suvendu bose ppt
TRANSCRIPT
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NOVEMBER 07
MEANS OF INFRASTUCTUREFINANCING
BY
SUVENDU BOSE, Ph.D
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NOVEMBER 07
Todays Discussions will be on -
Infrastructure Project FinancingAn Overview
Infrastructure Project FinancingRisks & Its Mitigation
Average Cost of Funds
Innovative Financing
An example of Structured Finance
Conclusion
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NOVEMBER 07
Todays Discussions will be on -
Infrastructure Project Financing An Overview
Infrastructure Project FinancingRisks & Its Mitigation
Average Cost of Funds
Innovative Financing
An example of Structured Finance
Conclusion
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NOVEMBER 07
Infrastructure Project FinancingAn Overview (2)
Typical Payment Security Structures underling Project Finance
Security structure is Lender Centric and is usually tri-layered involving
Escrow of Receivables
Guarantee by Off-takers Sponsor Long Term PPA
First Charge on the Project Fixed Assets and Second Charge on ProjectCurrent Assets
However, the domestic (Indian) debt financing markets have now seen achange -
Tariffs are lowering and paying ability of consumers has gainedimportance in project structuring / implementation
The sector has started reforming and opportunities for alternate sourcesof cash flows exist (direct access to consumers)
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NOVEMBER 07
Infrastructure Project FinancingAn Overview (3)
Nature of Funds for Infrastructure Project Financing
Funds requirement for long durations
Long gestation periods & longer physical / operational life
Given limited availability of equity funds, High component of debt financing
Lenders, who as a source of finance are most risk averse, are expected to anddo take the maximum exposures
Project Risk Mitigation measures are thus taken to enhance the certainty /predictability of cash flows of the project since they serve as the primaryrecourse
The crux of all Infrastructure project financing thus, is an assessment of thestandalone financial and commercial viability of the Project
Here again, as far as Infrastructure Projects are concerned, the approach ofLenders has changed dramatically
Viability should be demonstrated at Tariffs Affordable by the Off-taker
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Infrastructure Project FinancingAn Overview (4)
Risk
Mitigation
Mechanism
Management MachineryManInfrastructure
Market Materials
Margins & RisksMethods OperationFactors
Land &Building
TechnicalInstallation
Operating Costs Capital Costs
Revenues
Financial & Commercial Analysis
Viability
Sensitivity
Analysis
ContractualFramework
Based on the results of the above, as assessed on Qualitative and Quantitativeparameters, Debt financiers would determine the Risk Premium (Margin) that isrequired over and above the risk free rate
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NOVEMBER 07
COD
Risk
Performance Risk
Regulatory Risk
Environmental Risk
Coal Pilferage Risk
Supply Risk
Environmental Risk
Time
Delay / Technical Risk
Performance Risk
Cost Over-run Risk
Environmental Risk
CONSTRUCTION OPERATION
Infrastructure Project Financing Risks & Its Mitigation
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NOVEMBER 07
Long TermOff-TakeContract
Insurance &ContractualPerformanceGuarantees
Turn-keyContractor
Market /RevenueRisks
PerformanceRisks
Delay /TechnicalRisk
PROJECT COMPANY RESIDUAL RISK
Legal/Regulatory Political RiskFinancial Risk
Due Diligence Hedging/ Insurance/Credit Enhancement
Insurance/MultilateralFinancing/Host Govt.
Assurance
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NOVEMBER 07
Todays Discussions will be on -
Infrastructure Project FinancingAn Overview
Infrastructure Project FinancingRisks & Its Mitigation
Average Cost of Funds
Innovative Financing
An example of Structured Finance
Conclusion
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NOVEMBER 07
Average Cost of Borrowing (1)
Sources of Funds typically comprise
Equity, either from Sponsors, Public Offerings, Internal Resource Generation
As per CERC norms, Equity is eligible for a 14% post tax return upto an investment of 30% of theProject Cost, beyond which, it earns only the prime lending rate as stipulated by SBI (viz. 12%)
The opportunity loss, thus makes Equity a more expensive form of Debt
Debt, from Banks & Institutions (Domestic & Overseas), Bond Investors
Apart from the base rate and risk premium, other costs include
Cost of issuance / syndication
Upfront fees
Risk Insurance
Cost of Guarantee
Commitment Fee
Hedging Costs / FERV
The aim / objective to reduce the average cost of funds is -
To reduce the cost of generation and consequently support a competitive tariff
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NOVEMBER 07
Cost of Borrowing & Tariff Linkage (2)
In all fairness, the tariff of a Infrastructure Project would need
To Comprise
Interest
O&M
Return on Equity
Depreciation
Taxes etc.
In making Tariffs Reasonable / Affordable, the major components that can be targeted are
Sponsor returns, Lenders payments, Statutory payments
Reducing financiers returns may make the project unattractive for investment
Merit of certain statutory payment waivers could be possibly weighed vis--vis theoverall social value of a project and the benefits derived there from
To Service
Debt annual charges
Operating expenses
Sponsor returns
Debt Amortization
Other annual charges
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NOVEMBER 07
Cost of Borrowing in India (3) - Interest costs are Rising
Sovereign yields have firmed up substantially in the past one year
Overall shift of around 250 bp in Yield curve in the past 2 years
Source: RBI Website
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Source: RBI Website
Strategically, the way forward for reducing average cost of funds would be
Identify and peg loan costs to stable benchmarks
Optimize between long and longer term loans
Build in options for riding a favorable change in the interest rate scenario
through refinancing or changing the financing source during the
construction period or soon thereafter
Cost of Borrowing in India (4)Widening of Spreads on Corporate Bonds
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The 5 year G-Sec return has seen a upward shift of around 200 basis point in thepast 30 months
Prime Lending Rates have been relatively stable with an increase of less than 100
basis point in the corresponding period
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Period
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5 year G-sec PLR
Cost of Borrowing in India (5) - Popular Benchmarks for Indian Debt
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NOVEMBER 07
Todays Discussions will be on -
Infrastructure Project FinancingAn Overview
Infrastructure Project FinancingRisks & Its Mitigation
Average Cost of Funds
Innovative Financing
An example of Structured Finance
Conclusion
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NOVEMBER 07
Innovation does not mean Complexity - Instead Innovation is
synonymous to Structuring -
Thus, working within given constraints, it is the process of Simplifying
each financing component such that it is capable of meeting the end
goals
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NOVEMBER 07
Innovative Financing (1)
A simple and effective form of structuring is extending the tenor of loan
repayment
Helps reduce the cashflow mismatches - viz. Base Capital recovery chargethrough depreciation vis--vis debt amortization
Trade-off between annual amortization and interest would need to beoptimized
The example shows that extending the repayment period from 10 to 15 years, even at100 bp extra premium, is a more competitive financing and can contribute towardsreducing the tariff
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NOVEMBER 07
Innovative Financing (2) - Indian Debt Financing Market Facts
Long term loans are selectively available
Banks are capable of lending upto 14-15 year loans comprising construction, graceperiod (moratorium) and loan repayment
Constraining factors are Asset-Liability mismatch
Limited appetite from Insurance companies
LICI is practically the only serious player
Development Financial Institutions are selectively deepening the market in terms of tenor
However, they are largely dependent on Banks for financing
Interest rates (and reset terms) are not commensurate with tenors
Bond markets are not yet mature for long term project finance debts
Limited secondary market
May entail negative Carry costs
Mismatch of initial drawdown and funds requirement
Bullet payments with stipulation of redemption reserves
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NOVEMBER 07
Innovative Financing (3) - Expo rt Credit Agencies (ECA)
COUNTRY ECA COUNTRY ECA
Australia EFIC Italy SACE
Austria OeKB Japan JBIC & NEXI
Belgium OND Korea KEIC & K-EXIM
Canada EDC Norway GIEK
China Sinosure South Africa CGIC
Denmark EKF Spain CESCE
Finland Finnvera Sweden EKNFrance COFACE Switzerland ERG
Germany Euler Hermes UK ECGD
Netherlands Atradius USA Ex-Im Bank
Source: Standard Chartered
In India, US Exim, ECGD, JBIC , Nexi are among the active lenders
Long repayment tenors feasible possible (10-15 Years) but lending usually tied to
and limited to a % of equipment imports from a particular country
Funding tie-up can be made a part of EPC bid for better pricing
Detailed appraisal processes are taken by ECA itself and can be Time Consuming
May restrict Developers preference for retaining EPC Contractor as per their choice
Not necessarily cost competitive
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NOVEMBER 07
Innovative Financing (4) -External Commercial Borrow ings (ECB)
Automatic route for borrowing upto US $ 500 mn during a financial year
Minimum average maturity of five years, preferred tenor 5-7 years
All-in-cost ceilings over 6 month LIBOR
200 bps for 3 to 5 years maturity
250 bps for more than 5 years maturity
ECB proceeds should be parked overseas until actual requirement
Not permitted for
Working Capital funding, General corporate purposes and Repayment of existingrupee loans
Long Tenor Loan (for 20 years) may not be possible
Large appetite for high quality assets
Foreign banks do not have interest in 12-14 years project finance
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Bottlenecks of Innovative Financing
1. The Innovation Process is inherently uncertainuncertainty isfundamentally different from Risk
2. The challenge of making investment in the face of extreme uncertaintyis compounded by the fact that return from the innovation process isquiet skewed
3. Although often times nether the innovator nor the financiers knows thetrue potential of the project, the innovator may still know more about theproject than the financier.
4. Finally firm engaged in innovation have a high percentage of intangiblesassets, where knowledge is embedded in human capital of the firmsemployees.
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NOVEMBER 07
Todays Discussions will be on -
Infrastructure Project FinancingAn Overview
Infrastructure Project FinancingRisks & Its Mitigation
Average Cost of Funds
Innovative Financing
An example of Structured Finance
Conclusion
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NOVEMBER 07
Sharing of Some Relevant Rural Infrastructure Project Financing Experience
MORTGAGE OF ASSETS
OF PROJECTS
TRANSFER OF ASSETS OF PROJECTS TO SPDCL
PROJECTS
currently LOAN REPAYMENT
owned by
Payment for Power * TRA Account PROJECTSPOWER to be
DEPRT. owned by
SIKKIM Shortfall LOAN
GOSIKKIM DSRA Account transfer SPDCL LENDERS
Power generated from the Projects
sold to Power Department
* Payment for power shall be at tariff as per PPA
Power generated shall be equivalent to actual generation
or generation at 60% load factor which ever is higher
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NOVEMBER 07
Todays Discussions will be on -
Infrastructure Project FinancingAn Overview
Infrastructure Project FinancingRisks & Its Mitigation
Average Cost of Funds
Innovative Financing
An example of Structured Finance
Conclusion
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NOVEMBER 07
Conclusions
Choose stable benchmarks or a mix
Lock-in rates for shorter period
- Interest rates could see a dip (Bank F/D rates can serve as a
reference point)- Simultaneously attempt longer term debt if available at a
reasonable premium
Keep options for refinancing / replacing with alternates based on
movements in interest rates at a later date (towards the end of theconstruction period)- ECBs, Bonds etc.
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Q & A
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Thank You
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Reasons for Change
The government on August 07,2007 tightened the rules governingoverseas borrowing by local companies
to check the inflow of foreign funds. This would enable it to check therise in the rupee value against other currencies.
The rupee has risen to a nine-year high, rising nearly 14 per centagainst the US dollar since August 2006. This has been largely due tomassive inflow of foreign funds as debt and equity
In the period from April-July, 2007 India has received ECBs to the tune
of USD 9 billion. Indian companies had raised a total of $24 billion of ECBs during 2006-
07 against the governments internal target of $22 billion.
In terest co sts for com panies m ight jum p b y 75-100 basis points as ECBs
are usual ly at lower interest rates than domest ic borrowin gs
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What are the Major Changes
ECBs of more than $20 million per borrowing company would bepermitted only for foreign currency expenditure for permissible end-usesof the ECBs. Accordingly, borrowers raising ECB of more than $20 millionshall park the ECB proceeds overseas for use as foreign currencyexpenditure for permissible end-uses. The above modifications would beapplicable to ECBs exceeding $20 million per financial year both under theautomatic route and under the approval route.
ECBs up to $20 million per borrowing company would be permitted forforeign currency expenditure for permissible end-uses under the
automatic route and these funds shall be parked overseas and notremitted to India. Borrowers proposing to avail ECBs up to $20 million forrupee expenditure for permissible end-uses would require prior approvalof the RBI. Such funds shall be continued to be parked overseas untilactual requirement in India.
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What are the Major Changes
All other aspects of ECB policy such as $500 million limit per company peryear under the automatic route, eligible borrower, recognised lender,average maturity period, all-in-cost-ceiling, prepayment, refinancing ofexisting ECB and reporting arrangements remain unchanged.
These conditions will not apply to borrowers who have entered into loanagreement and obtained loan registration numbers from the RBI.Borrowers who have taken verifiable and effective steps wherein the loanagreement has been entered into to avail of ECB in the previousdispensation, and not obtained the loan registration number, may apply
to the RBI through their authorised dealer
It wi l l c ertainly help ind us try, i f these gu idel ines are a sho rt-term m easure