerships UK plc, January 2006

Page6

of England are used not only in England but also for many international project
financings because of the number of precedents which facilitates the settlement of
any disputes).
GREEN BOOK
Published by HM Treasury, this sets out Government best practice guide to carrying
out appraisal and evaluation of policies and capital projects. The Green Book is
binding on government departments and executive agencies. In practice it is also
tailored for use in devolved administrations. The Green Book is also used widely in
regional agencies and local government, especially for proposals that require funding
from central government.
HARD FM
See Facilities Management
HEDGING
A course of action undertaken to mitigate a risk. Typically the risk that interest rates
might increase is hedged by the project company taking out an interest rate
instrument (see Interest Rate Swap) for all or some of the duration of the loan. It is
also possible to hedge against the risk of changes in the rate of inflation
HMT
Her Majestys Treasury
The arm of the government charged with maintaining macroeconomic stability and
managing public sector finances.
INTEREST RATE SWAP
A contract between a borrower and a financial institution whereby the borrower
exchanges a variable interest rate (usually LIBOR based) on a loan for a fixed
interest rate to the financial institution. Thereby will either receive or need to pay a
balancing amount each fund period. The loan provider will find at LIBOR and margin
and MRC (which then pays the variable interest rate to the original lender). The
borrower does not necessarily have to pay the financial institution an up front fee for
an interest rate swap as the fee may be included in the fixed interest rate charged by
the financial institution.
ITN
Invitation to Negotiate, send to pre-qualified bidders if the negotiated procedure of
EU procurement is used.
ITT
Invitation to Tender, sent to pre-qualified bidders if the restricted procedure of EU
procurement is used

Partnerships UK plc, January 2006

Page7

IRR
Internal Rate of Return - the discount rate which, when applied to a given series of
cash flows, results in an NPV of zero.
JUNIOR DEBT
Debt which is subordinate in terms of interest and principal repayment to senior debt.
Usually scheduled repayment is made to the providers of junior debt unless all
scheduled repayments and interest due to senior debt providers have been met.
Typically the term of junior debt is at least as long as that of the senior debt. The
margin on the junior debt tends to be higher than that on senior debt in view of the
higher risk of default on repayments.
LATENT DEFECTS
When any building or construction is complete it will have some obvious defects
which should be quickly remedied. Over a period of time other defects may become
apparent - such a defect is generally referred to as a latent defect, provided it is
attributable to:
(a)defective design
(b)defective workmanship or defective materials, plant or machinery used in
construction
(c)defective installation of anything in or on the buildings
(d)defective preparation of the site on which the building is constructed
(e)defects brought about by adverse ground conditions or by reason of subsidence,
water table change or any other change to ground conditions
Within PFI projects involving refurbishment the transfer to the private sector of latent
defect risk within the existing estate can be a contentious issue. Provided value for
money can be achieved transferring this risk is by far the best option for the public
sector.
LETTER OF CREDIT
An obligation on a bank on behalf of a customer to pay on demand monies against
the receipt of certain specified and pre agreed documents or conditions usually a
fixed ate have been met. (it is similar to a guarantee).
LIBOR
London Inter Bank Offer Rate
The rate that banks can usually lend to each other in sterling in London and
represents the interest rate of senior debt less the margin.
LIMITED RESOURCE FINANCE

Financing which involves limited obligations of the sponsor companies. Lenders have
recourse to the contracts and the cashflows generated from these.

Partnerships UK plc, January 2006

Page8

MAINTENANCE RESERVE
A cash reserve maintained by the project company usually at the requirement of the
lenders to meet future maintenance capital expenditure costs in the event that there
is a shortfall in revenue.
MARGIN
The rate of interest charged above LIBOR or some other base rate by senior lenders,
representing the riskiness of the facility.
MATERIAL ADVERSE EFFECT/CHANGE
An event which could have, generally in the opinion of the lenders, a materially
adverse effect on the project.
MEZZANINE FINANCE
See Junior Debt. Mezzanine Finance is so called as it lies between equity and debt.
MONOLINE INSURER
Financial institution with an AAA rating from the rating agencies (eg Standard and
Poors, Moodys) which , for a fee, will enhance a project companys credit rating in
order to attract bond investors to provide funding for the project.
NET PRESENT VALUE
The discounted value of future cash flows less the initial investment required to
generate such cash flow. These cash flows are discounted to take account of the fact
that money today is worth more than the same amount of money in the future.
NON VITATION INSURANCE
This protects the lenders' interests in the event that another insured party vitiates (i.e.
Makes them invalid most probably through non disclosure) the insurances. It is not
always possible to obtain non-vitiation insurance.
NPV
Net Present Value - refers to the present value of a future stream of cash flows
discounted at a certain discount rate. An alternative interpretation is - the amount that
one should invest today at an interest rate equal to the discount rate (above) if one is
to have a given stream of cash inflows in the future.
OFF BALANCE SHEET
An asset or a liability that does not appear as an asset or a liability in the financial
statements of the relevant entity.
OGC
Office of Government Commerce.

Partnerships UK plc, January 2006

Page9

ONS
Office of National Statistics.
OUTPUT SPECIFICATION
A specification written to focus on the deliverable service and outputs rather than
prescriptive inputs.
PARI PASSU
Ranking equal. Often used in the context of different lenders ranking Pari Passu for
repayment purposes.
PERFORMANCE BONDS
A bond issued by an insurance company to guarantee satisfactory completion of a
project by a contractor.
PERMITTED ENCUMBRANCES
Typically all of the Project Company's assets are pledged/charged to the lenders
under the Debenture. However, there are exceptions where the assets may already
be charged or the terms of trade mean that they are charged to another entity. Such
charges are known as Permitted Encumbrances.
PFI
Private Finance Initiative.
The PFI was launched in 1992. PFI projects are a type of Public-Private Partnership
(PPP).
The principle of PFI is a public sector body obtains a service rather than an asset. A
private sector contractor funds any asset required and is then paid for the services
provided. Usually payments will be made by the commissioning authority, but in
some projects, payment, either in part or in full, will be made by the users (eg toll
bridge, trams, etc).
Because the contractor is paid for the services, PFI contracts provide for the risks of
asset construction and ongoing service provision to pass to the private sector.
PFI CREDITS
PFI Credits are the means through which central Government provides financial
support to local authorities for PFI schemes. PFI Credits provide support for capital
expenditure in the form of revenue support grant in much the same way as traditional
local authority borrowing approvals.
PRIVATE PLACEMENT
The sale of stocks, bonds or other investments directly to an institutional investor
such as an insurance company.

Partnerships UK plc, January 2006

Page10

PROJECT FINANCE
A method of using debt to finance the construction of a specific project with the loan
being repaid solely from the cashflows associated with that project. Project Finance
was developed in the 1980s in sectors such as energy, transport, and infrastructure.
It is currently the principal method of funding larger schemes under the Private
Finance Initiative.
PRG
Project Review Group.
The PRG oversees the approval process for local authority PFI projects that receive
Government support. It is the gatekeeper for the delivery of PFI credit funding to the
local authority PFI programme
4Ps
Public Private Partnerships Programme.
A company limited by guarantee established by the Local Authority Associations in
England and Wales to promote PPPs in local government.
REFINANCING
The prepayment of existing debt and/or equity and its replacement with debt enjoying
better terms (eg lower margin, longer tenor, weaker covenants etc).
REPRESENTATIONS & WARRANTIES
A project company will be required to represent and warrant that certain statements
and information are true. An unfulfilled warranty does not invalidate the contract but
could result in damages being sought by the authority.
REVENUE SUPPORT GRANT (RSG)
The form in which support from PFI Credits is paid to local authorities in England and
Wales. The RSG typically commences on the date that full services are implemented.
RPI SWAPS
Often payments under a Concession Agreement are indexed in line with the Retail
Price Index ("RPI"). If RPI falls to low levels then the Project Company's income is
affected. Under an RPI Swap, the Project Company may swap a variable RPI based
rate on a fixed principal amount for a fixed indexation rate.
SENIOR DEBT
The bank debt that is used by a project company (SPV) to fund the construction of a
PFI project.
SPV
Special Purpose Vehicle

Partnerships UK plc, January 2006

Page11

A company established for the specific purpose of entering into the Concession
Agreement or Contract for a project. Often referred to as the Project Company in
respect of a particular project
SPONSORS
The companies providing the service under a PFI Contract or Concession (typically
the construction and facilities management companies). The companies are usually
also shareholders of the Project Company through investment company subsidiaries.
STANDBY FACILITY
A Facility provided usually by the Senior Debt providers to cover additional agreed
expenditure through the Variations process and sometimes cost overruns.
STEP IN RIGHTS
Senior Debt providers typically have the right to step into (through for example a
Receiver or a special purpose vehicle) the relevant contract and perform the
underlying obligations contained in that contract. This provides the Senior Debt
providers with the opportunity to keep the project performing even when the original
provider under the contract is no longer able to do so (e.g. for reasons of insolvency).
The right of step in is documented under the Direct Agreements.
SUBORDINATED DEBT
See Junior Debt
SYNDICATION
The Arrangers may invite additional lenders to participate in the Senior or Junior Debt
through a syndication or a sell down. This process usually takes place after Financial
Close and allows other financiers with a relationship with the project's sponsors or
with an interest in the sector to join the facilities. It also allows the Arranges to reduce
their exposure to the project allowing them to free up capital for further projects.
Where the Senior Debt is provided by way of a Bond then the Underwriter is likely to
syndicate by selling the Bonds to other investors.
TENOR
The length of time that a senior debt facility for a project can be outstanding.
Normally this is one of two years shorter than the term of the underlying PFI Contract
or Concession
TERM
The duration of a PFI concession agreement/ project contract.
TERM SHEET
A summary of proposed terms and conditions of the senior debt facilities for a
project.

Partnerships UK plc, January 2006

Page12

THIRD PARTY INVESTOR

A provider of Risk Capital to the project, but which is not a project sponsor (eg not an
affiliate of the construction company or the Facilities Manager).
TUPE
TRANSFER OF UNDERTAKINGS PROTECTION OF EMPLOYMENT
REGULATIONS governing what happens to existing employees when an
undertaking (e.g. a service) transfers from one provider to another provider. It applies
equally whether the transfer is public sector to private sector or private sector to
private sector. It protects the transferring employees' terms and conditions so that
they should be no worse off after the transfer. TUPE does not cover pension
provision so a separate statement will often be made about what will happen to
pension provision. TUPE is a constantly developing field and is greatly influenced by
European changes.
TREASURY GREEN BOOK
See Green Book.
TTF
Treasury Taskforce.
PUK's predecessor which was a body wholly owned by HM Treasury.
ULTRA VIRES
Outside the powers of. A contract is ultra vires if one of the parties does not have
the necessary legal power to enter into that contract.
UNDERWRITER
A financial institution that guarantees to the Project Company that it will provide a
specified amount of debt or equity for a project financing on pre agreed terms. An
Underwriter takes the risk that it will subsequently be able to syndicate or "sell down"
the debt to other lenders. Both bank debt and Bonds may be underwritten.
Also used in the usual context of an insurance underwriter.
VALUE FOR MONEY (VFM)
Usually represented as a comparison of bidders proposals against the Public Sector
Comparator taking into consideration the benefits, opportunities, and values of public
sector retained risk
WEIGHTED AVERAGE COST OF CAPITAL
The average cost of a company's finance (equity, loans, etc) weighted according to
the proportion each element bears to the total.

Partnerships UK plc, January 2006

Page13

WRAPPING
The means by which a monoline insurer enhances the creditworthiness of a project
company by payment of a fee and the commitment to make good any payments to
the bond investors in the event of problems.

Partnerships UK plc, January 2006

Page14