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TiE Funding Clinic

Presentation on Fund Raising – Equity / Debt

By Haribhakti SME Transformation & Support Solutions Private Limited

Agenda

• Different Funding Options

• Different forms of Debt

• Debt options & relevance to business

• Approach to apply

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Fund Raising Options

EquityRaising money for company activities by selling common or preferred stock. In return for the money paid, shareholders receive ownership interests in the corporation. (Owned Funds)

Subsidy Monetary assistance granted by the government to a person or group in support of

an enterprise regarded as being in the public interest.

DebtRaising of funds by borrowing (Debt Fund). That part of a firm's total capital which commonly comprises of loan-capital and short term bank loans such as overdraft. Part of a firm's total financing, it commonly comprises of (1) short-term bank borrowings (such as overdraft), (2) cash raised through debt instruments (such as bonds), (3) off-balance-sheet financing (such as operating leases), (4) and trade credit.

Equity Financing

• Public Issue Initial Public Offering Further Public Offering

• Rights Issue

• Preferential Offer

• Private Equity

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Subsidy

Economic benefit (such as a tax allowance or duty rebate) or financial aid (such as a cash grant or soft loan) provided by a government to

(1) support a desirable activity (such as exports)(2) keep prices of staples low(3) maintain the income of the producers of critical or strategic

products(4) maintain employment levels or (5) induce investment to reduce unemployment.

The basic characteristic of all subsidies is to reduce the market price of an item below its cost of production. Also called subvention.

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Debt Financing Working Capital financing • Cash Credit/Bank overdraft • Bill discounting/Factoring• Letters of Credit

Term loan: • Normally given to the borrowers for acquiring long term assets i.e. assets which will benefit the

borrower over a long period viz purchases of plant and machinery, constructing building for factory etc

Project Financing:• Financing of long-term infrastructure and industrial projects based upon complex financial

structure where project debt and equity are used to finance the project, rather than the balance sheets of Promoters/Project Sponsors

• Private and public debtPrivate debt comprises bank-loans while Public debt is a freely tradable financial instruments on the

stock exchange or over the counter

Debt Financing ……..cont• Securitization

Occurs when a company groups together assets or receivables and sells them in units to the market through a trust. Any asset with a cash flow can be securitized. The cash flows from these receivables are used to pay the holders of these units. Companies often do this in order to remove these assets from their balance sheets and monetize an asset.

• Secured and unsecured debtDefined on basis of recourse to assets

• Syndicated and bilateral debtA syndicated loan that is granted to companies that wish to borrow more money than any single lender is prepared to risk in a single loan, In such a case, a syndicate of banks can each agree to put forward a portion of the principal

• Mezzanine DebtRefers to a subordinated debt or preference shares which represents a claim on a company's assets which is senior only to that of the shares.

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Comparison - Syndicated Debt & Mezzanine Debt

CriteriaSyndicated

DebtMezzanine

Security Secured Subordinated

Charge on Assets (Ranking) First Second

Covenants Tight Flexible

Coupon Floating Fixed

Rate Prime Risk Adjusted

Equity Kicker None Warrants

Prepayment Penalties Yes Fixed Period

Expected Returns 12% - 14% 13% - 20%

Capital Provider Chartered Banks Private Capital

Reasons for availing Debt Finance

• Use of Funds – Working capital, Project Loan, Fixed Asset creation, Purchase of

Equipment .

• Security for debt – Function of use of funds, creation of charge/mortgage – mitigating

against delinquency.

• Repayment profile – Cash flow – Source and timing - thus maturity/tenor of loan.

• Credit standing of Borrower

• Credit Ratios – Debt Equity, Interest Cover, Debt service coverage.

• Credit History – Years of operations, relationships with lending institution/banks.

• Risk Assessment by Lender – Security/Asset cover, equity invested-in by borrower, cash

flow profile of borrowers’ business/operations.

Debt Raising - Seven level analysis

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Individual

Company

Rating

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History

Future Potential

Plans

Packaging

Debt Financing – Execution overview

• Preparation of Project/Funding requirement

• Assessment of cash flow – Funding requirements and cash flows for repayments

• Preparation of documents – CMA/CAS for working capital, project report for capital

projects, detailed report for project financing

• Discussion with relationship lenders/Retaining an arranger

• Commercial terms

• Security and Underwriting

• Proposal within the lenders’ credit system

• Legal Documentation – Loan documents, covenants, restrictions

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Approach

• Analyse the prevailing internal structures & processes

• Take measures to improve gaps, if any

• Understand the funding requirement

• Analyse the various funding options available & check which fits well

• Present the actual data in requisite format

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Questions

?

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Connectivity:

42 Free Press House,215, Nariman Point,Mumbai – 400 021INDIAOffice +91 22 61326999Fax +91 22 2285 6237vipul.thaker@haribhaktisme.com

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Disclaimer: This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact Haribhakti SME Transformation & Support Solutions Pvt. Ltd to discuss these matters in the context of your particular circumstances. Haribhakti SME Transformation & Support Solutions Pvt. Ltd. , its directors, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

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