12 sources of project funds

7/23/2019 12 Sources of Project Funds

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SESSION - 12

Saturday, January 2, 2016Shyam Ji Mehrotra1

Financing of projects



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#




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




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.



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



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:



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/



'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



'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



F<N'IN9 OA=IONS@EGG6NINE FIN6N8IN9




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,




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




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



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.



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#


12 sources of project funds

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