Starting Up:Introduction to venture Capital: by Anand Lunia
Debt funding vipul thaker oct2010
1. Fund Raising through DebtFund Raising through Debt
By – Vipul Thaker
CEO – Haribhakti SME Transformation and Support Solutions Pvt Ltd.pp
2. Agenda
• Different Funding Optionsg p
• Different forms of Debt
• Debt options & relevance to business• Debt options & relevance to business
• Approach to apply
Client name - Event - Presentation title
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3. Fund Raising Options
Equity
Raising money for company activities by selling common or preferred stock. In return for the
money paid, shareholders receive ownership interests in the corporation. (Owned Funds)
Subsidy
Monetary assistance granted by the government to a person or group in support of an
i d d b i i h bli ienterprise regarded as being in the public interest.
Debt
R i i f f d b b i (D bt F d) Th t t f fi ' t t l it l hi h lRaising of funds by borrowing (Debt Fund). That part of a firm's total capital which commonly
comprises of loan-capital and short term bank loans such as overdraft. Part of a firm's total
financing, it commonly comprises of (1) short-term bank borrowings (such as overdraft), (2)
cash raised through debt instruments (such as bonds), (3) off-balance-sheet financing (such
as operating leases), (4) and trade credit.
4. Equity Financing
• Public Issue
Initial Public OfferingInitial Public Offering
Further Public Offering
• Rights Issue• Rights Issue
• Preferential Offer
• Private Equity
Client name - Event - Presentation title
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5. Subsidy
Economic benefit (such as a tax allowance or duty rebate) or financial aid (such
as a cash grant or soft loan) provided by a government to
(1) support a desirable activity (such as exports)
(2) keep prices of staples low( ) p p p
(3) maintain the income of the producers of critical or strategic products
(4) maintain employment levels or
(5) i d i t t t d l t(5) induce investment to reduce unemployment.
The basic characteristic of all subsidies is to reduce the market price of an
item below its cost of production. Also called subvention.
Client name - Event - Presentation title
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6. Debt Financing
Working Capital financingWorking Capital financing
• Cash Credit/Bank overdraft
• Bill discounting/Factoring
• Letters of Credit
Term loan:
• Normally given to the borrowers for acquiring long term assets i.e. assets which will benefit the borrower
over a long period viz purchases of plant and machinery, constructing building for factory etcg p p p y, g g y
Project Financing:
• Financing of long-term infrastructure and industrial projects based upon complex financial structure
where project debt and equity are used to finance the project rather than the balance sheets ofwhere project debt and equity are used to finance the project, rather than the balance sheets of
Promoters/Project Sponsors
• Private and public debt
Private debt comprises bank-loans while Public debt is a freely tradable financial instruments on the stock
exchange or over the counter
7. Debt Financing ……..cont
• Securitization
Occurs when a company groups together assets or receivables and sells them in units to the market through
a trust. Any asset with a cash flow can be securitized. The cash flows from these receivables are used to
pay the holders of these units. Companies often do this in order to remove these assets from their balance
sheets and monetize an asset.
• Secured and unsecured debt
Defined on basis of recourse to assets
• Syndicated and bilateral debt
A syndicated loan that is granted to companies that wish to borrow more money than any single lender is
prepared to risk in a single loan, In such a case, a syndicate of banks can each agree to put forward a
i f h i i lportion of the principal
• Mezzanine Debt
Refers to a subordinated debt or preference shares which represents a claim on a company's assets which isRefers to a subordinated debt or preference shares which represents a claim on a company s assets which is
senior only to that of the shares.
Client name - Event - Presentation title
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8. Comparison - Syndicated Debt & Mezzanine Debt
Criteria Syndicated Debt Mezzanine
Security Secured SubordinatedSecurity Secured Subordinated
Charge on Assets (Ranking) First Second
Covenants Tight Flexible
Coupon Floating FixedCoupon Floating Fixed
Rate Prime Risk Adjusted
Equity Kicker None Warrants
Prepayment Penalties Yes Fixed PeriodPrepayment Penalties Yes Fixed Period
Expected Returns 12% - 14% 13% - 20%
Capital Provider Chartered Banks Private Capital
9. Reasons for availing Debt Finance
• Use of Funds – Working capital, Project Loan, Fixed Asset creation, Purchase of Equipment .
• Security for debt – Function of use of funds, creation of charge/mortgage – mitigating againstSecurity for debt Function of use of funds, creation of charge/mortgage mitigating against
delinquency.
• Repayment profile – Cash flow – Source and timing - thus maturity/tenor of loan.
• Credit standing of Borrower
• Credit Ratios – Debt Equity, Interest Cover, Debt service coverage.
• Credit History – Years of operations, relationships with lending institution/banks.
• Risk Assessment by Lender – Security/Asset cover, equity invested-in by borrower, cash flow
profile of borrowers’ business/operations.
10. Debt Finance - Illustration: Project Financing
Sponsor
T L
Execution experience –
mitigate against cost over-runs
through EPC contract
Equity
Term Loan
Suppliers’ credit for
i t
Commissioning risk
Guarantees that
fall away
Project Company
equipmentCommercial risk
Cash flow
assessment Security structure – Cash flow/
carve out Credit support in the
short term
Typically used for infrastructure, large industrial and mining projects
11. Debt Raising - Seven level analysis
PackagingPackaging
Plans
Future Potential
History
Rating
Company
Individual
14. Debt Financing – Execution overview
• Preparation of Project/Funding requirement
• Assessment of cash flow – Funding requirements and cash flows for repaymentsg q p y
• Preparation of documents – CMA/CAS for working capital, project report for capital projects,
detailed report for project financing
• Discussion with relationship lenders/Retaining an arranger
• Commercial terms
• Security and Underwriting
• Proposal within the lenders’ credit system
Legal Documentation Loan documents covenants restrictions• Legal Documentation – Loan documents, covenants, restrictions
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15. Approach
• Analyse the prevailing internal structures & processesy p g p
• Take measures to improve gaps, if any
• Understand the funding requirement• Understand the funding requirement
• Analyse the various funding options available & check which fits well
Present the actual data in requisite format• Present the actual data in requisite format
Client name - Event - Presentation title
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17. Thank You
Connectivity:
Thank You
42 Free Press House,
215, Nariman Point,
Mumbai – 400 021
INDIA
Office +91 22 61326900
Fax +91 22 2285 6237
vipul.thaker@haribhaktisme.com
Disclaimer: This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication
cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining
specific professional advice. Please contact Haribhakti SME Transformation & Support Solutions Pvt. Ltd to discuss these matters in the context of your particular
circumstances Haribhakti SME Transformation & Support Solutions Pvt Ltd its directors employees and agents do not accept or assume any liability or duty of
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circumstances. Haribhakti SME Transformation & Support Solutions Pvt. Ltd. , its directors, employees and agents do not accept or assume any liability or duty of
care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.
