Financing of Power Projects
Dy. General Manager (Int. Fin) NTPC
• NTPC adopts packaging concept to obtain optimum price. • Resorts to competitive bidding for attaining least cost • International Competitive Bidding (ICB) for major packages
– earlier approval of packages was required from administrative ministry
• Domestic Commercial Bidding (DCB) for other packages
PROJECT COSTS STRUCTURE
Cost of Thermal Power Project (indicative)
Direct Capital Outlay Working Capital Margin & Start-up Costs Interest During Construction & Fin. Charges Establishment & Consultancy Physical Contingency 72 % 3% 16% 6% 3%
POWER PROJECT CHARACTERSTICS
Long gestation period- 4 to 8 years Long Operating life- 25 to 35 years High Construction Risk on the project company High off take risk in case of Merchant plants Low credit of offtakers- Indian scenario
POWER PROJECT -FINANCING
Project Financing Balance Sheet Financing
FINANCING A POWER PROJECT - Issues
• Optimal financing mix (Debt Equity Ratio) • Debt
– Domestic Market – International Market
• Instruments of Debt • Managing Fx variations • Equity
– Fresh Equity from Market – Internal Resources
• • • Power projects traditionally had DE ratio of 1:1 Private power policy announced in 1991 permitted project funding with maximum D/E of 80:20. CERC Tariff Regulation 2004 stipulates a maximum Debt Equity Ratio of 70:30
– – CERC tariff regulation effectively reduces generation of Internal resources which could be used as equity Leading to increased reliance on debt
NTPC also switched over to Debt Equity ratio 70:30 from earlier 50:50 even before advent of CERC.
OPTIMAL DEBT EQUITY RATIO
Optimal debt equity ratio depends on
– Debt Servicing capability of the organisation / project
• Debt Service coverage ratio (DSCR) • Interest coverage ratio (ICR)
– – – – –
Depth of loan market Exposure norms Cost of borrowed capital compared to cost of Equity Regulatory Requirement Internal resources generation & requirement
• • • • Key to capacity addition Enables leveraged borrowings Increases confidence in lenders \ Investor Earning potential & stability in cash flows under regulatory tariff environment
• Fresh Equity- IPO/FPO
• Promoters Contribution • Convertible Bonds/ Preference Shares/ FCCBs • Internal Accruals
– Dividend policy
COST OF EQUITY & LEVERAGING
Principally cost of Equity is the opportunity cost of deployment of funds to equally risky investment. It is generally higher than cost of Debt funds being riskier investment; Leveraging refers to use of low cost debt funds to provide increased returns to high cost Equity participants.
SOURCES OF DEBT: AVAILABILITY & CONSTRAINTS
• Selection of instrument of borrowings will depend upon availability, Regulation, Exposure norms, cost of funds and maturities needed • Maturities to match with cash flows
– Present regulatory environment in nascent stage thus un-predictive
• Long term loans with moratorium period of four years or more preferred. • Risk Mitigation
– Exchange Rate Risk – Interest Rate Risk
COMPARISON OF TERM LOAN & BONDS
• Bond have Easy Transferability , hence preferred by Investors • Bonds are secured hence preferred by the Investors. • Corporate Bonds are bench marked with G.Sec of comparable maturity • Spread over G sec depending on market conditions. • Exchange Traded bonds indicate the existing yields
COMPARISON OF TERM LOAN & BONDS Contd…
• But Bond Issue – has to be timed with requirement of funds where as term loan can be drawn in small lots – requires rating by CRISIL/ICRA/CARE – requires creation of Charge over Assets upto 1.25 times – involves high administrative work w.r.t. Trustee agreement, Transfers etc. – are costly in case of Public Issues – ultimately fall into exposure issues when subscribed by Banks etc.
RATE OF INTEREST
Factors effecting interest rate decision
– The rate of interest on any debt instrument is determined by demand and supply mechanism. – The market is indifferent to the option of interest rate i.e. floating or fixed since there are a large number of players for both these options. – The fixed rate quotes are available on “Reuters” screen etc. for different maturities of the loan with respect to LIBOR which set once in a day at 1100 hours GMT in London. – Any lending decision is based on two factors –
• (a) Credit risk – Specific to a corporate and depends on debt rating, capital structure, etc. • (b) Liquidity risk – Higher the tenure higher will be liquidity risk.
FIXED vs FLOATING INTEREST RATE
Floating Rate of Interest
– Interest Rate subject to change for every interest period based on the benchmark. – A fixed spread is added to the benchmark rate to arrive at effective rate of interest which remains fixed for a interest period. – A floating rate of interest is cheaper typically by about 1.80 to 2.25% per annum (for a 7 year term).
Advantages of floating rate of interest
– Interest Rates are market aligned – Lenders are most comfortable since their risk is eliminated with regard to interest rate fluctuations due to demand and supply in the market. – Efficient way of borrowing in a declining interest rate scenario.
FIXED vs FLOATING INTEREST RATE
Fixed Rate Loans
– The rate of interest is decided upfront i.e. at the time of signing of the Loan. – In case of Export Credit, CIRR is locked at the time of signing the Loan Agreement. – In case of Syndicated Loans, the rate is agreed two days before drawdown is made. – In case of Bonds margin over UST decided thru Book-building
Advantages of fixed rate of interest
– Eliminates interest rate risk for borrowers. – Such a borrowing is possible only if there is an underlying liability i.e. where draw-down is of a fixed size and is known to occur on a specific date(s) – for loans to fund capex it is difficult to predict with certainty the exact amounts and exact dates of draw-downs so that loans can undertake the swaps. – Funding on fixed rate loans is challenging for loans having many draw-downs.
DOMESTIC DEBT – EXPOSURE ISSUES
• PRESENT EXPOSURE NORMS OF ALL INDIA FINANCIAL INSTITUTIONS (AIFIs) & BANKS
– Exposure to a particular borrower are presently fixed at 15% of the lenders‟ “Capital Funds”. – For companies in infrastructure sector, limit is 20% of lender‟s “Capital Funds”. – Group is 50% of the lender‟s Capital Funds incl. Infrastructure – Maximum exposure can be enhanced by 5%exceptional circumstances-Board Approval
DEBT - POSSIBLE LT SOURCES IN DOMESTIC MARKET
• Indian Capital Market (Direct Market Borrowing)
– issue of bonds/debentures
• Private Placement: which are subscribed by Provident Fund, Pension Fund, Gratuity Fund, Insurance Cos, Regional Rural Banks, Foreign Banks, Corporates, Non-profitable institutions, Mutual Funds and Commercial Banks • Public Issues
• Term Loans from the Banks & FIs • Term Loans from LIC, GIC • The Loan could be
– Secured – Unsecured
MEETING FUNDS REQUIREMENT DOMESTIC V FOREIGN
• • • • • • • • Domestic debt preferred as revenues in INR Exposure limits of domestic lenders Profile building Preserving precious on- tap lines Available tenure of debt. Rates in international market Exchange Rate Variation Liquidity in Domestic & International Markets
ADVANTAGES OF RUPEE BORROWINGS
• Cost Competitive • Free from Exchange Fluctuations • Generally Higher Credit Ratings leading to reduced cost • Known to the lenders- less due diligence • With Basel II norms coming into forcebetter quality credit preferred • Natural Hedge as INR revenue
LIMITATIONS OF DOMESTIC BORROWINGS
• Exposure norms limit the market- reduced availability of funds despite being preferred borrower • Banks which have large quantity of funds at their disposal can not generally meet the tenor requirement of the power projects (in regulatory context) • Undeveloped pension fund market unlike US • Security issues in case of Bonds despite highest rating
WHY INTERNATIONAL FINANCING
• Fund availability subject to sectoral ceilings and existing exposures are also to be kept in mind. • Issue of creating security @ 1.25 times of the loan amount is also there in case of Bonds. • Availability of cheap funds in International Markets-6m- Libor for USD 2.71 % p.a., • Foreign investors have started viewing India favorably. Investors are now willing to lend / invest in good Indian Corporates. • To meet the cost of imports
• Why Rating
– Each investor can not go into the details of management, accounts, prospects, risk factors etc.; – A holistic view generally acceptable amongst lenders; – Legal/customary requirement in certain casesDomestic Bonds/USPP/Domestic Loans; – Makes credit distinction- to some extent – Provides comfort to the lenders
• Domestic Credit Rating Agencies
– The credit rating information services of India ltd. (CRISIL) – Investor credit rating agency (ICRA) – CARE – Fitch
• International Credit Rating Agencies
– Standard & Poors (S&P) – Moody‟s Investor Service Ltd. (Moody‟s) – Fitch Ratings
• • • • • • • • •
Preliminary meeting Analyze material- prepare initial write-up Detail information package Meeting/ Discussion/Formal presentation Rating committee meeting Disclosure of Preliminary rating Appeal process Issue of final rating Rating rationale/ Full credit report Monitoring / Review / Surveillance
• Sovereign risk
– Political climate – Credit worthiness of country Govt. Policies
• Industry Risk
– Demand supply – Regulatory restriction
• Organisation risk
– – – – – – – – Long term planning and Strategic direction Quality of senior management Market share & competitive position Operating position Financial requirement Capital expenditure management Employee relation Liquidity concerns
CREDIT RATING Contd…
• Rating Definitions
– – – – – – –
Highest Rating – Capacity to meet financial obligation extremely strong AA Very Strong A Still Strong BBB Exhibit adequate protection parameters BB/B Speculative CCC/C Speculative D Payment Default, filing of bankruptcy petition Plus(+) or Minus(-) sign is added to show relative standing with in the major rating categories
SOVEREIGN RATING Long Term Issuer FC Credit Rating
S&P MOODY‟S FITCH
BBB-/Stable Baa3 / Stable BBB-/Stable
BBB-/Stable Not Rated BBB-/Stable
REQUIREMENT OF CREDIT RATING
• • • • Rupee Bonds US Yankee bonds US 144a offerings Sec- registered bonds
Optional for: • • • • Euro bonds Samurai bonds Dragon bonds US private placements • Syndicated loans
FUND RAISING -NTPC Perspective
MAJOR TERMS & CONDITIONS OF RUPEE TERM LOANS- NTPC Perspective
• Tenor - 10 years door to door • Drawl over 3-4 years • Rate of interest negotiable based on prevalent market conditions and individual Banks‟ PLR / MTLR/SBAR • Financial Covenants
– The ratio of total liabilities to net worth will not at any time exceed 2:1; and – The ratio of EBITDA to interest expenses shall not at any time be less than 1.75:1
• Prepayment possible with notice generally without prepayment fee or breakage cost
• Negative Lien on the Assets. • Restriction of sale, transfer or otherwise disposal of assets in excess of 25% of book value of last annual accounts; • Restriction on change of business • Restrictions on issue of bonds in excess of prescribed amount;
What is Negative Lien ?
A Commitment to the Lender for not doing certain acts without prior written consent of the Borrower eg.
Except the charges and encumbrances already created on the assets (movable / immovable) by the Borrower for availing financial assistance, as disclosed in writing as of date by the Borrower, the Borrower shall not without prior written consent of the Bank:– create or permit to arise or subsist any mortgage, charge, pledge, lien encumbrance or security interest whatsoever over all or any of its undertaking, assets present or future (including un-called capital) of the Borrower as security for any obligations now or hereafter existing in favour of any person, however, subject to following exceptions:• • The Borrower may create security interests on its assets to secure the issue of its secured long term bonds with a maturity in excess of one year. The Borrower may create security interest on its assets to secure any rupee loan, the repayment of which is due within 12 months or less from the date of the said loan including working capital financing and The Borrower may create security interest on its assets to secure any foreign currency borrowings from multilateral and bilateral agencies like IBRD, JBIC and KFW etc. Sell, transfer or otherwise dispose of, by one or more transactions or series of transactions (whether related or not) the whole or any substantial part of its fixed assets, the book value of which is 25% or more of the book value as shown in the latest audited financial statements of the Borrower.
Recent Rupee loan- PFC
• Amount Rs 100 Bn- largest single loan for both organisations • Interest Rate 3 Yr AAA Bond yield + Spread • Moratorium 4.5 Yrs from first drawl • Tenor- 16 years Door-to-Door • Drawl over 4 years
SOURCES OF FINANCE UPTO 31/03/2008
Sources of Funds
1. - Equity Share Capital-GOI - Loan from GOI - Grant-in-Aid
Bonds issued in domestic market Loans from domestic financial Inst. Foreign Loans Private Equity Internal Resources & Share Premium
78126 36730 33
79806 174501 154790 4329 22860
2. 3. 4. 5. 6.
MULTILATERAL AND BILATERAL FUNDING IN NTPC
Italian 1% Saudi 1% West German 9% UK 2% French 3% Japan 24%
World Bank 51%
Total Resources raised INR 106.227 Billion
(Routed through Govt. of India as Equity / Loans)
E C B as on 31-03-2008
K-Exim 0.06 Euro Bond 7% Swedish 0.01 MTN 0.07 ADB II 0.07
Total Mobilisation Rs.165.55 Billion
JBIC-B 0.00 NIB 0.00 KfW 0.01 SCMB 11%
ADB 5% WORLD BANK 16% EXIM,JAPAN 13%
MEMORANDUM OF ASSOCIATION
- Borrowing power conferred upon the company under “objects incidental or ancillary to the attainment of the main object” - “Borrowing Power” are stated as – to borrow money or to receive money or deposits for the purpose of financing the business of the company either with security or mortgage or other security charged on the undertaking on all or any of the assets of the company including uncalled capital and to increase, reduce or pay off any such securities.
ARTICLES OF ASSOCIATION
- Subject to the provisions of Section 58A, 292 and 293 of the Companies Act, and Government Guidelines issued from time to time, the Board may be means of resolution passed at meetings of the Board from time to time accept deposits or borrow and/or secure the payment of any sum or sums of money for the purpose of the Company.
COMPANIES ACT 1956 – SECTION 292
The Board of Directors of a company shall exercise the following powers on behalf of the company, and it shall do so only by means of resolutions passed at meetings of the Board :The power to make calls on shareholders in respect of money unpaid on their shares ; The bower to issue debentures ; The power to borrower moneys otherwise than on debentures ; The power to invest the funds of the company ; and The power to make loans.
a) b) c) d) e)
COMPANIES ACT 1956 – SECTION 293
As per section 293 of the Companies Act, the company can borrow any amount which does not exceed the aggregate of the paid up capital of the company and its free reserves (free reserves means “reserves not set apart for any specific purposes”). Any borrowing which exceeds the above limit can be made only with the consent of such company in general meeting.
WHAT IS INTERNATIONAL FINANCING
• Sourcing of funds from international markets • Management of funds so sourced • Servicing of external debt/equity • Exchange risk management
SOME COMMONLY USED JARGONS
• • • • LIBOR- London Inter Bank Offer Rate MIBOR- Mumbai Inter bank Offer Rate G Sec- Government Securities Direct Quote- A quote of One unit of Foreign Currency in Domestic Currency eg 1 Usd = INR 45 • UST- Treasury Rate of US Securities • Cross Rates- Quote of one Foreign Currency in another Foreign currency generally USD
SOME COMMONLY USED JARGONS Contd.
• Arbitrage- an opportunity to buy at one place or time and sell at another place or time with possibility of profit and no possibility of loss. • Spread- the additional amount (generally in %) charged by the lender/seller over the Benchmark Rate • Basis Points- 100th part of a Percentage i.e. 1% = 100 Basis Points • SWIFT- Society for Worldwide Inter-bank Financial Telecommunication
SOME COMMONLY USED JARGONS Contd.
• Euro Bonds- Bonds issued by a non-resident in a currency other than domestic currency e.g. $ bonds issued by NTPC in Europe and Asia. • Spot- Forex Quotation for two business days hence • TOM- Forex Quotations for next business Day • Forward- Forex Quotation for any day beyond two business days.
SOME COMMONLY USED JARGONS Contd.
• European Quote- Number of FC units per $ • American Quote- No. of $ for 1 Unit of FC • CIRR- Commercial Interest Reference Rate –used by OECD member countries of ECA
RAISING DEBT FROM INTERNATIONAL MARKET
– – – – – Syndicated Loans Export Credit Bonds Multilateral and Bilateral funds Development Banks-through GOI
A syndicated loan deal generally consists of :
– An ‘arranger’ or ‘lead manager, generally one (or more) banks chosen by the borrower – Members of the syndicate or consortium – The remaining syndicate, or consortium, of banks generally simply provide funds for the loan. A syndicate, or consortium, of banks act as a single financier, based on a single loan agreement. The participating banks split and allocate the risks connected with the loan.
• In case of disputes, all banks must concur with the majority vote
• SALIENT FEATURES – Easy to raise
– – – – Little pre-marketing requirement Less formalities Can be arranged within 6-8 weeks Interest rate
• Fixed • Floating
– Rating not required – Lowest margin – Tenure of loan and Amount- Limiting factors
Arranger(s) Lenders Lenders‟ Agent Process Agent
Formalities of prepayment
Prepayment charges Notice Prepayment in part or full
Covenants Events of default including cross default
• Material Adverse changes
– Changes in business conditions operation, performance of borrowers, syndication market, financial / capital market that materially impairs syndication of the facility.
– All payment free and clear of all present & future taxes, duties of whatever nature. In case of any such deduction , borrower will suitably gross up the payment in such a manner as if no deduction levied.
• NEGATIVE LIEN (PLEDGE)
– Borrower shall not create any security interest over any of its present of future revenues or assets for any loan/ indebtedness. With the exception – Working capital needs – Long Term bond of Maturity more than 1 year – Multilateral Loans – may or may not
• CLEAR MARKET
– From the date of the acceptance of the offer until the date of
the signing of the facility agreement no borrowing or guarantee facilities shall be discussed, syndicated or privately placed by the borrower where the prior consent of the lead arranger , which would have the effect of competing with or adversely affecting the successful conclusion of the proposed facility.
SYNDICATED LOANS contd…
COVENANTS IN LOAN AGREEMENT
– FINANCIAL RATIOS • Total liability to total net worth • Ratio of EBITDA to Interest Expenses • Debt Service Coverage Ratio • Months Debtors – MANAGEMENT COVENANT • Company „A‟ will continue to have management control over the Borrower during the life of the Facility – SHAREHOLDER COVENANT • Company „A‟/GoI will hold 51 % more of the issued or paid up capital of the Borrower.
SYNDICATED LOANS contd…
EVENTS OF DEFAULT
– Failure to pay under the facility (with in __Business Day) – Unable to pay debts (Cross Defaults) in excess of ceiling amount • To any creditors / lenders • Commencement of negotiation for re-scheduling – Corporate action for • Winding up • Reorganisation • Legal proceeding for winding up (which proceeding are not frivolous or vexatious) material litigation – Acquisition / Nationalisation – Change of Business
SYNDICATED LOANS contd…
– Material Adverse Change in the financial condition of the borrower – Unlawfulness – Incorrect Representation – Failure or Repudiation : Borrower fails to perform and observe any of its obligations under the loan agreement
• RESULTS OF OCCURRENCE OF EVENT OF DEFAULTS
– No further drawing under the loan agreement – Loan and all interest accrued become immediately payable – Reimburse all losses and expenses including loss of profit consequent to event of default.
ADVANTAGES TO THE BORROWER
• May negotiate a higher total sum of borrowed funds • It is not necessary to enter personal negotiations with each and every one of the financing banks • The terms and conditions agreed in the syndicated loan agreement equally bind all of the participating banks.
ADVANTAGES TO THE LENDERS
• Banks split, or “syndicate” their large loans with each other to avoid a single large loss. • Participating banks are usually entitled to transfer their proportion of the loan to a third party without the borrower's consent. • Quite often, banks that participate in syndicated deals later sell their interest in those loans to other investors. • “The market for loan participation is so brisk that borrowers sometimes do not know exactly which bank is financing them” – White & Case
• Financing for goods originating from the respective countries and in some cases, for local/third country goods • Usually upto 85% of the value of goods imported, individual agencies have different limits • Funds are usually provided by a commercial bank which gets guarantee for political and/or commercial risk from the export credit guarantee agency • Sometimes ECA also provide finances
EXPORT CREDIT ...CONTD.
• Loans are available for tenors ranging from 5-12 years and repayment are in semi-annual installments • Interest rates are usually fixed and are determined on the date of submission clear proposal to ECA
• Minimum subsidized interest rates (Commercial Interest Reference Rates-CIRRs) are applicable
• Interest rates are notified as OECD consensus rates. OECD is “Organisation for Economic Cooperation and Development” and has 30 members.
EXPORT CREDIT ….CONTD.
• Interest rates are effective from 15th of every month; • All the OECD member lend at the rate and tenure notified by OECD. • OECD lending guidelines pay special attention to Environment and compliance with Environment guidelines. • Loans are generally to be guaranteed by the government or the borrower‟s country-not in case of NTPC. • Expenses include guarantee fee payable to the export credit guarantee agency, commitment fee, agency fee and other out of pocket expenses.
ECA ECGD Coface Hermese SACE OND US Exim Korea Switzerland JBIC & MITI Country U.K France Germany Italy Belgium USA K-Exim SERV Japan
• Govt. agencies that exist to support the export from each OECD country. • They guarantee bank finance, supplier Finance, provide direct loans, provide political risk insurance • ECA work within an established set of guidelines called the OECD consensus (April 1978) • Arrangement places limitation on the term of export credit – Minimum premium benchmark – Minimum cash payment – Maximum repayment – Minimum interest rates
EXPORT CREDIT (OECD CONSENSUS)
• Consensus is the basis for the actions of ECAs.
– An agreement for level playing field. – Consensus rules relate to both terms of covers and terms of funding – Borrower countries are classified under two categories – Category - I World Bank graduation list e.g. 1996 - GNP per capita labour $5435 – Category II -other than Category I – An ECA can support finance or guarantee maximum of 85% of the export content – Minimum of 15% of contract to be paid before the use of the ECA facility – Exporter have to win contract on product quality and price competitiveness and not on beneficial finance terms – Interest can be capitalized (drawn out of loan proceeds) during drawdown period
EXPORT CREDIT Contd…
• Minimum interest rate: CIRR (Commercial Interest Reference Rate) is declared in different currencies.
– It is based on Govt. bonds yields of different durations – A fixed margin of 100 bp is added – As available to first class domestic borrowers – Exception is Yen CIRR i.e. LTPR – 20 bp
Interest Rate - Fixed (CIRR based) or Floating (LIBOR based)
– Also possible to convert to fixed rate after disbursement period or once draw-downs accumulates to agreed level.
EXPORT CREDIT Contd…
• Repayment terms
– for category I
• • 5 years to 8 ½ years 10 years (for power Cos. 12 Years)
– For category II
– Sovereign credit risk – Country credit risk- whether a country will service its external debt – political event, legal provision. – Participant to charge minimum premium bench marks
INSURANCE COVER FROM ECA - ADVANTAGES
• Protects lenders against non payment caused by– War, civil war, Rebellion – Prevention or delay in payment of external debt – Cancellation or non renewal of license – Failure of Last Govt. to honour written undertaking
EXPORT CREDIT COST
• Application fees (25000 USD) • Commitment fee
– 0.125% to 0.50% p.a.
• Insurance premium
– Depends on tenure, type of borrower country,% age of cover, drawdown period etc., typically 3.00% to 6.00%
• • • •
Presently CIRR rates are greater than 8.5 years USD 4.19% Euro 5.00% JPY 2.14%
EXPORT CREDIT – NTPC‟s RECENT EXPERIENCE
• Export – Import Bank of Korea (KEXIM)
– – – – – – – Facility amount USD 354.25 million Maturity 16 Years (Repayment in 12 years) Rate of Interest (CIRR) 4.31% p.a. Exposure Premium Management Fee Arrangement Fee All- in- Cost 5.06%
• Swedish Export Credit (EKN)
– – – – – – Facility amount USD 41.55 million Maturity 7 Years (Repayment in 5 years) Rate of Interest 3.851% p.a. Insurance Premium Arrangement Fee All- in- Cost 4.736%
INTERNATIONAL BOND ISSUE : EURO BONDS
• Term Euro is misleading and not restricted to European investors • Bond issued internationally outside home country‟s market in own or different currency. – e.g. – a firm issuing yen bonds outside Japan – e.g. - a US firm issuing dollar bonds outside US. • Long tenure possible up to 30 years even perpetual • Huge depth of market • Primary market – for first issue of securities • Secondary market – trading after issue • Public issue –eg. 144A • Private placement- Recent product USPP
INTERNATIONAL BOND ISSUE : EURO BONDS CONTD…
• • • •
Book building Fixed coupon Vs Zero Coupon (Deep Discount) Section 144 A issue Credit rating not essential- however good rating enhance the success of issue Listing – either at London, Luxemburg or Singapore stock exchange A prospectus / offering circular is prepared by independent legal adviser containing – Details of issue – Financial position of the issuer (4 year data) – Purpose of the issue – Terms and Conditions of the issue Unsecured do not require borrower to create pledge
• Borrower agrees not to create charge on Assets which are unencumbered on the date of signing of Loan Agreement without the permission of lenders. • Borrower may negotiate for certain exclusions depending upon the terms of agreement such as:– No requirement of seeking permission if charge is to be created on Assets in tune with requirement of trade credits/working capital requirement – No permission required for creating charge on Assets for borrowing in INR – Generally no permission required for creating charge on Assets for borrowings from Multilateral Agencies.
EVENTS OF DEFAULT
• • • • • • • • Non payment Misrepresentation Cross default breach Insolvency Repudiation Material Adverse Change( MAC) Illegality Change in Business
RESULTS OF OCCURRENCE OF EVENTS OF DEFAULTS
• No further drawing under the loan agreement • Loan and all interest accrued become immediately payable • Reimburse all losses and expenses including loss of profit consequent of event of default. • Other Loans may also become payableCascading effect
CURRENCY MOVEMENT FOR LAST 5 YEARS
EXCHANGE RATE DATE
Mar’ 07 Mar’ 06 Mar’ 05 Mar’ 04 Mar’ 03
% CHANGE IN Y to Y
43.86 44.95 44.07 44.31
0.3731 0.3837 0.4113 0.4238
58.66 54.84 56.98 54.28
-2.76% -6.71% -2.95% 5.92%
6.97% -3.76% 4.97% 4.75%
-2.42% 2.00% -0.54% -7.36%
NTPC‟ Context -Recent Experiences
ADB II- CFS
• First Loan by ADB with A & B Loan Structure • For entire loan, ADB is “Lender of Record” • First time tapped Taiwanese Capital Market – 30% contribution by 12 Banks • Exempt from Withholding and Service Tax • Stress on Environmental and Social aspects • No Sovereign Guarantee
• • • • • • Loan Guaranteed by JBIC-Principal Four Japanese Banks participated Total amount of USD 380 mn. Exempt from Withholding Tax Stress on Environmental aspects No Sovereign Guarantee
MEDIUM TERM NOTE (MTN) PROGRAM
Established in February 2006
• An EMTN program is essentially a documentation platform which provide the issuer an opportunity to enter frequently, efficiently and economically the international debt capital market:– Can be used for large and small issuances; – Multicurrency and Structured notes – Any number of times with the cap on the aggregate amount – Investor may initiate issuance- Reverse Enquiry
PROS OF A MTN
• Cost efficient if used regularly • Allows easy and timely access • Once set-up minimum additional Documentation • Facilitates both private and public placements • Advantage of Reverse Enquiries • Broadens Investor Base • Reverse Enquiries
LIMITATIONS OF A MTN
• Expensive if not used; • Requires Annual update thus cost • Loss of goodwill if not used and surrendered
• • • • • • • • • • Offering Circular Program Agreement Issuing and Paying Agency Agreement Trust Deed Agency Agreement Listing Application Subscription Agreement Pricing Supplement Legal Opinion Auditor‟s Comfort Letters
• Internal Management Approval • RBI Approval (in case of Approval Route else in-principle approval is required) • Appointment for Arranger(s) • Appointment of various intermediaries
– – – – – – International legal counsel- Lender and Borrower Indian Legal Counsel- Lender and Borrower Trustee and Agent Rating Agencies Process Agent Stock Exchange
• Commencement of Due Diligence with legal counsels • Obtaining schedule for Road Shows and Signing from JBRs • Finalising the Offering Circular, Trust Deed, Agency Agreement, Program Agreement, Subscription Agreement, Signing Memorandum, Closing Memorandum, Comfort Letters
• Appointment of NTPC representatives for :
– Liasoning with Stock Exchange; – Operating Bank Account
• Opening of Bank Account-getting SWIFT code etc.; • Obtaining all documents relating to MTN establishment; • Signing of MTN Documents; • Finalising the Road show presentation including preparation for prospective questions from prospective investors;
• Finalising the deal • Signing the subscription agreement; • Seeking RBI‟s loan registration number thru AD; (before money is transferred to our account approval
should be in place)
• Furnishing Bank account details to the Trustee and the Agent to effect the fund transfer; • Getting the money , utilise it, furnish CA certificate to RBI along-with ECB 2
FEATURES OF USD 300 Mn. ISSUE UNDER MTN
• Bond was issued in Feb 2006 • The issue evoked an overwhelming response – order book over subscribed by over 5 times attracting 105 investors • The deal was sold 50% in Asia, 42% in Europe and 8% to offshore US accounts. • 42% issue was sold to banks, fund mangers took 38%, insurance took 15% and retailer subscribe to 5% • The coupon is 5.875%, maturity is 10 years bullet
Issued in March‟2004
EURO BONDS – TYPICAL FEATURES
• Bearer form, freely negotiable debt instruments; • Issued and underwritten through an international syndicate of banks and investment banks („issuing houses”) • Held principally by investors outside the country in whose currency the issue is denominated; And, • Issued for long maturity.
USD 200 MLN – 5.5% BONDS DUE 2011
Size of the issue Date of issue of Bonds Denominations Coupon Issue price Security Listing Repayment Final Maturity Transaction fee to Joint Lead Managers USD 200 million 10.03.2004 US$ 1,000 , US$ 10,000 and US$ 100,000 5.5% per annum, payable semi-annually 99.37% Unsecured At Singapore Stock Exchange Bullet, after 7 years 10.03.2011 0.20% flat of the face value
Not to exceed the overall cap of USD 700,000 approved by Ministry of Finance
1. 2. 3. 4. 5. Mandate Letter Offering Circular Subscription Agreement Trust Deed Paying Agency Agreement
EUROBOND – SEQUENCE OF EVENTS
1 2 3 4 5 6 7 8 9 Presentation by prospective Managers Finalize Committee Report and issue Mandate Letter Appointment of Legal Counsel(s), others Due diligence process Finalize OC File OC with SGX-ST Road shows Pricing Signing of Subscription Agreement 1 Week 3 days 3 days 3-4 days 7 days 3 days 3 days 1 day (T) 1 day
Signing of Trust Deed and Fiscal Agency Agreement
Settlement of proceeds
Within 5 days
• UST 3.56% + 2.05% = 5.61% p.a. • Adjusted to 1/8th of a percent to arrive a coupon of 5.5% p.a. • Issue price discounted at 99.37% • In terms of Libor : 3.965% + 1.645% = 5.61%
DISTRIBUTION OF INVESTORS
US Offshore 8% Asia 45% Europe 47%
Insurance / Pension 17%
Asset Managers 39%
• 79 Accounts participated • 45% of the issue placed in Asia, 47% in Europe, 8% to US Off-shore Accounts. • Assets Managers took 39%, Banks 32%, Pension / Insurance 17% and Retail / others 12%
• Faridabad : through GOI • Simhadari : Direct about JPY 66 billion Terms - Interest rate - 2.6% p.a. (Faridabad) - 2.3%,1.8% p.a. (Simhadari) - service charges-0.1% of amount disbursed - Repayment period 20 years excluding grace period. - Grace period 10 years - Currency - Jap. Yen • North Karanpura- Direct JPY 16 billion
– Interest Rate 0.75% p.a. – Repayment in 10 Years with grace period of 5 years – GOI Guarantee 0.75% p.a.
JBIC LOAN (OTHER FEATURES)
• Assistance available upto 85% of eligible component of project cost. • Items ineligible - Cost of land - Compensation/rehabilitation cost - Taxes and duties - IDC (idc on JBIC loan can be covered) • Procurement generally on untied basis.
ADB LOAN FOR UNCHAHAR -II
• Disintermediation by GOI • Interest rate-cost of qualified borrowings+spread (presently 1.69% p.a.) • Commitment fees - 0.75% p.a. • Repayment period 15 years excl. Grace period of 5 years • Pool currency : major portions Jap. Yen. Now converted to Yen Loan
COMPOSITION OF NTPC‟S FOREX LOAN BASKET
Fixed (%) 31.03.2008 31.03.2007 31.03.2006 31.3.2005 69 75.17 79.16 81.76 8.52 Floating(%) Variable(%) 31 16.31 20.84 18.24
COMPOSITION OF NTPC‟S FOREX..…CONTD.
• NTPC‟s Forex debt is predominantly carries fixed rate of interest. Out of a total of Rs.54.4 billion of Forex debt, an amount of Rs.24.5 billion represented by loans have Floating rates of interest. • As of March 08- 32% is JPY, 67 % USD and 1% Euro exposure
Regulatory Framework in India for raising ECBs
Regulatory Framework of ECBs in India
Reserve Bank of India-Nodal AgencyIssues ECB guidelines • Last review of guidelines issued on 2209-2008 • Covers Export Credits-Suppliers Credit, Buyers Credit, Syndicated loans, Bonds, FRNs, MTNs • ECBs can be assed by either Automatic Route or with the Approval Route
• Eligible Borrowers- Corporates can borrow under this route.
Financial intermediaries are exempt such as banks, FII, housing finance companies.
• Recognized Lenders
– International Banks, International capital markets, Multilateral institutions such as IFC, ADB, IBRD etc., – Export Credits etc. – Suppliers of equipment, foreign collaborators, foreign equity bidders financial
• Amount & Maturity
– ECBs upto USD 20 million with avg. Maturity of 3 years. – ECBs above USD 20 million and upto USD 100 Million with avg. Maturity of 5 years. – ECBs upto USD 500 million with avg maturity of over 7 years for Infrastructure under approval route
End – Use
- For import of capital goods, new projects - For infrastructure sector-power, telecommunications, roads including Bridges, railways, ports, industrial parks, urban infrastructure and Mining, exploration and refining - For Investment in JVs and WOS - Not permitted for on-lending or investment in capital market by corporates - Not permitted for real estate except integrated township
• All-in Cost ceilings
- 3-5 years - 5-7 years - More than 7 years 200 bps plus 6m Libor 350 bps plus 6m Libor 450 bps plus 6m Libor
- Parking of Funds abroad-allowed
actual use of funds in India. till
- Prepayment-permitted upto USD 400 mn - Refinancingpermitted provided
outstanding maturity is maintained and the cost of raising fresh loan is lower
- Guarantee- guarantee or letter of comfort
from by banks , FIIs etc not permitted
SOME COMMONLY USED JARGONS Contd.
• Foreign Bonds- Bonds issued by a nonresident in the domestic currency- eg Bonds issued by an Indian Company in $ in US • Yankee Bonds- Foreign Bonds issued in US i.e. $ bonds in US • Samurai Bonds- Foreign Bonds issued in Japan i.e. ¥ bonds in Japan • Bulldog Bonds- Foreign Bonds issued in UK i.e. £ Bonds in UK
TOTAL FOREIGN LOANS AS ON 31.03.07
Amount (Rs. Mln) 145,579
Direct foreign loans
Through Govt. Of India Total
• Vanilla-Fixed or Simple Floating Rate-non callable • Inflation Linked-Coupon linked to designated measure of Inflation • Bermudan callable- Callable at discrete intervals throughout life of notes • European Callable-Callable at single date • Fixed Rate step-up callable- coupon increases over life- stated at the time of setupcallable
• TEC-10-FRN linked to constant Maturity 10 yr Fench Govt. rates • CMS linked- FRN linked to “Constant Maturity Swap” rate • Callable Zero coupon • Range Accrual- Fixed coupon that accrues every day that a designated index (say 3 m libor) is trading within specified range. In case index is trading outside the range, the note does not accrue interest. • Inverse FRN- bears a Fixed minus float coupon
COST OF CAPITAL
• Cost of Debt
– Pre Tax – Post Tax = Pre-Tax*(1-t)
• Cost of Equity
– Present value of expected returns with market value of shares
– Book value vs Market value of Weights
COST OF CAPITAL-CONTD.
• Issues concerning International Financing in the Cost of Capital
– In addition to the Interest Cost impact of FERV and Tax need to be considered