2 The Loan
The loan agreement
5. In his response to our letter of 28 July, the
Secretary of State set out the key features of the loan as agreed
in March 2010:
The loan was a form of State aid provided under
the Regional Aid provisions in the General Block Exemption Regulation
(EC) No. 800/2008 of 6 August 2008. The Gross Grant Equivalent
of the loan was estimated to be £12 million.
The loan was to be fully secured against all
the assets of SFIL and the project.
The return to HMG was based on three elements
(i) repayment of capital; (ii) interest of 3.5%; and (iii) equity
warrants - i.e. HMG would have an option to purchase a share of
SFIL for a nominal fee at a specific point in time.[5]
6. Relating to part iii) the terms of the loan stated
that the Secretary of State's targeted benchmark for the number
of equity warrants would be 15% of the fully diluted share capital
of the Company. However, the conditional offer letter acknowledged
that the "final quantum" would be subject to negotiation
to reflect:
(a) the outcome of due diligence;
(b) the availability of funding for the Project from
third parties (including any additional equity providers); and
(c) the reasonable expectations of existing shareholders
in the Company as to their economic return.[6]
The warrants would have been possible to exercise
in whole or in part (i) on and after the tenth anniversary of
issue, (ii) on a change of control, sale or IPO of SFIL, or (iii)
on and after a default under the Loan.[7]
7. The repayment schedules for the loan would have
been as follows:
| Repayment Date |
Amount of the loan to be repaid
|
| 31 March 2015 | £6,000,000
|
| 31 March 2016 | £12,000,000
|
| 31 March 2017 | £12,000,000
|
| 31 March 2018 | £12,000,000
|
| 31 March 2019 | £12,000,000
|
| 31 March 2020 | £12,000,000
|
| 31 March 2021 | £12,000,000
|
| 31 March 2022 | £12,000,000
|
| 31 March 2023 | £12,000,000
|
| 31 March 2024 | £8,900,000
|
8. The total return to the Government was calculated
by adding the loan repayment and interest to the estimated value
of the Government's equity share in the company, which was assumed
to be 15%.[8] The Department
estimated the following returns:
five-year HMG return (estimate)= £133.9m
(IRR 10.9%)—management case; and
five-year HMG return (estimate)= £114.4m
(IRR 7.4%)—downside case.[9]
9. Had the loan been provided, the Sheffield Forgemasters
would not have begun repayments until the press had become operational.
However, interest would have accrued during the intervening period.
On that basis, the Department estimated that the total debt repayment
would be £110.9 million.[10]
Value for Money
Despite the many disagreements over the cancellation
of the loan, there was a consensus that it potentially represented
value for money to the Government as a financial arrangement.
When he came before us, the Secretary of State was clear that
Sheffield Forgemasters was "a very good company" which
had "produced a project that was good value for money".[11]
He also confirmed that both Deloitte and the Industrial Development
Advisory Board provided positive assessments in terms of value
for money.[12] However,
while this may be the case, the Secretary of State pointed out
that while a project may demonstrate value for money, availability
and affordability were equally important factors in coming to
any investment decision.[13]
It is these factors which lie at the heart of the Government's
decision to cancel the loan and we consider them in the next section
of our Report.
5 Ev 11 Back
6
Ev 11 Back
7
Ev 11 Back
8
Ev 12 Back
9
Ev 12 Back
10
Ev 12 Back
11
Q 27 Back
12
Q 17 Back
13
Q 14 Back
|
