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akasam
Financial Appraisal & Financial Viability
Deepak Narang
General Manager – Allahabad Bank
Allahabad Bank
2
Project Appraisal
� The assessment of the viability of proposed long-term
investments are as under:
Market Technical Financial
Appraisal Appraisal Appraisal
Potential
market
Market
Share Risk Return
Technical
Viability
Sensible
Choices
3
Financial Appraisal - Objective
� Cash Flow Comfort
� Analysis of Returns
� Dynamics of Business
� Return to Risk Analysis
4
Financial Appraisal - Process
RISK RETURN TRADEOFF
Risk
Return
Assessment
of
Business
Case
Assessment
of Financial
Viability
Assessment
of Financial
Structure
Financial
Assessment of
Entity/
Promoters
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Assessment of Entity/Promoters
6
Financial Assessment of Entity
Past Performance
(overview of past three years)
• Operating Capacity
• Short Term Funds Flow
• Turnover Ratios
• Performance of Associate
Entity
Present Financial Strength
• Equity Strength
• Funds available for Investment
• Financial Position of Associate
7
Financial Assessment of Promoters
Deep Pocket
Promoters
Track Record Financial Acumen
• Personal Net-worth Statements
• Income Tax and Wealth Tax Details of the last three years
• Credit Worthiness Report from the Bankers
• Relationship with other promoters
8
Assessment of Financial Structure - Process
�Estimating CAPEX
�Assessing Sources of Investment
�Risk Assessment
� Time-Gaps in Raising Liquidity
�Buffer for Future Surprises
�Structuring Means of Finance
9
Typical Cost of the Project
Land & Site Development `
Buildings & Civil Works `
Plant &Machinery `
Furniture & Fixtures `
Other Assets `
Contingencies `
Total Hard Cost `
Preliminary Expenses `
Preoperative Expenses `
Margin Money for Working Capital `
Total Soft Cost `
CAPEX `
10
Means of Finance - Types
� Debt
� Long Term Debt
� Receivables Discounting
� Debentures
� Quasi-Debt
� Convertible Preference Shares
� Convertible Debentures
� Equity
� Promoters Equity
� Private Equity
� Quasi- Equity
11
Structuring Issues for Debt/Quasi-Debt
� Tenor
� Terms of Conversion of Quasi-Debt
� Terms - Repayment/ ROI/ Moratorium etc
� Repayment of Unsecured Loans
� Waterfall Mechanism – Escrow/ TRA etc
� Third Party Comforts/Agreements
� Financial Covenants (FACR; DER; DSCR etc)
12
Trends in Financial Structuring
�Project Structures such as
BOT/BOO/BOOT/BOLT etc.
�Asset-backed Lending to Cash Flow based
lending
�Securitization of Future Cash Flows
�Escrow Arrangements
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Assessment of Financial Viability
Allahabad Bank
14
Assessment of Financial Viability
• Projected Profitability Statement
• Projected Balance Sheet
• Funds Flow Statement
Financial Forecasts Financial Parameters
• Debt Equity Ratio
• Debt Service Coverage Ratio
• Break Even Point
• Internal Rate of Return
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Sensitivity Analysis
Allahabad Bank
16
Sensitivity Analysis – Specific Impacts
� Increase in Project Cost
� Increase in O&M Costs
� Increase in DER
� Decrease in PLF/ Capacity Utilisation
� Increase in Cost of Borrowings
� Increase in Working Capital
� Increase in Raw material Cost
� Decrease in Sale Price
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Model for Financial Forecasts
Allahabad Bank
18
Model for Financial Appraisal -Objective
Excel Spreadsheet forms an effective tool for developing a
Financial Model to facilitate :
� Projected Sales by way of regression analysis
� Forecasts in quick time with accuracy
� Forecasts under varied variables with ease and accuracy
� Sensitivity analysis
19
Model for Financial Appraisal -Input
� Cost of the Project
� Means of Finance
� Economics of Operation
Installed and Operating Capacities
Revenue Projections
Direct & Indirect Costs
Selling & Distribution Expenses
� Interest on Term Loan
� Repayment Schedule; ROI; COD; Moratorium
20
Model for Financial Appraisal -Output
� Projected Profitability Statement
� Projected Balance Sheet
� Cash Flow Statement
� Working Capital Schedule
� Break Even Point
� Internal Rate of Return
� Debt Service Coverage Ratio
� Scenario Analysis
Infrastructure Finance
Deepak Narang
General Manager - Credit.
Allahabad Bank
DEFINITION
OF
INFRASTRUCTURE
DEFINITION OF
INFRASTRUCTURE• Infrastructure is generally defined as the physical
framework of facilities through which goods andservices are provided to the public. It createspositive and negative externalities, involves largeflow of expenditure and affects production andconsumption directly.
• It has a multiplier effect: With 1% increase ininfrastructure spending household access to safewater increases by 0.3%, paved roads by 0.8%,power 1.5% and telecommunications 1.7%. (WorldBank, 2010)
DEFINITION OF INFRASTRUCTURERBI Definition
Developing or developing and operating or developing,operating and maintaining an infrastructure facility in
- Energy
- Logistics and Transportation
- Telecom
- Urban and Industrial Infrastructure
- Agro Processing, Construction for storage of AgroProducts
- Schools and Hospitals
- Pipelines for Oil, Petroleum and Gas
- Water and sanitation
FINANCING NEED
OF
INFRASTRUCTURE
Financing needs are significantSector Investment USD
Billion
Investment
` Crores
Civil Aviation 9 40,000
Ports 11 50,000
National Highways 49 220,000
Railways 66 300,000
Power 130 616,500
Subtotal 265 1,226,500
Residual Sector 55 223,500
Total 320 14,50,000
CATEGORIES
OF
PROJECTS
&
STRUCTURE
Categories of Projects
Brown field:
• Expansion of capacity of product lines by
existing ventures.
• Expansion by adding new product lines.
• Investment by existing ventures for new
technologies.
Green field:
• Entirely new industrial venture being
established.
Project Structure
A set of transaction agreements between stakeholders
Project Contracts Financial Agreements
Concession Agreement Common Loan agreement
EPC contract(Price, Perf. Inter-Creditor agreement
Guarantee, L.D, Retention Money, Project Cost Comparison
Insurance agreements
State Support, Offtake Agreements,O&MSupplier contract (Supply & Transp)
Successful project structure entails a win-win situation for all
Project SPVSovereign Sponsors
Suppliers Guarantor EPC
LendersO&M
Off takers
FEASIBILITY STUDY
OF
INFRASTRUCTURE
WHO CONDUCTS THE STUDY
• TEV & Lenders Independent Engineer
• Phase 1: Project review and assessment
(Date of appointment till closure)
• Phase 2: Construction Monitoring /
Performance Testing
( 2 months after COD)
• Annual operational review ( Optional)
FINANCING NEED
&
ASSESSMENT
Financial Assessment …
Determination of the accuracy of cost
estimates, suitability of the envisaged
pattern of financing and general
soundness of the capital structure
Aspects to be analyzed for impact
• Itemized cost of the project
• Means of finance
• Working capital requirements
… Financial Assessment …
• Itemized cost of the project …
Conceptually, it is the total of all items of outlay
associated with the project which are supported
by Long Term Funds
… Financial Assessment …
Borrowed fundsTerm loans …
While negotiating the terms of the loans, it is also pertinent to factor in a repayment profile such that matches with the
inflow profile
The repayment profiles could be -• Equal
• Front ended
• Back ended
• Ballooning
• Bullet
• Equated
TRA
ACCOUNT
TRUST AND RETENTION ACCOUNT
A Trust and Retention Account (TRA) is envisaged as
the mechanism by which the Project cash flows are
distributed towards payment/reimbursement of the
Project lenders and creditors. The TRA mechanism
pre-defines the priorities and proportions, in line
with the degree of risk assumed through the
contract/s executed for the Project.
MODEL TRA ACCOUNT
DOCUMENTATIONS
FINANCING DOCUMENTS
Documents that govern the Financing of the
Project are referred to as Financing
Documents. The Financing Document are:
Loan Agreement /Common Loan Agreement
/Facility Agreement /Rupee Facility
Agreement /Senior Loan Agreement.
SECURITY DOCUMENTS
1. Mortgage Document
2. Deed of Hypothecation
3. Share Pledge Agreement
4. Assignment of contracts – Concession Agreement,
Licensing Agreements, Insurance Contracts, Off-take
Agreements, Constructions Contracts, etc.
5. Escrow Agreements/ Trust and Retention Account
Agreements
6. Direct Agreements
7. Power of Attorney
RISK ANALYSIS
Risk and DescriptionRisk Head Description
Promoter Risk Capability to implement projects
Ability to Infuse Capital
Market Risk Demand Risk
Tariff Risk
Financing Risk Financial Closure Risk
Equity Infusion Risk
Construction Risk Capability to construct
Technology Used, Equipment Quality
Land Acquisition Risk, Environmental Risks
Fuel Supply Risk Availability of Requisite quantity and Quality of
Fuel at Budgeted Cost
Regulatory Risk Risk of not getting approvals
Policy Risk Risk of Change in Policy
Operations and
Maintenance Risk
Risk of unsatisfactory O & M.
Risk and Mitigation…(i)Risk Allocated to Risk Mitigation Mechanism
Management Risk
Promoter Risk ABC Company • Existing capability of the promoters’ w.r.t. their experience.
• TEV Study to assess the market potential, technological advantage
etc.
Pre-completion Risk
Environment and
Forest / Clearances
ABC Company • Lenders’ Engineer so appointed to review the status of such
availability.
Land Acquisition ABC Company • To be acquired/ transferred in the name of the Company,
preferably before application for finance.
Water clearance/
allocation/ approval
ABC Company • Lenders’ Engineer so appointed to review the status of such
availability.
Finalization of
Project cost
ABC Company • Prudent TEV Study helps to assess the feasible CAPEX of the
Project.
Technology Risk ABC Company • Prudent TEV Study helps to assess whether proven technology is
being proposed.
Risk and Mitigation…(ii)
Financial Risk-
Promoter’s
contribution
ABC Company • Upfront equity contribution to be at least 25% of the envisaged
equity.
• Source of further equity.
Project cost
overrun
ABC Company • Prudent TEV study to assess the hard cost of the project.
• Contingencies provision.
• Undertaking by the Company to meet cost overrun from own
sources.
Time Over-run risk ABC Company • Past experience of the promoters
Achievement of
financial closure
ABC Company &
Syndicating Bank
• Syndication
• Underwriting etc
Risk Allocated to Risk Mitigation Mechanism
Risk and Mitigation…(iii)Risk Allocated to Risk Mitigation Mechanism
Post completion Risk
Power Availability ABC Company • Position of obtention of statutory clearances
• Lenders’ Engineer to assess the required power.
• DG sets
• Captive Power availability.
Water Availability ABC Company • Position of obtention of statutory clearances for usage of ground water.
• Lenders’ Engineer to assess the required water.
• Availability of ground water
O&M risk ABC Company • In house team
• Outsourcing etc
Market Risk
Competitor Risk ABC Company • Marketing analysis
• Selling & Distribution strategy
• Demand analysis
Price Risk ABC Company • Sensitivity analysis with comfortable DSCR and IRR
Foreign Exchange Risk ABC Company • Import LC (Capex)
• Hedging mechanism
Interest rate risk ABC Company • Cash flow and
• Sensitivity analysis
Other Risk
Force Majeure ABC Company &
Insurance companies
• Suitable insurance covers
Disputes and
Arbitration
ABC Company • Suitable provisions for dispute resolution in all the project related agreements.
Infrastructure Financing
Deepak Narang
General Manager – Credit
Allahabad Bank
Email: [email protected]
Thank You
By Deepak Narang
General Manager (Credit)
Allahabad Bank
ObjectiveObjective
�� TheThe overalloverall aimaim isis toto supportsupport qualityquality
lending,lending, buildbuild upup aa healthyhealthy creditcredit portfolioportfolio
inin conformityconformity withwith thethe prudentialprudential lendinglending
normsnorms andand soundsound RiskRisk ManagementManagement
practices,practices, emphasizeemphasize uponupon lendinglending
disciplinediscipline andand adherenceadherence toto variousvarious policiespolicies
ofof thethe ReserveReserve BankBank ofof IndiaIndia..
Methodologies of W.C AssessmentMethodologies of W.C Assessment
�� LimitLimit ofof RsRs..1010..0000 CrCr andand aboveabove -- CashCashBudgetBudget methodmethod..
�� ExistingExisting MPBFMPBF method,method, ifif requestedrequestedbyby thethe BorrowerBorrower..
�� InIn consortium,consortium, thethe appraisalappraisal mademade bybythethe LeadLead BankBank maymay bebe acceptedaccepted..
Working Capital CycleWorking Capital Cycle
Work-in-progress
Finished stock
Debtors
Cash
Pay
Suppliers
& labour force
Creditors
Purchase raw
materials
Start manufacture
Sale
Raw materials
Complete manufacturing
Working Capital AssessmentWorking Capital Assessment
Nature of Bank FinanceNature of Bank Finance
�� Fund BasedFund Based
��OverdraftOverdraft
��Cash Credit (Pledge)Cash Credit (Pledge)
��Cash Credit (Hypothecation)Cash Credit (Hypothecation)
�� Bills Purchased/Discounted/ Bills Purchased/Discounted/ NegotiatedNegotiated
��Working Capital Term LoanWorking Capital Term Loan
Working Capital AssessmentWorking Capital Assessment
Nature of Bank FinanceNature of Bank Finance
�� Non Fund BasedNon Fund Based•• Letter of CreditLetter of Credit•• Bank GuaranteeBank Guarantee•• Letter of ComfortLetter of Comfort
APPRAISALAPPRAISAL
••Managerial AppraisalManagerial Appraisal
••Market Appraisal:Market Appraisal:
••Financial Appraisal:Financial Appraisal:
••Economic Appraisal:Economic Appraisal:
ASSESSMENTASSESSMENT
�� COMPARISON WITH PEERSCOMPARISON WITH PEERS
�� CURRENT SCENARIOCURRENT SCENARIO
�� DEMAND AND SUPPLYDEMAND AND SUPPLY
�� RISK RATING BY OUTSIDE RISK RATING BY OUTSIDE CONSULTANTS CONSULTANTS –– ICRA/CARE/CRISILICRA/CARE/CRISIL
�� CIBIL/RBI DEFAULTER LISTCIBIL/RBI DEFAULTER LIST
END USE OF FUNDS END USE OF FUNDS
�� DIRECT PAYMENTS THROUGH RTGS/ DIRECT PAYMENTS THROUGH RTGS/ NEFT NEFT
�� INSPECTION INSPECTION
�� BALANCE SHEETBALANCE SHEET
�� STOCK AUDITSTOCK AUDIT
�� CA CERTIFICATECA CERTIFICATE
SECURITY PERFECTIONSECURITY PERFECTION
CREATIONCREATION OFOF VALIDVALID MORTGAGEMORTGAGE--� Photocopy / Colored Copy of Title Deed should not be accepted.
� Laminated Title Deed should not be accepted� Property to be mortgaged should be visited by the branch incumbent
� Legal search & Non encumbrance certificate from reputed/ empanelled advocate should be obtained.
� Valuation Report of the property should be obtained from two independent reputed/ empanelled Valuers.
DIVERSION OF FUNDSDIVERSION OF FUNDS
�� SHORT TERM TO LONG TERMSHORT TERM TO LONG TERM
�� GROUP COMPANIESGROUP COMPANIES
�� CAPITAL MARKETCAPITAL MARKET
�� INVESTMENTSINVESTMENTS
�� SIPHONING OF FUNDSSIPHONING OF FUNDS
PRIMARILY POST FACTOPRIMARILY POST FACTO
DOCUMENTATIONDOCUMENTATION
�� POSTPOST--VETTINGVETTING
�� LEGAL COMPLIANCELEGAL COMPLIANCE
�� REGISTRATION OF CHARGEREGISTRATION OF CHARGE
�� ROC SEARCHROC SEARCH
Structured Format for AppraisalStructured Format for Appraisal
�� SubjectSubject
�� Credit Facilities Credit Facilities
�� Executive SummaryExecutive Summary
�� Borrower Profile & Facility Borrower Profile & Facility
�� Details of Limits/Position of the Details of Limits/Position of the Account with our Bank & other Account with our Bank & other LendersLenders
�� SecuritySecurity
�� Background Background
Contd..Contd..
�� Present PropositionPresent Proposition
�� Conduct & Value of Account Conduct & Value of Account
�� Financial Position & Profitability `with Financial Position & Profitability `with comments’comments’
�� Details of UnDetails of Un--audited Quarterly audited Quarterly ResultsResults
�� Assessment of Credit Facilities with Assessment of Credit Facilities with computation of MPBFcomputation of MPBF
�� Confirmation & Compliance Status Confirmation & Compliance Status
Contd…Contd…�� Details of Adverse Features, if any, as per Details of Adverse Features, if any, as per CIBIL, etc. CIBIL, etc.
�� Exposure of Bank in the Company & the Exposure of Bank in the Company & the SectorSector
�� Details of Associate/Connected Concerns Details of Associate/Connected Concerns financed by the Bank financed by the Bank
�� Risk Grading, Internal & ExternalRisk Grading, Internal & External
�� Comments on the Industry Scenario Comments on the Industry Scenario
�� Compliance to the Bank’s Lending Compliance to the Bank’s Lending Policy/Short Term Loan Policy/RBI Norms Policy/Short Term Loan Policy/RBI Norms (Deviations, if any, to be given) (Deviations, if any, to be given)
Contd..Contd..�� Department Views, Comments & Department Views, Comments & Recommendations Recommendations
�� Detailed Terms and ConditionsDetailed Terms and Conditions
Thank Thank
YouYou
Risk Assessment and Mitigation
Deepak NarangFebruary 2nd , 2012
“Take risks: if you win, you will be happy; if you lose, you will be wise”
Project risk must be limited
A Banker is a man who
lends you an
umbrella when it is
not raining!!!
MURPHY'S LAWS
• Nothing is as easy as it looks.
• Anything that can go wrong will go wrong.
• If there is a possibility of several things going wrong, the
one that will cause the most damage will be the one to go
wrong.
• If everything seems to be going well, you have obviously
overlooked something.
The gospel truth in Risk Management
“You cant manage, what you cant measure”
SENSITIVITY ANALYSIS
�NPV Analysis
�"What if" Analysis.
�Break-even analysis allows you to
determine how much a variable must
change before the NPV turns
negative.
SCENARIO ANALYSIS
What is the set of circumstances that are likely to
combine to produce different "cases" or "scenarios"?
A) Worst case/ pessimistic case.
B) Expected case/ best estimate case.
C) Best case/ optimistic case.
RISK SHARING…. The deal diagram
PROJECT COMPANY
BANKSSPONSORS
SHAREHOLDERS’
AGREEMENT
CREDIT
ENHANCEMENT
LOCAL LAWS
GOVERNMENT
SUPPLIERS OFFTAKERS
EPC CONTRACTOR
OPERATOR
CONSENTS/PERMITS
AGREEMENTS
SUPPLY
AGREEMENTSOFFTAKE
AGREEMENT
EPC CONTRACT
O&M AGREEMENT
“Be not too tame neither, but let your own
discretion be your tutor: suit the action to the
word, the word to the action…”
“One ought never to turn one's back on a
threatened danger and try to run away from
it. If you do that, you will double the danger.
But if you meet it promptly and without
flinching, you will reduce the danger by half.
Never run away from anything. Never!”
Project Risks and Causes of Project Failure
� Delay in completion (increase in IDC)
� Capital cost over-run
� Technical Failure
� Revenue Contract Default
� Increased Price of Raw Materials
� Loss of Competitive Position
� Commodity Price Risk
� Volume Risk
� Overoptimistic Reserve Projections
� Exchange rate
� Technical Obsolescence of Plant
� Financial Failure of Contractor
� Contract Mismatch
� Uninsured Casualty Losses
