INSTRUMENTS OF LONG

TERM FINANCE
 LONG TERM FINANCE
• Shares
• Debentures
• Term Loans
• Convertible debentures
• Warrants
• Zero Interest Debentures
• Deep Discount Bonds
• Secured Premium Notes
 LONG TERM FINANCE (2)
Asset Based Financing

• Lease
• Hire Purchase
• Project Financing

Venture Capital Finance

 Shares
Features of Ordinary Shares
• Claim on Income: Residual ownership claim
• Claim on Assets: Residual claim
• Right to control
• Voting rights
• Pre-emptive rights
• Limited Liability
 Shares (2)
Pros and cons of equity Financing
Advantages:

• Permanent capital

• Borrowing Base

• Dividend payment discretion

 Shares (3)
Disadvantages

• Cost

• Earnings dilution

• Ownership dilution
 Issue of Equity
• Public Issue of equity
Underwriting of issues

• Private Placement

• Rights Issue of equity shares

 Preference Shares
Features
• Claims on income and assets
• Fixed dividend
• Cumulative dividends
• Redemption: Sinking fund & Call
• Participation feature
• Voting rights
• Convertibility
Pros and Cons of Preference Shares

Advantages
• Riskless Leverage
• Dividend postponability
• Fixed dividend
• Limited voting rights
Limitations
• Non-deductibility of dividends
• Commitment to pay dividend
 Debentures
Features
• Interest Rate
• Maturity
• Redemption
Sinking Fund
Buy-back (call) provision
• Indenture: Debenture trust deed
• Security
• Yield
• Claims on assets and income
 Types of Debentures

• Non-convertible Debentures

• Fully-convertible Debentures

• Partly-convertible Debentures
Pros and cons of Debentures
Advantages
• Less costly
• No overall dilution
• Fixed payment of interest
• Reduced real obligation
Limitations
• Obligatory payment
• Financial Risk
• Cash Outflows
• Restricted covenants
 Term Loans
Features
• Maturity
• Direct negotiation
• Security
• Restrictive covenants
• Convertibility
• Repayment schedule
 Convertible Debentures
Why issue convertible debentures
• Sweetening fixed-income securities

• Deferred equity financing

• Avoiding earnings dilution

• Raising low cost capital

 Warrants
A warrant entitles the purchaser to buy a fixed number
of ordinary shares at a particular price during a
specified time period.
Characterisitics
• Exercise price
• Exercise ratio
• Expiration date
• Detachability
• Right
 Warrants
Why issue warrants

• Sweetening debt

• Deferred equity financing

• Cash inflow in future

 Other Types of Debentures

• Zero interest debentures

• Deep–discount bonds

• Secured premium notes

 Lease
Lease is a contract between the lessor, the owner
of the asset, and a lessee, the user of the asset.
Some Terms:
• Up-front lease
• Back-ended lease
• Primary lease
• Secondary lease
 Types of Leases

• Operating lease

• Financial lease

• Sale and lease back

 Cash Flow Consequences of a
Financial Lease

• Avoidance of the purchase price

• Loss of depreciation tax shield

• After-tax payment of lease rentals

 Advantages of Leasing

• Convenience and flexibility

• Shifting the risk of obsolescence

• Maintenance and Specialized services

 Hire Purchase Financing
Difference between Leasing and Hire
Hire Purchase Purchase
Lease Financing
Financing
Depreciation: claimed by Lessee is not entitled to
the hirer claim depreciation
HP Payments: Hirer can Lessee can charge the entire
charge only interest portion of lease rental as expenses for
payment as expenses for tax tax purposes
purposes
Salvage Value: Hirer becomes Lessee does not become the
owner after payment of last owner of the asset
installment
 Project Financing
• In project financing, the project, its assets,
contracts, inherent economics and cash flows
are separated from their promoters or sponsors
in order to permit credit appraisal and loan to
the project independent of the sponsors.
• The assets of the specific project serve as
collateral for the loan, and all loan repayments
are made out of the cash flows of the project.
Characterisitics of Project Financing

• A separate project entity is created that receives

loans from lenders and equity from sponsors.
• The component of debt is very high in project
financing. Thus project financing is a highly
leveraged financing.
• The project funding and all its cash flows are
separated from the parent company’s balance
sheet.
 Characteristics of Project Financing
(2)
• Debt services and repayments entirely depend
on the project’s cash flows. Project assets are
used as collateral for loan repayments.
• Project financiers’ risks are not entirely
covered by the sponsor’s guarantees.
• Third parties like suppliers, customers,
government and sponsors commit to share the
risk of the project.
 Project Financing
Arrangements

• Build-Own-Operate-Transfer (BOOT)

• Build-Own-Operate (BOO)

• Build-lease-Transfer (BLT)