Project Financing

January, 2016

SUMEDHA FISCAL SERVICES LTD.

Contents

Contents

• Definition of Project Finance

• What is Project Appraisal

• Present Indian Economy

- Overview

- Reform Measures by GOI

• Stages in Project Financing

• Basic Parameters in Project Financing

Definition of Project Financing

International Project Finance Association (IPFA) defined project financing as:

“The financing of long-term infrastructure, industrial projects and public services

based upon a non-recourse or limited recourse financial structure where project

debt and equity used to finance the project are paid back from the cash flows

generated by the project.”

A project finance transaction involves the mobilization of debt, equity, contingent

equity, hedges & a variety of limited guarantees through a newly organized

company, partnership or contractual joint venture for the purpose of building a

capital intensive facility and operating a discrete business activity.

What is Project Appraisal

Project Finance requires project appraisal

Project appraisal is the due diligence conducted on sponsors, technical,

market, environmental, financial, legal and risk aspects, among others, of the

proposed project

It is the assessment of the viability of proposed long-term investments in terms

of shareholder wealth

•From a commercial bank’s perspective, the focus is on whether the project can

generate sufficient cash flow to repay its debt and provide an acceptable rate of

return to sponsors.

Indian Economy – Overview

Current Position of Indian Economy

.• The Indian economy grew by 7.3% in FY15 as compared to 6.9% in FY14

• The growth in GDP in FY15 was driven by higher contribution from manufacturing,

electricity and financial, real estate and professional services. Sectors like agriculture,

forestry & fishing and mining & quarrying were the weak performers in FY15

• The International Monetary Fund (IMF) and the Moody’s Investors Service have

forecasted that India will witness a GDP growth rate of 7.5 per cent in 2016, due to

improved investor confidence, lower food prices and better policy reforms

Source :IMF

Indian Economy

India & World inflation differential (%) has

been coming down…

Among currencies, INR exhibiting low

volatility relatively…...

Source: Bloomberg, IMF

Stressed Assets in the Banking system

PSB’s reported higher NPAs as compared to Private sector banks.

The major sectors that added to asset quality stress were mining, iron & steel, textiles,

infrastructure and aviation.

Credit growth percentage for Banks

Credit growth of Scheduled Commercial Banks (SCB) on a y-o-y basis as on March

2015 stood at 9.34% which was lower than 14.73% witnessed a year ago.

From a sector point of view ,y-o-y credit growth was-

Agriculture -15 %( PY :13.5%) , Industries-5.6%(PY:13.1%), Services -5.6% (PY:16.1%)

and Personal Loans -15.4%(PY:15.5%) .

There has been a clear decline in growth rates in industries and services

Corporate Debt RestructuringCDR is the reorganisation of a company's outstanding obligations, often achieved by

reducing the burden of the debts on the company by decreasing the rates paid and

increasing the time the company has to pay the obligation back. This allows a company

to increase its ability to meet the obligations.

Position as on September 2015 :

Corporate Debt Restructuring

Corporate Debt Restructuring

The 5:25 flexible structuring scheme As per the 5:25 flexible structuring scheme, the lenders are allowed to fix longer

amortization period for loans to projects in the infrastructure and core industries sector,

for say 25 years, based on the economic life or concession period of the project, with

periodic refinancing, say every 5 years.

Conditions for 5:25 flexible structuring scheme

• Term loans to projects, in which the aggregate exposure of all institutional lenders

exceeds Rs.500 crore, in the infrastructure and core industries sector will qualify.

• Banks may fix a fresh amortization schedule for the existing projects loans, once

during the life time of the project, after the Commercial Operations Date (CoD)

without it being treated as restructuring subject to:

- The loan is standard as on date of change of loan amortization schedule

- The Net Present Value of the loan remains same before and after the change in

the amortization schedule

- The Fresh loan amortization schedule should be within 85% of the initial

concession period / life of the project

• In case of accounts which are already classified as NPA, banks are allowed to

extend the flexible structuring scheme. However, it shall be considered as

‘restructuring’ and such accounts would continue to remain classified as NPAs

Beneficiary sectors of the 5:25 scheme

Few examples-Jaypee Infratech, Adani Power, Uttam Galva Metallics, Hindalco,GMR,

Lanco ,Bhushan Steel, Neelachal Ispat Nigam

Strategic Debt Restructuring scheme

(SDR)The SDR scheme has been enacted with a view to revive stressed companies and provide lending

institutions with a way to initiate change of management in companies which fail to achieve the

milestones under Corporate Debt Restructuring ("CDR")

Eligibility

The JLF (Joint Lenders Forum) conversion of outstanding debts can be done by a consortium of

lending institutions.

The Scheme will not be applicable to a single lender.

CONDITIONS

At the time of initial restructuring, the JLF must incorporate an option in the loan agreement for

SDR if the company fails to achieve the milestones and critical conditions stipulated in the

restructuring package.

This option must be corroborated with a special resolution since the debt-equity swap will result

in dilution of existing shareholders.

Such a mandate will result in the lenders acquiring a majority (51%) ownership.

If the company fails to achieve the milestones stipulated in the restructuring package, the

decision of invoking the SDR must be taken by the JLF within thirty (30) days of the review of the

account during the restructuring.

The JLF must approve the debt to equity conversion under the Scheme within ninety (90) days of

deciding to invoke the SDR.

The JLF will get a further ninety (90) days to actually convert the loan into shares.

List of companies under SDR scheme

Name of the company Debt Amount

(Rs.in Crs)

Electrosteel Steels 10,240

Lanco Teesta 2,400

Jyoti Structures 2,360

Monnet Ispat 11,710

Coastal Projects 3,250

Visa Steel 3,090

IVRCL 9,390

Other companies which have joined the list are :

• Shiv-Vani Oil & Gas

• Rohit Ferro-Tech

• Ankit Metal & Power

• Educom Software

• Gammon India

Strategic Debt Recast may hit bank’s credit growth

• Success of SDR not clear, given that of the 530

cases received under CDR, only 190 cases –totaling

Rs.70,000 crores have exited CDR, as loans could

not be repaid.

• For CDR to be successful , banks need to find new

promoters for the companies within the 18 –month

window and this would require restoring viability and

generating investor interest in such companies

• SDR has been exercised on loans worth Rs.81,300

crore (mostly in infrastructure and metals

sectors).With RBI directing banks to clean up their

books by March 2017, and banks continuing to fund

interest and working capital costs during the 18

months period, NPA levels are bound to shoot up.

• Shares acquired by banks through SDR are exempt

from RBI’s restrictions on capital market exposures.

Experts feel this would dilute business of banks and

they consider it a departure from core banking

opportunities, as banks are not in the business of

running companies.

Likely impact on Banks if SDR failsCompany Provision/

MTM Losses

Rs.in Crs

% of

Debt

Gammon India 13,848 93.5

Electrosteel Steels 9,826 89.5

IVRCL 9,195 88.9

Coastal Projects 5,519 95.0

Monnet Ispat 4,388 35.1

Shiv-Vani Oil & Gas 3,635 90.8

Visa Steel 2,838 91.7

Rohit Ferro-Tech 2,462 93.6

Ankit Metal & Power 1,190 92.9

Jyoti Structures 986 37.4

The Insolvency & Bankruptcy Code 2015

• Applicability: All kinds of corporate

enterprises, limited liability partnerships,

partnership firms and individuals

• Scope: Insolvency, liquidation, voluntary

liquidation (solvent insolvency) and

bankruptcy

• Key Objectives:

- Preserve value by providing linear, time-bound

and collective process

- Improve time taken to resolve failure and

provide clear exit options to investors

- Increase recovery value

- Develop other avenues of financing businesses

(such as bond markets, venture capitals )

other than banks

• Tribunal :National Company Law Tribunal

(NCLT) is the proposed forum for corporate

bankruptcy and DRT is for individual

bankruptcy

Resolution process

Default

Appointment of an Insolvency

professional

Calm period/moratorium period

(180/270 days)

75% of creditors to approve

Yes No

Implement

the plan

Goes into

liquidation

The Insolvency & Bankruptcy Code 2015-

New opportunities/scope

• The Bill proposed a new class of Insolvency

Professionals to assist companies.

• The Investment Professionals will be drawn from

different fields like investment bankers, lawyers,

cost accountants, chartered accountants,

engineers, bureaucrats who are presently heading

sick PSUs.

• They will take over the management of the

company and restore the health of a company-will

be given 180 days to decide if a company can be

revived. The time can be extended for a further

period of 90 days.

-if yes, then a resolution has to be planned. The

management committee will come under

suspension and creditors committee will take over.

-If no, then then the Creditors committee will

decide to dissolve the company and the decision

would go to the tribunal for ratification.

• The Insolvency professionals will act as a

liquidator.

• Distribution of proceeds on liquidation, in

order of priority:

- Insolvency resolution process including the

fees of insolvency professionals

- Debts of secured creditors

- Workmen’s dues for 12 months

- Unpaid dues to employees other than

workmen

- Financial dues owed to unsecured creditors

- Government taxes for two years

- Other debts, preference shareholders and

equity shareholders (last priority)

Reform Measures by GOI

Reform Measures by Central Government

Ease of doing business

• New de-licensing and de-regulation measures for reducing complexity, increasing speed and transparency-process

of Industrial License made online 24x7 basis through portal and validity extended to 3 years

• Process of obtaining environmental clearances made online

Banking, Finance & Insurance

• Indradhanush -To revamp public sector banks

• Mudra Bank to bring finance to 5.7 crore small entrepreneurs

• Create Infrastructure Debt Fund and National Investment and Infrastructure Fund to kick start investment cycle

• Notification of Investment Pattern for Non-Government Provident Funds, Superannuation Funds and

Gratuity Funds to create additional demand for equity funds

Industrial Corridor

• GOI is building a pentagon of corridors across the country to boost manufacturing as a Global manufacturing

destination of the world

• Delhi-Mumbai Industrial Corridor(DMIC) is being developed -24 manufacturing cities envisaged in the DMIC

project

• Other corridors conceptualized-Bengaluru –Mumbai Economic Corridor (BMEC),Amritsar-Kolkata Industrial

Development Corridor(AKIC),Chennai-Bengaluru Industrial Corridor (CBIC),East Coast Economic Corridor(ECEC)

with Chennai Vizag Industrial Corridor (CVIC)

Reform Measures by Government

Pahal Scheme

•LPG is being sold to consumers at the market rate while the subsidy is credited to their bank account directly as per

entitlement . However. GOI has announced the scrapping of the LPG subsidy for “well-off” people whose annual taxable

income is more than Rs 10 lakhs from January 2016

Tackle NPAs

• RBI has allowed banks to acquire 51% or more stake in companies defaulting after restructuring their loans

Strategic Debt Restructuring

• Allowing lenders to convert debt into equity within 30 days of review of companies’ accounts. In addition, lenders

acquiring shares of listed companies under restructuring would be exempted from making open offers.

Bankruptcy Bill

• Facilitate banks to restructure and recover non performing assets in a timely manner

100 Smart Cities

• With an aim to achieve ‘inclusive growth”,the Smart City Mission promotes integrated city planning

Coal block auction and allotement under the Coal Mines

• Law has been introduced to facilitate a transparent and non-discretionary method of allocation of coal

blocks,enabling commercial mining to enhance the potential of the sector.

Stages in Project Financing

Stages in Project Financing

Project identification

Risk identification & minimizing Pre Financing

Stage

Technical and financial feasibility

Equity arrangement

Negotiation and syndication Financing

Stage

Commitments and documentation

Disbursement.

Monitoring and review

Financial Closure / Project Closure Post Financing

Stage

Repayments & Subsequent monitoring.

Project Identification

Identification of the Project

- Government announced

- Self conceived / initiated

Identification of market

- Product of the project

- Users of the product

- Marketability of the product

- Marketing Plan

Risk Identification and Minimizing

Risk Solution

Completion Risk Contractual guarantees from contractors,

manufacturer, selecting vendors of repute.

Price Risk hedging

Resource Risk Keeping adequate cushion in assessment.

Operating Risk Making provisions, insurance.

Environmental Risk Insurance

Technology Risk Expert evaluation and retention accounts.

Interest Rate Risk Swaps and Hedging

Insolvency Risk Credit Strength of Sponsor, Competence of

management, good corporate governance

Risk Identification and Minimizing…contd.

Currency Risk Hedging

Political and

Sovereign Risk

• Externalizing the project company by forming it abroad or

using external law or jurisdiction

• External accounts for proceeds

• Political risk insurance (Expensive)

• Export Credit Guarantees

• Contractual sharing of political risk between lenders and

external project sponsors

• Government or regulatory undertaking to cover policies

on taxes, royalties, prices, monopolies, etc

• External guarantees or quasi guarantees

Technical and Financial Feasibility

Technical feasibility

- Location

- Design

- Equipment

- Operations / Processes.

Financial feasibility

- Business plan / model

- Projected financial statements with assumptions

- Financing structure

- Pay-back, IRR, NPV etc.

Equity arrangement

Sponsors

- Lead sponsors

- Co – sponsors

Private equity participation

- Angel investors – Private equity funding

- Financial institutions

- Non-financial institutions.

Debt Arrangement-Negotiation and

syndication

Lenders

- Banks

- Non- banking financial institutions

- International lending institutions

Syndication

- Lead arranger

- Co-arrangers

Negotiation

- Pricing

- Documentation

- Disbursement

Documentation

Commitment letters / MOUs

- Commitment letters from sponsors and investors

- MOU signing with financiers.

Documents

- Offer Letters

- Lending agreements

- Security documents

- Disbursement plan

Contracts

- Management/shareholder agency relationship

- Inter corporate agency relationship

- Government/corporate agency relationship

- Bondholder stockholder relationship

Disbursement

Equity Disbursement

⁻ Shares application

⁻ Shares proceeds

⁻ Share certificates

Loan Disbursement

⁻ Sponsor loans

⁻ Advance payments

⁻ Progress Payment

Monitoring and Review

Why?

- Project is running on schedule

- Project is running within planned costs.

- Project is receiving adequate costs.

How?

- First hand information.

- Project completion status reports.

- Project schedule chart.

- Project financial status report.

- Project summary report.

- Informal reports.

Financial Closure / Project Closure

Financial closure is the process of completing all project-related financial

transactions, finalizing and closing the project financial accounts, disposing of project

assets and releasing the work site.

Financial closure is a prerequisite to project closure and the Post Implementation

Review (PIR). A project cannot be closed until all financial transactions are complete,

otherwise there may not be funds or authority to pay outstanding invoices and

charges. Financial closure establishes final project costs for comparison against

budgeted costs as part of the PIR. Financial closure also ensures that there is a

proper disposition of all project assets including the work site.

Project closure and commencement take place after financial closure

Project Financing Parameters

Loan Limit: Determining maximum borrowing capacity of the project

Currency: Maybe denominated in either local or foreign currency.

Capital Structure: Maximum debt-to-equity ratio up to 75:25

LoanTenure: Maximum tenure of the loan depends on project nature. Tenure will

typically include a grace period, which commemorates with length of construction

period and timing of revenue generation by the project. Earlier 7 years were

considered , now extended to 15-20 years depending on nature of project for

infrastructure projects.

Facility Nature: Both funded and non-funded (L/C, BG etc.).Funded facilities may

include revolving credit for working capital facility

Rate of Interest: Rate of interest is 13% pa or lower.

Fees & charges: As applicable

Securities: Primary(first charge on project assets) ,and collateral (PG, corporate

guarantee, R/M on other immovable properties, lien on financial assets FDR, shares

etc.)

Syndication of Loans-Role of an Arranger

Point of Contact

Monitoring the compliance of certain terms of the facility

Assistance in drawing Financial Model capturing requirements of the Company

Introducing the Company to the Lenders

Liaison on behalf of the Company with the Lenders

Negotiate on behalf of the Company for suitable terms and conditions i.e.

interest rate, processing fee, security, guarantee, repayment schedule, etc.

About Sumedha Fiscal – An Overview

One stop destination for financial solutions. A SEBI registered Merchant Banker

& Stock Broker

Incorporated in the year 1989 and listed on BSE

Promoted by a group of Chartered Accountants

PAN India presence across seven locations

Has large pool of talents

Provides professional services in Merchant Banking, Corporate Finance,

International Finance

Team Sumedha

Ms. Moumita Chowdhury is based out of Kolkata and takes care of execution of debt relatedmandates such as techno economic feasibility studies, restructuring, due diligence andvaluation.

Ms. Sudeshna Agarwal is situated out of Kolkata and manages the Execution Desk for alldebt related proposals. Her domain area includes project appraisal, risk analysis, evaluation ofproposals, relationship management, compliance and due diligence for deal execution.

Reach Us

Contact us

AHMEDABAD

A/82 Pariseema Complex, Opp. IFCI Bhawan,

C.G. Road , Ahmedabad – 380 009

Telephone: +91 79 3002 3337 / 6605 2957

Fax: +91 79 2646 0394

Email: ahmedabad@sumedhafiscal.com

Contact : Mr. K. K. Kabra

BANGALORE

“Park Plaza”, 1st Floor, No. 1 Park

Road, (Off. Infantry Road), Tasker

Town,

Bangalore – 560 051

Telephone: +91 80 4124 2545 / 2546

Fax: + 91 80 4124 2547

Email: bangalore@sumedhafiscal.com

Contact: Mr. Anil Birla

HYDERABAD

309/1, 3 rd Floor, Krishna Plaza,

Khairatabad, Hyderabad-500 004

Telephone: +91 40 4020 2826 / 4026

7272

Fax: +91 40 4020 2826

Email: hyderabad@sumedhafiscal.com

Contact : Mr. M .S. Prashant

NEW DELHI

B1/12 Safdarjung Enclave,2nd Floor,

New Delhi – 110 029

Telephone: +91 11 4165 4481 / 82

Fax: +91 11 4165 4483

Email: delhi@sumedhafiscal.com

Contact : Mr. Gaurav Gaggar

MUMBAI

C-703 "Marathon Innova",

Off Ganapatrao Kadam Marg,

Opp. Peninsula Corporate Park,

Lower Parel (W) , Mumbai - 400 013

Telephone: +91 22 4033 2400

Fax: +91 22 2498 2878

Email: mumbai@sumedhafiscal.com

Contact: Mr. B.S. Rathi

Registered & Corporate Office

KOLKATA

8B Middleton Street, 6A Geetanjali,

Kolkata – 700 071

Telephone: +91 33 2229 8936 / 6758 / 3237 / 4473

Fax: +91 33 2226 4140 / 2265 5830

Email: kolkata@sumedhafiscal.com

Contact : Mr. Vijay Maheshwari / Mr. Bijay Murmuria

CIN: L70101WB1989PLC047465

Thank you