Financing of projects

SESSION - 12

Shyam Ji Mehrotra

Saturday, January 2, 2016

Key issues in financing of

projects
What

is the role of advisors, arrangers,

underwriters and legal advisors
in project
financing?
How syndicated loan or consortium of loans are
organized?
How large projected are funded?
What is appropriate Debt Equity structure?
Which financing instrument makes more sense?
What is viability gap funding (support is
available from government)?
What is financial closure?
2

Shyam Ji Mehrotra

Saturday, January 2, 2016

Who finance large projects?

Financing

of large project is complex

work
Sponsors need sophisticated legal and
financial advice to take off a project
Lead arrangers: Leading international banks
- Banks financing constitutes 47% of project
funding - top 10 bank arrangers are 40%
Lead managing underwriters:
Bond
market is increasing important source- top
three leading investment banks (underwriters)
manages 50% of funding
3

Shyam Ji Mehrotra

Saturday, January 2, 2016

Who finance large projects?

Project finance advisors- do financial

engineering Top international

accounting firms like Ernst and Young
lead the market
Project finance law firms: contracts of
financing are drafted, vetted and
executed with the help of law firmsrepresents both lenders and
sponsors.

Shyam Ji Mehrotra

Saturday, January 2, 2016

Loan syndication
One bank can not fund large requirement from

exposure reason as well as capital requirement

Syndication is loan granted by a group of bankers
Allow sharing of credit risk among various lenders
Syndication risk for non-subscription
Single loan agreement but each bank may have
separate claim on debtors and security offered
Loan syndication may have senior debt as well as
junior debt
Syndicate leaders earns syndication fee for
arranging loan
5

Shyam Ji Mehrotra

Saturday, January 2, 2016

Loan Consortium
Group of banking lending to a borrower generally

when credit requirement is more than 10 crores

Consortium have a leader bank
Leader bank is responsible for documentation,
charging of security, verification of end use of
funds and recovery of loan including enforcement
of security interest
Banks under obligation to share the credit history
and conduct of the account with member bank
periodically
All decision pertaining to finance and recalling the
account has to be taken through meeting
6

Shyam Ji Mehrotra

Saturday, January 2, 2016

EQUITY & DEBT

Equity holders have

residual claim on
income and wealth of
the firm
Dividend paid is not
tax deductible
payment
Equity have indefinite
life
Equity holders enjoy
right to control the
affairs of the firm
7

Shyam Ji Mehrotra

Debt holders have fixed

claim over interest and

principal payment
Interest payment is tax
deductible
Debt has fixed maturity
Debt investors play a
passive role but they
put restrictive
covenant to safe guard
their interest

Saturday, January 2, 2016

Debt equity ratio:

Considerations
Cost: Debt is cheaper but more risky
Nature of assets: Software
companies raises more equity whereas
manufacturing companies raises more
debt

Business risk: PBIT/Total assets

( Demand variability, price variability,
variability of input prices, proportion of
fixed operating cost)
8

Shyam Ji Mehrotra

Saturday, January 2, 2016

Debt equity ratio:

Considerations
Norms of lenders:

DER

prescribed by banks

Control considerations: Stake

promoters wants ( 51% or less)

Market conditions: Conditions

of capital market

Shyam Ji Mehrotra

Saturday, January 2, 2016

FUNDING OPTIONS:
MEZZANINE FINANCING

10

Shyam Ji Mehrotra

Saturday, January 2, 2016

Why mezzanine financing?

Equity : High risk high return
Debt: low risk low return
Mezzanine: Can not subscribe to equity ( legal

restrictions) but open to high risk & look for high

returns
Operating cash flow are applied first to
service non-subordinated debts; then for
subordinated debts and lastly for paying
dividends to sponsors
11

Shyam Ji Mehrotra

Saturday, January 2, 2016

Why Mezzanine financing ?

Suitable to investors who wants high risk but can

not invest in equity

Retention of business control
Flexibility of financing terms collateral,

repayment terms,
Long term perspective
Cushion to both equity holders and senior debtor
12

Shyam Ji Mehrotra

Saturday, January 2, 2016

Why mezzanine financing?

CAPITAL STRUCTURE 1
Assets
Senior debt
Mezzanine

13

CAPITAL STRUCTURE 2
100
75
0

Assets

100

Senior debt

75

Mezzanine

15

Equity

25

Equity

10

EBIT

10

EBIT

10

Interest on senior debt (

8%)

Interest on senior debt

( 8%)

Interest on mezzanine
debt

Interest on mezzanine debt

(10%)

1.5

Earnings before taxes

(EBT)

Earnings before taxes

(EBT)

2.5

Tax @50%

Tax @50%

PAT

1.2
5

Shyam Ji Mehrotra

ROE

8%

PAT

1.2
Saturday, January 2, 2016

Financial Closure
Means all funds are tied up. Its take a

long time.
Suitable credit enhancement is done to
the satisfaction of lenders
Adequate underwriting arrangements are
made for market related offerings
Resource fullness of promoters is well
established
Concurrent
appraisal is initiated if
several lenders are involved
14

Shyam Ji Mehrotra

Saturday, January 2, 2016

RECAP
What is the role of lead arrangers in project

finance?
What are key factors for determining debt
equity ratio?
When a firm should use more equity?
When a company is formed, it must issue
share to promoters first Why?
Equity share holders bears the risk of ?
Why mezzanine financing is done?
Bonds are better option than term loans.
Why?
15

Shyam Ji Mehrotra

Saturday, January 2, 2016