03-Long Term Finance.ppt 1
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Transcript of 03-Long Term Finance.ppt 1
Source of FinanceHow much of Long Term Project Finance and How much of Short Term Working Capital Finance?
Project Cost and Means of Financing
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
Project CostLand & Land Development
Building and Factory Shed
Plant and machinery
Misc Non Current Assets
(including Preoperative Exp) -----------------------
Non Current Assets
------------------------
Add Margin on Working Capital
to get the total Project Cost
Project Cost
Current Liability + (Term Liability + Tangible Net Worth) = Total of Liability Side of Balance Sheet = Total of Asset Side of Balance Sheet = Non Current Asset + Current Asset
Project Cost
Thus,
Long Term Finance = (Tangible Net Worth +
Long Term Debt/Liab)
= Non Current Assets +
(Current Assets –
Current Liabilities)
= Non current Assets +
Margin on Working Cap
Project Cost
In other words,
Project Cost = Long Term Finance required
for setting up the project
= Non Current Assets + Margin
on Working Capital
Project Cost
Liabilities Assets
Net Worth 500 Non Current Asset 600
Term Liability 200 Current Asset 400
Current Liab 300
Total------1000 Total------1000
Project Cost Margin on Working Capital = (Current Asset - Current Liability) = 100Long Term Finance = Non Current Assets + Margin on Working Cap = 600 + 100 = 700 = Net Worth + Long Term Debt = 500 + 200Term Loan of SBI is a part of Long Term Debt
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
The Complete Process
SBI examines the DPR (Detailed project
Report submitted by the company).
Check for: 1) Technical Feasibility
2) Financial Viability
The Complete Process
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
The Complete Process
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)
The Complete Process
For Financial Viability : - Employ Capital Budgeting Techniques ( NPV, IRR , Payback Period etc.)
Any Project is acceptable only if it is bothTechnically Feasible and Financially Viable
The Complete Process
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. how
much Long Term Debt & how much Equity
are to be used for financing the Project
The Complete Process
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.
The Complete Process
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.
The Complete Process
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 by
the company (The Project can not be set up
only with Term Loan without the Equity).
The Complete Process
Once the company successfully makes a
Public Issue of Equity and the Project is
otherwise ready for implementation, the
Bank can start disbursement.
The Complete Process
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.
Sources of Finance
Long Term Finance (Project Finance)
Short Term Finance (Working
Capital)
Sources of Long-term Finance
Share CapitalLong-term Debt
Equity Preference
DomesticInternational GDR/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 Bond
NCD
PCD
FCD
Sources of Long-term Finance
Share CapitalLong-term Debt
Equity Preference
DomesticInternational GDR/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 Bond
NCD
PCD
FCDINTERNATIONAL FINANCE
Issue of Ordinary Shares Eligibility Norms
– Unlisted Companies:
Initial Public Offer (IPO)
Track record of Distributable Profit (in 3
out of last 5 years)
Net Worth >=Rs1Crore (in 3 out of last 5
years of which last 2 years must count)
Condition in case of Change of Name
during last one year
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% margin money and there will be proportionate allotment for them also.
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.
Right Issue of Equity Shares• Selling of Ordinary Shares to the existing shareholders of
the company.• Value of Right • Letter of Offer• Right Renunciationx sp p
rn
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?
International Equity Offering Process
1. Project to be implemented: Project Cost; Means of Financing; Project
Capital Structure Whether Project is (a) Technically Feasible & (b) Financially Viable2. Necessary Approvals for the issue (Shareholders’ approval; FIPB Clearance, wherever necessary)
International Equity Offering Process
3. Appointment of Merchant Banker (s)
4. Drafting of Prospectus
5. Countries where issue to be launched
6. Road Shows
7. Book Building
8. Structuring the issue/instrument
9. Actual Issue of GDR/ADR & Listing
International Equity Offering GDR/ADR Issue Process
IssuerCompany
Domestic Custodian
GlobalDepository
Ordinary Rupee Shares
Confirmation
GDR/ADR Investors
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.
Bonds / Debentures
FCD – Fully Convertible Debentures
Full face value of such a Bond / Debenture
is to be converted into Equity Shares either
at one shot or in more than instalment.
Features of a Bond
1. Face Value - Rs 1000
2. 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
Cash Flow from a Bond
Time Interval Cash Inflow Present Valueend of h.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)
Foreign Currency Bond
Foreign currency Bonds
Foreign Currency
Bond
Floating RateNote (FRN)
Foreign CurrencyConvertible
Bond (FCCB)
YankeeBond ($)
Bull DogBond (GBP)
Samurai Bond (JPY) Dragon Bond
(Hong Kong $)
Domestic Bond
Euro Bond
Preference Shares• Similarity to Ordinary Shares:
Carries Dividend rather than Interest.
Dividends are not deductible for tax
purposes.
Paid out of Profit and NOT by debit
to P&L A/C. No Profit, No Dividend.
Preference SharesSimilarity to Debentures:
Fixed Tenure & Specified Dividend
Rate.
Do not share in residual earnings.
Usually do not have voting rights.
Payment in preference to Equity
Shares.
Preference Shares–Features
• Claim on Income and Assets. Between Creditors and Equity Shares
• Fixed Dividend and Maturity Period
• Cumulative Dividend (in some cases)
• No Voting Rights
• Convertibility
• Qualifies as Tier II Capital for Banks
Preference Shares
• Advantages for Issuers
• Fixed Dividend (out of profit only)
• No Voting Rights (No Dilution)
• Advantages for Investors
• No Tax on Dividends
Preference Shares–Pros and Cons
• Disadvantages
•Non - deductibility of
Dividends for Tax purposes
Cases where Preference
Shares work : Tax Angle
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)
A Comparative Chart
5 No ownership No ownership Ownership No voting right No voting right Voting right6 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 and Preference share)