Project financing Chap 1: Introduction Project financing is an innovative and timely financing technique that has been used on many high-profile corporate projects, including Euro Disneyland and the Eurotunnel. Employing a carefully engineered financing mix, it has long been used to fund large-scale natural resource projects, from pipelines and refineries to electric-generating facilities and hydro-electric projects. Increasingly, project financing is emerging as the preferred alternative alternative to conventional conventional methods of financing financing infrastruct infrastructure ure and other large-scale large-scale projects worldwide. Project Financing discipline includes understanding the rationale for project financing, how to prepare the financial plan, assess the risks, design the financing mix, and raise the funds. funds. In additio addition, n, one must must underst understand and the cogent cogent analys analyses es of why some some projec projectt financing financing plans have succeeded succeeded while others have failed. failed. A knowledge-base knowledge-base is required required regarding the design of contractual arrangements to support project financing; issues for the host government government legislativ legislativee provisions, provisions, public/priv public/private ate infrastru infrastructure cture partnershi partnerships, ps, public/private financing structures; credit requirements of lenders, and how to determine the project's borrowing capacity; how to analyze cash flow projections and use them to measur measuree expecte expected d rates rates of return return;; tax and account accounting ing consid considerat eration ions; s; and analy analytic tical al techniques to validate the project's feasibility Project finance is different from traditional forms of finance because the credit risk associated with the borrower is not as important as in an ordinary loan transaction; what is most important is the identification, analysis, allocation and management of every risk associated with the project. The purpose of this project is to explain, in a brief and general way, the manner in which risk riskss are are appr approa oach ched ed by fina financ ncie iers rs in a proj projec ectt fina financ ncee tran transa sact ctio ion. n. Such Such risk risk minimization lies at the heart of project finance.
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In a no recourse or limited recourse project financing, the risks for a financier are great. Since the loan can only be repaid when the project is operational, if a major part of the project fails, the financiers are likely to lose a substantial amount of money. The assets that remain are usually highly specialized and possibly in a remote location. If saleable, they they may may have have litt little le valu valuee outsi outside de the the proj project ect.. Ther Theref efor ore, e, it is not surp surpri risi sing ng that that financiers, and their advisers, go to substantial efforts to ensure that the risks associated with the project are reduced or eliminated as far as possible. It is also not surprising that because of the risks involved, the cost of such finance is generally higher and it is more time consuming for such finance to be provided. Project finance is the financing of long-term infrastaructure and industrial projects based upon a complex financial structure where project debt and equity are used to finance the proje project. ct. Usual Usually ly,, a projec projectt financ financing ing scheme scheme involve involvess a number number of equity of equity investors, known as sponsors, as well as a syndicate of banks banks which provide loans to the operation. The loans are most commonly non-recourse loans, which are secured by the project itself and and paid paid enti entire rely ly from from its its cash cash flow flow,, rath rather er than than from from the the gene genera rall asse assets ts or creditworthiness of the project sponsors. The financing is typically secured by all of the project assets, including the revenue-producing contracts. Project lenders are given a lien on all of these assets, and are able to assume control of a project if the project company has difficulties complying with the loan terms. Generally, a special purpose entity is created for each project, thereby shielding other assets owned by a project sponsor from the detrimental effects of a project a project failure. failure. As a special purpose entity, the project company has no assets other than the project. Capital contr contrib ibut utio ion n commi commitm tmen ents ts by the the owne owners rs of the the proj projec ectt compa company ny are are some someti time mess necessary to ensure that the project is financially sound. Project finance is often more complicated than alternative financing methods. It is most commonly used in the mining mining,, transportation,, telecommunication and public transportation and public utility industries. Risk identification and allocation is a key component of project finance. finance. A project may be subject to a number of technical, environmental, economic and political risks, particularly in developing countries and emerging markets. markets. Financial institutions and project sponsors
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may concl conclude ude that that the the risk riskss inher inherent ent in proj project ect devel develop opme ment nt and oper operat atio ion n are are unaccep unacceptab table le (unfin (unfinanc anceabl eable). e). To cope with with these these risks, risks, projec projectt sponso sponsors rs in these these industries (such as power plants or railway lines) are generally completed by a number of specialist companies operating in a contractual network with each other that allocates risk in a way that allows financing financing to take place. The various patterns of implementation implementation are sometimes referred to as " project delivery methods." methods." The financing of these projects must also be distributed among multiple parties, so as to distribute the risk associated with the project while simultaneously ensuring profits ensuring profits for each party involved.
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Chap 2: AN OVERVIEW 2.1 Banking Sector
There have been major structural changes in the financial sector since banking sector refo reform rmss were were intr introdu oduce ced d in Indi Indiaa in 1992. 1992. Sinc Sincee then then Bank Bankss have have been been lendi lending ng aggress aggressive ively ly provid providing ing funds funds toward towardss infras infrastr tructu ucture re sector sector.. Major Major policy policy measur measures es include include phased phased reduct reduction ionss in statu statutory tory pre-em pre-empti ption on like like cash cash reserv reservee and statut statutory ory liquidity requirements and deregulation of interest rates on deposits and lending, except for a select segment. The diversification of ownership of banking institutions is yet another another featur featuree which which has enabled enabled private private shareh sharehold olding ing in the public public sector sector banks, banks, thro throug ugh h list listin ing g on the the stoc stock k exch exchang anges es,, aris arisin ing g from from dilu diluti tion on of the the Gover Governme nment nt ownership. Foreign direct investment in the private sector banks is now allowed up to 74 per cent. The co-existence of the public sector, private sector and the foreign banks has generated competition in the banking sector leading to a significant improvement in efficiency and customer service. The share of private and foreign banks in total assets increased to 31.5 per cent at end-March 2007 from 27.6 per cent at end-March 2006 and less than 10.0 per cent at the inception of reforms. •
The nationalized banks have more branches than any other types of banks in India. Now there are about 33,627 Branches in India, as on March 2005.
•
Investments of scheduled commercial banks (SCBs) also saw an increase from Rs 8,04,199 crore in March 2005 to Rs 8,43,081 crore in the same month of 2006.
•
India's retail-banking assets are expected to grow at the rate of 18% a year over o ver the next four years (2006-2010).
•
Retail loan to drive the growth of retail banking in future. Housing loan account for major chunk of retail loan.
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2.2 An Overview on Union Bank Of India Unio Union n Bank Bank of Indi Indiaa was was inau inaugu gura rate ted d by the the fath father er of the the nati nation on – Moha Mohand ndas as Karamchand Gandhi. It commenced operations in the year 1920. Union Bank has offered vast and varied services to its entire valuable clientele taking care of their needs. Today, with its efficient customer service, consistent profitability & growth, adoption of new technologies and value added services, Union Bank truly lives up to the image of, “Good People to bank with”. Anticipative banking is an integral ingredient of value-based services. This ability to gauge the customer's needs long before he realizes, best reduces the gap between expectance and deliverance Manpower is the key factor for the success of any organization. Union Bank has a dedicated family of about 26,000 qualified / skilled employees who will and always will be delighted to extend their services to the customers with heartfelt efforts The Bank is a Public Sector Unit with 55.43% Share Capital held by the Government of India. The Bank came out with its Initial Public Offer (IPO) in August 20, 2002 and Follow on Public Offer in February 2006. Presently 44.57 % of Share Capital is presently held by Institutions, Individuals and Others. The Bank has over the years earned the reputation of being a techno-savvy Bank and is one of the front runners amongst public sector bank in the field of technology. It is one of the pioneer public sector banks, which launched Core Banking Solution in 2002. As of September 2005, more than 719 branches/extension counters of Bank are networked under Core Banking Solution, powered with the centralized technology platform, the Bank has launched multiple Electronic Delivery Channels and has installed nearly 469 networ networked ked ATMs ATMs.. Online Online Tele banking banking facili facility ty is availa available ble to all its Core Core Banking Banking customers. customers. The multi facility versatile versatile Internet Internet Banking Solution provides extensive information in addition to the on line transaction facility to both individuals and corporate
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banking with the Core Banking branches of the Bank. In addition to regular banking facilit facilities ies,, today today custom customer er can also also avail avail variety variety of value value added added servic services es like like cash cash management service, insurance, mutual funds, Demat from the bank. Today there are more than 26,000 employees in Union Bank of India. UBI has been ranked at 5th position among the nationalized bank in India. Overview on banks deposits and advances Items
2003-04
2004-05
20 2005-06
2006-07 2007-08
Deposits Investments
Advances
2.2. 2.2.1 1
Rati Ration onal alee for for the the stu study dy
Offering credit is an operation fraught with risk. Before offering credit to an organization, its financial health must be analyzed. Credit should be disbursed only after ascertaining satisfactory financial performance. Based on the financial health of an organization, banks assign credit ratings. These credit ratings are used to fix the interest rate and quantum of installment.
This study aims to analyze the credit health of organizations that approach Union Bank of India for foreign exchange credit facilities. After analyzing credit health, the credit rating is determ determine ined. d. On the basis basis of credit credit rating, rating, the intere interest st rate rate guideli guidelines nes circul circular ar is consulted to fix a price for the credit facilities i.e. determine the interest rate.
2.2.2
Credit Credit disburse disbursement ment at Union Union Bank Bank of of India India
This project project was undertaken undertaken at the Industrial Industrial Finance Branch of Union Bank of India, at the Credit Department. Financial requirements for Project Finance and Working Capital purposes are taken care of at the Credit Department. Companies that intend to seek credit facilities approach the bank. Primarily, Primarily, credit is required for following purposes:1. Workin orking g capit capital al fina finance nce 2. Term loan loan for for mega mega proj project ectss
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3. non fund fund based based Limits Limits Like Like Letter Letter of Guarantee, Guarantee, Letter Letter of Credit Credit Companies present audited balance sheets of the current and previous years. These are used to determine the financial health, turnover trends and rise and fall of profitability. Then credit rating is done.
The financial health and credit rating are theoretical methods for determining the right interest rate. However, in practice, banks consider other factors such as history with client client,, market market reputa reputatio tion n and future future benefit benefitss with with client clients. s. Thus, Thus, a differ differenc encee exists exists between theory and practice.
2.2. 2.2.3 3
Obje Ob ject ctiv ives es of the the pr proj ojec ectt
To assess the financial health of organizations that approach Union Bank of India for credi creditt for import import export export purpo purposes ses.. This This would would entail entail undert undertaki aking ng of the follow following ing procedures:
Analysis of past and present financial statements
Analysis of Balance Sheet
Analysis of Cash Flow Statements
Examination of Profitability statements
Examination of projected financial statements
Examination of CMA data
To assess the suitability of the company for disbursement of credit. This would involve the following actions:
Use of credit rating charts
Evaluation of management risk
Evaluation of financial risk
Evaluation of market-industry risk
Evaluation of the facility
Evaluation of compliance of sanction terms
Calculation of credit rating
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Determination of interest rate: This would entail the following sequence of actions.
Collect data regarding financial health evaluation Noting down of credit rating
Referencing the banks’ interest rate guidelines circular
Choosing the interest rate from the circular on the basis of financial health and credit rating
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Chap 3 : Term Term Loan Loa n Assesment 3.1 Steps in term loan processing
Submission of Project Report along with the Request Letter .
Carrying out due diligence Preparing Credit Report
Determining Interest Rate
Preparing and submission of Term Sheet
If not approved
if approved
Preparation of proposal
Submission of Proposal to designated authority If No queries raised
Project Rejected
If queries raised
Sanction of proposal on various Terms & Condition
Solve the queries
Communication of Sanction Terms & Condition
Acknowledgement of Sanction Terms & Condition Application to comply with Sanction Terms Terms & Condition & execution of Loan Documents Disbursement
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3.1 CONDUCTING FEASIBILITY STUDY
The success of a feasibility study is based on the careful identification and assessment of all of the important issues for business success. A detailed Project Report is submitted by an enterpreneur , prepared by a approved agency or a consultancy organisation. Such report provides indepth details of the project requesting finance. It includes the technical aspects, Managerial Aspect, the Market Condition and Projected performance of the company. It is necces neccessay say for the apprai appraisin sing g offic officer er to cross cross check check the inform informati ation on provided in the report for dtermining the worhiness of the project. Project Details: Definition of the project and alternative scenarios and models. •
List the type and quality of product(s) or service(s) to be marketed.
•
Outline the general business model (ie. how the business will make money).
•
Include the technical processes, size, location, k ind of inputs
•
Specify the time horizon from the time the project is initiated until it is up and running at capacity. capacity.
Relationship to the surrounding geographical area. •
Identifies economic and social impact on local communities.
•
Identifies environmental impact on the surrounding area.
MARKET FEASIBILITY Industry description. •
Describes the size and scope of the industry, industry, market and/or market segment(s).
•
Estimates the future direction of the industry, industry, market and/or market segment(s).
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•
Describes the nature of the industry, market and/or market segment(s) (stable or going through rapid change and restructuring).
•
Identifies the life-cycle of the industry, industry, market and/or market segment(s) (emerging, mature)
Industry Competitiveness. •
Investigates industry concentration (few large producers or many small producers).
•
Analyzes major competitors.
•
Explores barriers/ease of entry of competitors into the market or industry. industry.
•
Dete Determ rmiines nes
conc concen entr trat atio ion n
and and
comp compet etit itiivene venesss
of
input nput
suppl uppliiers ers
and and
product/service buyers. •
Identifies price competitiveness of product/service.
Market Potential . •
Will the product be sold into a commodity or differentiated product/service market?
•
Identifies the demand and usage trends of the market or market segment in which the proposed product or service will participate.
•
Examines the potential for emerging, niche or segmented market opportunities.
•
Explores the opportunity and potential for a "branded product".
•
Assess Assesses es estima estimated ted market market usage usage and potent potential ial share of the market market or market market segment.
Sales Projection. •
Estimates sales or usage.
•
Identi Identifie fiess and assess assess the accurac accuracy y of the underly underlying ing assumpt assumption ionss in the sales sales projection.
•
Projects sales under various assumptions (ie. selling prices, services provided).
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Access to Market Outlets. •
Identifies Identifies the potential potential buyers of the product/serv product/service ice and the associated associated marketing costs.
Investigates the product/service distribution system and the costs involved. ORGANIZATIONAL/MANAGERIAL ORGANIZATIONAL/MANAGERIAL FEASIBILITY Business structure. •
Outline alternative business model(s) (how the business will make money).
•
Identify the proposed legal structure of the business.
•
Iden Identi tify fy any pote potent ntia iall join jointt ventu venture re part partne ners rs,, alli allianc ances es or other other impor importa tant nt stakeholders.
•
Identify availability of skilled and experienced business managers.
•
Identify availability of consultants and service providers with the skills needed to realize the project, including legal, accounting, acc ounting, industry experts, etc.
•
Outline the governance, lines of authority au thority and decision making structure.
Managerial Personnel
Managerial Personnel play a key role in directing the working of the company. It is important important for an organisation organisation to have a pool of eficient personnel personnel who bear the capacity capacity to bail the company out from crisis situation and work towards optimum utlisation of organisational resources. Such capacity of the personnel can be determined by having complete details on following key aspects:
Market reputation on the promoter / management of the company
Hands Hands on exper experie ienc ncee of the mana managem gement ent pers person onnel nel in the the indus industr try y / Busi Busines nesss managed by qualified personnel
Ability of the promoters / management to bail out the company in case of crisis (for example, this could be derived from a strong group company)
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Decision making – Is it concentrated ?
Organisation structure / Succession planning / Labour relations
Is any group company in default / Any Directors on RBI’s negative list / Borrower’s track-record in honouring financial commitment
Length of relationship with the bank
TECHNICAL FEASIBILITY
Technology echnology plays an important important role in maintaining maintaining a competitive competitive position in this highly competitive market conditions. Investing in the proper technology is the key to success it irresp irrespect ective ive of size size of busine business ss thus thus for achiev achieving ing its projec projected ted perfor performan mance, ce, it is important important for it to have sound technological technological background. background. Such technical technical competence of the project can be determined by having detailed study done on following key aspects: Determining Facility Needs. •
Estimates the size and type of production facilities.
•
Investigates the need for related buildings, equipment, rolling-stock
Suitability of Production Technology. •
Investigates and compare technology providers.
•
Determines Determines reliability reliability and competitivene competitiveness ss of technology technology (proven (proven or unproven, unproven, state-of-the-art).
•
Identifies limitations or constraints of technology.
Availability and Suitability of Location. •
Access to markets.
•
Access to raw materials.
•
Access to transportation.
•
Access to a qualified labor pool.
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•
Access to production inputs (electricity, (electricity, natural gas, ga s, water, etc.).
•
Investigate emissions potential.
•
Analyze environmental impact.
•
Identifies regulatory requirements.
•
Explores economic development incentives.
•
Explores community receptiveness to having the business located there.
Raw materials. •
Estimates the amount of raw materials needed.
•
Investigates the current and future availability and access to raw materials.
•
Assesses the quality and cost of raw materials and markets of easily substituted inputs.
Other inputs . •
Investigates the availability of labor including wage rates, skill level, etc.
•
Assesses the potential to access and attract qualified management personnel.
FINANCIAL FEASIBILITY Estimate the total capital requirements. •
Assesses the capital needs of the business project and how these needs will be met.
•
Estimates capital requirements for facilities, equipment and inventories.
•
Dete Determ rmin ines es repl replac acem ement ent capi capita tall requ requir irem emen ents ts and timi timing ng for for faci facili liti ties es and equipment.
•
Estimates working capital needs.
•
Estimates start-up capital needs until revenues are realized at full capacity.
•
Estimates contingency capital needs (construction delays, technology malfunction, market access delays, etc.
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•
Estimates other capital needs.
•
Estimated equity and credit needs.
•
Identi Identifie fiess altern alternati ative ve equity equity source sourcess and capita capitall availab availabili ility ty -- produc producers ers,, local local investors, angel investors, venture capitalists, etc.
•
Identifies and assess alternative credit sources -- banks, government (ie. direct loans or loan guarantees), grants, local and state economic development incentives.
•
Assesses expected financing needs and alternative sources -- interest rates, terms, conditions, covenants, liens, etc.
•
Establishes debt-to-equity levels.
Budgets expected costs and returns of various alternatives. •
Estimates expected costs and revenue.
•
Estimates the profit margin and expected net profit.
•
Estimates the sales or usage needed to break-even.
•
Estimates Estimates the returns under various various production, production, price and sales levels. levels. This may involv involvee identi identify fying ing "best "best case", case", "typica "typical", l", and "worst "worst case" case" scenar scenarios ios or more more sophisticated analysis like a Monte Carlo simulation.
•
Assesses the reliability of the underlying assumptions of the financial analysis (prices, production, efficiencies, market access, market penetration, etc.)
•
Creates a benchmark against industry averages and/or competitors (cost, margin, profits, ROI, etc.).
•
Identifies limitations or constraints of the economic analysis.
•
Determines project expected cash flow during the start-up period.
•
Identifies Identifies project an expected expected income statement, statement, balance sheet, sheet, etc. when reaching reaching full operation.
Study Conclusions
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The study conclusions contain the information you will use for deciding whether to proceed business. The major categories this section should should include are: •
Identify and describe alternative business scenarios and models.
•
Compare and contrast c ontrast the alternatives based on their business viability. viability.
•
Compare and contrast the alternatives based on the goals of the producer group.
•
Outline criteria for decision making among alternatives.
Next Step
After the feasibility study has been completed and presented, a carefully study and analysis analysis the conclusions conclusions and underlying assumption assumptions. s. Next, you will be faced with deciding which course of action to pursue. Potential courses of action include: •
Choosing the most viable business model, for investment
•
Identifying additional scenarios for further study.
•
Deciding Deciding that a viable business business opportunity opportunity is not available and moving to end the business assessment process.
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3.2 CREDIT REPORT AND CREDIT RATING The credit report is an important determinant of an individual's financial credibility. They are used by lenders to judge a person's creditworthiness. They also help the person concerned to narrow down on the financial problem areas. Credit Credit report report is a documen document, t, which which compri comprises ses detail detailed ed inform informati ation on about about the credit credit payment history of an applicant. It is mostly used by the lenders to determine the credit worthi worthines nesss of an applica applicant. nt. The busine business ss credit credit report reportss provid providee inform informati ation on on the background of a company. This assists one to take crucial business related decisions. People can also assess the amount of business risk associated with a company and then decide whether they would be comfortable in providing them with credit facilities. The degree of interest that would be shown by investors in their company can also be gauged from the business credit reports as they can get an idea of the conception of their customers regarding themselves. Since these records are updated at regular intervals of time they enable people to identify the risk levels associated with a business as well as its future. These reports also allow businesses to get detailed information about the financial status of business partners and suppliers.
What Is A Corporate Credit Rating? Ratings can be assigned to short-term and long-term debt obligations as well as securities, loans, preferred loans, preferred stock and stock and insurance companies. Long-term credit ratings tend to be more indicative of a country's investment surroundings and/or a company's ability to honor its debt responsibilities. . The ratings therefore assess an entity's ability to pay debts. There There are are vari various ous orga organi nizat zatio ion n who who perf perfor orm m credi creditt rati rating ng for for vari various ous busin busines esss organization. Union Bank of India follows a finely defined Credit Rating Model for assessing the creditworthiness of the applicant. The credit rating model asses various aspects of the projects and assigns scores against them thereby determining the risk level involved with the project. It is divided in Four Sections:
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1. Rati Rating ng of the the Bor Borro rowe wer r
Financial Risk
Management Risk
2. Market Market Cond Conditi ition/ on/ Demand Demand Situ Situati ation on 3. Rati Rating ng of the the Faci Facili lity ty 4. Busi Busine ness ss Cons Consid ider erati ation on 5. Cash Cash Flow Flow relat related ed para parame mete ters rs
1) Rating of the Borrower: This part of credit rating model deals with assessing the financial and managerial ability of the borrower. The financial ability of the firm is derived derived by calcul calculati ating ng ratios ratios that that determi determine ne the short short term term and long long term term financ financial ial position of the firm Current Ratio, determ Short Short term term ratios ratios include include Current determines ines the liquid liquidity ity position position of the
company over a period of one year. The current ratio is an indication of a firm's market liquidity and ability to meet creditor's demands. It is excess of current assets over current liability. If current liabilities exceed current assets (the current ratio is below 1), then the company may have problems meeting its short-term obligations. If the current ratio is too high, then the compan y may not be efficiently using its current assets. According to the guidelines given to UBI the ideal level is at 1.33:1 however the acceptable level is at 1.17:1. However at times current ratio may not be a true indicator, the current ratio for road projects is very high but this does not indicate that the company is not using its assets well but the ratio is high because beca use the activity involves more in dealing with cu rrent assets. Hence it is important for the evaluator to understand the nature of the industry. industry. Long term ratio include Debt Equity Ratio is a financial ratio indicating the relative proportion of equity of equity and debt used to finance a company's assets. This ratio is also known as Risk, Gearing or Leverage. A high debt equity ratio is not preferable by an investor as the company already has aquired high amount of funds from market thereby reducing the investor share over the securities available, inreasing the risk.
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It is aslo important for the lender bank to assess the firms debt paying capacity over a period. Such capacity is derived by calculating ratio like Debt Serice Coverage Ratio minimum acceptable level is 1.50. It also necessary for the lender to determine the ability of the firm to achieve the projected growth by evaluating the projected sales with actuals.However such parameter remains non applicable if the business bu siness is new. new.
Finacial risk evaluation is oly one of the parameter and not thje only parameter for determining determining the risk level. It is important to evaluate evaluate the Management Risk also while evaluating the risk relaing to borrower. It is the management of the company that acts as guiding force for the firm. The key manager managerial ial person personnel nel should should bear the capacity capacity to bail bail out the company company frm crisis crisis situation. situation. Inorder to remain remain competitive competitive it is essential essential to take initiatives. initiatives. Such skills are developed over years of experience, thus for better performance it is required to have a team of well qualified and expirienced personnel.
2) Market potential / Demand Situation
A Company does not operate in isolation there are various market forces that acts in either favourable or unfavraouble manner towards its performance. Thus the rating would not give true picture if does take market or demand situation in consideration. co nsideration. The demand supply situation / market Potential plays an important role in determining the growth level of the company like i) Level of competition : monolpoly , favourable , unfavourable seasonality in demand : affected by short term seasonality, long term seasonality or ii) seasonality
may not be affected by seasonality in demand. Materia l Availablity Availablity : iii)Raw Material
iv)Locational proximity to to market, Locational Issues like proximity
inputs, inputs, infratstr infratstructure ucture:: Favourable, Favourable,
neutral, unfavourable. v)Technology ie, proven Technology- not to be changed in immeditate future, technology undergo change, outdated technolgy. vi)Capacity utilisation
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3)Rating of the Facility:
The company can start functioning only after completing statutary obligations laid down by the governing authority. Such statutary obligation involves obtaining licenses, permits for ensuring ensuring smooth smooth operations. operations. Perparatio Perparation n and Submission Submission of Finacial Finacial Statements Statements,, Stock statements in the standard format within the given time schedule.
4)Business Consideration:
The length length of relation relationshi ship p with with the bank
enables enables the lender lender to assess assess the previo previous us
perfor performan mance ce of the account account holder. holder. A good track track record record
acts acts in the favour favour of the
applicant, however a under perfomance make the lender more vigiliant. The income value to the bank also given due consideration.
Thus Credit Rating of the Business takes into consideration various aspects that directly or indiretly bears an effects the performance of the business. After evaluating the risk level involved the lender bank decided on lending Interest Rate. In UBI they are catagorised in 9 segements 1. lowe lowest st Risk Risk CR-1 CR-1 2. Low Risk CR-2 3. Medi Medium um Risk Risk CRCR- 3 4. Modera Moderate/ te/ Satisf Satisfato atory ry Risk Risk CR- 4 5. Fair air Ris Risk k CRCR- 5 6. High High Risk Risk CRCR- 6 7. High Higher er Risk Risk CRCR- 7 8. high highes estt ris risk k CRCR- 8 9. NPA
CR- 9
In UBI, a business receiving Credit Rating above level 6 are not considered good from point of investment and thus are avoided.
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3.3 DETERMINATION OF INTEREST RATE The intere interest st rate rate is determ determine ined d from from the intere interest st rate rate guideli guidelines nes circul circular ar.. This This circular is regularly updated to reflect the bank’s latest credit policies. The rupee credit is based on BPLR and the foreign exchange loans are based on LIBOR.
The guidelines define how much interest rate is to be assigned for a particular credit rating and credit duration. However, credit rating and its use in determining interest rate is a theoretical concept and the bank may allow a reduction in interest rate under the following conditions:
Good Client
The organization is a long term client and brings good business to the bank. The organization’ organization’ss actions actions show that it intends intends to become a long term customer of the bank
Banking Consortium
The organization is seeking credit from a consortium of banks. In some cases like this, the lead bank might decide the interest rate and all the member banks of the consortium follow this interest rate.
3.4 TERM SHEET Following a favrouable feasibility check, credit rating the next step is preparing term sheet . A Term Term Sheet is breif document do cument that provides details de tails on aspects like: •
Account Details
•
Financial highlights for immediate previous two audited years and projection for proceeding year
•
Nature of Project
•
Cost of Project
•
Means of finace 1. Natu Nature re of Faci Facili lity ty 2. Purpose
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3. Tennur ennuree of Term erm Loan Loan 4. Inte Intere rest st rat ratee Rese Resett 5. Margin 6. Inte Interes restt Rate, Rate, Comm Commis issi sion on
Door Door to Door Door Tenor enor ie.t ie.the he perio period d with within in whic which h the the entir entiree amoun amountt I sto sto be disbursed. o
Repayment Terms
o
Prime Security
o
Collateral Security
o
Upfr Upfron ontt fees fees ie the the char charges ges levi levied ed by the the bank bank for for proce process ssin ing g the the documents.
3.5 PROPOSAL An approved term sheet leads to preparation proposal. A proposal is prepared in standard format, this enables the bank to keep a proper track record and also facilitates proper comparision. comparision. A proposal proposal a full fledged document providing providing details on project project submitted submitted and requesting finance from bank. A proposal contains information on following aspects:
* Details Details of Account Account: It includes name of the Account Holder, Holder, Date of incorporati incorporation, on, Line of Activity, Activity, Internal Credit Rating level, Address of the Registered Registered Office, Name of Directors, Share Holding Pattern, Pattern, Asset Classification, Classification, Purpose of the Loan.
* Securities:Lenders often feel more confident about a loan if they are given a security interest in the assets of a business. Then, if the borrower does not repay the loan as promised, the lender can take the property the borrower pledged, sell it and use the proce proceeds eds to repay repay (or (or parti partial ally ly repay repay)) the the borr borrow owed ed amoun amount.i t.itt provi provides des deta detail iled ed information on nature of securities given in lieu of the Loan.they are of two types Prime securities, Collateral Secuties
22
Prime Securities : Pari Passu is a term used in banking transactions which means that the
charge to be created is in continuation of an earlier charge which might be held by the same institution or by an other institution. Collateral Securities: In lending agreements, collateral is a borrower's asset that is
forfeited to the lender if the borrower is insolvent --- that is, unable to pay back the principal and interest on the loan. When insolvent, the borrower is said to default on the loan, in which case the lender becomes the owner of the collateral. It includes details on
Nature / Description of collateral security indicating area & location of property
Value in Rupees.
Date of valuation along with name of Valuer Valuer
Insurance Amount & Date of Expiry
Personal guarantee / Corporate Guarantee if any, includes Name of the guarantor, Value of Guarantee. * Financial Highlights:
It povides details of important financial elements over a period of years. It includes Details on Paid capital, Tangible Networth, Net working Cpaital,Current Assets, Current Liabilities, Net Profit, Net Sales, Reserves and Surplus, Intangible Asstes, Long Term Liailities, Fixed Assets, Investments, Non current Assets like guarantees , Cash Accruals, Capital employed. It also includes ratios like Debt Equity Ratio, Current Ratio, Debt Service Coverage Ratio and so. The interpretation of the financial data presented provides information on the perfomance trend of the company also of the Projections made. Such financial highlight play an important role in assesing the financial strenghts and weakness of the business.
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* Status of the project:
A brief of Project In this part of proposal a brief about the project is explained, it includes information on nature, type of project, purpose of the project, commencement details, the promoters and related details of the project. If it is a on-goin project it also gives details on progress and status of progress
* Evaluation of Industry : This Section gives brief details on the 1. Scope Scope of the the indu indust stry ry 2. Growth Growth level level and overall overall performa performance nce of the industr industry y 3. Recent Recent Develo Developme pments nts and and Trend Trend Evalu Evaluati ation on
* Conduct of the Account: This section provides details on : — Regularity in Submission of
Stock Statements / Book Debt Statement
QPR Statements / Half Yearly Yearly Statement
Financial Statements
CMA Data
* Compliance to Terms of Sanction It furnishes information on following aspect:
Completion of Mortgage formalities
Registration of Charges with RoC
Whether documents valid and in force
Compliance of RBI guidelines
Whether consortium meetings held at prescribed periodic intervals where the Bank is the leader.
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* Exposure details from banking system (existing) (Incl. Our Bank)
The sharing pattern of the banks ban ks is mentioned in this section of proposal. It includes
Name of the bank
Percentage of share for the fund based and non Fund based Limits
Amount in Rs.
Non Fund based credit are in form of gaurantees like Letter of Credit (L/c), Letter of gaurantee (L/g)
Letter of Credit
A ‘Letter of credit’ also known as documentary credit is the most commonly accepted instrument of settling international trade payments. A letter of credit is an arrangement whereby a bank, acting at the request of a customer, undertakes to pay a third party by a given date, on documents being presented in compliance with the conditions laid down.
Letter of Guarantee
A letter from a bank stating that a customer owns a particular security and that the bank will guarantee delivery of the security. A letter of guarantee is used by an investor who is writing call options when the underlying stock is not in his or her brokerage account. A Call Option is an agreement that gives an investor the right (but not the obligation) to buy a stock, bond, commodity, or other instrument at a specified price within a specific time period. Financial Guarantee:
A non-cancelable indemnity bond guaranteeing the timely payment of principal and interest due on securities by the maturity date. If the issuer defaults, the insurer will will pay a fixed sum of money to holders of the securities. securities. Financial Financial guarantees guarantees are similar to a Standby Letter of Credit, Credit, but are issued by an insurance company company.. A Standby Letter of Credit is a form of insurance on an underlying agreement or obligation (contract), insuring all parties to the contract against failure to perform or pay on the part of one or another party to the contract. Standbys are issued issued by banks.
25
Assessment of Non Fund Based Limit 1. Non Fund Fund Based Limits Limits are are normally normally to to be sanctioned sanctioned for for exixting exixting customer customer only who already enjoy fund based limits 2. If new borrower borrower full full processi processing ng as applicable applicable to Fund Fund Based Limit Limitss to be carried. carried. 3. Borrower’ Borrower’ss background background and experience experience of of meeting meeting commitment commitmentss to be examined examined in details. 4. L/c limit limit to be consider considered ed as per terms terms of Purchas Purchasee or contra contract, ct, lead lead period period and minimum econmical quantity of supply of stocks 5. Non Fundabsed Fundabsed Limits Limits are to to be supported supported by necessary necessary fund fund based limits. limits. 6. Past Past experienc experiencee of payment payment of billsunde billsunderr L/c to be verified verified before before consider considering ing new request. 7. While While Asses Assessin sing g the L/g Limit Limit contrac contractt or agreem agreement ent which which is the base for L/g, should be examined in details for any ambigious clauses. 8. Any reques requestt for for fina financi ncial al Guar Guarant antee ee to be crit critic ical ally ly exami examined ned befo before re taki takin n decision.
* Details of Sister/ Allied Concerns: This section section provides information information about the Sister/ Sister/ Allied Allied Concerns Concerns aspects like the performance, promoters, share holding pattern, operation exposure and experience from various banks.
* Terms Terms and Condition: It is important both for the bankand the applicant to safegaurd its interest, this could be achieved by settling at mutually acceptable terms and condition inorder to ensure that both the parties the lender and borrower perform their part of obligation thereby not putting putting other party at loss. All loans are subject to regulations regulations and conditions. conditions. The legal information relating to these regulations and conditions can be viewed in this section. It is advisable for both the parties to read this information carefully before approval.
26
3.6 DISBURSEMENT: DISBURSEMENT:
After submission Proposal to Designated/ Sanctioning Authortiy for sanctioning the Term Term Loan. the authorities may raise querries, if any relating to projects and thereby convey it to the processing officer the processing officer inturn addresses them to the borrower for necessary step to be taken, such querries are required to be solved to the earliest by the applicant for further proceesing of the proposal. If the authoritiees are satisfied and have no further querries with respect to proposal,the Loan gets sancti sanctioned oned and
the disburs disburseme ement nt would be released released in as per the terms terms
decided.
3.7 FOLLOW-UP: This is most cruicial stage in process of term loan assesment. Since amount of credit required is usually high, such amounts are disbursed in one installment, they are paid in installments.this helps the lender bank to understand and assess the utilisation of funds disbursed by the lender Bank. Such evualtion is done by obtaining Lender’s Engineer Report, it is report that provides complete details of the status of the project. It is prepared on monthly basis. It also provides CA Report, it verifies the Finacial details furnished to bank for further disbursement.this is known as renewal of account.
27
Chap 4: 4: Analysis of Credit proposals 4.1 Prposal of JKL Ltd.
4.1.1 BACKGROUND: The company was incorporated on January 5, 2001, however later the name was changed and the current name is effective from March 23, 2006 with the objective of generation of power based on coal. The proposed manufacturing facilities are located at Angul district, Orissa.. The group is already engaged in the business of manufacturing Photographic goods, goods, Polyest Polyester er film, film, BOPP BOPP films, films, Metall Metallize ized d films, films, Cold Cold rolled rolled steel steel strips strips and Galvanized sheets. The details of associate concerns are as under :-
JPL - Photographic films & equipment.
JPFL - Polyester chips, Polyester film, PVDC film, BOPP film & Metallized film. The company’s manufacturing plant at Nasik, Maharashtra is one of the world’s largest single location plant for the manufacture of BOPET and BOPP films. films.
JIL - Steel pipes, cold rolled strips & GP/GC sheets. Esta Establi blish shed ed in 1952, 1952, ranks ranks among among the the majo majorr manu manufa fact ctur urer erss of ERW ERW / HFIW HFIW and and galvanized steel pipes and tubes in the country. The company commenced business operations through establishment of a manufacturing facility in Howrah, West Bengal for manuf manufac actu ture re of pipe pipe fitt fittin ings gs,, bend bendss and sock socket ets. s. At pres present ent,, the the compa company ny has has a manufacturing capacity of 160,000 TPA of steel pipes & tubes, 300,000 TPA of GP/GC sheets and 350,000 350, 000 TPA TPA of CR coil / sheets.
Promoter JPL JPFL
Shareholding (%) 26 % 4%
28
Group Investment Companies include:
45%
Consolidated Photo & Finvest Ltd Rishi Trading Co. Ltd. Soyuz Trading Co. Ltd. Non-Group Companies
25%
Budhiya Marketing Pvt. Ltd. (BMPL) Edward Supply Pvt. Ltd. (ESPL) TOTAL
100%
EVALUA EVALUATION TION OF MANAGEMENT MANAGEMEN T 1) Market reputation on the promoter / management of the company:
Satisfactory
2) Hands on experience of the management personnel in the industry / Business managed by qualified personnel :
The qualified professionals & experienced persons are proposed to be appointed for managing the overall operation of the company. details of key management personnel of JKL Pvt. Ltd. Are as under: Mr Punit Gupta
Mr. Punit Gupta, aged about 41 years, is a B.Sc. and M.B.A. He has work experience of about 18 years in the field of Project Management and Marketing with the group. He is presently heading the Project team for setting up of the proposed power project and is involved in budgeting, costing, financial analysis, sensitivity analysis, project planning, tendering, bid evaluation, award of contracts, post award activities, coordination with contractors, finalisation of MOUs, JV Agreements, and various types of studies required for Power Projects etc.
Mr Umesh Chand Jain
Mr. Umesh Chand Jain is a graduate with work experience of about 33 years in the areas of Trading, Liaisoning, Business management and implementation of new Projects. He
29
has been working with the Group for the last seven years. He is on the Board of various group companies including Consolidated Finvest & Holdings Limited.
Mr S. R. Yadav
Mr. S.R.Yadav is an ex-Executive Director, NCR region, NTPC. He is also a Director on the board for NTPC-SAIL Power Company (P) Ltd. He will be heading the Engineering team in JKL Pvt. Ltd. He is a Mechanical engineer from RIT, Jamshedpur and has work experience of over 35 years in the areas of project planning, erection, commissioning, operation and maintenance. He has been involved in many green field projects of NTPC and was posted in Korba, Bokaro, Singrauli etc.
Mr A. K. Sehdev
Mr AK Sehdev is an engineering graduate from Delhi College of Engineering. He has over 36 years of experience of Navaratna Companies like IOC and NTPC. He is involved in preparation of action plan, project formulation, project scheduling, FRs and DPRs, cost estimation and cost control, financial analysis, tariff calculations, budget preparation, project engineering and finalization of technical tech nical specifications of various packages.
Mr P. K. Patnaik
Mr Patnaik has many years of experience in IPP (Industrial Power Projects) He had also worked in two UK based company as an advisor. He was VP and country Manager with Kennedy & Donkin Ltd and Head Business Development with Merz & McLellan Ltd. He worked in Lanco Kondapalli also. Prior to joining JITPL as Sr VP (Corporate affairs), he was Head (Corporate Affairs) Affairs) at Egateway Egatewa y, New Delhi.
Mr A C Sarkar
Mr Sarkar is Executive Director (Eastern Region-1), Power Grid Corporation of India L td (PGCIL) and has work experience of about 35 years of experience in Power transmission. He is an Electrical engineer from Sibpur Engg College. He has been involved in the establ establish ishment ment of the national national transmis transmissio sion n grid grid and has experienc experiencee in the areas areas of
30
planning, coordination, project management, technical and commercial considerations. He is joining JITPL as Vice-President (Transmission).
Mr J. Ramesh Chandra
Mr Chandra is Master in Applied physics & Instrumentation. He has work experience of around 33 years in various companies including Desein and BHEL. He has joined JKL Pvt. Ltd as GM (Control and Instrumenta Instrumentation) tion).. He has experience of instrumentat instrumentation ion proces processs for BTG (boile (boilerr, turbin turbinee & generat generator) or) and BOP (balanc (balancee of plant) plant),, projec projectt engineering, design and commissioning.
Mr L. P. Soni
Mr Soni Soni is a Chart Charter ered ed Acco Account untan antt and Comp Company any Secr Secret etary ary with with over over 25 year yearss experience in various companies. Mr. Soni’s areas of expertise include project financing, working working capital capital management, management, fund raising raising through through capital capital market, market, foreign foreign exchange management, Company law matters. Mr. Soni has been earlier associated with various companies including Surya Roshni Ltd., Maharaja Shree Umaid Mills Ltd. in senior positions prior to joining the group as VP (Finance).
Mr Ashok Kr Kucheria
Mr Kucheria is M Com and Chartered Accountant and has work experience of over 24 years. He was head of Finance of Jamlal Drilling and Industries Ltd for around 14 years and rose to the post of CFO of the Company. His strengths points are auditing, MIS, Taxation, project financing, working capital management, fund raising, capital market, foreign exchange management etc. Presently he is GM (Finance) for power project and he is involved in resource management and financial closure for the project.
Mr P. Girish Giris h
Mr P Girish is Vice President, (Corporate affairs) in charge of govt liaisoning for Delhi. He has 21 years of experience in corporate affairs, administration in various Companies. Mr. Mr. Giri Girish sh has has star starte ted d his his care career er with with Roll Rollss Royce Royce Indu Indust stri rial al Powe Powerr Ltd Ltd in the the Commercial department. He has been associated with the Malaxmi Infra Ventures Ventures Pvt Ltd
31
as General Manager with the major responsibilities of Navabharat Power Pvt Ltd. and Simhapuri Energy Pvt Ltd Nellore based on Imported Coal. He has also worked for Lanco Power Pvt Ltd as a Manager Administration.
Mr Naveen Goel
Mr Naveen Goel is Head (State Liaisoning), Orissa. He is B .Com from Delhi University and inter in CA and ICWA. ICWA. He started his career with Jindal Photo Limited since 1995.
Mr. B L Dua
Mr Dua is General Manager Manager Project Project Development Development and Construction. Construction. He has over 38 years of experience on civil construction, especially power plants. He has experience of construction engineering and has completed a Diploma in civil engineering. He has been associ associated ated with with variou variouss public public sector sector compani companies es includ including ing Centra Centrall Board Board of Water ater, Central Electricity Authority and NTPC etc.
3) Ability of the promoters / management to bail out the company in case of crisis (for example, this could be derived from a strong group company)
The experienced directors bear the capacity to bail out the company co mpany in case of crisis.
4) Decision making – Is it concentrated?
A commi committ ttee ee of dire direct ctor orss comp compri risi sing ng of quali qualifi fied ed & exper experie ience nced d pers person onnel nel will will professionally manage the company. company.
5) Organisation structure / Succession planning / Labour relations
The company will be a professionally managed company hence, any threat of succession planning is not perceived.
6)Is 6)Is any any grou group p comp compan any y in defa defaul ultt / Any Any Dire Direct ctor orss on RBI’ RBI’ss nega negati tive ve list list / Borrower’s track-record in honouring financial commitment?
32
The company has confirmed that none of the Directors of JKL Pvt. Ltd are on RBI’s defaulters’ list in respect of JKL Pvt. Ltd. or any other company in which they are a Director.
7) Length of relationship with the bank
The Group is new to us.
EVALUATION OF INDUSTRY Thermal Thermal power power statio stations ns constit constituti uting ng over over 66% of the aggreg aggregate ate instal installed led generat generation ion capacity and despite being relatively less environment-friendly as compared to hydroelectric projects (HEPs), thermal power plants offer certain advantages over HEPs as mentioned below: Lesser implementation time-frame: 2.5-3.5 years as compared to 5-6 years for HEPs; Ability to function as base load power plants as compared to HEPs which serve as peakload power plants; Standardized generation technology: independent of project site; Absence of seasonal variations in power generation; Location flexibility: Can be located either close to load-centre or at fuel pit-head while HEPs are site-specific and often located in challenging geographical terrain.
Demand-Supply Scenario
Power supply position in the country has worsened over the last few years with growth in power demand outstripping new capacity addition with peak power deficit being worst having peak deficit of 13.5% in 2006-07. The energy deficit at the national level has increased from 7.5% in 2003-04 to 9.9% in 2006-07
•
Projected Power Requirement beyond 2011-12 till 2021-22
With ith rapi rapid d growt growth h of the the econom economy y, power power requi require reme ment nt is proj projec ected ted to incr increa ease se signif significa icantl ntly y over the next next decade decade with with per capita capita power power consumpt consumption ion expecte expected d to increase from ~612 kWh at present to about 1000 kWh by 2012 (GoI’s target for 100% electrification).
33
Given the prevalent demand supply deficit scenario and projected growth in
•
power requirement, huge addition in generation capacity is required in the country over the coming decade. Consequently, there exists an attractive business and market opportunity for establishment of power generation plants in the country, especially in the northern & western regions of the country.
Target States for Power Sale
In view view of the the adver adverse se powe powerr defic deficit it scen scenar ario io in weste western rn and and nort norther hern n regi region on as mentioned in the previous sections, both these regions have been identified as target markets for ultimate sale of JKL Pvt. Ltd power.
Analysis Projected Balance Sheet As On Assets Gross Block CWP Less:Accum ulated Depreciation Closing Block Net Current Assets Cash & Bank Balances DSRA TOTAL ASSETS Liabilities Shareholders ' Equity Reserves & Surplus Net Worth Rupee Term Loan Sub-Debt Working Capital Loan Deferred AAD
Rs. in Crores
Mar-09
Mar10
Mar11
Mar12
Mar13
Mar14
Mar15
Mar16
Mar17
Mar18
Mar19
Mar20
33 316
33 816
33 2188
2818 0
2818 0
2818 0
2818 0
2818 0
2818 0
2818 0
2818 0
2818 0
0
0
0
49
196
343
490
637
784
931
1078
1225
349
849
2221
2769
2622
2475
2328
2181
2034
1887
1740
1593
0
0
0
187
188
189
190
190
178
179
180
181
0 0
0 0
0 0
54 65
106 209
252 229
441 216
639 203
783 190
934 177
1092 164
1259 151
349
849
2221
3075
3125
3145
3174
3213
3186
3176
3176
3184
201
201
444
573
573
573
573
573
573
573
573
573
0 201
0 201
0 444
70 643
276 849
492 1065
718 1291
954 1526
1132 1705
1319 1892
1515 2088
1719 2291
139 9
608 41
1666 111
2148 143
1987 140
1772 125
1558 111
1343 97
1128 82
913 68
698 54
483 39
0
0
0
140
141
142
142
143
134
135
135
136
0
0
0
0
8
40
72
104
137
169
201
233
34
As On
Mar-09
Mar10
Mar11
Mar12
Mar13
Mar14
Mar15
Mar16
Mar17
Mar18
Mar19
Mar20
349
849
2221
3075
3125
3145
3174
3213
3186
3176
3176
3184
TOTAL LIABILITI ES
Projected Profit and Loss Account
Rs. in Crores
Primary energy sale to GoO Powe sale PTC Less AAD
60 253 0
188 758 8
209 758 32
206 758 32
202 758 32
198 683 32
195 683 32
192 683 32
189 683 32
O& M exp. Travel and Fuel Exp. Secondary Fuel Exp. Environment Cess
24 55 8
74 171 24
77 178 25
80 185 26
83 192 28
86 200 29
90 208 30
94 217 31
97 225 32
6
18
18
18
18
18
18
18
18
Depreciation
49
147
147
147
147
147
147
147
147
Int. on RTL Int. Sub. Debt Int. on WC Loan
80 6 6
235 19 18
211 18 18
187 16 18
163 14 18
139 12 17
115 10 17
91 8 17
66 6 17
Tax
9
26
28
29
30
23
24
25
26
Sensitivity Analysis Scenario Base Case Increase in Project Cost by 5% Decrease in Power Sale Tariff Tariff through PTC by 5% during Year Year 1-5 Increase in Primary Fuel price by 5% Decrease in PLF by 5% Increase in Interest rate by 1% for both Senior debt & Subordinated debt
Avg. DSCR 1.60 1.54 1.56
Min. DSCR 1.38 1.34 1.33
Project IRR* 15.6 % 14.9 % 14.9 %
1.58
1.37
15.3 %
1.49 1.54
1.29 1.34
14.2 % 15.6 %
Interpretation
35
Project is able to withstand the operations at a lower tariff and its debt servicing capacity (Average (Average DSCR: 1.56, Min DSCR: 1.33) is satisfactory. satisfactory.
Increase in Primary Fuel price by 5%
Sensitivity has also been carried out for increase in the fuel prices by 5% over the base case numbers. The Project is able to sustain the increased fuel cost and its debt servicing capacity remains satisfactory with an average DSCR of 1.58 and minimum DSCR of 1.37. 1.37. The impact of any fuel price price escala escalatio tion n on the projec projected ted financi financials als is partly partly mitigated on account of the pass-through effect in the power sale tariff applicable to Gridco. Gridco. It may however be noted that since most of the coal requirement requirement for the Project will be met from the captive coal block allotted to the company, the company will be able to have a better control over the coal price thereby reducing it exposure to any escalations in coal price.
Decrease in Plant PLF by 5%
Under the base case projections, the operations of the project have been projected at a PLF of 80%. Sensitivity has been carried out for the scenario of the Project running at a lower PLF i.e. 75%. It has been observed that the Project is able to withstand the operations at a lower PLF and its debt servicing capacity (Average DSCR: 1.49, Min DSCR: 1.29) is satisfactory. Considering the better operational performance of existing IPPs in the country vis a vis state sector projects, the situation of a PLF lower than 80% seems unlikely.
Increase in RTL Interest Rate by 1%
Sensitivity has also been carried out for increase in the RTL interest rate by 1% over the base case interest rate of 11.5% for Senior debt and 13.5% for Subordinated Debt. It is observed that the Project is able to sustain the increased interest costs comfortably and its debt servicing capacity capac ity (Average (Average DSCR: 1.54, Min DSCR: 1.34) remains satisfactory.
As can be seen above, the debt serviceability of the project is comfortable adverse sensitivities considered. Hence, it can be concluded that the proposed power project will
36
be able to withstand adverse circumstances and the debt serviceability is satisfactory, even under adverse circumstances. Decrease in Power Sale Tariff through PTC by 5% during Year 1-5
Under the base case projections, tariff for power sale to PTC has been maintained at Rs. 2.60 per kWh for Year 1-5 and Rs 2.34 per kWh for subsequent years. Sensitivity has been carried carried out for the scenario scenario of the power being sold at 5% lower than the base case tariff i.e. Rs. 2.47 per kWh. As seen above, the Project is able to withstand the operations at a lower tariff and its debt servicing capacity (Average DSCR: 1.56, Min DSCR: 1.33) is satisfactory.
Increase in Project cost by 5%
A sensitivity has been carried out for 5% increase in the works cost which have estimated at Rs. 2294 crore in the base case. The Project is able to sustain a 5% escalation in capital cost comfortably and its debt servicing capacity (Average DSCR: 1.54, Min DSCR: 1.34) remains satisfactory.
KEY POINTS:
1. Sensitivity Sensitivity analysis analysis was done. done. The result resultss of which which are as follows: follows:-
When the power sale tariff tariff to “PTC” (PTC India Ltd ) are decreased by 5% the Average DSCR: 1.56, Min DSCR: DSCR: 1.33 . This is above the benchmark level.
When project cost is increased by 5% Average DSCR: 1.54, Min DSCR: 1.34. This is above benchmark levels and is considered favourable.
In case of increase in RTL Interest Rate by 1% the Average DSCR: 1.54, Min DSCR: 1.34) remains satisfactory
When the primary fuel prices increase by 5% the Average DSCR of 1.58 and Minimum DSCR of 1.37 remains satisfactory.
As can be seen above, the debt serviceability of the project is comfortable when adverse sensitivities considered. Hence, it can be concluded that the proposed power project will be able to withstand adverse circumstances.
37
2. The profitabi profitability lity estima estimates tes are sensit sensitive ive to fluctuati fluctuation on in sales. sales. 3. The projected projected Debt Debt Equity ratio ratio and Current Current Ratio Ratio are at satisfactor satisfactory y level. level. As As the project project implementat implementation ion is yet to commence, commence, offering any comments comments on financial financial indica indicator torss would would not be relevan relevantt at this this junctur juncturee as the same same would would
go on
changing. 4. According According to interna internall credit credit rating, rating, the company company has been been rated as as CR-3. CR-3. 5. Primary Primary fuel fuel requirements requirements for for the Project Project will will be met with with from the Coal linkage linkage from from Mahana Mahanadi di Coalfi Coalfield eldss Ltd (MCL) (MCL) and Captive Captive Mandaki Mandakini ni coal block in Talcher coalfields, Orissa .JKL Pvt. Ltd. will enter into separate long-term Fuel Supply Agreements with the Mining JVC and MCL for supply of coal from the captive block and coal linkage respectively, taken together would be adequate for requirement of proposed 600 MW for its entire project life. 6. The company has has already already into Power Power Purchase Purchase Agreements Agreements (PP (PPA) with Gridco Gridco for sale of 25% of the power. Company has also entered into HOA(Heads of Agreement) with PTC for sale of balance 75% power at reasonably attractive tariff. 7. Both Both Gridc Gridco o and and PTC PTC woul would d open open LC in favor favor of JKL JKL Pvt. Pvt. Ltd Ltd for for time timely ly payment of invoices. 8. Even Even with an increas increasee of 1% in the inter interest est rate, rate, averag averagee & minimu minimum m DSCR are comfortable.
29. Recommendations JKL Pvt. Pvt. Ltd. is being promoted by BCJ Group, implementi implementing ng a 600 MW pit-head pit-head coal-based power project in Angul district of Orissa. The project capacity is proposed to be enhanced to 1200 MW through implementation of a second unit of 600 MW at a later stage. Salient features of the proposed project, are as under:
38
1. Prove Proven n track track record record of prom promot oter erss [JPL [JPL along along with with othe otherr grou group p / inve invest stme ment nt companies of BCJ group] - in running profitable business operations and adequate financial strength to meet the equity requirements for the project;
2. Assured Assured fuel at reasonable reasonable cost cost – fuel fuel from allocated allocated captive captive coal block adjacent adjacent to project site along with additional long-term coal linkage from MCL. Captive coal source will protect JKL Pvt.Ltd from fuel price fluctuations and make the power cost competitive;
3. Significant Significant progres progresss in project project development development activit activities ies as under under.. State support for land acquisition, water allocation and other developmental aspects of the project secured through MoU; Section (4) notification for acquisition of land issued; In-principle allocation of water sufficient to meet project requirements; Grant of various project clearances / approvals, including TOR for EIA study from MoEF, GoI;
4. Powe Powerr offoff-ta take ke arra arrang ngem emen entt- Execu Executi tion on of PPA PPA with with Grid Gridco co for for sale sale of 25% 25% project capacity and execution of HOA for sale of balance power through PTC. Analysis of the project development structure and projected financial performance of the Project, based on the information pertaining to the project cost, financing plan, and prevalent market conditions while a sensitivity analysis has also been carried out to test the robustness of project financial in respect of key business and performance parameters. The project projected ed financi financials als of the projec projectt are reason reasonably ably comfor comfortab table le under under differ different ent sensitivity scenarios as required to service the project debt over proposed tenor. 5. Base Based d on the the proj projec ected ted fina financi ncial als, s, sens sensit itiv ivit ity y analy analysi siss and and risk riskss fact factor ors, s, SBI SBI Capital Markets has viewed the proposed project of JITPL, JITPL, as financially viable. SBICAP SBICAP has further further stated that keeping keeping in view the proven credentials credentials of the proje project ct promot promoters ers,, progre progress ss achieved achieved in projec projectt develo developme pment nt and projec projected ted financial performance of the project, the project appears to be bankable and accordingly, the proposal may be considered favorably for final sanction of RTL and Subordinated debt.
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In view of the above mentioned observations, recommended the following. (Rs. in Crores) Nature of Limit
Amount Existing
Proposed 300.00
Margin
Nil 25% Term loan Interest shall be 11.50% p.a. floating for senior debt and 13.50% p.a for subordinate debt payable monthly. monthly.
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Conclusion Credit Apprais Appraisal al is a process process of appraising the credit worthiness worthiness of loan applicants. applicants. The funds funds of deposit depositor’ or’ss i.e genera generall public public are mobili mobilized zed by means means of such such advance advance / investment. Thus it extremely important for the lender bank to assess the risk associated with credit, thereby ensure the security for the funds deposited by the depositors. In UBI the credit appraisal is done by thorough study of the project project which involves Following. 1) Evaluation Evaluation of Managemen Management: t: A detaile detailed d study about about the promote promoters rs is carried out in order to ensure promoters are experienced in the line of business and are capable to implement and run the project 2) Technical echnical Feasibilit Feasibility: y: A detailed detailed study study about the technical technical aspects is done to determine the technical techn ical soundness of the project 3) Financial Financial Viabil Viability: ity: A detailed detailed study relating relating to financial viability viability of the project is done; thereby ensuring that project will generate sufficient surplus to repay the lan installment and interest 4) Risk analys analysis: is: it determi determines nes the risk risk associated associated with with the project project this is done by performing a Sensitivity analysis and Credit Rating. With Sensitivity Analysis the projects capacity to service debts under worsened conditions is determined. Credit rating, provides rating for various parameters like management, financial, market and so, thereby determine the credit worthiness of the borrower 5) It is on the the basis of of the credit credit risk risk level, collate collateral ral securiti securities es to be given by the borrower are determined. This shows Union Bank of India has sound system for credit appraisal.
Annexure 1: Format of Term Sheet 41
Union Bank OF India Industrial Finance Branch, Mumbai
APPROVAL OF BROAD TERMS OF THE PROPOSAL
IFB:ADV:: Name of the account
Dated
Account with Group Existing connection or new connection Credit Rating Background of promoters (Rs. In Crores) Brief Financials Year (A (Aud.)
Year (A (Aud.) Year (Prov.)
Net Sales PAT(Loss) TNW* Current Ratio TOL/TNW RATIO (Rs. In Crores) Nature of Project
Cost of Project tal MEANS OF FINANCE Nature of Facility Amount Margin
Rs.
% of
Crores
Interest/Commission
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Interest reset Purpose Period of the facility Moratorium Door To Door Tenor Repayment terms Security – Prime
Collateral security Upfront fees Prepayment terms Whether conforms to Loan Policy Customer profitability, profitability, (in case of existing accounts) 1. Commi Commiss ssio ion n earne earned d on bill billss purchased/discounted. 2. Proc Proces essi sing ng char charges ges 3. Comm Commis issi sion on on on LC/L LC/LG G 4. Cred Credit it bala balanc nces es in a. SB b. CD 5. Term erm depo deposi sits ts a. Thro Throug ugh h own own sour source cess b. b. Thro Throug ugh h thir third d part party y
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