Comparison between Single and Multiple source of Financing

Single source Multiple source Very huge (Much more than single source) Much time consuming Loan spread do not increase with loan amount as the number of sources are more. More complex Very high end expertise is Less expertise needed. needed eg. sovereign, commercial, and project lending expertise Much higher negotiating Negotiating power (for borrowers) Lower, as options are less. power is with the borrower as there is many options available. Much higher, because as Negotiating power on price and terms (in case of lenders) there is less option present with the borrower, lenders can dictate the terms and also the restrictions. Capacity- pricing tradeoffs Decisions of quantum Only one source. for each source is to be determined. Lower as borrower have other options too.

Amount of capital

Limited

Time

Less time consuming Rises with loan amount

Loan spreads

especially for the projects as there is very high risk of failure present.

Complexity (for borrower) Less complex

Expertise (in case of raising or borrowing company)

Conflicts of interests & constraints

Low

High

Interest rates

Usually high (less fluctuating)

Usually lower(more fluctuating because more kind of funds involved) High due to presence of

Structure, manage and restructure (in case needed). low

different conditions and many parties. High,eg.:Advisory fees Execution fees Legal fees

Additional costs

Low

Advantage of multi-source financing strategy

Choice, flexibility and interpool competition: - Multi-source financing strategy is based on the strategy that it will create interpool competition among the various lenders. That competition will provide several benefits and power of negotiating to borrower. It also avoids lock-in or depend to a single lender for a large number of services for a long period of time. It allows a customer to evaluate different type of proposals of finance from the different source of finance. It provide customer option of the mix and match approach to outsourcing, that is, building on lenders different strengths to obtain better overall service quality. Safety: - Multi-source finance reduce the dependency of customer on any single lenders. So it will reduce the dominance of lenders and if in any situation single lender gets fail in providing fund or fulfils requirement of borrower on time then they can take help of other lender for collecting funds.

Multi-sourced benefits related to Alba

Commercial Bank Loans Commercial banks syndicate with each other for providing loans for the large projects. No credit rating needed to borrow from commercial banks Advantages Borrowers can draw loan down to match their investment needs No public reporting required, so confidentiality

Local bonds
Companies, which need financing, issue bonds in capital market. Advantages of bonds issuance: Allow investors to participate in and benefit from the project

Develop the local Capital markets Consistent with the government policy Fixed interest rate Long tenors (10 to 20 years)

Islamic Financial Instruments

Islamic financial Institutions operate under Sharias that means no interests are charged for loan. But I.F.I. earns profit on asset ownership. Islamic lenders control asset due to the ownership In case of default Islamic Institutions can reclaim their assets Islamic Institutions are prohibited from earning penalty interest for late payments or default situations Advantage of Islamic financial Instruments: Bahrain is an Islamic country and a regional center for Islamic finance

ECA Financing
Provided by export credit agencies cover 90% to 95% of loan losses due to political risk and 85% to 95% of losses associated with commercial risk Advantage: Availability Hallo effect: help sponsors attract financing

Metals-Linked Facility
Typically are handled by different groups within investment or commercial banks It has 2 components A basic commercial loan with a spread over Libor A hedging component similar to a call option on aluminum (The hedging component provides benefits to lower the cost of debt it ties the interest rate and debt service requirements to the underlying price of a commodity such as aluminum)

Advantages of metal-linked facility

The hedging component allows decreasing cost of debt. Could be viewed as a competing source of Capital

Disadvantages & Risk of multi-sourced financing

Complexity: - The customers operational risk is higher than in a single sourcing because it delegates responsibility to several lenders. This interaction with different parties can make it harder to strike the right deal and ensure that the separate contracts are properly implemented.the more parties involved the more difficult the transaction .The customer often cannot state which lender is ultimately responsible for a default, or cannot prove it to a sufficient standard to enable the customer to enforce its rights and remedies under the contract. In the beginning of project financing its very difficult for customer to structure the initial deal because there are several lenders are involved in financing and each follows different kind of rules and agreement. So customer need to make different covenants for different lenders. In case of Islamic tranche there is a problem between the borrower and lender for the ownership of assets.