Leasing Solutions

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Financing of Captive Coal Blocks Chhitiz Kumar, VP, GE Capital E-Mail : chhitiz.kumar@ge.com Mobile : +91-9711013990

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Leasing – An Innovative Financing Solution Project Finance for Captive Coal Blocks & Challenges Financing of Captive Coal Blocks

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Leasing – An Innovative Financing Solution Project Finance for Captive Coal Blocks & Challenges

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Local Issues Mkt / Currency Fluctuation Environment Impact Structural/ Govt. Policies Financial Execution Capability Country/Political Stability Geology

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A) Project Challenges Uncertain Cash-flows – nascent industry and geological reasons Future linked with user industry – implies underwrite / understand User Industry Third party reports on Mine Plan – limited credible players Pricing of captive coal produced B) Contract Miners Typically, large CAPEX for Balance Sheet size of the borrower Overleveraged, with no cushion for underperformance /downturn Aggravates with aggressive bidding C) Limited expertise mining sector financing Suggestions Onward sale contracts - Unconditional , Take/Pay, Date/Sum certain Assign the Mining rights Financials

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Execution capability of the most of the private players is still to be proven over long term Limited number of Indian mining contractors Have not handled large scale projects especially in coal production Usually overleveraged Lack of expertise / technical manpower C) International players need to step in BUT Most operations too small to attract large players Not comfortable with overall Indian mining industry structure / processes / delay. India is now trying to Get new technology / Increase Mine Size – Eg. Surge of PPP in CIL Develop and build talent in mining Execution Capability

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A) Captive Block Allocation Issues Multiple users (sometimes non-serious) players allocated captive coal blocks Board formation and co-ordination Projects have different timelines for coal Mining lease not assignable Weak security structure Recourse to lender in case of delay or default in payment Bar on outside sale B) Other Policy Issues Logistics and infrastructure Dispute resolution mechanism SARFAESI Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interests Act) do not cover NBFCs. Structural / Govt Policy

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Leasing – An Innovative Financing Solution Project Finance for Captive Coal Blocks & Challenges

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100% Payment Sale of Asset Lease Agreement Lease Rentals (usually monthly) Negotiates & finalizes Technical & Commercial Leasing Structure Financier (Lessor) Mine Owner / Contract Miner (LESSEE) Equipment Supplier / Mfr)

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“Leasing is simply more cost effective compared to other forms of acquiring assets” A) Financial Reasons: Flexibility – Payment structure, Off-balance sheet financing, Multi end of term options etc. Debt raising capacity is not impacted. B) Management Reasons: Flexibility – upgrade, technology, respond quickly to customer demands etc. Right equipment expense allocation Why Lease?

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When? When you need to sub-contract, but what to ensure close control (productivity, maintenance etc) Customer of higher credit rating, rents equip from Lessor and re-renting to the contractors (lower credit). Lease End of Term Secondary Lease and Sub Lease Flexible Structure - Sub-lease Financier Contractors LESEE Sub - Lease

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Globally leasing is a preferred mode of financing (Eg. US Equipment Leasing Market ~ $ 600 Bn, India is 1% ~ $ 6 Bn) Banks DO NOT / CANNOT offer Leasing – as they cannot have Residual Value (RV) risk on balance sheet. Accounting & tax issues in India In past treatment of leases was unclear AS 19 has got the clarity and leasing is now picking up Lack of knowledge / fear Once understood by customer, its always LEASE !! Why Leasing is not popular in India?

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Thanks!