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Financial Appraisal & Financial Viability

Deepak Narang

General Manager – Allahabad Bank

gmcr@allahabadbank.in

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

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Thank You

Deepak Narang

General Manager

Allahabad Bank

gmcr@allahabadbank.in

Allahabad Bank

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: gmcr@allahabadbank.in

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

Thank You

Deepak Narang

General Manager – Credit

Allahabad Bank

Email: gmcr@allahabadbank.in