WEEKLY EXERCISE #2

Case –National Bank for Financing Infrastructure Plans to Raise ₹30K Cr Via Long Term
Bond & Lend ₹4L Cr

Background

 Nabfid is a government-backed development financial institution that started

operations last year with Rs 20,000 crore capital and a Rs 5,000-crore grant from the
government.
 Nabfid has granted in-principal approvals to proposals of Rs 50,000 crore, and final
sanctions have crossed Rs 25,000 crore, with road and energy being the major sectors.
 Nabfid is chaired by veteran banker KV Kamath, who headed ICICI during its DFI
days. And has appointed Mr Rajkiran Rai as Managing Director of the Bank.
 The infrastructure sector in India is expected to grow at a CAGR of 15% over the next
five years, driven by government initiatives and private investments.
1. MD Rajkiran Rai has announced in month of June 2023, that the company plans to
create a subsidiary that will offer credit enhancement to infrastructure borrowers,
including urban bodies. It will use our equity capital of Rs 20,000 crore to lend up
to Rs 4 lakh crore by March 2026. We intend to raise Rs 30,000 crore this year
through long-term bonds.” He also said that the company has given in-principle
approvals for projects worth Rs 50,000 crore, and has sanctioned more than Rs
25,000 crore, mainly in road and energy sectors.
2. Drivers: Nabfid has a strong backing from the government, which enhances its
creditworthiness and reputation. Nabfid has a clear vision and strategy to lend to
the infrastructure sector, which has high growth potential and social impact.
Nabfid has access to low-cost funds from the government grant, which reduces its
cost of capital.
 Risks: Nabfid faces competition from other DFIs and banks that also lend to the
infrastructure sector. Nabfid may face regulatory or political uncertainties that could
affect its operations or profitability. Nabfid may face project delays or defaults from
its borrowers in the infrastructure sector, which could impair its asset quality and cash
flow."
Action Mr RajKiran has taken to engage you as Investment Banker to execute this bond
issuance are:

 Hire you as an investment bank as an underwriter and advisor for the bond issuance.
 Prepare a prospectus that outlines Nabfid’s business model, financial performance,
growth prospects, risk factors, etc.
 Obtain regulatory approvals from SEBI and RBI for the bond issuance.
 Conduct roadshows and meetings with potential investors, such as insurance
companies, pension funds, sovereign wealth funds, etc., to market the bond.

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  Price and allocate the bond according to market demand and supply conditions.

Day 1: In your role as an Investment Banker on the Nabfids Bond issuance, you will develop
recommendations for the following:

Formulate recommendations and action plan.

3. What is your final answer or solution to your client’s problem or question,

provide why Bond is more suitable instrument over Equity? Analyze the
information and data. What are the main drivers and risks that affect your
client’s bond issuance?
What are the trade-offs and alternatives that your client has to consider?
Ans : Bonds are more suitable over Equity as issuer’s ownership will not get diluted
further and their funds requirement also get fulfilled by raising bonds in market.
Main drivers of bond issuance:
1. Interest rates: Changes in interest rates directly impact the cost of borrowing for
issuers. Lower interest rates can make bond issuance more attractive for issuers as
they can obtain funds at a lower cost.
2. Creditworthiness: Clients with high credit ratings can raise funds more easily
3. Market conditions: The overall market conditions including investor demand for
bonds, economic conditions, and liquidity in market play important role in
success of bond issuance.
4. Purpose of issuance: The purpose for using funds can influence investor interest
and perception of bond’s risk
Risks associated with bond issuance:
1. Interest rate risk
2. Credit risk
3. Market risk
4. Liquidity risk
5. Currency risk, etc
Client can use trade-offs and alternatives like bank loans, convertible bonds,
commercial papers, etc

4. Provide which kind of Bond and its features you believe is suitable for the
same Bond type: Bond Tenure: Years Feature:
You can use charts, tables, graphs, etc., to illustrate your recommendations. Your
recommendation is based on the reasons: List your reasons while answer the
above question.
Ans:

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 Bond Type: Long term bonds (Infrastructure projects generally take 10-20 years in
completion of projects hence it will allow sufficient time for company to generate
revenue from project and repay to borrowers
Bond Tenure: 10-20 years
Features: Fixed interest rate and high credit rating along with offering tax benefit to
investors. Lower default risk as it is backed by goverement

Day 2: In your role as an Investment Banker working on Nabfids Bonds, develop the Term
Sheet and Bond Valuation, assuming your recommendation is the following:

Recommendation "Based on our analysis, we recommend that Nabfid should issue a 10-year
bond with a coupon rate of 8%, which would raise Rs 30,000 crore. This would enable
Nabfid to achieve its lending target of Rs 4 lakh crore by March 2026 with an internal rate of
return (IRR) of 12%. Your recommendation is based on the reasons: List your reasons while
answer the above question.
Work as Investment Banker at Nabfid's Bank on the following two important Bond
Floatation tasks.

1. Prepare a term sheet highlighting feature for a proposed bond prospectus that needs
your input?
2. Create an excel sheet that values the above 10 years bond and reflects the range of
bond prices (NPV) and Yield To Maturity (YTM) in the term sheet?
You can use Standard Term sheet template for Bond floatation and Bond YTM &
Valuation Calculator attached
Ans : Excel attached

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