3_long term sources of finance

8/3/2019 3_Long Term Sources of Finance

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Long term sources of

financing in Internationalfinancial markets


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Why International market??

Diversify investor base (by both type of institution and

geographic location)- Saturation of limits with the Indian long-term investors

- Increase in funding costs

Profile building (both international and among peer group)

Flexibility in terms of shifting between fixed/floating rates

and switching between currencies

Lower administrative time required for debt servicing

Refinance existing debt at competitive cost

Lengthen debt maturity profile -10 years and longer

Create benchmark for future capital markets financing


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Long term

source offinance

Equity Market

ADR+GDR FCCB

Debt Market

Various Bonds

External

CommercialBorrowing

Syndicate

Loan


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International Bonds

Those bonds, which are initially sold outsidethe country of borrower.

InternationalBonds

Euro BondForeign

Bond


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EURO BOND

Euro bond refers to the bonds issued and sold outside the homecountry of the currency of issue.

These bonds are issued in international market and denominated inhard currency i.e. dollar, yen, pound, euro.

They are bearer securities, the names of the bearer are notregistered anywhere.

Unsecured debt securities maturing at least a year after launch.

Long-term loans usually having a maturity period between 5 yearsto 30 years. Nowadays euro bonds have a maximum maturityperiod of 10 years

The euro bonds may be fixed or floating rate bonds. Borrowing not subject to domestic regulations especially exchange

controls, which may limit their ability to export capital gains.


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Eurobond Market - Characteristics

Maturity - Up to 10 years Investors - Widespread institutional and retail investor

base outside the U.S. Pricing - Priced over benchmark U.S. Treasuries. Pricing

spread is generally wider for institutional investors Liquidity - Potentially good if well syndicated anddistributed

Ratings - Advisable but not necessary Documentation - Standard Euromarket

Disclosure - Sufficient to meet London or LuxembourgStock Exchange requirements

Timing - 4-6 weeks


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Euro Bonds

Advantages

Highly targeted investorbase

Regional Identity

Quick to access market

(relative to US marketalternatives)

High Profile Transactions

Disadvantages

Limited liquidity

Maturity restricted

Bank rather thaninstitutional investors


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Eurobonds - Indicative pricing example 1

Issuer NTPC LimitedIssue Size US$300,000,000

Issue Format Reg S Eurobond

Issue Ratings BB+ Stable (S&P) /BB+ Stable (Fitch)

Reoffer Spread 10-year UST +140bp

Coupon 5.875% (semi-annual)

Reoffer Yield 5.939%

Reoffer Price 99.523%

Listing Singapore

Governing Law EnglishPricing Date 23 February 2006

Settlement Date 2 March 2006

Maturity Date 2 March 2016

NTPC Limited

US$300 Million Bonds due 2016

Joint Bookrunner

Barclays Capital


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Foreign Bonds

A bond issued by a company in Country A in themarkets of Country B in Country Bs currency.

Country B = ?

US: Yankee Bonds

Netherlands: Rembrandt Bonds

Japan: Samurai Bonds

UK: Bull Dog Bonds

These bonds are different from Euro bonds in thesense that they are governed by the regulationsof the country in which they are issued whereasEuro bonds are not.


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Advantages of Yankee Bonds

Yankee bonds are that the longer maturities of

bonds place them outside the ECB ceiling.

Yankee bond markets are extremely deep and

liquid

Funds are available at low interest rates for

long maturity periods.


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Equity Market


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What is ADR? Certificates that represent shares of a foreign

stock owned and issued by a U.S bank

They buy up shares of the foreign stock andrepackage them into securities which can be

traded on the NYSE, NASDAQ or AMEX.

The foreign shares are usually held in custodyoverseas, but the certificates trade in the U.S.

They provide easy access to gaining internationalequities exposure without actually having toexchange currencies and open additional accountsto transact in overseas


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TYPES OF ADR

Level 1Basic, common, traded on OTC, leastregulation, no US accounting standard, no annualreports

Level 2Listed on stock exchange, highertrading volumes

Level 3Most rigorous regulations, go as far asraising capital from US investors


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Each ADR represent a single share, a fractionof shares or multiple shares.

The depository bank sets the ratio of US

ADRS per home country share. Ratio can be

=1,1

Once ADR priced & sold in the market, its

price moves based on the market conditions

How to price ADR


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Advantages

Cost Effective

Hassle Free

Ease of Usage

Risk Diversification

Protection of Ownership

Disadvantages

Limited selection

Liquidity

Exchange rate risk

Limited Diversification

ADR: Companies/Shareholder's perspective


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Summary of the Infosys ADRs issued

Issue Day Stock

ExchangeAmount

Mobilized

($ Million)

ADR:

Domestic

Share

% of Share in

ADR formActual

Price/share($)

1.03.1999 NASDAQ 68

70.4 2:1

30.07.2003 49

294 1:1

09.05.2005 67

1050.13 1:1

21.11.2006

1605 1:119.11*

53.5

* % of share in the form of ADRs as on March 31, 2007


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Excess demand with limited supply of ADRs.

Few opportunities in the US to invest incompanies that are growing at the 2030% rates

Official barriers prevent foreign investors frombuying the shares trading in India

Returns are negatively correlated with otherassets held by them.

ADRs provides a value added layer transparency, liquidity and greater coverage thanthe existing Indian stock.

Reasons why ADRs was overpriced


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Return Behavior :INFY ADS vs. NASDAQ vs.

Infosys Tech


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GDR- Global Depositary Receipts

GDR is a certificate issued by a depository bank, whichpurchases shares of foreign companies and deposits iton the account.

Global Depository Receipts facilitate trade of shares,

and are commonly used to invest in companies fromdeveloping or emerging markets.

Prices of GLOBAL DEPOSITARY RECEIPT are often closeto values of related shares, but they are traded andsettled independently of the underlying share.

Offered for sale globally through the various bankbranches

Shares trade as domestic shares


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GDR Market

GDRs can be created or cancelled depending

on demand and supply.

Factors governing GDR prices are:

i. company track record

ii. analysts recommendations

iii. relative valuationsiv. market conditions international status

of the company


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GDR Advantages and Disadvantages

Advantages

It allows investors to invest inforeign companies withoutworrying about foreign trading

practices, law Easier in trading and payment of

dividend is in the GDR currency

GDR are liquid because they arebased on demand and supplywhich is regulated by creating or

cancelling shares

It provides the company withvisibility, more larger and diverseshareholder base and the abilityto raise more capital

internationally

Disadvantages

They have foreign exchange risk

i.e. currency of issuer is different

from the currency of GDR


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GDR Trend (Source:capitaline.com)

162.19

37.54

233.37

43.02

2007-08 2008-09 2009-10 2010-11

GDR

Amount(In Cr.)


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FCCB

It is a type of convertible bond issued in a currencydifferent than the issuer's domestic currency.

It is a quasi-debt instrument which are attractive to

both investors and issuers. The investors receive the

safety of guaranteed payments on the bond and

are also able to take advantage of any large

price appreciation in the company's stock.

Due to the equity side of the bond, which adds value,the coupon payments on the bond are lower for the

company, thereby reducing its debt-financing costs.


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ISSUE OF FCCBS

An Indian company or a body corporate,

created by an Act of Parliament may issue

FCCBs not exceeding US $ 500 million in any

one financial year to a person resident outsideIndia under the automatic route, without the

approval from Government or the Reserve

Bank.


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Where the amount of fund to be raised is tobe USD 20 million or less the minimummaturity period should be not less than three

years.

If the amount to be raised is more than USD20 million and upto 500 million the minimum

maturity period should not be less than 5years.

FCCBs upto USD 20 million can also carry a calland put option provided the option shall notbe exercised until minimum maturity period of3 years has expired.


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In terms of paragraph (x) of Schedule II of the

notification the issue of FCCB is required to be

reported to the Reserve Bank through thedesignated branch of an authorised dealer.

Authorised dealers may forward the same to the

concerned Regional Office of the Reserve Bankfor obtaining a loan registration number.

While forwarding the offer documents to Reserve

Bank the authorised dealers shall ensure that the

FCCBs are issued strictly in accordance with the

notification.


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WHY FCCBS ARE POPULAR?

Being hybrid instruments, the coupon rates on

FCCB are particularly lower than pure debt or

zero, thereby reducing the debt financing cost.

FCCB are book value accretive on conversion.

Saves the risk of immediate equity dilution as

in the case of public shares.


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Lucrative offer for investors:-

Assured returns to investors on bond in the formof fixed coupon rate payments.

Ability to take advantage of price appreciation in

the stock by means of warrants attached to thebonds, which are activated when price of a stockreaches a certain point.

Significant Yield to Maturity (YTM) is guaranteed

at maturity. Lower tax liability as compare to puredebt instruments due to lower coupon rates.


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REMEDIES TAKEN BY GOVERNMENT

Promoters or issuers of foreign currency

convertible bonds (FCCBs) may be allowed to buy

back the bonds if they go in for prepayment.

Also, promoters are likely to be allowed to utilizethe unused portion of the foreign currency-

denominated borrowings parked overseas. This

could also be utilized to meet the redemptionpressure after the bonds mature.


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CONTD..

It has now been decided to permit prematurebuyback of FCCBs. For the buyback of FCCBs outof rupee resources the RBI has fixed a minimumdiscount of 25% on the book value. The amountof the buyback is limited to US $50 mn of theredemption value per company wherein thiswindow will be kept open till March 09.

To Buyback FCCB out of Foreign Currencyminimum discount of 15% on the book value.


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FOR R-COM

R-Com had issued zero-coupon FCCBs in February2007, to raise USD 1 billion. The bonds are nowtrading at a 35% discount to the issue price,meaning, its bonds worth has now come down to

US$650 million RCom, as it currently has over Rs.100 billion in cash

reserves, which also includes about US$ 600 millionworth of investments in mutual funds overseas

This move to buy back by Rcom is good, as it wouldhelp the company reduce its liability and also bringdown its forex exposure.


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TATA MOTORS

Tata Motors has cumulative outstanding FCCBs worthRs.44.87bn.

Compared to current market price of Rs.152 theFCCBs is at a 85% discount compared to theconversion price.

Considering the large capex program planned by thecompany and the downturn in automobile industry, shutdown of production facilities, likely increase in

borrowings to fund JLR, it could face difficulties interms of cash flow management in near term future andis unlikely to opt for pre-payment option for FCCBs.


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Thus many companies Like Tata Motors which

are already under high debts are unlikely to

buyback due to limited cash flows Examples: SUBEX, AMTEK AUTOS,HOTEL LEELA

et al.

Also $50million sum with limit of 25%discount is only a small step for large FCCB

issues. Many companies will not be able to

meet the requirements.

C


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Contd Two to three years back Indian markets were on high

growth and FCCBs became popular for raising fundsfrom overseas market. With the fall in the market, manyFCCBs has gone down, which means no money andmore problem in the market.

Issuing companies will now have to search for

resources to repay the debt along with redemptionperiod whenever it matures. For this companies willseek to fresh borrowings, with high interest rates, whichin turn would impact their profitability. Another option,

which companies have is to reset the conversion clause,to bring it closer to reality.


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(Source: capitaline.com)

110.3171.5

293.49

797.68

230.25

45.85

2004-05 2005-06 2006-07 2007-08 2008-09 2009-10(till

july)

FCCB in India (All fig in cr.)


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External Commercial Borrowing

ECBs include bank loans, suppliers' and

buyers' credits, fixed and floating rate bonds

(without convertibility) and borrowings fromprivate sector windows of multilateral FI such

as International Finance Corporation.


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Contd..

In India, ECBs are being permitted by the

Government for providing an additional

source of funds to Indian corporate and PSUsfor financing expansion of existing capacity

and as well as for fresh investment, to

augment the resources available domestically.


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ACCESS ROUTES


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Access Routes

ECB can be accessed under two routes, viz., (i) Automatic Route

and (ii) Approval Route.ECB for investment in real sector-industrial sector, infrastructure

sector-in India, and specific service sectors as indicated are under

Automatic Route, i.e. do not require the Reserve Bank /

Government of India approval. In case of doubt as regardseligibility for the Automatic Route, Approval Route may be taken.


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Eligible Borrowers

Corporate including hotel,

hospital, and software sectors

except financial intermediaries,

Housing Finance Companies

(HFCs) and NBFCs are eligible to

raise ECB.

Individuals, Trusts and Non-Profit

making organizations are not

eligible to raise ECB.

Financial institutions dealing

exclusively with infrastructure or

export finance, on a case by case

basis

Banks and FI which had

participated in the textile or steel

sector restructuring package

ECB with minimum average

maturity of 5 years by NBFCs,

which are exclusively involved infinancing of the infrastructure

sector, can avail of ECBs

Automatic

Route

Approval

Route


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Eligible Borrowers

Units in Special Economic Zones

(SEZ) are allowed to raise ECB for

their own requirement.

Non-Government Organizations(NGOs) engaged in micro finance

activities are eligible to avail ECB.

SPVs or any other entity notified

by the Reserve Bank, set up to

finance infrastructure companies /

projects exclusively

SEZ developers can avail of ECBs

for providing infrastructure

facilities within SEZ, as defined in

the extant ECB policy

Corporate which have violated the

extant ECB policy and are underinvestigation by Reserve Bank

Automatic

Route

Approval

Route


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Re Financing Of Existing ECB

The existing ECB may be

refinanced by raising a fresh ECB

subject to the conditions that the

fresh ECB is raised at a lower all-

in-cost and the outstanding

maturity of the original ECB is

maintained

Existing ECB may be refinanced by

raising a fresh ECB subject to the

condition that the fresh ECB is

raised at a lower all-in-cost and

the outstanding maturity of the

original ECB is maintained

Automatic

Route

Approval

Route


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ECB trends (Source:capitaline.com)

1.161.27

1.62

2.47

1.6

2.83

1.13

1.7 1.67

1.34

0.452

1.11

ECB 2008-09

Amount($bn)

0.2980.494

1.922.01

1.09

1.51

2.58

2.35

1.571.32

2.19

4.32

ECB 2009-10

Amount($bn)


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Syndicate Loan

Maturity Up to 7 years (Usually 5 years)

Investors Entirely Banks - relationship oriented

Pricing The lowest priced option for offshore

borrowing Liquidity Minimal

Ratings Unnecessary

Documentation Mostly standard but some

negotiation required Disclosure No formal requirements

Timing 6-8 weeks


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The Syndicated Loans contd

Cheapest margin to LIBOR

Speed and ease of Arrangement

Little pre-marketing required--except for

first time borrowers

Limited to bank market

Limited appetite

Maturity restrictions

Advantages

Disadvantages


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Players in a Syndicated Loan Issue

Lead Arranger (s)

- Normally also underwriter

Then follow

- Co Lead Arranger, Lead Manager, Co Lead Managers etc

Facility Agent

Responsibility split among Lead Arrangers

- Documentation--normally done by Facility Agent

- Road shows

- Book running

- Signing ceremony


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Euro or

Euro/AsianPrepare documentation/due diligence/marketing

Finalize

documentation

Global Prepare and finalize documentation/due diligence/SEC filing/SEC review/rating process/marketing

launch, price & sign

Prepare and finalize documentation/due diligence/SEC filing/SEC review/rating process/marketing

SEC

RegisteredYankee

Rule

144APrepare and finalize documentation/due diligence/rating process/marketing CLOSE

CLOSE

CLOSE

CLOSE

Summary Timetable for a First Time Issuer

1 2 3 4 5 6 7 8 9 10 11 12 13 14Weeks




CLOSEPrepare documentation/due diligence/marketing

launch

Convertible

Bond

CLOSEPrepare documentation/due diligence/marketing

Launch & sign

Syndicate

Loan


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Thank You

3_long term sources of finance

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