Long Term Finance.ppt

8/10/2019 Long Term Finance.ppt

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IIM CalcuttaJulySeptember, 2010

Sources of Long Term Finance

DR. U. K. BASU

[email protected]


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Source of Finance

How much of Long Term ProjectFinance and How much of Short

Term Working Capital Finance?

Project Cost and Means of Financing


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Project Cost

Project Cost for any Project includes:

1) All Non Current Assets required to be

acquired in connection with the project.

2) Margin on Working Capital


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Project Cost

Current Liability + (Term Liability +

TangibleNet Worth) = Total of Liability Side of

Balance Sheet = Total of Asset Side of

Balance Sheet = Non Current Asset +

Current Asset


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Project Cost

In other words,

Project Cost = Long Term Finance required

for setting up the project

= Non Current Assets + Margin

on Working Capital


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Project Cost

Liabilities Assets

Net Worth 500 Non Current Asset 600

Term Liability 200 Current Asset 400

Current Liab 300

Total------1000 Total------1000


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Project Cost

Margin on Working Capital = (Current Asset

- Current Liability)

= 100

Long Term Finance = Non Current Assets

+ Margin on Working Cap

= 600 + 100 = 700

= Net Worth + Long Term Debt = 500 + 200

Term Loan of SBI is a part of Long Term Debt


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The Complete Process

Company wanting to set up a Project

( a new, an expansion, a modernisation

or a diversification project)

Approaches SBI for a Term Loan


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SBI examines the DPR (Detailed project

Report submitted by the company).

Check for: 1) Technical Feasibility2) Financial Viability


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For Financial Viability : -

Employ Capital Budgeting Techniques

( NPV, IRR, Payback Period etc.).

The Project is acceptable only if it is both

Technically Feasible and Financially Viable


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For Technical Feasibility:

Check (A) The Process

(B) The Installed Capacity

(C) Availability of all Inputs

including Power, Water, Skilled

Labour, Raw Material

(D) Market Demand (Global

Demand Supply Gap; WTO)


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For Financial Viability : -

Employ Capital Budgeting Techniques

( NPV, IRR , Payback Period etc.)

Any Project is acceptable only if it is both

Technically Feasible and Financially Viable


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Assuming the Project is acceptable and the

Project Cost is in order, take a look at the

Means of Financing.

Capital Structure for the Project, i.e. howmuch Long Term Debt & how much Equity

are to be used for financing the Project


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The Project Debt : Equity Ratio may be 1

(i.e. Debt and Equity both at 50% of the

Project Cost) or 1.5 (i.e. Debt at 60% &

Equity at 40%). Besides, a minimum

contribution by the Promoters, say at 15%of the Project Cost, may also be necessary.


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In case the Project is acceptable (both

Technically Feasible and Financially Viable)

and the Project Cost as well as the Means

of Financing is in order, Bank can go ahead

with processing of the Term Loan Proposal.Check the Debt Service Coverage Ratio.


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Once the processing is complete, the Bank

can go ahead with issuing a Sanction Letter.

But, NO DISBURSEMENT is to be made

until the Equity contribution is lined up bythe company (The Project can not be set up

only with Term Loan without the Equity).


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Once the company successfully makes a

Public Issue of Equity and the Project is

otherwise ready for implementation, the

Bank can start disbursement.


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With the entire Project Finance (Equity as

well as Term Loan) already available, the

company is to implement the project.

Once the project is already set up and the

company is ready for commercial operation,

the company approaches for Working

Capital Finance from the Bank.


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Sources of Finance

Long Term Finance

(Project Finance)Short Term Finance

(Working Capital)


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Sources of Long-term Finance

Share CapitalLong-term Debt

Equity Preference

Domestic InternationalGDR/ADR etc.

Retained

Earnings

(Dividend

Policy)

New Issue

Public Issue Rights Issue

Term Loans

Lease

Rupee Foreign

Currency

(ECB)

Bond /Debenture

International Domestic

Foreign

Currency

Bond

Euro

BondNCD

PCD

FCD


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Sources of Long-term Finance

Share CapitalLong-term Debt

Equity Preference

Domestic InternationalGDR/ADR etc.

Retained

Earnings

(Dividend

Policy)

New Issue

Public Issue Rights Issue

Term Loans

Lease

Rupee Foreign

Currency

(ECB)

Bond /Debenture

International Domestic

Foreign

Currency

Bond

Euro

BondNCD

PCD

FCDINTERNATIONALFINANCE


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IssueofOrdinaryShares

Eligibility Norms

Prospectus to SEBI through an eligible

registered Merchant Banker before filing

with the ROC

Application for listing

Agreement with a registered Depositoryfor dematerialisation


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Public Issue of Shares

Book-building process, with at least

50% allotted to QIBs, 35% to Retail

Investors & 15% to HNIs.

New Guidelines for Book- Built Issues:

QIBs have to apply with 10% marginmoney and there will be proportionate

allotment for them also.


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Issue of Ordinary Shares

Eligibility Norms

Listed Companies: Public Issue

Pricing Mechanism Rights Issues


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Issue of Ordinary Shares

Existing Unlisted Companies

Initial Public Offer (IPO) Newly established Company

No Track Record; In such a case,

Projections be appraised by a Bank,

which must have at least 10%

Exposure.


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Major Steps for Public Issue of

Ordinary Shares

Appoint the lead managers

Appoint other intermediaries, likeco-managers, underwriters, bankers,

brokers, and registrars

File prospectusSend prospectus to brokers


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International Equity Offering

GDR (Global Depository Receipt)

ADR (American Depository Receipt)

Denominated in US Dollars.

1) Why are these necessary?

2) How are they issued?


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Process

1. Project to be implemented:

Project Cost; Means of Financing; ProjectCapital Structure

Whether Project is

(a) Technically Feasible &

(b) Financially Viable

2. Necessary Approvals for the issue

(Shareholders approval; FIPB

Clearance, wherever necessary)


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Process

3. Appointment of Merchant Banker (s)

4. Drafting of Prospectus

5. Countries where issue to be launched

6. Road Shows

7. Book Building8. Structuring the issue/instrument

9. Actual Issue of GDR/ADR & Listing


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International Equity OfferingGDR/ADR Issue Process

IssuerCompany

DomesticCustodian

GlobalDepository

Ordinary Rupee Shares

Confirmation

GDR/ADR Investors


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GDR/ ADR Investors - Risks

The investors of GDR/ADR have twin risks.

The value of their investments decreases if:

1) The price of the underlying ( Indian ) share

declines.

2) The value of Rupee ( Indian Currency )

aaadecreases vis-a vis the US Dollar.


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DebenturesFeatures

Types of Debentures (NCD,PCD,FCD)

Face Value

Coupon Rate

Periodicity of Payment of Interest Maturity Period / Tenure

Claim on Assets and Income (Creditor)

Interest is Tax Deductible


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Debentures - Features

RedemptionBullet or In Instalment : At

Par or Premium or Discount.

Current Yield & Yieldto-Maturity. RatingEssential, Lowest Acceptable

RatingBBB;

For issues above Rs 100 Croresmore than one Rating is required.


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Debentures - Features

Buy-back (Call Option) and Surrender (Put

Option) provisions

Security - Debenture Redemption Reserve

and appointment of Debenture

Trustee required if Tenure >18

months


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Bonds / Debentures

NCDNon Convertible Debenture

No part of such a Bond / Debenture is to be

converted into Equity Share.

PCDPartially Convertible DebentureA part of such a Bond / Debenture is to be

converted into Equity Share.


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Bonds / Debentures

FCDFully Convertible Debentures

Full face value of such a Bond / Debenture

is to be converted into Equity Shares eitherat one shot or in more than instalment.


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Features of a Bond

1. Face Value - Rs 10002. Coupon Rate - 12% p.a.

3. Frequency of Interest Payment / Compounding

Annual

4. Tenure - 5 years

5. Redemption - Bullet, at a Premium

of 10%

6. Market Price - Rs 1200


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Cash Flow from a Bond

Time Interval Cash Inflow Present Value

end of .y. 1 Rs 120 Rs 120 /(1+r)

,, ,, ,, 2 Rs 120 Rs 120 /(1+r)^2,, ,, ,, 3 Rs 120 Rs 120 /(1+r)^3

,, ,, ,, 4 Rs 120 Rs 120 /(1+r)^4

,, ,, ,, 5 Rs (120+ Rs1220/(1+r)^5

1100)


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Types of Debentures

Non Convertible Debentures

Fully Convertible Debentures

Partly Convertible Debentures


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Convertible Debentures

PartiallyConvertible - Debentures

FullyConvertibleDebentures

These are converted into a specified

number of ordinary shares at

specified points of time.


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Foreign Currency Bond

Foreign currency Bonds

ForeignCurrency

Bond

Floating RateNote (FRN)

Foreign CurrencyConvertible

Bond (FCCB)

YankeeBond ($)

Bull DogBond (GBP)

SamuraiBond (JPY)

Dragon Bond(Hong Kong $)

Domestic Bond

Euro Bond


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A Comparative Chart

Bond Preference Share Equity Share

Fixed Tenure Fixed Tenure Perpetual Security

Pays Interest Pays Dividend Pays Dividend

Interest Rate Dividend Rate Dividend never

pre-determined pre-determined pre-determined

Interest payable Dividend payable Dividend payable

irrespective of only if sufficient only if sufficient

profit profit is available profit is available

(after payment of

preference Dividend)


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A Comparative Chart

5 No ownership No ownership Ownership

No voting right No voting right Voting right

6 In case of liquidation of company,

Bond-holders Preference share Equity share

are paid first holders are paid holders paid

(along with after creditors last (after

other creditors) creditors andPreference

share)

Long Term Finance.ppt

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