debt funding vipul thaker oct2010
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Fund Raising through Debt Fund Raising through Debt
By – Vipul ThakerCEO – Haribhakti SME Transformation and Support Solutions Pvt Ltd.pp
Agenda
• Different Funding Optionsg p
• Different forms of Debt
• Debt options & relevance to business• Debt options & relevance to business
• Approach to apply
Client name - Event - Presentation titlePage 2
Fund Raising Options
EquityRaising money for company activities by selling common or preferred stock. In return for the money paid, shareholders receive ownership interests in the corporation. (Owned Funds)
SubsidyMonetary assistance granted by the government to a person or group in support of an
i d d b i i h bli ienterprise regarded as being in the public interest.
DebtR i i f f d b b i (D bt F d) Th t t f fi ' t t l it l hi h l Raising of funds by borrowing (Debt Fund). That part of a firm's total capital which commonly comprises of loan-capital and short term bank loans such as overdraft. Part of a firm's total financing, it commonly comprises of (1) short-term bank borrowings (such as overdraft), (2) cash raised through debt instruments (such as bonds), (3) off-balance-sheet financing (such as operating leases), (4) and trade credit.
Equity Financing
• Public IssueInitial Public OfferingInitial Public OfferingFurther Public Offering
• Rights Issue• Rights Issue
• Preferential Offer
• Private Equity
Client name - Event - Presentation titlePage 4
Subsidy
Economic benefit (such as a tax allowance or duty rebate) or financial aid (such as a cash grant or soft loan) provided by a government to
(1) support a desirable activity (such as exports)(2) keep prices of staples low( ) p p p(3) maintain the income of the producers of critical or strategic products(4) maintain employment levels or (5) i d i t t t d l t (5) induce investment to reduce unemployment.
The basic characteristic of all subsidies is to reduce the market price of an item below its cost of production. Also called subvention.
Client name - Event - Presentation titlePage 5
Debt Financing Working Capital financingWorking Capital financing• Cash Credit/Bank overdraft• Bill discounting/Factoring• Letters of Credit
Term loan:• Normally given to the borrowers for acquiring long term assets i.e. assets which will benefit the borrower
over a long period viz purchases of plant and machinery, constructing building for factory etcg p p p y, g g y
Project Financing:• Financing of long-term infrastructure and industrial projects based upon complex financial structure
where project debt and equity are used to finance the project rather than the balance sheets ofwhere project debt and equity are used to finance the project, rather than the balance sheets ofPromoters/Project Sponsors
• Private and public debtPrivate debt comprises bank-loans while Public debt is a freely tradable financial instruments on the stockexchange or over the counter
Debt Financing ……..cont• Securitization
Occurs when a company groups together assets or receivables and sells them in units to the market througha trust. Any asset with a cash flow can be securitized. The cash flows from these receivables are used topay the holders of these units. Companies often do this in order to remove these assets from their balancesheets and monetize an asset.
• Secured and unsecured debtDefined on basis of recourse to assets
• Syndicated and bilateral debtA syndicated loan that is granted to companies that wish to borrow more money than any single lender isprepared to risk in a single loan, In such a case, a syndicate of banks can each agree to put forward a
i f h i i lportion of the principal
• Mezzanine DebtRefers to a subordinated debt or preference shares which represents a claim on a company's assets which isRefers to a subordinated debt or preference shares which represents a claim on a company s assets which issenior only to that of the shares.
Client name - Event - Presentation titlePage 7
Comparison - Syndicated Debt & Mezzanine Debt
Criteria Syndicated Debt Mezzanine
Security Secured SubordinatedSecurity Secured Subordinated
Charge on Assets (Ranking) First Second
Covenants Tight Flexible
Coupon Floating FixedCoupon Floating Fixed
Rate Prime Risk Adjusted
Equity Kicker None Warrants
Prepayment Penalties Yes Fixed PeriodPrepayment Penalties Yes Fixed Period
Expected Returns 12% - 14% 13% - 20%
Capital Provider Chartered Banks Private Capital
Reasons for availing Debt Finance
• Use of Funds – Working capital, Project Loan, Fixed Asset creation, Purchase of Equipment .
• Security for debt – Function of use of funds, creation of charge/mortgage – mitigating againstSecurity for debt Function of use of funds, creation of charge/mortgage mitigating against
delinquency.
• Repayment profile – Cash flow – Source and timing - thus maturity/tenor of loan.
• Credit standing of Borrower
• Credit Ratios – Debt Equity, Interest Cover, Debt service coverage.
• Credit History – Years of operations, relationships with lending institution/banks.
• Risk Assessment by Lender – Security/Asset cover, equity invested-in by borrower, cash flow
profile of borrowers’ business/operations.
Debt Finance - Illustration: Project Financing
Sponsor
T L
Execution experience –mitigate against cost over-runs
through EPC contract
Equity
Term Loan
Suppliers’ credit for i t
Commissioning riskGuarantees that
fall away
Project CompanyequipmentCommercial risk
Cash flow assessment Security structure – Cash flow/
carve out Credit support in the short term
Typically used for infrastructure, large industrial and mining projects
Debt Raising - Seven level analysis
PackagingPackaging
Plans
Future Potential
History
Rating
Company
Individual
IndividualPromoters
ProfileKey
MembersOrganization
Structure
Company Type of Industry/ Setup (Plant/ Company Company Sector (Plant/
Branches)
RatingPast Rating
Existing Business Processes
Quality Controls
Client name - Event - Presentation titlePage 12
Financial Statement
Litigations, if any Credentials
History Statement if any
Future Potential Sales orders on hand
Market Potential
Industry Growth
Plans Business Plan (Sales)
Resource Allocation Operation
PackagingInformation
Memorandum Project Report CMA Data
Page 13
Debt Financing – Execution overview
• Preparation of Project/Funding requirement
• Assessment of cash flow – Funding requirements and cash flows for repaymentsg q p y
• Preparation of documents – CMA/CAS for working capital, project report for capital projects,
detailed report for project financing
• Discussion with relationship lenders/Retaining an arranger
• Commercial terms
• Security and Underwriting
• Proposal within the lenders’ credit system
Legal Documentation Loan documents covenants restrictions • Legal Documentation – Loan documents, covenants, restrictions
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Approach
• Analyse the prevailing internal structures & processesy p g p
• Take measures to improve gaps, if any
• Understand the funding requirement• Understand the funding requirement
• Analyse the various funding options available & check which fits well
Present the actual data in requisite format• Present the actual data in requisite format
Client name - Event - Presentation titlePage 15
Questions
??
Client name - Event - Presentation titlePage 16
Thank You
Connectivity:
Thank You
42 Free Press House,215, Nariman Point,Mumbai – 400 021INDIAOffice +91 22 61326900Fax +91 22 2285 6237vipul.thaker@haribhaktisme.com
Disclaimer: This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publicationcannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtainingspecific professional advice. Please contact Haribhakti SME Transformation & Support Solutions Pvt. Ltd to discuss these matters in the context of your particularcircumstances Haribhakti SME Transformation & Support Solutions Pvt Ltd its directors employees and agents do not accept or assume any liability or duty of
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circumstances. Haribhakti SME Transformation & Support Solutions Pvt. Ltd. , its directors, employees and agents do not accept or assume any liability or duty ofcare for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.
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