Debt funding vipul thaker oct2010

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Fund Raising through Debt By – Vipul Thaker CEO – Haribhakti SME Transformation and Support Solutions Pvt Ltd.

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Agenda • Different Funding Options • Different forms of Debt • Debt options & relevance to business • Approach to apply

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Equity Raising 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) Subsidy Monetary assistance granted by the government to a person or group in support of an enterprise regarded as being in the public interest. Debt 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.

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Equity Financing • Public Issue 􀂾 Initial Public Offering 􀂾 Further Public Offering • 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 (3) maintain the income of the producers of critical or strategic products (4) maintain employment levels or (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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Working 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 etc 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 of Promoters/Project Sponsors • Private and public debt Private debt comprises bank-loans while Public debt is a freely tradable financial instruments on the stock exchange or over the counter

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Securitization Occurs when a company groups together assets or receivables and sells them in units to the market through a trust. Any asset with a cash flow can be securitized. The cash flows from these receivables are used to pay the holders of these units. Companies often do this in order to remove these assets from their balance sheets and monetize an asset. • Secured and unsecured debt Defined on basis of recourse to assets • Syndicated and bilateral debt A syndicated loan that is granted to companies that wish to borrow more money than any single lender is prepared to risk in a single loan, In such a case, a syndicate of banks can each agree to put forward a portion of the principal • Mezzanine Debt Refers to a subordinated debt or preference shares which represents a claim on a company's assets which is senior only to that of the shares.

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Comparison - Syndicated Debt & Mezzanine Debt Criteria Syndicated Debt Mezzanine Security Secured Subordinated Charge on Assets (Ranking) First Second Covenants Tight Flexible Coupon Floating Fixed Rate Prime Risk Adjusted Equity Kicker None Warrants Prepayment Penalties Yes Fixed Period Expected Returns 12% - 14% 13% - 20% Capital Provider Chartered Banks Private Capital

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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 against delinquency. • Repaymentprofile – Cash flow – Source and timing - thus maturity/tenor of loan. • Credit standing of Borrower • CreditRatios – 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.

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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 risk Guarantees that fall away Project Company Commercial risk equipment Cash flow assessment Security structure – Cash flow/ carve out Credit support in the short term Typically used for infrastructure, large industrial and mining projects

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Debt Raising - Seven level analysis Packaging Plans Future Potential History Rating Company Individual

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Individual Promoters Profile Key Members Organization Structure Company Type of Industry/ Setup Company Sector (Plant/ Branches) Rating Past Rating Existing Business Processes Quality Controls Client name - Event -

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Financial Statement Litigations, if any Credentials History Future Potential Sales orders on hand Market Potential Industry Growth Plans Business Plan (Sales) Resource Allocation Operation Packaging Information 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 repayments • 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

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Approach • Analyse the prevailing internal structures & processes • Take measures to improve gaps, if any • Understand the funding requirement • Analyse the various funding options available & check which fits well • Present the actual data in requisite format

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Questions

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Connectivity: 42 Free Press House, 215, Nariman Point, Mumbai – 400 021 INDIA Office +91 22 61326900 Fax +91 22 2285 6237 vipul.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 publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact Haribhakti SME Transformation & Support Solutions Pvt. Ltd to discuss these matters in the context of your particular circumstances Haribhakti SME Transformation & Support Solutions Pvt Ltd its directors employees and agents do not accept or assume any liability or duty of care 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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