Case Study

Release of Trapped Cash:

– Accounting policy change – changing revenue recognition policy from FRS5 long-term margin to service concession accounting under FRS102, implementing the change in the operating model and negotiation of lender consent to release ~£1m of trapped cash
– Capital reduction – conversion of share premium into distributable reserves to enable payment of dividends to release trapped cash
– Lifecycle re-profile – implemented revised lifecycle profile in the operational model and negotiated lender consent to pay accelerated distributions

Financial Model and Value Enhancement / protection:

With any financial model there are invariable contingency lines built in, for example FM risk margins, insurance sharing, management fees, Director fees, defect / retention accrued etc. We register all potential upside returns, providing a classified register of these contingencies, their purpose and a commentary on the associated risks. Then an informed decision on their release and approval can be made.

Accounting Policy Optimisation:

Pario were appointed to a healthcare project during the construction phase where the accounting policies adopted were based on the financial close model. The revenue recognition policy was based on cash accounting, with no long- term profit smoothing. In addition there was an RPI SWAP which was unusually profiled against a flat notional value, resulting in upfront cash receipts during the 1st half of the project and cash payments in the 2nd half of the concession; again these receipts and payments were cash accounted.

The cash accounting approach resulted in upfront cash profits but poor tax optimisation as there were unrelieved tax losses during the 2nd half of the concession. We identified the benefit of implementation FRS5 and SSAP 9 revenue recognition and including the RPI SWAP as part of the operating results, as it was hedging the operating cashflows, and successfully negotiated with the Project Co’s auditors and lenders to implement the new accounting policy. The resultant change in accounting policy increased IRR by 170 basis points.

General Financial Management

Corporate & capital reorganisation – created value by identifying a reorganization of the holding company structure (to reduce administration & financial costs), procured legal & tax advice and implemented corporate & capital reorganisation (including conversion of loans into equity, capital reduction and solvent liquidations of redundant entities), which resulted in lower costs and long term higher distributions

It is expected that deposit interest income is optimized through effective cashflow management, i.e. collecting UC on time, paying creditors to terms and identifying surplus cash which can be deposited for maximum period to obtain highest interest rates, but in addition we have negotiated change of deposit bank or account bank where required as well.