Financing of Power Projects & International Finance.ppt

7/31/2019 Financing of Power Projects & International Finance.ppt

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Financing of

Power Projects

Sunil Gupta

Dy. General Manager (Int. Fin)

NTPC


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PROJECT COST

NTPC adopts packaging concept toobtain optimum price.

Resorts to competitive bidding for

attaining least cost International Competitive Bidding (ICB)

for major packages earlier approval of packages was required

from administrative ministry Domestic Commercial Bidding (DCB)

for other packages


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PROJECT COSTS STRUCTURE

Cost of Thermal Power Project (indicative)

Direct Capital Outlay 72 %

Working Capital Margin & Start-up Costs 3 %

Interest During Construction & Fin. Charges 16%

Establishment & Consultancy 6%

Physical Contingency 3%


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POWER PROJECT -CHARACTERSTICS

Long gestation period- 4 to 8 years

Long Operating life- 25 to 35 years

High Construction Risk on the project

company

High off take risk in case of Merchantplants

Low credit of offtakers- Indian scenario


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POWER PROJECT -FINANCING

Project Financing

Balance Sheet Financing


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FINANCING A POWER PROJECT- Issues

Optimal financing mix

(Debt Equity Ratio)

Debt

Domestic Market International Market

Instruments of Debt

Managing Fx variations

Equity Fresh Equity from Market

Internal Resources


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FINANCING MIX

Power projects traditionally had DE ratio of 1:1 Private power policy announced in 1991

permitted project funding with maximum D/E of80:20.

CERC Tariff Regulation 2004 stipulates amaximum Debt Equity Ratio of 70:30 CERC tariff regulation effectively reduces generation of

Internal resources which could be used as equity

Leading to increased reliance on debt NTPC also switched over to Debt Equity ratio70:30 from earlier 50:50 even before advent ofCERC.


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OPTIMAL DEBT EQUITY RATIO

Optimal debt equity ratio depends on Debt Servicing capability of the organisation /

project Debt Service coverage ratio (DSCR) Interest coverage ratio (ICR)

Depth of loan market Exposure norms Cost of borrowed capital compared to cost of Equity Regulatory Requirement

Internal resources generation & requirement Key to capacity addition Enables leveraged borrowings Increases confidence in lenders \ Investor Earning potential & stability in cash flows under regulatory

tariff environment


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EQUITY

Fresh Equity- IPO/FPO

ADRs/GDRs

Promoters Contribution Convertible Bonds/ Preference Shares/FCCBs

Internal Accruals Dividend policy


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COST OF EQUITY & LEVERAGING

Principally cost of Equity is the opportunitycost of deployment of funds to equallyrisky investment. It is generally higher

than cost of Debt funds being riskierinvestment;

Leveraging refers to use of low cost debtfunds to provide increased returns tohigh cost Equity participants.


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SOURCES OF

DEBT: AVAILABILITY& CONSTRAINTS


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SOURCE SELECTION-CRITERIA

Selection of instrument of borrowings willdepend upon availability, Regulation,Exposure norms, cost of funds andmaturities needed

Maturities to match with cash flows Present regulatory environment in nascent

stage thus un-predictive

Long term loans with moratorium period of

four years or more preferred. Risk Mitigation

Exchange Rate Risk

Interest Rate Risk


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COMPARISON OF TERM LOAN & BONDS

Bond have Easy Transferability , hencepreferred by Investors

Bonds are secured hence preferred by

the Investors. Corporate Bonds are bench marked

with G.Sec of comparable maturity

Spread over G sec depending onmarket conditions.

Exchange Traded bonds indicate theexisting yields


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COMPARISON OF TERM LOAN &BONDS Contd

But Bond Issue

has to be timed with requirement of funds where asterm loan can be drawn in small lots

requires rating by CRISIL/ICRA/CARE

requires creation of Charge over Assets upto 1.25times

involves high administrative work w.r.t. Trustee -agreement, Transfers etc.

are costly in case of Public Issues

ultimately fall into exposure issues when subscribedby Banks etc.


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RATE OF INTEREST

Factors effecting interest rate decision The rate of interest on any debt instrument is

determined by demand and supply mechanism. The market is indifferent to the option of interest rate

i.e. floating or fixed since there are a large number

of players for both these options. The fixed rate quotes are available on Reuters

screen etc. for different maturities of the loan withrespect to LIBOR which set once in a day at 1100hours GMT in London.

Any lending decision is based on two factors (a) Credit risk Specific to a corporate and depends on

debt rating, capital structure, etc. (b) Liquidity risk Higher the tenure higher will be liquidity

risk.


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FIXED vs FLOATING INTERESTRATE

Floating Rate of Interest Interest Rate subject to change for every interest period based on

the benchmark.

A fixed spread is added to the benchmark rate to arrive at effective

rate of interest which remains fixed for a interest period. A floating rate of interest is cheaper typically by about 1.80 to

2.25% per annum (for a 7 year term).

Advantages of floating rate of interest

Interest Rates are market aligned Lenders are most comfortable since their risk is eliminated withregard to interest rate fluctuations due to demand and supply in themarket.

Efficient way of borrowing in a declining interest rate scenario.


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Fixed Rate Loans The rate of interest is decided upfront i.e. at the time of signing of

the Loan.

In case of Export Credit, CIRR is locked at the time of signing theLoan Agreement.

In case of Syndicated Loans, the rate is agreed two days beforedrawdown is made.

In case of Bonds margin over UST decided thru Book-building

Advantages of fixed rate of interest Eliminates interest rate risk for borrowers.

Such a borrowing is possible only if there is an underlying liabilityi.e. where draw-down is of a fixed size and is known to occur on aspecific date(s) for loans to fund capex it is difficult to predict withcertainty the exact amounts and exact dates of draw-downs so thatloans can undertake the swaps.

Funding on fixed rate loans is challenging for loans having many

draw-downs.

FIXED vs FLOATING INTERESTRATE


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DOMESTIC DEBT EXPOSURE ISSUES

PRESENT EXPOSURE NORMS OF ALL INDIAFINANCIAL INSTITUTIONS (AIFIs) & BANKS

Exposure to a particular borrower are presentlyfixed at 15% of the lendersCapitalFunds.

For companies in infrastructure sector, limit is 20%of lendersCapitalFunds.

Group is 50% of the lenders Capital Funds incl.Infrastructure

Maximum exposure can be enhanced by 5%-exceptional circumstances-Board Approval


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DEBT - POSSIBLE LT SOURCESIN DOMESTIC MARKET

Indian Capital Market (Direct Market Borrowing) issue of bonds/debentures

Private Placement: which are subscribed by Provident Fund,Pension Fund, Gratuity Fund, Insurance Cos, Regional RuralBanks, Foreign Banks, Corporates, Non-profitable institutions,Mutual Funds and Commercial Banks

Public Issues

Term Loans from the Banks & FIs Term Loans from LIC, GIC The Loan could be

Secured Unsecured


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MEETING FUNDS REQUIREMENTDOMESTIC V FOREIGN

Domestic debt preferred as revenues in INR

Exposure limits of domestic lenders

Profile building Preserving precious on- tap lines

Available tenure of debt.

Rates in international market

Exchange Rate Variation

Liquidity in Domestic & International Markets


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ADVANTAGES OF RUPEEBORROWINGS

Cost Competitive

Free from Exchange Fluctuations

Generally Higher Credit Ratings leadingto reduced cost

Known to the lenders- less due diligence

With Basel II norms coming into force-better quality credit preferred

Natural Hedge as INR revenue


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LIMITATIONS OF DOMESTICBORROWINGS

Exposure norms limit the market- reducedavailability of funds despite being preferredborrower

Banks which have large quantity of funds attheir disposal can not generally meet thetenor requirement of the power projects (inregulatory context)

Undeveloped pension fund market unlike US Security issues in case of Bonds despite

highest rating


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WHY INTERNATIONALFINANCING

Fund availability subject to sectoral ceilings andexisting exposures are also to be kept in mind.

Issue of creating security @ 1.25 times of theloan amount is also there in case of Bonds.

Availability of cheap funds in InternationalMarkets-6m- Libor for USD 2.71 % p.a.,

Foreign investors have started viewing Indiafavorably. Investors are now willing to lend /invest in good Indian Corporates.

To meet the cost of imports


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Credit Rating


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CREDIT RATING

Why Rating Each investor can not go into the details of

management, accounts, prospects, risk factors

etc.; A holistic view generally acceptable amongst

lenders;

Legal/customary requirement in certain cases-

Domestic Bonds/USPP/Domestic Loans;

Makes credit distinction- to some extent

Provides comfort to the lenders


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CREDIT RATING

Domestic Credit Rating Agencies The credit rating information services of India

ltd. (CRISIL)

Investor credit rating agency (ICRA) CARE

Fitch

International Credit Rating Agencies Standard & Poors (S&P)

Moodys Investor Service Ltd. (Moodys)

Fitch Ratings


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RATING PROCESS

Preliminary meeting Analyze material- prepare initial write-up

Detail information package

Meeting/ Discussion/Formal presentation Rating committee meeting

Disclosure of Preliminary rating

Appeal process

Issue of final rating Rating rationale/ Full credit report

Monitoring / Review / Surveillance


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RATING CRITERIA

Sovereign risk Political climate Credit worthiness of country Govt. Policies

IndustryRisk Demand supply

Regulatory restriction Organisationrisk

Long term planning and Strategic direction Quality of senior management Market share & competitive position

Operating position Financial requirement Capital expenditure management Employee relation Liquidity concerns


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CREDIT RATING Contd

Rating Definitions AAA Highest Rating Capacity to meet

financial obligation extremely strong

AA Very Strong

A Still Strong BBB Exhibit adequate protection parameters

BB/B Speculative

CCC/C Speculative

D Payment Default, filing ofbankruptcy petition

Plus(+) or Minus(-) sign is added to show relativestanding with in the major rating categories


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SOVEREIGN RATINGLong Term Issuer FC Credit Rating

AGENCY INDIA NTPC

S&P BBB-/Stable BBB-/Stable

MOODYS Baa3/ Stable Not Rated

FITCH BBB-/Stable BBB-/Stable


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REQUIREMENT OF CREDITRATING

Mandatory for:

Rupee Bonds US Yankee bonds

US 144a offerings

Sec- registeredbonds

Optional for:

Euro bonds

Samurai bonds

Dragon bonds

US private

placements Syndicated loans


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FUND RAISING

-NTPC Perspective

MAJOR TERMS & CONDITIONS OF RUPEE


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MAJOR TERMS & CONDITIONS OF RUPEETERM LOANS- NTPC Perspective

Tenor - 10 years door to door

Drawl over 3-4 years

Rate of interest negotiable based on prevalentmarket conditions and individual Banks PLR /

MTLR/SBAR Financial Covenants

The ratio of total liabilities to net worth will not at anytime exceed 2:1; and

The ratio of EBITDA to interest expenses shall not atany time be less than 1.75:1

Prepayment possible with notice generally

without prepayment fee or breakage cost


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Covenants Continued

Negative Lien on the Assets. Restriction of sale, transfer or otherwise

disposal of assets in excess of 25% of bookvalue of last annual accounts;

Restriction on change of business

Restrictions on issue of bonds in excess ofprescribed amount;


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What is Negative Lien ?

A Commitment to the Lender for not doing certain acts withoutprior written consent of the Borrower eg.

Except the charges and encumbrances already created on the assets (movable /immovable) by the Borrower for availing financial assistance, as disclosed inwriting as of date by the Borrower, the Borrower shall not without prior writtenconsent of the Bank:-

create or permit to arise or subsist any mortgage, charge, pledge, lienencumbrance or security interest whatsoever over all or any of itsundertaking, assets present or future (including un-called capital) of theBorrower as security for any obligations now or hereafter existing in favourof any person, however, subject to following exceptions:-

The Borrower may create security interests on its assets to secure theissue of its secured long term bonds with a maturity in excess of one year.

The Borrower may create security interest on its assets to secure anyrupee loan, the repayment of which is due within 12 months or less fromthe date of the said loan including working capital financing and

The Borrower may create security interest on its assets to secure anyforeign currency borrowings from multilateral and bilateral agencies likeIBRD, JBIC and KFW etc.

Sell, transfer or otherwise dispose of, by one or more transactions or seriesof transactions (whether related or not) the whole or any substantial part ofits fixed assets, the book value of which is 25% or more of the book valueas shown in the latest audited financial statements of the Borrower.


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Recent Rupee loan- PFC

Amount Rs 100 Bn- largest single loanfor both organisations

Interest Rate 3 Yr AAA Bond yield +Spread

Moratorium 4.5 Yrs from first drawl

Tenor- 16 years Door-to-Door

Drawl over 4 years

SOURCES OF FINANCE


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SOURCES OF FINANCEUPTO 31/03/2008

Sources of Funds Amount

1. - Equity Share Capital-GOI

- Loan from GOI

- Grant-in-Aid

78126

36730

33

2. Bonds issued in domestic market 79806

3. Loans from domestic financial Inst. 174501

4. Foreign Loans 1547905. Private Equity 4329

6. Internal Resources & Share Premium 22860

Total Investment 756913

INR/MLN


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MULTILATERAL AND BILATERALFUNDING IN NTPC

World Bank

51%

Russian

9%

Japan24%

French

3%

Saudi

1%West

German9%

Italian1%

UK

2%

Total Resources raised INR 106.227 Billion(Routed through Govt. of India as Equity / Loans)


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KfW

0.01

JBIC-B

0.00 NIB

0.00

ADB II

0.07

Swedish

0.01

MTN0.07

SCMB

11%

BELGIAN

1%

WORLD BANK

16%

JBIC21%

ADB

5%

BTCO

2%

IBJ

10%

EXIM,JAPAN

13%SBI

5%FRENCH

9%

Euro Bond

7%

K-Exim

0.06

Total Mobilisation

Rs.165.55 Billion

ECB ason31-03-2008

MEMORANDUM OF


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MEMORANDUM OFASSOCIATION

- Borrowing power conferred upon the companyunder objects incidental or ancillary to theattainment of the main object

- BorrowingPower are stated as to borrowmoney or to receive money or deposits for thepurpose of financing the business of thecompany either with security or mortgage or

other security charged on the undertaking onall or any of the assets of the companyincluding uncalled capital and to increase,reduce or pay off any such securities.

ARTICLES OF


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ARTICLES OFASSOCIATION

- Subject to the provisions of Section58A, 292 and 293 of the CompaniesAct, and Government Guidelines issued

from time to time, the Board may bemeans of resolution passed at meetingsof the Board from time to time accept

deposits or borrow and/or secure thepayment of any sum or sums of moneyfor the purpose of the Company.

COMPANIES ACT 1956


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COMPANIES ACT 1956SECTION 292

- The Board of Directors of a company shallexercise the following powers on behalf of thecompany, and it shall do so only by means of

resolutions passed at meetings of the Board :-a) The power to make calls on shareholders inrespect of money unpaid on their shares ;

b) The bower to issue debentures ;

c) The power to borrower moneys otherwise than ondebentures ;

d) The power to invest the funds of the company ; and

e) The power to make loans.

COMPANIES ACT 1956


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COMPANIES ACT 1956SECTION 293

- As per section 293 of the CompaniesAct, the company can borrow anyamount which does not exceed theaggregate of the paid up capital of the

company and its free reserves (freereserves means reserves not set apartfor any specific purposes).

- Any borrowing which exceeds theabove limit can be made only with theconsent of such company in general

meeting.


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INTERNATIONAL

FINANCING


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WHAT IS INTERNATIONALFINANCING

Sourcing of funds from international

markets Management of funds so sourced

Servicing of external debt/equity

Exchange risk management

SOME COMMONLY USED


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SOME COMMONLY USEDJARGONS

LIBOR- London Inter Bank Offer Rate

MIBOR- Mumbai Inter bank Offer Rate

G Sec- Government Securities

Direct Quote- A quote of One unit of ForeignCurrency in Domestic Currency eg 1 Usd =INR 45

UST- Treasury Rate of US Securities Cross Rates- Quote of one Foreign Currency

in another Foreign currency generally USD

SOME COMMONLY USED


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SOME COMMONLY USEDJARGONS Contd.

Arbitrage- an opportunity to buy at one place ortime and sell at another place or time withpossibility of profit and no possibility of loss.

Spread- the additional amount (generally in %)charged by the lender/seller over theBenchmark Rate

Basis Points- 100th part of a Percentage i.e. 1%

= 100 Basis Points

SWIFT- Society for Worldwide Inter-bankFinancial Telecommunication

SOME COMMONLY USED


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Euro Bonds- Bonds issued by a non-residentin a currency other than domestic currencye.g. $ bonds issued by NTPC in Europe andAsia.

Spot- Forex Quotation for two business dayshence

TOM- Forex Quotations for next business Day

Forward- Forex Quotation for any day beyondtwo business days.

SOME COMMONLY USED


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European Quote- Number of FC units per $

American Quote- No. of $ for 1 Unit of FC

CIRR- Commercial Interest Reference Rate

used by OECD member countries of ECA


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RAISING DEBT FROMINTERNATIONAL MARKET

SOURCES

Syndicated Loans

Export Credit

Bonds Multilateral and Bilateral funds

Development Banks-through GOI


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SYNDICATED LOANS

A syndicated loan deal generally consistsof :

An arranger or lead manager, generally one (ormore) banks chosen by the borrower

Members of the syndicate or consortium

The remaining syndicate, or consortium, of banksgenerally simply provide funds for the loan. Asyndicate, or consortium, of banks act as a single

financier, based on a single loan agreement. Theparticipating banks split and allocate the risksconnected with the loan.

In case of disputes, all banks must concur with themajority vote


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SYNDICATED LOANS

SALIENT FEATURES

Easy to raise

Little pre-marketing requirement

Less formalities Can be arranged within 6-8 weeks

Interest rate

Fixed

Floating Rating not required

Lowest margin

Tenure of loan and Amount- Limiting factors

SYNDICATED LOANS


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SYNDICATED LOANS

CHARACTERSTICS Contd..Agencies involved

Arranger(s)

Lenders

Lenders AgentProcess Agent

Formalities of prepayment

Prepayment charges

Notice

Prepayment in part or full

Covenants

Events of default including cross default

SYNDICATED LOANS


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SYNDICATED LOANS

CHARACTERSTICS Contd..

Material Adverse changes

Changes in business conditions operation,performance of borrowers, syndication

market, financial / capital market thatmaterially impairs syndication of the facility.

Taxes

All payment free and clear of all present &

future taxes, duties of whatever nature. Incase of any such deduction , borrower willsuitably gross up the payment in such amanner as if no deduction levied.

SYNDICATED LOANS


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SYNDICATED LOANS

CHARACTERSTICS Contd.. NEGATIVE LIEN (PLEDGE) Borrower shall not create any security interest over any of its

present of future revenues or assets for any loan/indebtedness. With the exception

Working capital needs Long Term bond of Maturity more than 1 year Multilateral Loans may or may not

CLEAR MARKET From the date of the acceptance of the offer until the date of

the signing of the facility agreement no borrowing or guaranteefacilities shall be discussed, syndicated or privately placed bythe borrower where the prior consent of the lead arranger ,which would have the effect of competing with or adverselyaffecting the successful conclusion of the proposed facility.

SYNDICATED LOANS contd


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SYNDICATED LOANScontdCOVENANTS IN LOAN AGREEMENT

FINANCIAL RATIOS

Total liability to total net worth

Ratio of EBITDA to Interest Expenses

Debt Service Coverage Ratio

Months Debtors MANAGEMENT COVENANT

Company A will continue to havemanagement control over the Borrower duringthe life of the Facility

SHAREHOLDER COVENANT

Company A/GoI will hold 51 % more of theissued or paid up capital of the Borrower.



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EVENTS OF DEFAULT

Failure to pay under the facility (with in __Business Day) Unable to pay debts (Cross Defaults) in excess of ceiling

amount

To any creditors / lenders

Commencement of negotiation for re-scheduling

Corporate action for

Winding up

Reorganisation

Legal proceeding for winding up (which proceeding are

not frivolous or vexatious) material litigation Acquisition / Nationalisation

Change of Business



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SYNDICATED LOANScontd

Material Adverse Change in the financial

condition of the borrower Unlawfulness Incorrect Representation Failure or Repudiation : Borrower fails to perform

and observe any of its obligations under the loanagreement

RESULTS OF OCCURRENCE OFEVENT OF DEFAULTS No further drawing under the loan agreement

Loan and all interest accrued becomeimmediately payable

Reimburse all losses and expenses including lossof profit consequent to event of default.

ADVANTAGES TO THE


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ADVANTAGES TO THEBORROWER

May negotiate a higher total sum ofborrowed funds

It is not necessary to enter personal

negotiations with each and every one ofthe financing banks

The terms and conditions agreed in the

syndicated loan agreement equally bindall of the participating banks.


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ADVANTAGES TO THE LENDERS

Banks split, or syndicate their large loans witheach other to avoid a single large loss.

Participating banks are usually entitled totransfer their proportion of the loan to a third

party without the borrower's consent. Quite often, banks that participate in syndicated

deals later sell their interest in those loans toother investors.

The market for loan participation is so brisk thatborrowers sometimes do not know exactly whichbank is financingthem White & Case


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EXPORT CREDIT

Financing for goods originating from therespective countries and in some cases, forlocal/third country goods

Usually upto 85% of the value of goods

imported, individual agencies have differentlimits

Funds are usually provided by a commercialbank which gets guarantee for political and/orcommercial risk from the export creditguarantee agency

Sometimes ECA also provide finances

EXPORT CREDIT CONTD


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EXPORT CREDIT ...CONTD. Loans are available for tenors ranging from 5-12

years and repayment are in semi-annualinstallments

Interest rates are usually fixed and aredetermined on the date of submission clearproposal to ECA

Minimum subsidized interest rates (Commercial InterestReference Rates-CIRRs) are applicable

Interest rates are notified as OECD consensusrates. OECD is Organisation for EconomicCooperation and Development and has 30members.

EXPORT CREDIT CONTD


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EXPORT CREDIT .CONTD.

Interest rates are effective from 15th

of everymonth;

All the OECD member lend at the rate and tenurenotified by OECD.

OECD lending guidelines pay special attention toEnvironment and compliance with Environmentguidelines.

Loans are generally to be guaranteed by thegovernment or the borrowers country-not in caseof NTPC.

Expenses include guarantee fee payable to theexport credit guarantee agency, commitment fee,agency fee and other out of pocket expenses.


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EXPORT CREDIT

ECA Country

ECGD U.K

Coface FranceHermese Germany

SACE Italy

OND Belgium

US Exim USAKorea K-Exim

Switzerland SERV

JBIC & MITI Japan

EC AGENCIES

Govt. agencies that exist tosupport the export from eachOECD country.

They guarantee bank finance,supplier Finance, provide directloans, provide political risk

insurance ECA work within an established

set of guidelines called theOECD consensus (April 1978)

Arrangement places limitation

on the term of export credit Minimum premium

benchmark Minimum cash payment Maximum repayment Minimum interest rates

EXPORT CREDIT


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EXPORT CREDIT(OECD CONSENSUS)

Consensus is the basis for the actions of ECAs. An agreement for level playing field. Consensus rules relate to both terms of covers and terms of

funding Borrower countries are classified under two categories

Category - I World Bank graduation list e.g. 1996 - GNP percapita labour $5435 Category II -other than Category I An ECA can support finance or guarantee maximum of 85% of

the export content Minimum of 15% of contract to be paid before the use of the

ECA facility Exporter have to win contract on product quality and price

competitiveness and not on beneficial finance terms Interest can be capitalized (drawn out of loan proceeds) during

drawdown period

EXPORT CREDIT Contd


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EXPORT CREDIT Contd

Minimum interest rate: CIRR (CommercialInterest Reference Rate) is declared indifferent currencies. It is based on Govt. bonds yields of different

durations A fixed margin of 100 bp is added As available to first class domestic borrowers Exception is Yen CIRR i.e. LTPR 20 bp

Interest Rate - Fixed (CIRR based) orFloating (LIBOR based) Also possible to convert to fixed rate after

disbursement period or once draw-downsaccumulates to agreed level.

EXPORT CREDIT Contd


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EXPORT CREDIT Contd

Repayment terms for category I 5 years to 8 years

For category II

10 years (for power Cos. 12 Years) Insurance

Sovereign credit risk

Country credit risk- whether a country will service

its external debt political event, legal provision. Participant to charge minimum premium bench

marks

INSURANCE COVER FROM ECA


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INSURANCE COVER FROM ECA- ADVANTAGES

Protects lenders against non paymentcaused by-

War, civil war, Rebellion

Prevention or delay in payment ofexternal debt

Cancellation or non renewal of license

Failure of Last Govt. to honour writtenundertaking

EXPORT CREDIT COST


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EXPORT CREDIT COST

Application fees (25000 USD) Commitment fee

0.125% to 0.50% p.a.

Insurance premium

Depends on tenure, type of borrower country,% age ofcover, drawdown period etc., typically 3.00% to 6.00%

Presently CIRR rates are greater than 8.5 years USD 4.19% Euro 5.00% JPY 2.14%

EXPORT CREDIT NTPCs


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EXPORT CREDIT NTPC sRECENT EXPERIENCE

Export Import Bank of Korea (KEXIM) Facility amount USD 354.25 million Maturity 16 Years (Repayment in 12 years) Rate of Interest (CIRR) 4.31% p.a. Exposure Premium Management Fee Arrangement Fee All- in- Cost 5.06%

Swedish Export Credit (EKN) Facility amount USD 41.55 million Maturity 7 Years (Repayment in 5 years)

Rate of Interest 3.851% p.a. Insurance Premium Arrangement Fee All- in- Cost 4.736%

INTERNATIONAL BOND


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INTERNATIONAL BONDISSUE : EURO BONDS

Term Euro is misleading and not restricted to Europeaninvestors

Bond issued internationally outside home countrysmarket in own or different currency.

e.g. a firm issuing yen bonds outside Japan e.g. - a US firm issuing dollar bonds outside US.

Long tenure possible up to 30 years even perpetual Huge depth of market

Primary market for first issue of securities Secondary market trading after issue Public issueeg. 144A Private placement- Recent product USPP

INTERNATIONAL BOND ISSUE


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INTERNATIONAL BOND ISSUE: EURO BONDS CONTD

Book building Fixed coupon Vs Zero Coupon (Deep Discount) Section 144 A issue Credit rating not essential- however good rating

enhance the success of issue Listing either at London, Luxemburg or Singapore

stock exchange A prospectus / offering circular is prepared by

independent legal adviser containing

Details of issue Financial position of the issuer (4 year data) Purpose of the issue Terms and Conditions of the issue

Unsecured do not require borrower to create pledge


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NEGATIVE PLEDGE Borrower agrees not to create charge on Assets

which are unencumbered on the date of signingof Loan Agreement without the permission oflenders.

Borrower may negotiate for certain exclusionsdepending upon the terms of agreement suchas:- No requirement of seeking permission if charge is to be created

on Assets in tune with requirement of trade credits/workingcapital requirement

No permission required for creating charge on Assets forborrowing in INR

Generally no permission required for creating charge on Assets

for borrowings from Multilateral Agencies.

EVENTS OF DEFAULT


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EVENTS OF DEFAULT

Non payment

Misrepresentation

Cross default breach Insolvency

Repudiation

Material Adverse Change( MAC) Illegality

Change in Business

RESULTS OF OCCURRENCE OF


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RESULTS OF OCCURRENCE OFEVENTS OF DEFAULTS

No further drawing under the loanagreement

Loan and all interest accrued becomeimmediately payable

Reimburse all losses and expenses

including loss of profit consequent ofevent of default.

Other Loans may also become payable-

Cascading effect

CURRENCY MOVEMENT


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CURRENCY MOVEMENTFOR LAST 5 YEARS

DATEEXCHANGE RATE % CHANGE IN Y to Y

USD JPY EURO USD JPY EURO

Mar 07 40.19 0.4037 63.60 -8.37% 8% 8.42%

Mar 06 43.86 0.3731 58.66 -2.42% -2.76% 6.97%

Mar 05 44.95 0.3837 54.84 2.00% -6.71% -3.76%

Mar 04 44.07 0.4113 56.98 -0.54% -2.95% 4.97%

Mar 03 44.31 0.4238 54.28 -7.36% 5.92% 4.75%

Mar 02 47.83 0.4001 51.82


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NTPC Context

-Recent Experiences

ADB II CFS


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ADB II- CFS

First Loan by ADB with A & B Loan Structure

For entire loan, ADB is Lenderof Record

First time tapped Taiwanese Capital Market

30% contribution by 12 Banks Exempt from Withholding and Service Tax

Stress on Environmental and Social aspects

No Sovereign Guarantee

JBIC S di t d L


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JBIC-Syndicated Loan

Loan Guaranteed by JBIC-Principal

Four Japanese Banks participated

Total amount of USD 380 mn.

Exempt from Withholding Tax

Stress on Environmental aspects

No Sovereign Guarantee

MEDIUM TERM NOTE (MTN)


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MEDIUM TERM NOTE (MTN)PROGRAM

Established in February 2006

MTN PROGRAM


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MTN PROGRAM

An EMTN program is essentially adocumentation platform which providethe issuer an opportunity to enterfrequently, efficiently and economicallythe international debt capital market:- Can be used for large and small issuances;

Multicurrency and Structured notes Any number of times with the cap on the

aggregate amount

Investor may initiate issuance- Reverse

En uir

PROS OF A MTN


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PROS OF A MTN

Cost efficient if used regularly Allows easy and timely access

Once set-up minimum additional

Documentation

Facilitates both private and publicplacements

Advantage of Reverse Enquiries

Broadens Investor Base

Reverse Enquiries

LIMITATIONS OF A MTN


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LIMITATIONS OF A MTN

Expensive if not used;

Requires Annual update thus cost

Loss of goodwill if not used andsurrendered

DOCUMENTATION


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DOCUMENTATION

Offering Circular Program Agreement Issuing and Paying Agency Agreement Trust Deed

Agency Agreement Listing Application Subscription Agreement Pricing Supplement

Legal Opinion Auditors Comfort Letters

ESTABLISHMENT PROCESS


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ESTABLISHMENT PROCESS

Internal Management Approval RBI Approval (in case of Approval Route else

in-principle approval is required)

Appointment for Arranger(s)

Appointment of various intermediaries International legal counsel- Lender and Borrower

Indian Legal Counsel- Lender and Borrower

Trustee and Agent

Rating Agencies

Process Agent

Stock Exchange

ESTABLISHMENT CONTD


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ESTABLISHMENT-CONTD. Commencement of Due Diligence with

legal counsels

Obtaining schedule for Road Shows andSigning from JBRs

Finalising the Offering Circular, TrustDeed, Agency Agreement, ProgramAgreement, Subscription Agreement,

Signing Memorandum, ClosingMemorandum, Comfort Letters

ESTABLISHMENT CONTD


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ESTABLISHMENT-CONTD.

Appointment of NTPC representatives for : Liasoning with Stock Exchange;

Operating Bank Account

Opening of Bank Account-getting SWIFT code

etc.; Obtaining all documents relating to MTN

establishment;

Signing of MTN Documents;

Finalising the Road show presentationincluding preparation for prospective questionsfrom prospective investors;

ESTABLISHMENT CONTD


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ESTABLISHMENT-CONTD.

Finalising the deal Signing the subscription agreement;

Seeking RBIs loan registration number

thru AD; (before money is transferred to our account approvalshould be in place)

Furnishing Bank account details to theTrustee and the Agent to effect the fundtransfer;

Getting the money , utilise it, furnish CAcertificate to RBI along-with ECB 2

FEATURES OF USD 300 Mn.


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ISSUE UNDER MTN

Bond was issued in Feb 2006 The issue evoked an overwhelming response

order book over subscribed by over 5 timesattracting 105 investors

The deal was sold 50% in Asia, 42% in Europeand 8% to offshore US accounts.

42% issue was sold to banks, fund mangerstook 38%, insurance took 15% and retailersubscribe to 5%

The coupon is 5.875%, maturity is 10 yearsbullet

EURO BONDS


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EURO BONDS

Issued in March2004

EURO BONDS TYPICAL


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FEATURES

Bearer form, freely negotiable debtinstruments;

Issued and underwritten through an

international syndicate of banks andinvestment banks (issuinghouses)

Held principally by investors outside thecountry in whose currency the issue isdenominated; And,

Issued for long maturity.

USD 200 MLN


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USD 200 MLN 5.5% BONDS DUE 2011

Size of the issue USD 200 million

Date of issue ofBonds

10.03.2004

Denominations US$ 1,000 , US$ 10,000 and US$ 100,000

Coupon 5.5% per annum, payable semi-annually

Issue price 99.37%

Security Unsecured

Listing At Singapore Stock Exchange

Repayment Bullet, after 7 yearsFinal Maturity 10.03.2011

Transaction fee toJoint Lead Managers

0.20% flat of the face value

Expenses Not to exceed the overall cap of USD 700,000

approved by Ministry of Finance

EUROBOND DOCUMENTATION


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EUROBOND -DOCUMENTATION

1. Mandate Letter

2. Offering Circular

3. Subscription Agreement

4. Trust Deed

5. Paying Agency Agreement

EUROBOND SEQUENCE


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OF EVENTS

1 Presentation by prospective Managers 1 Week

2 Finalize Committee Report and issue Mandate Letter 3 days

3 Appointment of Legal Counsel(s), others 3 days

4 Due diligence process 3-4 days

5 Finalize OC 7 days

6 File OC with SGX-ST 3 days

7 Road shows 3 days

8 Pricing 1 day (T)

9 Signing of Subscription Agreement 1 day

10 Signing of Trust Deed and Fiscal Agency Agreement Within 5 days

11 Settlement of proceeds T+5 days

PRICING


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PRICING

UST 3.56% + 2.05% = 5.61% p.a.

Adjusted to 1/8th of a percent to arrive acoupon of 5.5% p.a.

Issue price discounted at 99.37%

In terms of Libor : 3.965% + 1.645% =5.61%

DISTRIBUTION OF


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INVESTORS

Asia

45%

Europe

47%

US

Offshore

8%

By location

Asset

Managers39%

Banks

32%

Insurance /Pension

17%

Retail

12%

By type

DISTRIBUTION


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DISTRIBUTION

79 Accounts participated

45% of the issue placed in Asia, 47% inEurope, 8% to US Off-shore Accounts.

Assets Managers took 39%, Banks 32%,Pension / Insurance 17% and Retail /others 12%


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OTHER LOANS

JBIC LOANS


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JBIC LOANS

Faridabad : through GOI Simhadari : Direct about JPY 66 billionTerms- Interest rate - 2.6% p.a. (Faridabad)

- 2.3%,1.8% p.a. (Simhadari)- service charges-0.1% of amount disbursed

- Repayment period 20 years excluding grace period.- Grace period 10 years- Currency - Jap. Yen

North Karanpura- Direct JPY 16 billion

Interest Rate 0.75% p.a. Repayment in 10 Years with grace period of 5 years GOI Guarantee 0.75% p.a.

JBIC LOAN (OTHER FEATURES)


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JBIC LOAN (OTHER FEATURES)

Assistance available upto 85% of eligiblecomponent of project cost.

Items ineligible

- Cost of land- Compensation/rehabilitation cost

- Taxes and duties

- IDC (idc on JBIC loan can be covered) Procurement generally on untied basis.

ADB LOAN FOR UNCHAHAR -II


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ADB LOAN FOR UNCHAHAR -II

Disintermediation by GOI

Interest rate-cost of qualifiedborrowings+spread (presently 1.69%

p.a.) Commitment fees - 0.75% p.a.

Repayment period 15 years excl. Grace

period of 5 years

Pool currency : major portions Jap. Yen.Now converted to Yen Loan

COMPOSITION OF NTPCS


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FOREX LOAN BASKET

Fixed (%) Floating(%) Variable(%)

31.03.2008 69 31

31.03.2007 75.17 8.52 16.31

31.03.2006 79.16 20.8431.3.2005 81.76 - 18.24

31.3.2004 74.58 - 25.42

31.3.2003 72.27 - 27.73

31.3.2002 66.37 7.59 26.04

31.3.2001 63.00 6.25 30.75

31.3.2000 60.95 9.36 29.68

COMPOSITION OF NTPCS


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COMPOSITION OF NTPC S

FOREX..CONTD.

NTPCs Forex debt is predominantlycarries fixed rate of interest. Out of atotal of Rs.54.4 billion of Forex debt,an amount of Rs.24.5 billionrepresented by loans have Floatingrates of interest.

As of March 08- 32% is JPY, 67 %USD and 1% Euro exposure


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Regulatory Framework inIndia for raising ECBs

Regulatory Framework of ECBs in


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g yIndia

Reserve Bank of India-Nodal Agency-Issues ECB guidelines

Last review of guidelines issued on 22-

09-2008

Covers Export Credits-Suppliers Credit,Buyers Credit, Syndicated loans, Bonds,

FRNs, MTNs ECBs can be assed by either Automatic

Route or with the Approval Route

ECB GUIDELINES RBI


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ECB GUIDELINES-RBI

Eligible Borrowers-Corporates can borrow under this route.Financial intermediaries are exempt such as banks, FII, housing financecompanies.

Recognized Lenders International Banks, International capital markets, Multilateral financial

institutions such as IFC, ADB, IBRD etc., Export Credits etc. Suppliers of equipment, foreign collaborators, foreign equity bidders

Amount & Maturity

ECBs upto USD 20 million with avg. Maturity of 3 years. ECBs above USD 20 million and upto USD 100 Million with avg.Maturity of 5 years.

ECBs upto USD 500 million with avg maturity of over 7 years forInfrastructure under approval route

ECB GUIDELINES RBI


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ECB GUIDELINES-RBI

End Use- For import of capital goods, new projects

- For infrastructure sector-power,telecommunications, roads including Bridges,railways, ports, industrial parks, urbaninfrastructure and Mining, exploration and refining

- For Investment in JVs and WOS

- Not permitted for on-lending or investment in

capital market by corporates- Not permitted for real estate except integrated

township

ECB GUIDELINES RBI


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ECB GUIDELINES-RBI

All-in Cost ceilings- 3-5 years 200 bps plus 6m Libor

- 5-7 years 350 bps plus 6m Libor

- More than 7 years 450 bps plus 6m Libor

ECB GUIDELINES-RBI


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ECB GUIDELINES RBI

- Parking of Funds abroad-allowed tillactual use of funds in India.

- Prepayment-permitted upto USD 400 mn- Refinancing- permitted provided

outstanding maturity is maintained and thecost of raising fresh loan is lower

- Guarantee- guarantee or letter of comfortfrom by banks , FIIs etc not permitted

SOME COMMONLY USEDJARGONS


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JARGONS Contd.

Foreign Bonds- Bonds issued by a non-resident in the domestic currency- eg Bondsissued by an Indian Company in $ in US

Yankee Bonds- Foreign Bonds issued in USi.e. $ bonds in US

Samurai Bonds- Foreign Bonds issued inJapan i.e. bonds in Japan

Bulldog Bonds- Foreign Bonds issued in UK i.e. Bonds in UK


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TOTAL FOREIGN LOANS


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AS ON 31.03.07

Source Amount(Rs. Mln)

1 Direct foreign loans 145,579

2 Through Govt. Of India 106,227

Total 251,806

VARIOUS INSTRUMENTS


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VARIOUS INSTRUMENTS

Vanilla-Fixed or Simple Floating Rate-noncallable

Inflation Linked-Coupon linked to designated

measure of Inflation Bermudan callable- Callable at discreteintervals throughout life of notes

European Callable-Callable at single date

Fixed Rate step-up callable- couponincreases over life- stated at the time of setup-callable

VARIOUS INSTRUMENTS


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VARIOUS INSTRUMENTS

TEC-10-FRN linked to constant Maturity 10 yrFench Govt. rates

CMS linked- FRN linked to Constant MaturitySwap rate

Callable Zero coupon Range Accrual- Fixed coupon that accrues

every day that a designated index (say 3 mlibor) is trading within specified range. In case

index is trading outside the range, the note doesnot accrue interest.

Inverse FRN- bears a Fixed minus float coupon

COST OF CAPITAL


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COST OF CAPITAL

Cost of Debt Pre Tax

Post Tax = Pre-Tax*(1-t)

Cost of Equity Present value of expected returns with

market value of shares

WACC Book value vs Market value of Weights

COST OF CAPITAL-CONTD.


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COST OF CAPITAL CONTD.

Issues concerning InternationalFinancing in the Cost of Capital

In addition to the Interest Cost impact of

FERV and Tax need to be considered