NATIONAL INSTITUTE OF CONSTRUCTION

MANAGEMENT AND RESEARCH

PEM BATCH 16 SECTION 2 PROJECT FINANCING

AND STRUCTURING
ASSIGNMENT-12

SUBMITTED BY:
Group-2
LOHITHA GUNDUBOYANA (PP20110)
NOWEL BOSE (PP20111)
SAIKAT SAHA (PP20113)
PROJECT ENGINEERING AND MANAGEMENT(PEM)
BATCH-16
SECTION-2
GROUP-2 PFS ASSIGNMENT-2 PEM, SECTION-II

MAX Powers Private Limited:

Sector: Manufacturing Power production equipment’s, installation of small captive thermal
power plants and co-gen plants.

Past Performance: Last years’ turnover has been Rs. 1050 cr. and it has been rising during
previous 3 years at the rate of 15% on average. It is a 20-year-old company having net
worth of Rs 500 cr.
Assumptions:
 The Firm has positive EBITDA, PAT, Debtor days, Payables Days of not more than 90
days.
 The firm has a Commercial CIBIL of above 700. The firm has no other group
companies and the directors of this company also maintain less than 30 days odd
dues (Consumer CIBIL is also above 700).
 The company is rated AAA+.
 As Max Power has good track record of performance, it is easy for them to raise fund
through debt financing.
 So, 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:

Percentage Cost of Weighted Average

Sources of Amount of Total Capital cost of capital
Financing (In Cr) Funding (2) (1) * (2) (In %)
(1)
Net Worth (Equity) 500 9 7% 0.63
Debt (Term Loan) 4500 82 10% 8.2
Debt (Overdraft) 400 7 10% 0.7
Debt (Secured Bond) 100 2 8% 0.16
5500 9.69

The firm has a total Weighted Average Cost of Capital of 9.69%

As Max Power becomes at least somewhat established and its strategy appears likely to lead to
profits in the near future, knowing the individual managers and their business plans on a personal
basis becomes less important, because information has become more widely available regarding
the company’s products, revenues, costs, and profits. As a result, other outside investors who do
not know the managers personally, like bondholders and shareholders, are more willing to provide
financial capital to the firm.

At this point, Max Power firm must often choose how to access financial capital. It may choose to
borrow from a bank, issue bonds, or issue stock. The great disadvantage of borrowing money
from a bank or issuing bonds is that the firm commits to scheduled interest payments, whether or
not it has sufficient income. The great advantage of borrowing money is that the firm maintains
control of its operations and is not subject to shareholders. Issuing stock involves selling off
ownership of the company to the public and becoming responsible to a board of directors and the
shareholders.

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The benefit of issuing stock is that a small and growing firm increases its visibility in the financial
markets and can access large amounts of financial capital for expansion, without worrying about
paying this money back. If the firm is successful and profitable, the board of directors will need to
decide upon a dividend payout or how to reinvest profits to further grow the company. Issuing
and placing stock is expensive, requires the expertise of investment bankers and attorneys, and
entails compliance with reporting requirements to shareholders and government agencies, such as
the SEBI.

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

The company will go for long term Bank Financing (loan) for Solar Panel, Frames and
Evacuation as they are fixed asset and can be mortgage as collateral to secure the loan.

For Current asset and working capital of Rs. 400 crore Max Power can avail overdraft against
receivables from State Power Transmission Company
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
financial institute such as Bank.
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:

FORM TYPE SOURCES

DEBT Long term Term Loan Banks
Short term Overdraft
Long term Debentures Private

Term Loan: means loans repayable in terms or installments over 1 year and above say up to 10 / 15
years.
1) Purpose: Purchase of fixed assets.
2) Security:
1. Primary: Charge on Assets purchased out of loan ,
2. Collateral Security: Charge on other additional Movable or immovable assets
3. Guarantees by owners / third parties.
2) Stages of processing:

Application: Promoters background / industry / project under consideration,

government consents/licenses etc., cost of project, means of finance, contract agreement
Profitability / cash flows,
 Appraisal: Managerial; Market; Technical

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 Financial:

1. Reasonableness of estimates,
2. Debt service coverage ratio,
3. Break even Sales / Capacity utilization / Sales rates / Sale volume,
4. Internal rate of return,
5. Debt equity ratio
Overdraft:
Overdraft facility is a type of short-term loan to be repaid in defined tenure, as required by the
financial institutions. Lenders shall levy the interest rates that the borrower needs to repay, as per
the bank’s terms and conditions.

Features of Overdraft Facility:

 Approved Credit Limit
 Interest Rate
 Nil prepayment charges
 Repayment is not done through EMIs
 Minimum Monthly Payment
 Joint borrowers are allowed on Overdraft
 Workings

Types of Overdrafts
1. Overdraft against Property
2. Overdraft Facility against Fixed Deposits
3. Overdraft against Insurance Policy
4. Overdraft against Equity
5. Overdraft against Salary

Differences Between Term Loan and Overdraft

Term Loan Overdraft

It’s a type of borrowed capital or

It’s a type of credit line facility
funds

Interest rate is calculated on a Interest rate is calculated on a

monthly basis daily basis

Interest rate is charged over the loan Interest rate is charged only on the
amount utilized amount

Term loan can be availed to repay Overdraft can be availed even if

on time with added interest rates the account balance is zero

Loans can be repaid in long-term Overdraft is availed for short-term

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The rate of Interest is fixed or The rate of interest is fixed for at

floating least 12 months

Maintain a current account is not a Compulsory to maintain current

mandate account

Repayment in cash or from bank

Repayment type is in form of EMIs
deposits

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 10% 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 10% 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

AAA+. So, it can go for secured bond financing at 8%, 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.

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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.
 An overdraft is flexible - you only borrow what you need at the time which may
make it cheaper than a loan.
 It's quick to arrange.
 There is not normally a charge for paying off the overdraft earlier than expected.

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.
 If you have to extend your overdraft, you usually have to pay an arrangement
fee.
 Your bank could charge you if you exceed your overdraft limit without

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authorization.
 The bank has the right to ask for repayment of your overdraft amount at any
time, although this is unlikely to happen unless you get into financial
difficulties.
 Overdrafts may be secured against business assets.
 Unlike loans you can only get an overdraft from the bank where you maintain
your current account. In order to get an overdraft elsewhere you need to
transfer your business bank account.
 The interest rate applied is nearly always variable, making it difficult to
accurately calculate your borrowing costs.
 Unutilized overdraft facilities may be reduced by the banks at short notice,
although this is unlikely to happen unless you get into financial difficulties.

Secured Bond Financing:

Secured Bond financing gives access to the wider market of investors. With a rating of
AAA+, the company can easily access the bond market with easier repayment schedules.
Advantages:

Bonds have a clear advantage over other securities. The volatility of bonds (especially short
and medium dated bonds) is lower than that of equities (stocks). Thus bonds are generally
viewed as safer investments than stocks. In addition, bonds do suffer from less day-to-day
volatility than stocks, and the interest payments of bonds are sometimes higher than the
general level of dividend payments.

Bonds are often liquid. It is often fairly easy for an institution to sell a large quantity of
bonds without affecting the price much, which may be more difficult for equities. In effect,
bonds are attractive because of the comparative certainty of a fixed interest payment twice
a year and a fixed lump sum at maturity.

Bondholders also enjoy a measure of legal protection: under the law of most countries, if a
company goes bankrupt, its bondholders will often receive some money back (the recovery
amount), whereas the company’s equity stock often ends up valueless. Furthermore, bonds
come with indentures (an indenture is a formal debt agreement that establishes the terms
of a bond issue) and covenants (the clauses of such an agreement). Covenants specify the
rights of bondholders and the duties of issuers, such as actions that the issuer is obligated
to perform or is prohibited from performing.

There are also a variety of bonds to fit different needs of investors, including fixed rated
bonds, floating rate bonds, zero coupon bonds, convertible bonds, and inflation linked
bonds.

 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

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Disadvantages:
 Bonds are also subject to various other risks such as call and prepayment risk,
credit risk, reinvestment risk, liquidity risk, event risk, exchange rate risk,
volatility risk, inflation risk, sovereign risk, and yield curve risk.
 Price changes in a bond will immediately affect mutual funds that hold these
bonds. If the value of the bonds in a trading portfolio falls, the value of the
portfolio also falls. This can be damaging for professional investors such as banks,
insurance companies, pension funds, and asset managers (irrespective of whether
the value is immediately “marked to market” or not). If there is any chance a
holder of individual bonds may need to sell his bonds and “cash out”, the interest
rate risk could become a real problem.
 Bond prices can become volatile depending on the credit rating of the issuer – for
instance if credit rating agencies like Standard and Poor’s and Moody’s upgrade or
downgrade the credit rating of the issuer. An unanticipated downgrade will cause
the market price of the bond to fall. As with interest rate risk, this risk does not
affect the bond’s interest payments (provided the issuer does not actually default),
but puts at risk the market price, which affects mutual funds holding these bonds,
and holders of individual bonds who may have to sell them.
 A company’s bondholders may lose much or all their money if the company goes
bankrupt. Under the laws of many countries (including the United States and
Canada), bondholders are in line to receive the proceeds of the sale of the assets of
a liquidated company ahead of some other creditors. Bank lenders, deposit holders
(in the case of a deposit taking institution such as a bank) and trade creditors may
take precedence. There is no guarantee of how much money will remain to repay
bondholders. In a bankruptcy involving reorganization or recapitalization, as
opposed to liquidation, bondholders may end up having the value of their bonds
reduced, often through an exchange for a smaller number of newly issued bonds.
 Some bonds are callable, meaning that even though the company has agreed to
make payments plus interest toward the debt for a certain period of time, the
company can choose to pay off the bond early. This creates reinvestment risk,
meaning the investor is forced to find a new place for his money. As a
consequence, the investor might not be able to find as good a deal, especially
because this usually happens when interest rates are falling.
 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.

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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 2nd
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.

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