20 SEPTEMBER 2012 NEW ZEALAND GAZETTE, No. 116 3365

(4) The Company will borrow funds (the “Senior Debt”) from a consortium of banks (the “Banks”). The Company will enter into interest rate swaps in respect of the Senior Debt (the “Swaps”). Holdings will also borrow money from a single shareholder during the Construction Phase (the “Shareholder Pre-subscription Loan”), and each of the other shareholders shall provide an investment support in the form of a stand-by letter of credit (LC) and/or cash collateral to be held in equity collateral accounts of Holdings (ECA) (for each Deferred Investor). Holdings will also borrow from each of its shareholders during the last part of the Construction Phase and during the Services Phase in the form of optional convertible notes (the “Notes”).

(5) The Services Phase of the Project Agreement, Construction Agreement, Operation and Maintenance Contract, Asset Management Agreement and Lease are all excepted financial arrangements. The Construction Phase of the Project Agreement, Senior Debt, Swaps, Shareholder Pre-subscription Loan, Notes, and investment support represented by LCs and/or cash collateral in the ECAs are financial arrangements to which Holdings and/or the Company is a party. The Project, including all of these agreements, is a wider financial arrangement.

(6) This determination prescribes:
• the amount of consideration that is solely attributable to the Lease;
• how the financial arrangements rules apply to the Construction Phase of the Project Agreement, Services Phase of the Project Agreement, Construction Agreement, Operation and Maintenance Contract, and Asset Management Agreement;
• the method for spreading the payments made under the Senior Debt, Shareholder Pre-subscription Loan, Swaps and Notes.

2. Reference
   This determination is made under sections 90AC(1)(bb) and 91AC(1)(h) of the Tax Administration Act 1994.

3. Scope of determination
   (1) This determination applies to the Company in respect of the Project (more fully described in private ruling BR Prv 12/33 issued on 27 August 2012), including the following agreements:

• Construction Phase of the Project Agreement, under which the Company agrees to design and construct the prison for the Crown and will receive a fixed lump-sum payment (which will be equal to and offset against the rental prepayment referred to below), once the prison is ready for operation.

• Services Phase of the Project Agreement, under which the Company will provide ongoing operation and maintenance services for 25 years to the Crown in consideration for monthly payments.

• Lease in respect of the prison, under which the Company will lease the prison from the Crown for 25 years and will prepay the rental to the Crown. This payment will be equal to and will offset the payment in relation to the Construction Phase.

• Construction Agreement, under which the Contractor will design and build the prison and receive capped monthly payments from the Company.

• Operation and Maintenance Contract, under which the Service Provider will provide services in respect of the prison and receive monthly payments from the Company.

• Asset Management Agreement, under which the Service Provider will provide management and administrative services to the Company and Holdings in consideration for periodic payments.

• Senior Debt, under which the Company will borrow an agreed sum from the Banks during the Construction Phase for a term of seven years from financial close of the Project (“Financial Close”). Interest will be capitalised during the Construction Phase and payable at a market rate thereafter. It is intended that the Senior Debt will be refinanced within seven years, and every five years thereafter over the term of the Project. While the Base Case has assumed five-yearly refinancings, the Company has flexibility to refinance at any time. As at the date of this determination there is no intention to deviate from the Base Case. Under IFRS (as the standards apply at the date of this Determination), the Senior Debt (and any subsequent refinancings) will initially be recognised at fair value, and subsequently measured using the amortised cost/effective interest method (regardless of whether or not hedge accounting is applied), and will not be treated as a hedge of another financial arrangement.

• Shareholder Pre-subscription Loan, under which Holdings will borrow an agreed sum from a shareholder during the Construction Phase for a market rate of interest. It is yet to be determined whether Holdings will treat the Shareholder Pre-subscription Loan, in part, as an equity instrument under IFRS.

• Swaps, under which the Company will pay a fixed rate of interest to the swap counterparties, and receive a floating rate in return. It is intended that each refinancing of the Senior Debt will be matched by an interest rate swap on materially the same terms as the Swaps (the “New Swaps”).

• Notes, under which Holdings will issue convertible notes to its shareholders for a term of 25 years and five months (assuming that the Services Phase commences on the planned date). The Notes will pay an agreed rate of interest quarterly in arrears in cash after the commencement of the Services Phase. If an interest payment is not paid because of insufficient project cash flows, the interest will be capitalised and added to the principal. Any capitalised interest must be paid in cash by the earlier of conversion or expiry (being, 25 years and five months, assuming that the Services Phase commences on the planned date). It is intended at the outset that all interest payments will be paid in cash on the quarterly due dates occurring after the commencement of the Services Phase. The Notes are also subject to a fixed inflation adjustment, that is added to the principal amount of the Notes each 1 July occurring after the Service Commencement Date. The Notes are redeemable in cash in accordance with an amortisation schedule that amortises the principal to zero over 25 years and five months. The Notes are convertible into shares in Holdings at the option of Holdings if Holdings experiences a material cash flow deficit because of events not taken into account in cash flow projections prepared before Financial Close and where conversion of the Notes would assist Holdings to manage its liabilities and solvency (subject to the consent of the Banks). There are no planned conversion dates for