12 sources of project funds
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7/23/2019 12 Sources of Project Funds
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SESSION - 12
Saturday, January 2, 2016Shyam Ji Mehrotra1
Financing of projects
7/23/2019 12 Sources of Project Funds
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Key issues in nancing ofprojectsWhat is the role of adisors! arrangers!
under"riters and legal adisors in projectnancing#
$o" syndicated loan or consortiu% of loans are
organi&ed#$o" large projected are funded#
What is appropriate 'e(t E)uity structure#
Which nancing instru%ent %a*es %ore sense#
What is ia(ility gap funding +support isaaila(le fro% goern%ent,#
What is nancial closure#
Saturday, January 2, 2016Shyam Ji Mehrotra2
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Who nance large projects#Financing of large project is complex
work
Sponsors need sophisticated legal andnancial advice to take o a project
Lead arrangers: Leading international (an*s- an*s nancing constitutes ./0 of project
funding - top 1 (an* arrangers are .0
Lead managing underwriters: ond
%ar*et is increasing i%portant source- topthree leading inest%ent (an*s +under"riters,
%anages 0 of funding
Saturday, January 2, 2016Shyam Ji Mehrotra3
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Who nance large projects#Project nance advisors- do nancial
engineering !op internationalaccounting rms like "rnst and #ounglead the market
Project nance law rms: contracts ofnancing are drafted$ vetted andexecuted with the help of law rms-represents %oth lenders andsponsors&
Saturday, January 2, 2016Shyam Ji Mehrotra.
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4oan syndicationOne (an* can not fund large re)uire%ent fro%
e5posure reason as "ell as capital re)uire%ent
Syndication is loan granted (y a group of (an*ers
6llo" sharing of credit ris* a%ong arious lenders
Syndication ris* for non-su(scriptionSingle loan agree%ent (ut each (an* %ay hae
separate clai% on de(tors and security o7ered
4oan syndication %ay hae senior de(t as "ell as
junior de(tSyndicate leaders earns syndication fee for
arranging loan
Saturday, January 2, 2016Shyam Ji Mehrotra
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4oan 8onsortiu%9roup of (an*ing lending to a (orro"er generally
"hen credit re)uire%ent is %ore than 1 crores
8onsortiu% hae a leader (an*
4eader (an* is responsi(le for docu%entation!
charging of security! erication of end use offunds and recoery of loan including enforce%entof security interest
an*s under o(ligation to share the credit historyand conduct of the account "ith %e%(er (an*periodically
6ll decision pertaining to nance and recalling theaccount has to (e ta*en through %eeting
Saturday, January 2, 2016Shyam Ji Mehrotra:
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E;<I=> ? 'E=E)uity holders hae
residual clai% oninco%e and "ealth ofthe r%
'iidend paid is notta5 deducti(lepay%ent
E)uity hae indenitelife
E)uity holders enjoyright to control thea7airs of the r%
'e(t holders hae 5edclai% oer interest andprincipal pay%ent
Interest pay%ent is ta5
deducti(le'e(t has 5ed %aturity
'e(t inestors play apassie role (ut theyput restrictie
coenant to safe guardtheir interest
Saturday, January 2, 2016Shyam Ji Mehrotra/
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'e(t e)uity ratio@8onsiderations8ost@ 'e(t is cheaper (ut %ore ris*y
Nature of assets@ Soft"are
co%panies raises %ore e)uity "hereas%anufacturing co%panies raises %orede(t
usiness ris*@ AI=B=otal assets
+ 'e%and aria(ility! price aria(ility!aria(ility of input prices! proportion of5ed operating cost,
Saturday, January 2, 2016Shyam Ji MehrotraC
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'e(t e)uity ratio@8onsiderationsNor%s of lenders@ 'ED
prescri(ed (y (an*s
8ontrol considerations@ Sta*e
pro%oters "ants + 10 or less,
ar*et conditions@ 8onditions
of capital %ar*et
Saturday, January 2, 2016Shyam Ji Mehrotra
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F<N'IN9 OA=IONS@EGG6NINE FIN6N8IN9
Saturday, January 2, 2016Shyam Ji Mehrotra1
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Why %e&&anine nancing#Equity @ $igh ris* high return
Debt: lo" ris* lo" return
Mezzanine@ 8an not su(scri(e to e)uity + legalrestrictions, (ut open to high ris* ? loo* for highreturns
' (perating cash )ow are applied rst toservice non-su%ordinated de%ts* then forsu%ordinated de%ts and lastl+ for pa+ing
dividends to sponsors,
Saturday, January 2, 2016Shyam Ji Mehrotra11
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Why e&&anine nancing #Suita(le to inestors "ho "ants high ris* (ut can
not inest in e)uity
Detention of (usiness control
Fle5i(ility of nancing ter%s H collateral!repay%ent ter%s!
4ong ter% perspectie
8ushion to (oth e)uity holders and senior de(tor
Saturday, January 2, 2016Shyam Ji Mehrotra12
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Why %e&&anine nancing#CAPITAL STRUCTURE 1 CAPITAL STRUCTURE 2
Assets 100
Senior de(t /
e&&anine
E)uity 2EI= 1
Interest on senior de(t +C0,
:
Interest on %e&&anine
de(t
Earnings (efore ta5es+E=,
.
=a5 0 2
A6= 2
DOE C0
Assets 100
Senior de(t /
e&&anine 1
E)uity 1EI= 1
Interest on senior de(t+ C0,
:
Interest on %e&&anine de(t+10,
1J
Earnings (efore ta5es+E=,
2J
=a5 0 1J2
A6= 1J2Saturday, January 2, 2016Shyam Ji Mehrotra13
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Financial 8losureeans all funds are tied upJ Its ta*e a
long ti%eJ
Suita(le credit enhance%ent is done to
the satisfaction of lenders6de)uate under"riting arrange%ents are
%ade for %ar*et related o7erings
Desource fullness of pro%oters is "ell
esta(lished8oncurrent appraisal is initiated if
seeral lenders are inoled
Saturday, January 2, 2016Shyam Ji Mehrotra1.
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DE86AWhat is the role of lead arrangers in project
nance#
What are *ey factors for deter%ining de(te)uity ratio#
When a r% should use %ore e)uity#When a co%pany is for%ed! it %ust issue
share to pro%oters rst Why#
E)uity share holders (ears the ris* of #
Why %e&&anine nancing is done#
onds are (etter option than ter% loansJWhy#
Saturday, January 2, 2016Shyam Ji Mehrotra1
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