financing of power projects & international finance.ppt
TRANSCRIPT
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Financing of
Power Projects
Sunil Gupta
Dy. General Manager (Int. Fin)
NTPC
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PROJECT COST
NTPC adopts packaging concept toobtain 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
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PROJECT COSTS STRUCTURE
Cost of Thermal Power Project (indicative)
Direct Capital Outlay 72 %
Working Capital Margin & Start-up Costs 3 %
Interest During Construction & Fin. Charges 16%
Establishment & Consultancy 6%
Physical Contingency 3%
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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 Merchantplants
Low credit of offtakers- Indian scenario
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POWER PROJECT -FINANCING
Project Financing
Balance Sheet Financing
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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
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FINANCING MIX
Power projects traditionally had DE ratio of 1:1 Private power policy announced in 1991
permitted project funding with maximum D/E of80:20.
CERC Tariff Regulation 2004 stipulates amaximum 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 ratio70:30 from earlier 50:50 even before advent ofCERC.
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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
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EQUITY
Fresh Equity- IPO/FPO
ADRs/GDRs
Promoters Contribution Convertible Bonds/ Preference Shares/FCCBs
Internal Accruals Dividend policy
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COST OF EQUITY & LEVERAGING
Principally cost of Equity is the opportunitycost of deployment of funds to equallyrisky investment. It is generally higher
than cost of Debt funds being riskierinvestment;
Leveraging refers to use of low cost debtfunds to provide increased returns tohigh cost Equity participants.
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SOURCES OF
DEBT: AVAILABILITY& CONSTRAINTS
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SOURCE SELECTION-CRITERIA
Selection of instrument of borrowings willdepend upon availability, Regulation,Exposure norms, cost of funds andmaturities 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
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COMPARISON OF TERM LOAN & BONDS
Bond have Easy Transferability , hencepreferred 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 onmarket conditions.
Exchange Traded bonds indicate theexisting yields
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COMPARISON OF TERM LOAN &BONDS Contd
But Bond Issue
has to be timed with requirement of funds where asterm loan can be drawn in small lots
requires rating by CRISIL/ICRA/CARE
requires creation of Charge over Assets upto 1.25times
involves high administrative work w.r.t. Trustee -agreement, Transfers etc.
are costly in case of Public Issues
ultimately fall into exposure issues when subscribedby Banks etc.
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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 withrespect to LIBOR which set once in a day at 1100hours 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.
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FIXED vs FLOATING INTERESTRATE
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 withregard to interest rate fluctuations due to demand and supply in themarket.
Efficient way of borrowing in a declining interest rate scenario.
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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 theLoan Agreement.
In case of Syndicated Loans, the rate is agreed two days beforedrawdown 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 liabilityi.e. where draw-down is of a fixed size and is known to occur on aspecific date(s) for loans to fund capex it is difficult to predict withcertainty the exact amounts and exact dates of draw-downs so thatloans can undertake the swaps.
Funding on fixed rate loans is challenging for loans having many
draw-downs.
FIXED vs FLOATING INTERESTRATE
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DOMESTIC DEBT EXPOSURE ISSUES
PRESENT EXPOSURE NORMS OF ALL INDIAFINANCIAL INSTITUTIONS (AIFIs) & BANKS
Exposure to a particular borrower are presentlyfixed at 15% of the lendersCapitalFunds.
For companies in infrastructure sector, limit is 20%of lendersCapitalFunds.
Group is 50% of the lenders Capital Funds incl.Infrastructure
Maximum exposure can be enhanced by 5%-exceptional circumstances-Board Approval
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DEBT - POSSIBLE LT SOURCESIN 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 RuralBanks, 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
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MEETING FUNDS REQUIREMENTDOMESTIC 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
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ADVANTAGES OF RUPEEBORROWINGS
Cost Competitive
Free from Exchange Fluctuations
Generally Higher Credit Ratings leadingto reduced cost
Known to the lenders- less due diligence
With Basel II norms coming into force-better quality credit preferred
Natural Hedge as INR revenue
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LIMITATIONS OF DOMESTICBORROWINGS
Exposure norms limit the market- reducedavailability of funds despite being preferredborrower
Banks which have large quantity of funds attheir disposal can not generally meet thetenor requirement of the power projects (inregulatory context)
Undeveloped pension fund market unlike US Security issues in case of Bonds despite
highest rating
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WHY INTERNATIONALFINANCING
Fund availability subject to sectoral ceilings andexisting exposures are also to be kept in mind.
Issue of creating security @ 1.25 times of theloan amount is also there in case of Bonds.
Availability of cheap funds in InternationalMarkets-6m- Libor for USD 2.71 % p.a.,
Foreign investors have started viewing Indiafavorably. Investors are now willing to lend /invest in good Indian Corporates.
To meet the cost of imports
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Credit Rating
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CREDIT RATING
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 cases-
Domestic Bonds/USPP/Domestic Loans;
Makes credit distinction- to some extent
Provides comfort to the lenders
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CREDIT RATING
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)
Moodys Investor Service Ltd. (Moodys)
Fitch Ratings
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RATING PROCESS
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
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RATING CRITERIA
Sovereign risk Political climate Credit worthiness of country Govt. Policies
IndustryRisk Demand supply
Regulatory restriction Organisationrisk
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
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CREDIT RATING Contd
Rating Definitions AAA 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 ofbankruptcy petition
Plus(+) or Minus(-) sign is added to show relativestanding with in the major rating categories
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SOVEREIGN RATINGLong Term Issuer FC Credit Rating
AGENCY INDIA NTPC
S&P BBB-/Stable BBB-/Stable
MOODYS Baa3/ Stable Not Rated
FITCH BBB-/Stable BBB-/Stable
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REQUIREMENT OF CREDITRATING
Mandatory for:
Rupee Bonds US Yankee bonds
US 144a offerings
Sec- registeredbonds
Optional for:
Euro bonds
Samurai bonds
Dragon bonds
US private
placements Syndicated loans
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FUND RAISING
-NTPC Perspective
MAJOR TERMS & CONDITIONS OF RUPEE
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MAJOR TERMS & CONDITIONS OF RUPEETERM LOANS- NTPC Perspective
Tenor - 10 years door to door
Drawl over 3-4 years
Rate of interest negotiable based on prevalentmarket conditions and individual Banks PLR /
MTLR/SBAR Financial Covenants
The ratio of total liabilities to net worth will not at anytime exceed 2:1; and
The ratio of EBITDA to interest expenses shall not atany time be less than 1.75:1
Prepayment possible with notice generally
without prepayment fee or breakage cost
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Covenants Continued
Negative Lien on the Assets. Restriction of sale, transfer or otherwise
disposal of assets in excess of 25% of bookvalue of last annual accounts;
Restriction on change of business
Restrictions on issue of bonds in excess ofprescribed amount;
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What is Negative Lien ?
A Commitment to the Lender for not doing certain acts withoutprior 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 inwriting as of date by the Borrower, the Borrower shall not without prior writtenconsent of the Bank:-
create or permit to arise or subsist any mortgage, charge, pledge, lienencumbrance or security interest whatsoever over all or any of itsundertaking, assets present or future (including un-called capital) of theBorrower as security for any obligations now or hereafter existing in favourof any person, however, subject to following exceptions:-
The Borrower may create security interests on its assets to secure theissue 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 anyrupee loan, the repayment of which is due within 12 months or less fromthe date of the said loan including working capital financing and
The Borrower may create security interest on its assets to secure anyforeign currency borrowings from multilateral and bilateral agencies likeIBRD, JBIC and KFW etc.
Sell, transfer or otherwise dispose of, by one or more transactions or seriesof transactions (whether related or not) the whole or any substantial part ofits fixed assets, the book value of which is 25% or more of the book valueas shown in the latest audited financial statements of the Borrower.
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Recent Rupee loan- PFC
Amount Rs 100 Bn- largest single loanfor 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
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SOURCES OF FINANCEUPTO 31/03/2008
Sources of Funds Amount
1. - Equity Share Capital-GOI
- Loan from GOI
- Grant-in-Aid
78126
36730
33
2. Bonds issued in domestic market 79806
3. Loans from domestic financial Inst. 174501
4. Foreign Loans 1547905. Private Equity 4329
6. Internal Resources & Share Premium 22860
Total Investment 756913
INR/MLN
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MULTILATERAL AND BILATERALFUNDING IN NTPC
World Bank
51%
Russian
9%
Japan24%
French
3%
Saudi
1%West
German9%
Italian1%
UK
2%
Total Resources raised INR 106.227 Billion(Routed through Govt. of India as Equity / Loans)
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KfW
0.01
JBIC-B
0.00 NIB
0.00
ADB II
0.07
Swedish
0.01
MTN0.07
SCMB
11%
BELGIAN
1%
WORLD BANK
16%
JBIC21%
ADB
5%
BTCO
2%
IBJ
10%
EXIM,JAPAN
13%SBI
5%FRENCH
9%
Euro Bond
7%
K-Exim
0.06
Total Mobilisation
Rs.165.55 Billion
ECB ason31-03-2008
MEMORANDUM OF
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MEMORANDUM OFASSOCIATION
- Borrowing power conferred upon the companyunder objects incidental or ancillary to theattainment of the main object
- BorrowingPower are stated as to borrowmoney or to receive money or deposits for thepurpose of financing the business of thecompany either with security or mortgage or
other security charged on the undertaking onall or any of the assets of the companyincluding uncalled capital and to increase,reduce or pay off any such securities.
ARTICLES OF
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ARTICLES OFASSOCIATION
- Subject to the provisions of Section58A, 292 and 293 of the CompaniesAct, and Government Guidelines issued
from time to time, the Board may bemeans of resolution passed at meetingsof the Board from time to time accept
deposits or borrow and/or secure thepayment of any sum or sums of moneyfor the purpose of the Company.
COMPANIES ACT 1956
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COMPANIES ACT 1956SECTION 292
- The Board of Directors of a company shallexercise the following powers on behalf of thecompany, and it shall do so only by means of
resolutions passed at meetings of the Board :-a) The power to make calls on shareholders inrespect of money unpaid on their shares ;
b) The bower to issue debentures ;
c) The power to borrower moneys otherwise than ondebentures ;
d) The power to invest the funds of the company ; and
e) The power to make loans.
COMPANIES ACT 1956
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COMPANIES ACT 1956SECTION 293
- As per section 293 of the CompaniesAct, the company can borrow anyamount which does not exceed theaggregate of the paid up capital of the
company and its free reserves (freereserves means reserves not set apartfor any specific purposes).
- Any borrowing which exceeds theabove limit can be made only with theconsent of such company in general
meeting.
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INTERNATIONAL
FINANCING
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WHAT IS INTERNATIONALFINANCING
Sourcing of funds from international
markets Management of funds so sourced
Servicing of external debt/equity
Exchange risk management
SOME COMMONLY USED
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SOME COMMONLY USEDJARGONS
LIBOR- London Inter Bank Offer Rate
MIBOR- Mumbai Inter bank Offer Rate
G Sec- Government Securities
Direct Quote- A quote of One unit of ForeignCurrency 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
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SOME COMMONLY USEDJARGONS Contd.
Arbitrage- an opportunity to buy at one place ortime and sell at another place or time withpossibility of profit and no possibility of loss.
Spread- the additional amount (generally in %)charged by the lender/seller over theBenchmark Rate
Basis Points- 100th part of a Percentage i.e. 1%
= 100 Basis Points
SWIFT- Society for Worldwide Inter-bankFinancial Telecommunication
SOME COMMONLY USED
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SOME COMMONLY USEDJARGONS Contd.
Euro Bonds- Bonds issued by a non-residentin a currency other than domestic currencye.g. $ bonds issued by NTPC in Europe andAsia.
Spot- Forex Quotation for two business dayshence
TOM- Forex Quotations for next business Day
Forward- Forex Quotation for any day beyondtwo business days.
SOME COMMONLY USED
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SOME COMMONLY USEDJARGONS 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
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RAISING DEBT FROMINTERNATIONAL MARKET
SOURCES
Syndicated Loans
Export Credit
Bonds Multilateral and Bilateral funds
Development Banks-through GOI
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SYNDICATED LOANS
A syndicated loan deal generally consistsof :
An arranger or lead manager, generally one (ormore) banks chosen by the borrower
Members of the syndicate or consortium
The remaining syndicate, or consortium, of banksgenerally simply provide funds for the loan. Asyndicate, or consortium, of banks act as a single
financier, based on a single loan agreement. Theparticipating banks split and allocate the risksconnected with the loan.
In case of disputes, all banks must concur with themajority vote
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SYNDICATED LOANS
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
SYNDICATED LOANS
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SYNDICATED LOANS
CHARACTERSTICS Contd..Agencies involved
Arranger(s)
Lenders
Lenders AgentProcess Agent
Formalities of prepayment
Prepayment charges
Notice
Prepayment in part or full
Covenants
Events of default including cross default
SYNDICATED LOANS
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SYNDICATED LOANS
CHARACTERSTICS Contd..
Material Adverse changes
Changes in business conditions operation,performance of borrowers, syndication
market, financial / capital market thatmaterially impairs syndication of the facility.
Taxes
All payment free and clear of all present &
future taxes, duties of whatever nature. Incase of any such deduction , borrower willsuitably gross up the payment in such amanner as if no deduction levied.
SYNDICATED LOANS
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SYNDICATED LOANS
CHARACTERSTICS Contd.. 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 guaranteefacilities shall be discussed, syndicated or privately placed bythe borrower where the prior consent of the lead arranger ,which would have the effect of competing with or adverselyaffecting the successful conclusion of the proposed facility.
SYNDICATED LOANS contd
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SYNDICATED LOANScontdCOVENANTS 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 havemanagement control over the Borrower duringthe life of the Facility
SHAREHOLDER COVENANT
Company A/GoI will hold 51 % more of theissued or paid up capital of the Borrower.
SYNDICATED LOANS contd
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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
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SYNDICATED LOANScontd
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 loanagreement
RESULTS OF OCCURRENCE OFEVENT OF DEFAULTS No further drawing under the loan agreement
Loan and all interest accrued becomeimmediately payable
Reimburse all losses and expenses including lossof profit consequent to event of default.
ADVANTAGES TO THE
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ADVANTAGES TO THEBORROWER
May negotiate a higher total sum ofborrowed funds
It is not necessary to enter personal
negotiations with each and every one ofthe financing banks
The terms and conditions agreed in the
syndicated loan agreement equally bindall of the participating banks.
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ADVANTAGES TO THE LENDERS
Banks split, or syndicate their large loans witheach other to avoid a single large loss.
Participating banks are usually entitled totransfer 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 toother investors.
The market for loan participation is so brisk thatborrowers sometimes do not know exactly whichbank is financingthem White & Case
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EXPORT CREDIT
Financing for goods originating from therespective countries and in some cases, forlocal/third country goods
Usually upto 85% of the value of goods
imported, individual agencies have differentlimits
Funds are usually provided by a commercialbank which gets guarantee for political and/orcommercial risk from the export creditguarantee agency
Sometimes ECA also provide finances
EXPORT CREDIT CONTD
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EXPORT CREDIT ...CONTD. Loans are available for tenors ranging from 5-12
years and repayment are in semi-annualinstallments
Interest rates are usually fixed and aredetermined on the date of submission clearproposal to ECA
Minimum subsidized interest rates (Commercial InterestReference Rates-CIRRs) are applicable
Interest rates are notified as OECD consensusrates. OECD is Organisation for EconomicCooperation and Development and has 30members.
EXPORT CREDIT CONTD
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EXPORT CREDIT .CONTD.
Interest rates are effective from 15th
of everymonth;
All the OECD member lend at the rate and tenurenotified by OECD.
OECD lending guidelines pay special attention toEnvironment and compliance with Environmentguidelines.
Loans are generally to be guaranteed by thegovernment or the borrowers country-not in caseof NTPC.
Expenses include guarantee fee payable to theexport credit guarantee agency, commitment fee,agency fee and other out of pocket expenses.
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EXPORT CREDIT
ECA Country
ECGD U.K
Coface FranceHermese Germany
SACE Italy
OND Belgium
US Exim USAKorea K-Exim
Switzerland SERV
JBIC & MITI Japan
EC AGENCIES
Govt. agencies that exist tosupport the export from eachOECD country.
They guarantee bank finance,supplier Finance, provide directloans, provide political risk
insurance ECA work within an established
set of guidelines called theOECD 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
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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 percapita 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
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EXPORT CREDIT Contd
Minimum interest rate: CIRR (CommercialInterest Reference Rate) is declared indifferent 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) orFloating (LIBOR based) Also possible to convert to fixed rate after
disbursement period or once draw-downsaccumulates to agreed level.
EXPORT CREDIT Contd
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EXPORT CREDIT Contd
Repayment terms for category I 5 years to 8 years
For category II
10 years (for power Cos. 12 Years) Insurance
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
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INSURANCE COVER FROM ECA- ADVANTAGES
Protects lenders against non paymentcaused by-
War, civil war, Rebellion
Prevention or delay in payment ofexternal debt
Cancellation or non renewal of license
Failure of Last Govt. to honour writtenundertaking
EXPORT CREDIT COST
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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 ofcover, 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 NTPCs
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EXPORT CREDIT NTPC sRECENT 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
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INTERNATIONAL BONDISSUE : EURO BONDS
Term Euro is misleading and not restricted to Europeaninvestors
Bond issued internationally outside home countrysmarket 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 issueeg. 144A Private placement- Recent product USPP
INTERNATIONAL BOND ISSUE
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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
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NEGATIVE PLEDGE Borrower agrees not to create charge on Assets
which are unencumbered on the date of signingof Loan Agreement without the permission oflenders.
Borrower may negotiate for certain exclusionsdepending upon the terms of agreement suchas:- No requirement of seeking permission if charge is to be created
on Assets in tune with requirement of trade credits/workingcapital requirement
No permission required for creating charge on Assets forborrowing in INR
Generally no permission required for creating charge on Assets
for borrowings from Multilateral Agencies.
EVENTS OF DEFAULT
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EVENTS OF DEFAULT
Non payment
Misrepresentation
Cross default breach Insolvency
Repudiation
Material Adverse Change( MAC) Illegality
Change in Business
RESULTS OF OCCURRENCE OF
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RESULTS OF OCCURRENCE OFEVENTS OF DEFAULTS
No further drawing under the loanagreement
Loan and all interest accrued becomeimmediately payable
Reimburse all losses and expenses
including loss of profit consequent ofevent of default.
Other Loans may also become payable-
Cascading effect
CURRENCY MOVEMENT
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CURRENCY MOVEMENTFOR LAST 5 YEARS
DATEEXCHANGE RATE % CHANGE IN Y to Y
USD JPY EURO USD JPY EURO
Mar 07 40.19 0.4037 63.60 -8.37% 8% 8.42%
Mar 06 43.86 0.3731 58.66 -2.42% -2.76% 6.97%
Mar 05 44.95 0.3837 54.84 2.00% -6.71% -3.76%
Mar 04 44.07 0.4113 56.98 -0.54% -2.95% 4.97%
Mar 03 44.31 0.4238 54.28 -7.36% 5.92% 4.75%
Mar 02 47.83 0.4001 51.82
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NTPC Context
-Recent Experiences
ADB II CFS
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ADB II- CFS
First Loan by ADB with A & B Loan Structure
For entire loan, ADB is Lenderof 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
JBIC S di t d L
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JBIC-Syndicated Loan
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)
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MEDIUM TERM NOTE (MTN)PROGRAM
Established in February 2006
MTN PROGRAM
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MTN PROGRAM
An EMTN program is essentially adocumentation platform which providethe issuer an opportunity to enterfrequently, efficiently and economicallythe 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
En uir
PROS OF A MTN
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PROS OF A MTN
Cost efficient if used regularly Allows easy and timely access
Once set-up minimum additional
Documentation
Facilitates both private and publicplacements
Advantage of Reverse Enquiries
Broadens Investor Base
Reverse Enquiries
LIMITATIONS OF A MTN
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LIMITATIONS OF A MTN
Expensive if not used;
Requires Annual update thus cost
Loss of goodwill if not used andsurrendered
DOCUMENTATION
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DOCUMENTATION
Offering Circular Program Agreement Issuing and Paying Agency Agreement Trust Deed
Agency Agreement Listing Application Subscription Agreement Pricing Supplement
Legal Opinion Auditors Comfort Letters
ESTABLISHMENT PROCESS
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ESTABLISHMENT PROCESS
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
ESTABLISHMENT CONTD
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ESTABLISHMENT-CONTD. Commencement of Due Diligence with
legal counsels
Obtaining schedule for Road Shows andSigning from JBRs
Finalising the Offering Circular, TrustDeed, Agency Agreement, ProgramAgreement, Subscription Agreement,
Signing Memorandum, ClosingMemorandum, Comfort Letters
ESTABLISHMENT CONTD
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ESTABLISHMENT-CONTD.
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 presentationincluding preparation for prospective questionsfrom prospective investors;
ESTABLISHMENT CONTD
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ESTABLISHMENT-CONTD.
Finalising the deal Signing the subscription agreement;
Seeking RBIs loan registration number
thru AD; (before money is transferred to our account approvalshould be in place)
Furnishing Bank account details to theTrustee and the Agent to effect the fundtransfer;
Getting the money , utilise it, furnish CAcertificate to RBI along-with ECB 2
FEATURES OF USD 300 Mn.
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ISSUE UNDER MTN
Bond was issued in Feb 2006 The issue evoked an overwhelming response
order book over subscribed by over 5 timesattracting 105 investors
The deal was sold 50% in Asia, 42% in Europeand 8% to offshore US accounts.
42% issue was sold to banks, fund mangerstook 38%, insurance took 15% and retailersubscribe to 5%
The coupon is 5.875%, maturity is 10 yearsbullet
EURO BONDS
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EURO BONDS
Issued in March2004
EURO BONDS TYPICAL
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FEATURES
Bearer form, freely negotiable debtinstruments;
Issued and underwritten through an
international syndicate of banks andinvestment banks (issuinghouses)
Held principally by investors outside thecountry in whose currency the issue isdenominated; And,
Issued for long maturity.
USD 200 MLN
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USD 200 MLN 5.5% BONDS DUE 2011
Size of the issue USD 200 million
Date of issue ofBonds
10.03.2004
Denominations US$ 1,000 , US$ 10,000 and US$ 100,000
Coupon 5.5% per annum, payable semi-annually
Issue price 99.37%
Security Unsecured
Listing At Singapore Stock Exchange
Repayment Bullet, after 7 yearsFinal Maturity 10.03.2011
Transaction fee toJoint Lead Managers
0.20% flat of the face value
Expenses Not to exceed the overall cap of USD 700,000
approved by Ministry of Finance
EUROBOND DOCUMENTATION
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EUROBOND -DOCUMENTATION
1. Mandate Letter
2. Offering Circular
3. Subscription Agreement
4. Trust Deed
5. Paying Agency Agreement
EUROBOND SEQUENCE
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OF EVENTS
1 Presentation by prospective Managers 1 Week
2 Finalize Committee Report and issue Mandate Letter 3 days
3 Appointment of Legal Counsel(s), others 3 days
4 Due diligence process 3-4 days
5 Finalize OC 7 days
6 File OC with SGX-ST 3 days
7 Road shows 3 days
8 Pricing 1 day (T)
9 Signing of Subscription Agreement 1 day
10 Signing of Trust Deed and Fiscal Agency Agreement Within 5 days
11 Settlement of proceeds T+5 days
PRICING
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PRICING
UST 3.56% + 2.05% = 5.61% p.a.
Adjusted to 1/8th of a percent to arrive acoupon of 5.5% p.a.
Issue price discounted at 99.37%
In terms of Libor : 3.965% + 1.645% =5.61%
DISTRIBUTION OF
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INVESTORS
Asia
45%
Europe
47%
US
Offshore
8%
By location
Asset
Managers39%
Banks
32%
Insurance /Pension
17%
Retail
12%
By type
DISTRIBUTION
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DISTRIBUTION
79 Accounts participated
45% of the issue placed in Asia, 47% inEurope, 8% to US Off-shore Accounts.
Assets Managers took 39%, Banks 32%,Pension / Insurance 17% and Retail /others 12%
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OTHER LOANS
JBIC LOANS
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JBIC LOANS
Faridabad : through GOI Simhadari : Direct about JPY 66 billionTerms- 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)
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JBIC LOAN (OTHER FEATURES)
Assistance available upto 85% of eligiblecomponent 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
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ADB LOAN FOR UNCHAHAR -II
Disintermediation by GOI
Interest rate-cost of qualifiedborrowings+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 NTPCS
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FOREX LOAN BASKET
Fixed (%) Floating(%) Variable(%)
31.03.2008 69 31
31.03.2007 75.17 8.52 16.31
31.03.2006 79.16 20.8431.3.2005 81.76 - 18.24
31.3.2004 74.58 - 25.42
31.3.2003 72.27 - 27.73
31.3.2002 66.37 7.59 26.04
31.3.2001 63.00 6.25 30.75
31.3.2000 60.95 9.36 29.68
COMPOSITION OF NTPCS
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COMPOSITION OF NTPC S
FOREX..CONTD.
NTPCs Forex debt is predominantlycarries fixed rate of interest. Out of atotal of Rs.54.4 billion of Forex debt,an amount of Rs.24.5 billionrepresented by loans have Floatingrates of interest.
As of March 08- 32% is JPY, 67 %USD and 1% Euro exposure
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Regulatory Framework inIndia for raising ECBs
Regulatory Framework of ECBs in
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g yIndia
Reserve Bank of India-Nodal Agency-Issues ECB guidelines
Last review of guidelines issued on 22-
09-2008
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
ECB GUIDELINES RBI
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ECB GUIDELINES-RBI
Eligible Borrowers-Corporates can borrow under this route.Financial intermediaries are exempt such as banks, FII, housing financecompanies.
Recognized Lenders International Banks, International capital markets, Multilateral financial
institutions such as IFC, ADB, IBRD etc., Export Credits etc. Suppliers of equipment, foreign collaborators, foreign equity bidders
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 forInfrastructure under approval route
ECB GUIDELINES RBI
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ECB GUIDELINES-RBI
End Use- For import of capital goods, new projects
- For infrastructure sector-power,telecommunications, roads including Bridges,railways, ports, industrial parks, urbaninfrastructure 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
ECB GUIDELINES RBI
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ECB GUIDELINES-RBI
All-in Cost ceilings- 3-5 years 200 bps plus 6m Libor
- 5-7 years 350 bps plus 6m Libor
- More than 7 years 450 bps plus 6m Libor
ECB GUIDELINES-RBI
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ECB GUIDELINES RBI
- Parking of Funds abroad-allowed tillactual use of funds in India.
- Prepayment-permitted upto USD 400 mn- Refinancing- permitted provided
outstanding maturity is maintained and thecost of raising fresh loan is lower
- Guarantee- guarantee or letter of comfortfrom by banks , FIIs etc not permitted
SOME COMMONLY USEDJARGONS
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JARGONS Contd.
Foreign Bonds- Bonds issued by a non-resident in the domestic currency- eg Bondsissued by an Indian Company in $ in US
Yankee Bonds- Foreign Bonds issued in USi.e. $ bonds in US
Samurai Bonds- Foreign Bonds issued inJapan i.e. bonds in Japan
Bulldog Bonds- Foreign Bonds issued in UK i.e. Bonds in UK
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TOTAL FOREIGN LOANS
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AS ON 31.03.07
Source Amount(Rs. Mln)
1 Direct foreign loans 145,579
2 Through Govt. Of India 106,227
Total 251,806
VARIOUS INSTRUMENTS
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VARIOUS INSTRUMENTS
Vanilla-Fixed or Simple Floating Rate-noncallable
Inflation Linked-Coupon linked to designated
measure of Inflation Bermudan callable- Callable at discreteintervals throughout life of notes
European Callable-Callable at single date
Fixed Rate step-up callable- couponincreases over life- stated at the time of setup-callable
VARIOUS INSTRUMENTS
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VARIOUS INSTRUMENTS
TEC-10-FRN linked to constant Maturity 10 yrFench Govt. rates
CMS linked- FRN linked to Constant MaturitySwap rate
Callable Zero coupon Range Accrual- Fixed coupon that accrues
every day that a designated index (say 3 mlibor) is trading within specified range. In case
index is trading outside the range, the note doesnot accrue interest.
Inverse FRN- bears a Fixed minus float coupon
COST OF CAPITAL
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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
WACC Book value vs Market value of Weights
COST OF CAPITAL-CONTD.
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COST OF CAPITAL CONTD.
Issues concerning InternationalFinancing in the Cost of Capital
In addition to the Interest Cost impact of
FERV and Tax need to be considered