NATIONAL INSTITUTE OF CONSTRUCTION

MANAGEMENT & RESEARCH

PROJECT FINANCING AND STRUCTURING

Assignment No- 2

PEM SECTION- II

Submitted by Group 1
Sanket Awate (PP20074)
Mehar Ali (PP20086)
Murtuza Rafi (PP20129)

Submitted to
Prof. Vivek Date
 MAX Powers Private Limited:
Sector: Manufacturing Power production equipment’s, installation of small captive
thermal power plants and co-gen plants.
Assumptions:
• The Firm has positive EBITDA, PAT, Debtor days, Payables Days of not more than
180 days (Here we’re taking a deviation as for this sector, ideally debtor days
and creditor days would be more than 90 days but less than 180 days.)
• The firm has a Commercial CIBIL of above 600. The firm has no other group
companies and the directors of this company also maintain less than 30 days od
dues (Consumer CIBIL is also above 600).
• The company is rated AA+.
• Max Power will go for a full debt financing with different arrangements. Majorly,
Fund Based limits (Term Loan, Overdraft and Cash Credit) and Bond financing.
The resulting capital structure would look like this:

Weighted Average
Sources of Amount % Of total funding Cost of Capital cost of capital
Financing (In Cr) (1) (2) (1) * (2) (In %)
Net Worth (Equity) 500 9 5% 0.5
Debt (Term Loan) 4500 82 8% 6.5
Debt (Overdraft) 400 7 8% 0.6
Debt (Secured Bond) 100 2 6% 0.1
5500 100 7.7

The firm has a total Weighted Average Cost of Capital of 7.7%

(i) Extent of find requirements / break up for different purposes.

The company will go for Bank Financing for Solar Panel, Frames and Evacuation &
Current Assets.
It will go for Term Loan for Solar Panel, Frames and Evacuation (4500 Cr) and Overdraft
(400 Cr) for Current Assets. Therefore, MAX Power is going for full fund-based financing
from Bank, say HDFC.
The company will go for Secured Bond Financing for Land leveling, Water Pumps and
Civil Structures (100 Cr). The corporate bond offering will be at 8%.
Therefore, the cost of the project Rs 5000 Cr will be financed.
 (ii) Composition of various forms, type and Sources.
As mentioned above in the Capital Structure, the firm already has an equity of
Rs 500 Cr. Hence, it was unleveraged. But with the new requirement, it will
have an Equity component of 9%, Term Loan Component of 82%, Overdraft
of 7% and Secured Bond of 2%.

Sources of Funding:
Term Loan: Assuming the project duration is 7 years, Max Powers can avail a
term loan at 8% for 7 years will at least 75% collateral offering. Meaning to
say, the Actual Market Value of the Solar Panel, Frames and Evacuation will
be at least Rs. 3375 Cr upon completion.
Overdraft: The firm can avail the overdraft at 8% with 75% collateral.
Meaning, the Actual Market Value of the Current Assets, combined will be at
least Rs. 280 Cr.

Secured Bond Financing: The company has an assumed credit rating of AA+.
So, it can go for secured bond financing at 6%, since it has good financials.

(iii) Justification for suggesting the aforesaid forms, types and sources on
the basis of cost of raising funds, advantages, disadvantages, limitations,
costs and time for raising the same.

Bank Financing:
Bank Financing is considered an easy way of raising money. With good rates and long
payment schedules, the company can go to a bank for funding. Also, with AA+ rating,
good financials, the company will pass through Credit department evaluation and
therefore easy sanction.
Term Loan:
A term loan provides borrowers with a lump sum of cash upfront in exchange for
specific borrowing terms. In exchange for a specified amount of cash, the borrower
agrees to a certain repayment schedule with a fixed or floating interest rate. Term loans
may require substantial down payments to reduce the payment amounts and the total
cost of the loan.
Overdraft:
Basically, an overdraft means that the bank allows customers to borrow a set amount of
money. There is interest on the loan, and there is typically a fee per overdraft.
• Allow you to grow your business: Bank loans are a convenient way to get extra
finance, without needing to wait until your business has generated enough profit to fund
expansion yourself. Taking out a loan means you can put your plans into action much
earlier and take advantage of any business opportunities that present themselves,
enabling faster and more accelerated growth.
 • You keep full control of the company: The main advantage of a bank loan, as with any
kind of small business loan, is the ability to get an injection to their cash flow without
losing any control of your company.
• No interference from the bank:
One of the other advantages of a small business bank loan is that, as long as you
make the repayments, banks shouldn’t interfere or set restrictions on what you
use the loan for.

Of course, when you first apply for a bank loan, you will need to send in a
business plan outlining how you plan to use the funds so the bank can assess the
risk involved in lending to your business. However, once you have the funding,
you have the flexibility to change your plans without any intervention from the
bank, as long as you carry on repaying the loan.
• Low Cost of Funds
• Competitive rates
• Better servicing of Overdraft and Term Loans.

Disadvantages:
• If the project faces some problems and the company goes low on cash, there is a
possibility of failure and therefore the Assets mortged (Solar Panels, Current
Assets, Frames) will be taken over bank., So, the firm risks not retaining its
assets.
• Bank Financing comes with terms and conditions. Firms with less than average
financials are not lent and those with slightly better financials are offered
different terms, than agreed earlier, due to Credit team evaluation. Generally,
700-900 CIBIL, both Consumer and Commercial, is considered to be safer for
faster bank financing.
• Lengthy application process: Preparing for a business loan application can also be a
long and time-consuming process. Not only will you need to fill out an application form
for each lender, but you will also need to provide a business plan, your account history,
and your financial forecasts to show your business is a viable lending prospect.

Secured Bond Financing:

Secured Bond financing gives access to the wider market of investors. With a rating of
AA+, the company can easily access the bond market with easier repayment schedules.
Advantages:
• Wider reach, high value investors like QIBs
• Competitive rates other than repo. The company can opt for fixed rate or floating
rate bonds
• The bond amortization schedules are easier for the company to pay off
Disadvantages:
• Losing popularity of benchmarks like LIBOR.
• Secured financing means the company has locked up its assets with respect to
investors. In priority of claims, secured bond investors need to be paid first, even
in case of default.
• Although investor access is a major advantage, only big investors generally opt
for such large-scale financing and they impose various negative covenants on the
company with respect to bond financing. The company has to be active if it has to
reach retail investors.
The capital structure based on the assumptions looks like this:

Amount (In
Sources of Financing Cr)
Net Worth (Equity) 500
Debt (Term Loan) 4500
Debt (Overdraft) 400
Debt (Secured Bond) 100

Term Loan has first priority since the amount of Rs 4500 Cr can only be financed by
this. Since the Commercial and Consumer CIBIL both are good, high debtor days and
creditor days are generally ignored. In terms of banks, those banks with high-risk
appetite will fund this project through term loans.
Overdraft is taken to cover the working capital requirements and will come at 2 nd
priority. Overdraft allows companies with large accounts at banks to avail facilities at
even lesser collateral. Here, we can assume that Max Powers Private Limited will have
the advantage of asking for less collateral.
Bond Financing is the final priority with a means to establish its presence in the
market. Major requirement is secured financing since 100 Cr is usually financed by
Secured offerings at fixed rate, preferably. Fixed rate would be good because, at Floating
rate Bond offerings, LIBOR is used and it is losing significance.
Other sources of finance can include:
Quasi Equity: This is money from Directors, Partners and relatives. It is another cheap
source of funding at very low rates. The major disadvantage being, projects with high
costs like that of Max Powers are usually not funded through Quasi Equity due to large
amounts.
Equity Market Offerings: Raising money at stock markets is a convenient way of
raising funds. It gives the company access to a large amount of capital. The only
disadvantage being, the company risks diluting ownership. Company directors,
generally like to maintain more than 60% ownership in the company, so that they still
exercise control. Large equity offerings like Class A shares, gives shareholders more
power to control the company.