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8/3/2019 3_Long Term Sources of Finance
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Long term sources of
financing in Internationalfinancial markets
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Why International market??
Diversify investor base (by both type of institution and
geographic location)- Saturation of limits with the Indian long-term investors
- Increase in funding costs
Profile building (both international and among peer group)
Flexibility in terms of shifting between fixed/floating rates
and switching between currencies
Lower administrative time required for debt servicing
Refinance existing debt at competitive cost
Lengthen debt maturity profile -10 years and longer
Create benchmark for future capital markets financing
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Long term
source offinance
Equity Market
ADR+GDR FCCB
Debt Market
Various Bonds
External
CommercialBorrowing
Syndicate
Loan
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International Bonds
Those bonds, which are initially sold outsidethe country of borrower.
InternationalBonds
Euro BondForeign
Bond
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EURO BOND
Euro bond refers to the bonds issued and sold outside the homecountry of the currency of issue.
These bonds are issued in international market and denominated inhard currency i.e. dollar, yen, pound, euro.
They are bearer securities, the names of the bearer are notregistered anywhere.
Unsecured debt securities maturing at least a year after launch.
Long-term loans usually having a maturity period between 5 yearsto 30 years. Nowadays euro bonds have a maximum maturityperiod of 10 years
The euro bonds may be fixed or floating rate bonds. Borrowing not subject to domestic regulations especially exchange
controls, which may limit their ability to export capital gains.
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Eurobond Market - Characteristics
Maturity - Up to 10 years Investors - Widespread institutional and retail investor
base outside the U.S. Pricing - Priced over benchmark U.S. Treasuries. Pricing
spread is generally wider for institutional investors Liquidity - Potentially good if well syndicated anddistributed
Ratings - Advisable but not necessary Documentation - Standard Euromarket
Disclosure - Sufficient to meet London or LuxembourgStock Exchange requirements
Timing - 4-6 weeks
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Euro Bonds
Advantages
Highly targeted investorbase
Regional Identity
Quick to access market
(relative to US marketalternatives)
High Profile Transactions
Disadvantages
Limited liquidity
Maturity restricted
Bank rather thaninstitutional investors
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Eurobonds - Indicative pricing example 1
Issuer NTPC LimitedIssue Size US$300,000,000
Issue Format Reg S Eurobond
Issue Ratings BB+ Stable (S&P) /BB+ Stable (Fitch)
Reoffer Spread 10-year UST +140bp
Coupon 5.875% (semi-annual)
Reoffer Yield 5.939%
Reoffer Price 99.523%
Listing Singapore
Governing Law EnglishPricing Date 23 February 2006
Settlement Date 2 March 2006
Maturity Date 2 March 2016
NTPC Limited
US$300 Million Bonds due 2016
Joint Bookrunner
Barclays Capital
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Foreign Bonds
A bond issued by a company in Country A in themarkets of Country B in Country Bs currency.
Country B = ?
US: Yankee Bonds
Netherlands: Rembrandt Bonds
Japan: Samurai Bonds
UK: Bull Dog Bonds
These bonds are different from Euro bonds in thesense that they are governed by the regulationsof the country in which they are issued whereasEuro bonds are not.
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Advantages of Yankee Bonds
Yankee bonds are that the longer maturities of
bonds place them outside the ECB ceiling.
Yankee bond markets are extremely deep and
liquid
Funds are available at low interest rates for
long maturity periods.
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Equity Market
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What is ADR? Certificates that represent shares of a foreign
stock owned and issued by a U.S bank
They buy up shares of the foreign stock andrepackage them into securities which can be
traded on the NYSE, NASDAQ or AMEX.
The foreign shares are usually held in custodyoverseas, but the certificates trade in the U.S.
They provide easy access to gaining internationalequities exposure without actually having toexchange currencies and open additional accountsto transact in overseas
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TYPES OF ADR
Level 1Basic, common, traded on OTC, leastregulation, no US accounting standard, no annualreports
Level 2Listed on stock exchange, highertrading volumes
Level 3Most rigorous regulations, go as far asraising capital from US investors
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Each ADR represent a single share, a fractionof shares or multiple shares.
The depository bank sets the ratio of US
ADRS per home country share. Ratio can be
=1,1
Once ADR priced & sold in the market, its
price moves based on the market conditions
How to price ADR
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Advantages
Cost Effective
Hassle Free
Ease of Usage
Risk Diversification
Protection of Ownership
Disadvantages
Limited selection
Liquidity
Exchange rate risk
Limited Diversification
ADR: Companies/Shareholder's perspective
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Summary of the Infosys ADRs issued
Issue Day Stock
ExchangeAmount
Mobilized
($ Million)
ADR:
Domestic
Share
% of Share in
ADR formActual
Price/share($)
1.03.1999 NASDAQ 68
70.4 2:1
30.07.2003 49
294 1:1
09.05.2005 67
1050.13 1:1
21.11.2006
1605 1:119.11*
53.5
* % of share in the form of ADRs as on March 31, 2007
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Excess demand with limited supply of ADRs.
Few opportunities in the US to invest incompanies that are growing at the 2030% rates
Official barriers prevent foreign investors frombuying the shares trading in India
Returns are negatively correlated with otherassets held by them.
ADRs provides a value added layer transparency, liquidity and greater coverage thanthe existing Indian stock.
Reasons why ADRs was overpriced
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Return Behavior :INFY ADS vs. NASDAQ vs.
Infosys Tech
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GDR- Global Depositary Receipts
GDR is a certificate issued by a depository bank, whichpurchases shares of foreign companies and deposits iton the account.
Global Depository Receipts facilitate trade of shares,
and are commonly used to invest in companies fromdeveloping or emerging markets.
Prices of GLOBAL DEPOSITARY RECEIPT are often closeto values of related shares, but they are traded andsettled independently of the underlying share.
Offered for sale globally through the various bankbranches
Shares trade as domestic shares
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GDR Market
GDRs can be created or cancelled depending
on demand and supply.
Factors governing GDR prices are:
i. company track record
ii. analysts recommendations
iii. relative valuationsiv. market conditions international status
of the company
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GDR Advantages and Disadvantages
Advantages
It allows investors to invest inforeign companies withoutworrying about foreign trading
practices, law Easier in trading and payment of
dividend is in the GDR currency
GDR are liquid because they arebased on demand and supplywhich is regulated by creating or
cancelling shares
It provides the company withvisibility, more larger and diverseshareholder base and the abilityto raise more capital
internationally
Disadvantages
They have foreign exchange risk
i.e. currency of issuer is different
from the currency of GDR
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GDR Trend (Source:capitaline.com)
162.19
37.54
233.37
43.02
2007-08 2008-09 2009-10 2010-11
GDR
Amount(In Cr.)
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FCCB
It is a type of convertible bond issued in a currencydifferent than the issuer's domestic currency.
It is a quasi-debt instrument which are attractive to
both investors and issuers. The investors receive the
safety of guaranteed payments on the bond and
are also able to take advantage of any large
price appreciation in the company's stock.
Due to the equity side of the bond, which adds value,the coupon payments on the bond are lower for the
company, thereby reducing its debt-financing costs.
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ISSUE OF FCCBS
An Indian company or a body corporate,
created by an Act of Parliament may issue
FCCBs not exceeding US $ 500 million in any
one financial year to a person resident outsideIndia under the automatic route, without the
approval from Government or the Reserve
Bank.
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Where the amount of fund to be raised is tobe USD 20 million or less the minimummaturity period should be not less than three
years.
If the amount to be raised is more than USD20 million and upto 500 million the minimum
maturity period should not be less than 5years.
FCCBs upto USD 20 million can also carry a calland put option provided the option shall notbe exercised until minimum maturity period of3 years has expired.
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In terms of paragraph (x) of Schedule II of the
notification the issue of FCCB is required to be
reported to the Reserve Bank through thedesignated branch of an authorised dealer.
Authorised dealers may forward the same to the
concerned Regional Office of the Reserve Bankfor obtaining a loan registration number.
While forwarding the offer documents to Reserve
Bank the authorised dealers shall ensure that the
FCCBs are issued strictly in accordance with the
notification.
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WHY FCCBS ARE POPULAR?
Being hybrid instruments, the coupon rates on
FCCB are particularly lower than pure debt or
zero, thereby reducing the debt financing cost.
FCCB are book value accretive on conversion.
Saves the risk of immediate equity dilution as
in the case of public shares.
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Lucrative offer for investors:-
Assured returns to investors on bond in the formof fixed coupon rate payments.
Ability to take advantage of price appreciation in
the stock by means of warrants attached to thebonds, which are activated when price of a stockreaches a certain point.
Significant Yield to Maturity (YTM) is guaranteed
at maturity. Lower tax liability as compare to puredebt instruments due to lower coupon rates.
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REMEDIES TAKEN BY GOVERNMENT
Promoters or issuers of foreign currency
convertible bonds (FCCBs) may be allowed to buy
back the bonds if they go in for prepayment.
Also, promoters are likely to be allowed to utilizethe unused portion of the foreign currency-
denominated borrowings parked overseas. This
could also be utilized to meet the redemptionpressure after the bonds mature.
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CONTD..
It has now been decided to permit prematurebuyback of FCCBs. For the buyback of FCCBs outof rupee resources the RBI has fixed a minimumdiscount of 25% on the book value. The amountof the buyback is limited to US $50 mn of theredemption value per company wherein thiswindow will be kept open till March 09.
To Buyback FCCB out of Foreign Currencyminimum discount of 15% on the book value.
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FOR R-COM
R-Com had issued zero-coupon FCCBs in February2007, to raise USD 1 billion. The bonds are nowtrading at a 35% discount to the issue price,meaning, its bonds worth has now come down to
US$650 million RCom, as it currently has over Rs.100 billion in cash
reserves, which also includes about US$ 600 millionworth of investments in mutual funds overseas
This move to buy back by Rcom is good, as it wouldhelp the company reduce its liability and also bringdown its forex exposure.
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TATA MOTORS
Tata Motors has cumulative outstanding FCCBs worthRs.44.87bn.
Compared to current market price of Rs.152 theFCCBs is at a 85% discount compared to theconversion price.
Considering the large capex program planned by thecompany and the downturn in automobile industry, shutdown of production facilities, likely increase in
borrowings to fund JLR, it could face difficulties interms of cash flow management in near term future andis unlikely to opt for pre-payment option for FCCBs.
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Thus many companies Like Tata Motors which
are already under high debts are unlikely to
buyback due to limited cash flows Examples: SUBEX, AMTEK AUTOS,HOTEL LEELA
et al.
Also $50million sum with limit of 25%discount is only a small step for large FCCB
issues. Many companies will not be able to
meet the requirements.
C
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Contd Two to three years back Indian markets were on high
growth and FCCBs became popular for raising fundsfrom overseas market. With the fall in the market, manyFCCBs has gone down, which means no money andmore problem in the market.
Issuing companies will now have to search for
resources to repay the debt along with redemptionperiod whenever it matures. For this companies willseek to fresh borrowings, with high interest rates, whichin turn would impact their profitability. Another option,
which companies have is to reset the conversion clause,to bring it closer to reality.
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(Source: capitaline.com)
110.3171.5
293.49
797.68
230.25
45.85
2004-05 2005-06 2006-07 2007-08 2008-09 2009-10(till
july)
FCCB in India (All fig in cr.)
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External Commercial Borrowing
ECBs include bank loans, suppliers' and
buyers' credits, fixed and floating rate bonds
(without convertibility) and borrowings fromprivate sector windows of multilateral FI such
as International Finance Corporation.
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Contd..
In India, ECBs are being permitted by the
Government for providing an additional
source of funds to Indian corporate and PSUsfor financing expansion of existing capacity
and as well as for fresh investment, to
augment the resources available domestically.
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ACCESS ROUTES
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Access Routes
ECB can be accessed under two routes, viz., (i) Automatic Route
and (ii) Approval Route.ECB for investment in real sector-industrial sector, infrastructure
sector-in India, and specific service sectors as indicated are under
Automatic Route, i.e. do not require the Reserve Bank /
Government of India approval. In case of doubt as regardseligibility for the Automatic Route, Approval Route may be taken.
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Eligible Borrowers
Corporate including hotel,
hospital, and software sectors
except financial intermediaries,
Housing Finance Companies
(HFCs) and NBFCs are eligible to
raise ECB.
Individuals, Trusts and Non-Profit
making organizations are not
eligible to raise ECB.
Financial institutions dealing
exclusively with infrastructure or
export finance, on a case by case
basis
Banks and FI which had
participated in the textile or steel
sector restructuring package
ECB with minimum average
maturity of 5 years by NBFCs,
which are exclusively involved infinancing of the infrastructure
sector, can avail of ECBs
Automatic
Route
Approval
Route
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Eligible Borrowers
Units in Special Economic Zones
(SEZ) are allowed to raise ECB for
their own requirement.
Non-Government Organizations(NGOs) engaged in micro finance
activities are eligible to avail ECB.
SPVs or any other entity notified
by the Reserve Bank, set up to
finance infrastructure companies /
projects exclusively
SEZ developers can avail of ECBs
for providing infrastructure
facilities within SEZ, as defined in
the extant ECB policy
Corporate which have violated the
extant ECB policy and are underinvestigation by Reserve Bank
Automatic
Route
Approval
Route
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Re Financing Of Existing ECB
The existing ECB may be
refinanced by raising a fresh ECB
subject to the conditions that the
fresh ECB is raised at a lower all-
in-cost and the outstanding
maturity of the original ECB is
maintained
Existing ECB may be refinanced by
raising a fresh ECB subject to the
condition that the fresh ECB is
raised at a lower all-in-cost and
the outstanding maturity of the
original ECB is maintained
Automatic
Route
Approval
Route
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ECB trends (Source:capitaline.com)
1.161.27
1.62
2.47
1.6
2.83
1.13
1.7 1.67
1.34
0.452
1.11
ECB 2008-09
Amount($bn)
0.2980.494
1.922.01
1.09
1.51
2.58
2.35
1.571.32
2.19
4.32
ECB 2009-10
Amount($bn)
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Syndicate Loan
Maturity Up to 7 years (Usually 5 years)
Investors Entirely Banks - relationship oriented
Pricing The lowest priced option for offshore
borrowing Liquidity Minimal
Ratings Unnecessary
Documentation Mostly standard but some
negotiation required Disclosure No formal requirements
Timing 6-8 weeks
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The Syndicated Loans contd
Cheapest margin to LIBOR
Speed and ease of Arrangement
Little pre-marketing required--except for
first time borrowers
Limited to bank market
Limited appetite
Maturity restrictions
Advantages
Disadvantages
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Players in a Syndicated Loan Issue
Lead Arranger (s)
- Normally also underwriter
Then follow
- Co Lead Arranger, Lead Manager, Co Lead Managers etc
Facility Agent
Responsibility split among Lead Arrangers
- Documentation--normally done by Facility Agent
- Road shows
- Book running
- Signing ceremony
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Euro or
Euro/AsianPrepare documentation/due diligence/marketing
Finalize
documentation
Global Prepare and finalize documentation/due diligence/SEC filing/SEC review/rating process/marketing
launch, price & sign
Prepare and finalize documentation/due diligence/SEC filing/SEC review/rating process/marketing
SEC
RegisteredYankee
Rule
144APrepare and finalize documentation/due diligence/rating process/marketing CLOSE
CLOSE
CLOSE
CLOSE
Summary Timetable for a First Time Issuer
1 2 3 4 5 6 7 8 9 10 11 12 13 14Weeks
launch, price & sign
launch, price & sign
launch, price & sign
CLOSEPrepare documentation/due diligence/marketing
launch
Convertible
Bond
CLOSEPrepare documentation/due diligence/marketing
Launch & sign
Syndicate
Loan
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Thank You