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

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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

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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.

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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.

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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

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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

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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

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Questions

??

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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.