Long Term Financing


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Long Term Financing

  1. 1. Long Term Financing….. Continued part left by Group C
  2. 2. What is Lease…..? <ul><li>Lease is a contract under which a lessor, the owner of the assets, gives right to use the asset to a lessee, the user of the assets, for an agreed period of time for a consideration called the lease rentals. </li></ul><ul><li>In up-fronted leases, more rentals are charged in the initial years and less in the later years of the contract. The opposite happens in back ended leases. </li></ul><ul><li>Primary lease provides for the recovery of the cost of the assets and profit through lease rentals during a period of about 4 or 5 years. It may be followed by a perpetual, secondary lease on nominal lease rentals. </li></ul>
  3. 3. <ul><li>Operating Lease </li></ul><ul><li>Financing Lease </li></ul><ul><li>Sale and Lease Back </li></ul>Types of Leases
  4. 4. Operating Lease <ul><li>Shot-term, cancelable lease agreements are called operating lease. </li></ul><ul><li>Tourist renting a car, lease contracts for computers, office equipments and hotel rooms. </li></ul><ul><li>The Lessor is generally responsible for maintenance and insurance. </li></ul><ul><li>Risk of obsolescence remains with the lessor. </li></ul>
  5. 5. Financial Lease <ul><li>Long-term, non-cancelable lease contracts are known as financial lease. </li></ul><ul><li>Examples are plant, machinery, land, building, ships and aircrafts. </li></ul><ul><li>Amortise the cost of the asset over the terms of the lease–Capital or Full pay-out leases. </li></ul>
  6. 6. Sale and Lease Back <ul><li>Sometimes, a user may sell an (existing) asset owned by him to the lessor (leasing company) and lease it back from him. Such sale and lease back arrangements may provide substantial tax benefits. </li></ul>
  7. 7. Commonly Used Lease Terminology <ul><li>Leveraged Lease. </li></ul><ul><li>Cross-border lease. </li></ul><ul><li>Closed and open ended lease. </li></ul><ul><li>Direct lease. </li></ul><ul><li>Master lease. </li></ul><ul><li>Percentage lease. </li></ul><ul><li>Wet and dry lease. </li></ul><ul><li>Net net net lease. </li></ul><ul><li>Update lease. </li></ul>
  8. 8. Advantages of Leasing <ul><li>Convenience and Flexibility. </li></ul><ul><li>Shifting of Risk of Obsolescence. </li></ul><ul><li>Maintenance and Specialized Services. </li></ul>
  9. 9. Lease Benefits to Lessor & Lessee: <ul><li>A lease can benefit both when their tax rate differs. </li></ul><ul><li>Leasing pays if the lessee’s marginal tax rate is less than that of the lessor. In fact in a lease, the lessee sells his depreciation tax shield to the lessor. </li></ul><ul><li>In the absence of taxes it is hard to believe that leasing would be advantageous if the capital markets are reasonably well functioning. </li></ul><ul><li>Gain of both is loss to the government in form of taxes. </li></ul>
  10. 10. Off Balance Sheet Financing <ul><li>Debt financing that is not shown on the face of the balance sheet is called &quot; off balance sheet financing&quot;. </li></ul><ul><li>Off balance sheet financing allows a company to borrow being without affecting calculations of measures of indebtedness such as gearing. </li></ul><ul><li>The motives includes misleading investors and remaining within the terms of debt covenants. It may also sometimes be a side effect of the method of raising capital chosen, but it is probably best to be suspicious of the motives for raising debt in a manner that is not visible to investors. </li></ul>
  11. 11. Hire Purchase Financing <ul><li>In this there are three parties: the manufacturer, the hiree and the hirer. The manufacturer sells assets to the hiree who sells it to the hirer in exchange for the payment to be made in specific period of time. </li></ul><ul><li>After an initial deposit, the balance is repaid by equal monthly payments. At the end of the agreement you become the owner. No VAT is added to the payments and interest is tax deductible. The equipment is considered a company asset, which allows it to be written down against taxable profits. </li></ul>
  12. 12. Difference Hire Purchase Financing Lease Financing Hirer is entitled to claim Depreciation Tax Shield. Lessee is not entitled to claim depreciation tax shield. Hirer can charge only interest Portion. Lessee can charge the entire lease payments as expense for tax computation. Once the hirer has paid all instalments, he becomes the owner of the asset and can claim its salvage value. Lessee does not become the owner of the asset. Therefore he has no claim over the asset salvage value.
  13. 13. Installment Sale <ul><li>Instalment Sale is a credit sale and the legal ownership of the asset passes immediately to the buyer as soon as the agreement is made between the buyer and the seller. </li></ul><ul><li>Except for the timing of the transfer of ownership, instalment sale and hire purchase are similar in nature. </li></ul>
  14. 14. Project Financing <ul><li>Scheme of financing a particular economic unit in which a lender is satisfied in looking at the cash flows and the earnings of that economic unit as a source of funds, from which a loan can be repaid and to the assets of the economic unit as a collateral for the loan. </li></ul><ul><li>It is different from the traditional form of financing, i.e., the corporate financing or the balance sheet financing. </li></ul>
  15. 15. Characteristics <ul><li>A separate project entity is created that receives loans from lenders and equity from sponsors. </li></ul><ul><li>The component of debt is very high in project financing. </li></ul><ul><li>The project funding and all its other cash flows are separated from the parent company’s balance sheet. </li></ul><ul><li>Debt services and repayments entirely depends on the project’s cash flows. Project assets are used as collateral for loan repayments. </li></ul><ul><li>Project financer’s risk are not entirely covered by the sponsors guarantees. </li></ul><ul><li>Third Parties like suppliers, customers. government and sponsors commit to share the risk of the project. </li></ul>
  16. 16. Project Financing Risk & their Allocation <ul><li>Risks </li></ul><ul><ul><li>Project Completion Risk </li></ul></ul><ul><ul><li>Market Risk </li></ul></ul><ul><ul><li>Foreign Currency Risk </li></ul></ul><ul><ul><li>Inputs Supply Risk </li></ul></ul><ul><li>Risk Mitigation </li></ul><ul><ul><li>By Government </li></ul></ul><ul><ul><ul><ul><li>Country Risk </li></ul></ul></ul></ul><ul><ul><ul><ul><li>Sector Policy Risk </li></ul></ul></ul></ul><ul><ul><li>By Others </li></ul></ul><ul><ul><ul><ul><li>Commercial Risk </li></ul></ul></ul></ul>
  17. 17. Venture Capital Financing
  18. 18. Features of Venture Capital <ul><li>Equity Participation. </li></ul><ul><li>Long-term Investments. </li></ul><ul><li>Participation in Management. </li></ul><ul><li>Venture capitalist combines the qualities of bankers, stock market investors and entrepreneur in one. </li></ul>
  19. 19. Features of Venture Capital <ul><li>Equity participation- Venture financing is actual or potential equity participation through direct, purchase of shares, options or convertible securities. The objective is to make capital gain by selling of the investment once the enterprise becomes profitable. </li></ul><ul><li>Long Term Investments- V.F. is a long term illiquid investments, it is not repayable on demand. It requires long term investment attitude that necessitates the venture capital firms (VCFs) to wait for a long period, say 5-10 years, to make large profit. </li></ul><ul><li>Participation in management- V.F. ensures continuing participation of the venture capitalist in the management of the entrepreneur’s business. This hand-on mgmt approach helps him to protect and enhance by actively involve and supporting the entrepreneur more than finance, v.c. gives his mktg, technology, planning and mgmt. skills to the new firm. </li></ul>
  20. 20. VC Development <ul><li>Impetus </li></ul><ul><li>Internal context </li></ul><ul><li>External context </li></ul><ul><li>Sustainability </li></ul>
  21. 21. Stages in Venture Financing <ul><li>Early Stage Financing </li></ul><ul><li>Expansion Financing </li></ul><ul><li>Acquisition/Buyout Financing </li></ul>
  22. 22. Venture Capital Investment Process <ul><li>Deal Origination </li></ul><ul><li>Screening </li></ul><ul><li>Evaluation </li></ul><ul><li>Deal Structuring </li></ul><ul><li>Post-investment activity </li></ul><ul><li>Exit </li></ul>
  23. 23. Methods of Venture Financing <ul><li>Equity </li></ul><ul><li>Conditional Loan </li></ul><ul><li>Income Note </li></ul><ul><li>Other Financing Methods </li></ul><ul><ul><ul><li>Participating Debentures </li></ul></ul></ul><ul><ul><ul><li>Partially Convertible Debentures </li></ul></ul></ul><ul><ul><ul><li>Cumulative Convertible Preference Shares </li></ul></ul></ul><ul><ul><ul><li>Deferred Shares </li></ul></ul></ul><ul><ul><ul><li>Convertible Loan Stock </li></ul></ul></ul><ul><ul><ul><li>Special Ordinary Shares </li></ul></ul></ul><ul><ul><ul><li>Preferred Ordinary Shares </li></ul></ul></ul>
  24. 24. Disinvestment Mechanisms <ul><li>Buybacks </li></ul><ul><li>Initial Public Offerings </li></ul><ul><li>Secondary Stock Markets </li></ul>