Académique Documents
Professionnel Documents
Culture Documents
ON
Submitted to:
MR. RAJESH TULSIANI
MANAGER (FINANCE)
ADANI PORTS LTD
Submitted by:
AGARWAL YASH K.
MBA (1ST YEAR)
NRIBM, AHMEDABAD
Yash K. Agarwal
CONTENTS
1. EXECUTIVE SUMMARY
2. OBJECTIVE
6. CORPORATE BOND
7. SECURITISATION
9. MEZZANINE FINANCE
11. CONCLUSION
12. BIBLIOGRAPHY
1.EXECUTIVE SUMMARY
2.OBJECTIVES OF PROJECT
To study the Indian Infrastructure financing market.
To analyze different ways of substituting costly loans for other cheap debt
instruments.
What is Infrastructure?
As per India Infrastructure Report:
These raise the productivity of other factors including labour and other capital.
Infrastructure is thus often described as an "Unpaid Factor of Production",
since its availability leads to higher obtainable from other capital and labour.
Privatization
The importance of privatization is because it brings along with it a) Additional
resources and b) improved managerial efficiency in asset creation, asset
utilization and customer service leading to better financial health, due to stake
holding.
The key issue here is one of appraising the project against future cash flows
rather than an asset base or collaterals. Various forms of revenue, control over
revenue and risk guarantees would also be related concerns. A vital banking
infrastructure to complement all this would be essential.
Project Implementation
Speed of project implementation would be imperatives, in the context of
environmental and other regulatory issues.
These assets are not amenable to resale or reapplication and hence are
unacceptable as security cover to conventional lenders. Furthermore, the step-in
rights to lenders are non-existent since such projects are awarded on basis of
concession and are on a Build Operate and Transfer basis (BOT) with the
"Ownership" of such assets rests with the State of Central Government or Quasi
Government Organization.
The use of Credit Derivative Structures can also be given a thought while
structuring the transaction structure for financing the Infrastructure Projects.
3. Financial Risk:
Financial risk takes place when Implementation Risk and Operational Risk are
partly mitigated. The result of this risk makes the problems of Financial Closure
of the Project Impossible. This risk is mitigated by achieving necessary financial
closure of the Project in the Implementation Stage.
4. Revenue Risk:
Revenue Risk takes place when the project cash flows does not achieves the
standards of worst possible case revenues. This is partly mitigated through
Concession Agreement, Take or Pay, Guarantees.
India has 13 major ports and 139 intermediate and minor ports (at present,
however, only 40 are active), and 30 cater to the Andaman and Nicobar and
Lakshadeep and Minicoy Archipelagos along its 5560 km coastline. The Indian
ports handled traffic of 368.96 million tones in fiscal 2000-01 and the total traffic
handled at Indian ports has grown at a compounded annual growth rate of 9.03%
p.a during the period 1991-92 to 2000-01. in fiscal 2001, the major 13 ports
accounted for 280.96 million tones (76.15%) of the cargo, while the minor ports
(primarily from Gujarat), accounted for the balance. The minor ports during the
same period have shown a faster growth of around 24.95% p.a, primarily due to
increased congestion at major ports, an increased development in shore-based
industries and initiatives by state governments in developing the ports within their
jurisdiction.
Indian ports suffer from low labour productivity and low equipment efficiency
levels adversely affecting their operating performance. The main factors
contributing to the low productivity of Indian ports are:
Turnaround Time: Time between a ship arriving at a port and sailing back.
Pre-berthing Time: Time between a ship arriving at a port and getting
berthed.
Idle Time: Time during which the loading/unloading operations are not being
performed on the ship when the ship is berthed.
Idle Time to Total Time at berth: The ratio of the total idle time of the ship
and the total time for which it was on the berth.
Idle Time to Total Time at Port: The ratio of the total idle time of the ship and
the total time for which it was on port.
Average Output per ship berth day: The ratio between total output from the
ship and the total number of days of occupation of a berth by the ship.
Gujarat Port Sector
Gujarat, situated on the west coast of India, is a principal maritime state endowed
with several strategic port locations. The state has a 1600 km long coastline
(which is a third of the total Indian coastline) and has a large potential cargo
market comprising the northern, western and central Indian states. Of the 41
ports in Gujarat, Kandla is the only major port. The 11 intermediate and 29 minor
ports fall within the jurisdiction of GMB(Gujarat Maritime Board). GMB has been
proactive in terms of encouraging private sector participation in port
developments. Out of the 10 identified probable site locations by GMB, port with
private sector participation have commenced operations at Mundra and Pipavav.
BOOT Guidelines
Under the port policy, GoG announced the Build-Own-Operate-Transfer (BOOT)
Guidelines in July 1997 to serve as framework for involvement of private sector in
the construction and operation of the 10 identified green field projects, including
the Mundra port. Under the BOOT principles, the ports are to be developed as
commercially viable entities capable of operating without government support
and the responsibility of financing the port will rest with the developer. The
government will grant license/concession to the private developer to Build-Own-
Operate and manage the port facilities for a specific period and permit the
developer to create mortgage/hypothecation of the real estate as security for
lenders to the project to be limited to the BOOT period. The ownership of the
land and waterfront will vest with the government. The acquisition of land for the
project will be the responsibility of the GoG/GMB. The land will be allotted on
lease to the developer for a term concurrent with the term of the concession
agreement. In order to facilitate the development of the port, the government
intends initiating concomitant development of road and rail corridors and
industrial parks. The road and rail linkages from the port to the nearest
highway/railhead will be structured as separate BOT packages and the port
developer will have the first preference of undertaking such development. The
ownership rights of developer would include the right to mortgage, hypothecate
or to execute such covenants as may be required for effectively vesting a charge
on the port assets in favor of a lender to the project and the right to sell, convey
or transfer to another party, the right title and interest and concession vested in
the developer, on the request of lender to the project, subject to contractual
agreements. The lender in consultation with GMB will select the new developer
and if necessary the terms and conditions of the concession agreement may be
re-negotiated. The developer may operate the port as a full service or as landlord
port. The GoG/GMB will permit subleasing of facilities or subcontracting of
services provided the developer continues to remain responsible to the GoG for
due performance under the contracted terms and conditions. The duration of the
BOOT package would be 30 years and can be considered for period greater than
30 years for projects will entail sizeable capital investment on account of site-
specific marine conditions and back-up infrastructure such as road/rail linkages.
Introduction
Gujarat Adani Port Ltd (GAPL), a company promoted by Adani Port Ltd (APL) in
the joint sector with the Gujarat Port Infrastructure and Development Company
Limited (GPIDCL), is undertaking the development of Mundra Port located at
Navinal Island, Village Mundra, dist Kachch.
Promoters
Gujarat Adani Port Ltd (GAPL) is a company incorporated on 26th May 1998 and
promoted by Ahmedabad based Adani Group and Government of Gujarat
through Gujarat Port Infrastructure Development Company Ltd (GPIDCL) for the
development of Mundra port as per the port policy and BOOT guidelines of the
GoG.
Board of Directors:
1. Balwant singh Chairman
Secretary, Port and Fisheries Department, GoG
2. Gautam S. Adani Managing Director
3. P. N. Roy Chaudhury, IAS Director
Managing Director, GPIDCL
4. Rajesh S. Adani Director
5. K.N. Venkatasubramaniam Independent Director
6. K.N. Shelat Director
Industry Commissioner, GoG
Business Development
With a view to giving a focused thrust to the overall development of the port, an
exercises has been carried out by GAPL to identify bulk customers who would
like to have an alternative port. GAPL has developed and is in the process of
developing the services and facilities in tune with the requirements of bulk users
of the port facilities.
Product Customer
POL IOC,Caltex,IBP,Swiss Singapore(Jayshree),Ruchi
Petrochemicals Asian Paints, Nirma, C.J.Shah, Crescent, Hareshkumar
Edible Oil Andre, Cargill, Ruchi, Soya, Liberty, B.Arunkumar
Shadiram, Godrej, Wilmar.
Castrol Oil Hindustan lever, Minal, M.lakhamshi
DOC, rice Peter Cremer, A.C.Toefer, Gee Premji, Cargill, Nidera
Ruchi, Shivnath Rai, Priyanka, L&T, KB overseas
Satnam overseas.
Coal Emirates Trading Agency, Glencore, Binani Cement
Laxmi cement, Esteco, Gee Premji, Hindustan Zinc.
Minerals Ashapura Trimax, Gimpex, GMDC
Salt Friends, Bharat Salt & Chemical Industries
Timber Sentrans, Glory, Gupta Global
Steel Shah Alloys, Tisco
Sulphur Swiss Singapore, GSFC, Emmsons, Rama Phospate, Nirma
Fertilizers ETA, GSFC, SPIC, IPL, NFL, STC, MMTC, KRIBHCO,
MFL, Indo gulf fertilizers, ICI, GNFC, Zuari, Chmbal Fertilisers
Observations
1.Mundra port has handled more than 700 vessels till 15 th September,2002,
carrying about 9.5 million tones of cargo. The connectivity of railway(in
November, 2001) further boosted the strategic importance of Mundra. The
deep draft and the connectivity of the port to the hinterland has culminated
in attracting HPCL and IOCL to establish crude oil handling facilities on
the port. In addition, the port has encouraged creation of other industrial
activities like largest single location edible oil refinery in the country viz.
Adani Wilmar Ltd at Mundra.
Revenue Realizations: -
1. Marine Income
2. Royalty Income
3. Lease Rent Income
4. Development Charges
5. Railway Income
6. Sharing of Container Revenue
Marine Income
Wharfage Charges
GAPL has availed loan from various Banks and Institutions to the extent of
approximately Rs.500 crores and proposed to make the repayment of
approximately Rs.250 crores. In view of the said repayment, GAPL has reduced
its interest expenses on long-term loan, which is very important in Infrastructure
project due to their capital-intensive nature. This has resulted substantial saving
in interest cost in future and thereby increasing the profitability.
With this background GAPL is looking for various alternative option to reduce its
cost of loan funds.
The company is looking for new alternatives to raise cheaper fund to replace
their existing debt so what I have done is spotted four alternatives for
infrastructure financing and looked at their advantages, disadvantages and
suitability to company and suggested it to company and the four alternatives are
1. Issuing Corporate Bond
4. Mezzanine Finance
I tried to cover all related aspect of each alternative and tried to see that it is
feasible for the company to explore this alternative but due to time constraint and
technicalities of port sector and confidentiality clause some information might not
be presented by me in this report.
6. CORPORATE BOND
The first option for Debt Restructuring is issuing Bond in this alternative I
have given details of different types of bond that company can issue in
future, recent market trend by example of recent bond issues by some
companies, credit rating process and in annexure SEBI guidelines for debt
issuance and credit rating symbols of different agencies.
According to Mr Pratip Kar of the Securities and Exchange Board of India (SEBI),
``Infrastructure financing is predominantly a structured debt finance and places a
higher burden on the capital market to raise debt resources. A vibrant bond
market thus becomes a necessary condition for infrastructure financing.''
Bond
Bond refers to a security issued by a company, financial institution or
government, which offers regular or fixed payment of interest in return for
borrowed money for a certain period.
2.Callable bond
3.Combination bond
4.Consolidated bond
5.Convertible bond
7.Dollar bond
8.Eurobond
9.Guaranteed bond
10.Income bond
11.Junk bond
12.Mortgage bond
13.Secured bond
14.Surety bond
15.Zero-coupon bond
Total
Name Of Issue
the Issuing Size(Rs Instrumen Rating Tenor(in Put/Call Open Close
Company cr) t Rating Agency Coupon yrs) Option Date Date
11.00,
11.25,
11.50% 5, 7 & 10
respectivel 7, 10 & respectivel Mar 4 May 2
GMIDC 349NCD y 12 y 2003 2003
11.00,
11.25,
Gujarat 11.50% May
Electricity respectivel 7, 10 & Mar 3 31
Board 350NCD y 12 5, 8 &10 2003 2003
11.00,
11.25,
11.50% Feb
respectivel 7, 10 & 27 Apr 30
MKVDC 300NCD BB(So) CARE y 12 5, 7 &10 2003 2003
11.00,
11.25,
Maharashtra 11.50% Feb
Patbandhar 350 + respectivel 7, 10 & 18 Apr 25
e Vittiya GS 150 NCD BBB(So) CARE y 12 5, 7 &10 2003 2003
With many bond issues, the issuer is required to retain some portion of the
proceeds from sale of the bonds, sometimes as much as 10%, as a reserve fund.
This increases significantly the imputed interest cost of the bonds. A 5% face
value issue might actually cost the issuer 5.5% approximate due to the cost of
the reserve.
Issuance cost (one time) will be nearly 2-3% of bond issue that includes all legal
obligations and credit rating expenses.
So by looking at the above details Gujarat Adani Port Ltd can issue bond with
coupon rate 11%-14% and as per my view they should go for following types of
bonds to raise money
Assumed bond
This bond they can issue because GAPL is new company they don’t have any
proven reputation in market so they can issue this bonds and liability can taken
over by Adani Exports Ltd. Which is flagship and very reputed company.
Callable bond
A bond, which the issuer has the right to redeem prior to its maturity date, under
certain conditions. When issued, the bond will explain when it can be redeemed
and what the price will be. In most cases, the price will be slightly above the par
value for the bond and will increase the earlier the bond is called. A company will
often call a bond if it is paying a higher coupon than the current market interest
rates. Basically, the company can reissue the same bonds at a lower interest
rate, saving them some amount on all the coupon payments; this process is
called "refunding." Unfortunately, these are also the same circumstances in
which the bonds have the highest price; interest rates have decreased since the
bonds were issued, increasing the price. In many cases, the company will have
the right to call the bonds at a lower price than the market price. If a bond is
called, the bondholder will be notified by mail and have no choice in the matter.
The bond will stop paying interest shortly after the bond is called, so there is no
reason to hold on to it. Companies also typically advertise in major financial
publications to notify bondholders. Generally, callable bonds will carry something
called call protection. This means that there is some period of time during which
the bond cannot be called. Also called redeemable bond. Opposite of
irredeemable bond or non-callable bond.
GAPL can go for this bond because as per the current market condition we can
not predict any thing about interest rate scenario so better to have bond with
callable option so in adverse condition we can not get into trouble by paying
higher interests.
Combination bond
A bond which is backed both by revenue from the project for which the borrowing
is being done as well as by the full faith and credit of the company issuing it.
Convertible bond
A corporate bond, usually a junior debenture, that can be exchanged, at the
option of the holder, for a specific number of shares of the company's preferred
stock or common stock. Convertibility affects the performance of the bond in
certain ways. First and foremost, convertible bonds tend to have lower
interest rates than non-convertibles because they also accrue value as the
price of the underlying stock rises. In this way, convertible bonds offer some of
the benefits of both stocks and bonds. Convertibles earn interest even when the
stock is trading down or sideways, but when the stock price rises, the value of
the convertible increases. Therefore, convertibles can offer protection against a
decline in stock price. Because they are sold at a premium over the price of the
stock, convertibles should be expected to earn that premium back in the first
three or four years after purchase. In some cases, convertibles may be callable,
at which point the yield will cease.
7.SECURITISATION
The objective of this study is to understand the concept of Securitisation and how
it can be helpful to GAPL in Debt Restructuring.
Introduction to Securitisation
Securitisation is the buzzword in today's World of Finance. It's not a new subject
to the developed economies. It is certainly a new concept for the emerging
markets like India. The Technique of Securitisation definitely holds a great
promise for a Developing Country like India.
One of the Major Issue in the Development of Infrastructure Sector in India is the
availability of the long-term resources for the sector. One such financial
innovation to raise a long-term resource is "Securitisation". Securitisation is the
Financial Instrument of the new Millennium.
Definition
Traditionally there are many definitions of 'Securitisation'. Each definition aims at
defining this Financial Jargon. Some of the definitions are: -
"The Creation of a Security based on a stream of Cash flows, such that the
security is liquidated by Cash Flows.
In simple words: -
"Selling the Cash flow generated from the assets (either existing or future)
against the charge of the assets, by converting them into homogenous market
negotiable instruments is known as Securitisation."
The process of securitisation integrates all the illiquid financial claims or loans
(pooling) and then differentiates them into marketable lot securities
(homogenous).
Securitisation Focuses on the use of the resources and not their ownership
The Investors does not look at the originator, but his interest lies in the
performance of the asset.
Features of Securitisation
The following are the features of the Securitisation:
1. Homogenous Product
The Instrument is issued by a SPV, the structure of the SPV is designed in such
a manner that the SPV remains "Bankruptcy Remote" from the Originator. Thus
the Investors Beneficial Interest is protected in this manner.
4. Recourse
5. Assets Features
6. Issuer Features
7. Investors
The originator estimates the cash flows from the underlying assets. For this
purpose, the originator uses his historical data. Appropriate and accurate
calculations are done keeping in view of the pre payments rates, amortization,
etc for estimation of the cash flows.
2. Creation of SPV
The next step is to create a SPV. The basis logic behind the creation of SPV is:
a. To isolate the underlying assets from the originator. This is an important step
in the whole process as the ultimate result of this is "Bankruptcy Remoteness"
from the Originator.
b. Aggregation of the underlying assets into Pool.
Thus the assignment of the cash flow to the SPV is done in this manner.
In this step the Servicing agent passes the collected payments from the obligors
to the SPV less his fees.
The SPV if permitted does reinvestments of the proceeds from the Servicing
agent (Generally in the Pay Through Structures) and in turn receives the
reinvestment proceeds also.
If the structure of the instrument is Pass through Structure then directly Step no.
8 is followed after Step no. 6.
The Investors earns on his investments by receiving the proceeds from the SPV.
Depending upon the structure of the Instrument the payment of the investment is
done to the Investors.
After the payments done to the Investors if any residuary is left that is passed on
the Originator as his residuary profit, which is generally maintained, by the
originator for the over-collaterisation and guarantee purpose.
1.Structure is almost similar to the Debt instrument, but with an off balance
sheet treatment to the originator
4. Investors are serviced on the dates of the schedule payment; the payment
for this is released from the Receiving and the Paying Bank Account.
Benefits of Securitisation
The following are benefits of Securitisation to the Issuer: -
1. Lower Cost
2. Asset - Liability Mismatch solution
3. Dictation of the rating for the transaction
4. Retail Distribution of the asset
5. Multiple asset creation ability
6. Off balance sheet financing
7. Relief in Capital Adequacy requirements
8. Improvement in the Capital Structure
9. Not regulated as loan
10. Avoids Interest rate risks
11. Escapes taxes based on interest
Applications of Securitisation
Following are the mostly used applications of securitisation:
1. Residential Mortgage Backed Securitisation.
2. Commercial Mortgage Backed Securitisation.
3. Auto Loan Securitisation.
4. Equipment Lease Securitisation.
5. Credit Card Receivables Securitisation.
6. Bank Loan Securitisation.
7. Aircraft Lease Securitisation
8. Insurance Risk Securitisation
9. Intellectual Property Rights Securitisation
10. Future Flow Securitisation
For GAPL most important is Future Flow Securitisation because in this future
cash flow is securitised at security.
Type of Assets
In terms of the asset profile, car loan/hire-purchase receivables account for over
65% of the transaction with the rest being accounted for by truck receivables.
Higher yields and relatively low delinquencies in auto loans in general are the
main reasons for this asset category being preferred for securitisation. Because
of the inherent higher yields in auto loans, the originator could offer attractive
yields to the investor and still book profits.
There has been only one transaction of securitisation of housing loan till date.
While three are some legal hurdles like the absence of the foreclosure laws, the
main reason has been the low yield inherent in this asset category. While the
interest rates on auto loans are generally higher than the housing loans rates.
Auto loans are presently in the range of 14% to 18% while housing loans are in
the range of 11.75% to 15%. Since the interest rates were ruling high till recently,
it was not possible for the originator to offer competitive yield to the investors
without booking losses. The long tenure of housing loans was another problem,
as housing loans are typically for nearly 15 years of tenure and not many
investors have appetite for such long tenure securities.
Originators
The originators in the transactions rated in the past include Citibank, Ashok
Leyland Finance Ltd, 20th Century Finance Corporation Ltd, Tata Finance Ltd,
etc have securitised there loans. Alternate funding, asset/liability mismatch
correction and profit booking have been the main motivating factors for these
originators.
Investors
Investors in ABS in the past have been Institutional Investors, Multinational
Banks and Mutual Funds.
Cost of Securitisation
Different cost involved in a securitisation are the interest rate (discount rate)
given to the investors, cost of maintaining cash collateral, stamp duty, SPV
expenses, legal fee and the rating fee. The interest rate is the rate used to
discount the future cash flows of the pool to arrive at the consideration to be paid.
The cost of maintaining cash collateral is the interest income foregone due to
blocking of funds in the collateral. Stamp duty differs along the different states. In
5 states viz Maharashtra, Gujarat, Karnataka, Tamilnadu and West Bengal have
reduced reduced stamp duty on securitisation transaction to 0.1%. SPV
expenses would be the fee payable to the SPV. Often it may not be necessary to
from a company to act as the SPV, if one of the existing investment companies
could be used as SPV. The legal fees is normally a lump sum, not directly related
to the volume of the transaction. Rating fee has two components viz the rating
fee and the surveillance fees. Most of the Rating Agencies like CRISIL, CARE,
ICRA, Fitch India, etc charges initial fees as 0.1% of future receivables for the
first year and the surveillance fee is 0.05% of remaining receivables for every
year of surveillance.
For a Rs. 50 Crore transaction with a 10% cash collateral, cost other than the
coupon rate on the ABS could be about 0.75% p.a. if the rate of the discount or
the coupon rate on the ABS is 12% p.a., total cost could be around 14.75% p.a.
inclusive of the stamp duty, legal fee, rating fee and interest fee and interest loss
on the cash collateral. If other forms of credit enhancement like over-
collateralization is used, interest loss on the cash collateral could be reduced
thereby reducing the overall cost.
Liquidity
Many of the securitisation issue are listed at the Wholesale Debt Market of the
NSE and a mechanism of market making is also incorporated in some of the
issues. Liquidity in general for all debt instruments could be considered to be
better in India. Lack of awareness could further reduce the liquidity in case of
ABS or RMBS.
Legal Issues
Transfer of a loan amount to conveyance and hence is subject to the stamp duty.
As stamp duty on conveyance comes under the purview of the State, the stamp
duty is different in different states. High level of stamp duties would make the
securitisation transaction uneconomical. Maharashtra, Gujarat, Tamilnadu,
Karnataka and West Bengal have reduced the stamp duty payable on
securitisation transactions involving some asset classes substantially in order to
encourage the development of this instrument. In some of the other states, the
incidence of stamp duty is as high as 13 - 14%.
Absence of foreclosure laws and slow legal process in India are areas of
concern. Ideally, a separate legislation recognizing the rights of the investors in
ABS or their trustees to effectively recover the dues from the underlying obligors
without the involvement of the originator and without having to approach the
Court would help develop the market for securitisation. This, however, would be
a time consuming process. There are some uncertainties with regard to some
legal issues like stamp duty on transfer of PTCs. It would help if the concerned
authorities issue clarification in this regard.
As securitisation is a relatively new concept, there have not been any legal cases
in this area. In the absence of the same, it is not know how Courts would view
these transactions and how the investors stand vis-à-vis the originator in the
event of bankruptcy of the originator. In the absence of the same, one would
have to go by professional advice.
Taxation Issues
These are uncertainties regarding taxability of SPVs, applicability of Tax
Deducted at Source (TDS) to PTCs, treatment of interest tax post securitisation,
etc. As regards to securitisation of housing loans, there was uncertainty as to
who would issue the certificate confirming the payment of principal and interest to
enable the borrowers to claim tax concessions. Some clarification from the Tax
Authorities in this regard would be beneficial.
Accounting Issues
Co-mingling of Cashflows
The risk that the cash flows from the securitised pool would get mixed with those
of the originator is referred to as co-mingling risk. If the originators rating is not
high this presents a problem. Internationally, a time limit is specified within which
the pool of cashflows should be transferred to the designated account. This could
pose a problem, if the contracts in the securitised pool are geographically
dispersed across many states and regions. There is a lack of quick fund transfer
systems in India. Hence, more time may have to be allowed for the transfer of
funds.
It would help in the development of ABS market particularly the mortgage backed
securities (MBS) market, it some incentives are given to these instrument in the
form of fiscal incentives like tax concessions. For example, MBS could be
declared as eligible investments by provident funds and pension funds and could
be declared as Infrastructure Bonds.
weightage average maturity of assets of the company comes down. This is a big
comfort, as typically, NBFCs were funding three-year assets with one year fixed
deposits. Further, the NBFCs which are required to bring down the excess
deposit level could use the proceeds of securitisation to retire the fixed deposits.
Traditionally in the fund based business segment of the financial services sector
in India, a single entity was engaged in the entire gamut of activities viz raising
funds, locating borrowers, credit appraisal of the borrowers, servicing of the loans
and recovery. Owing to the rapidly changing environment, some kind of
realignment is likely to happen in this sector. One could see some specializations
emerging in the market. In developed economies, particularly in the mortgage
market, there is a lot of specialization. Typically in these markets a single entity
could not perform more than one or two of the activities mentioned earlier. This is
also in line with the increasing emphasis on "core competence". Instead of an
entity engaging in all the activities, it makes sense to focus on a few areas where
it has competitive advantage.
The trend is already visible in the auto loan sector. Owing to many regulatory
changes, many NBFCs are finding it difficult to raise funds at competitive rates.
These NBFCs, however, have a relatively low cost distribution network in place
to originate and service loans. On the other hand, large companies and Foreign
Banks find that it is not economical to create a large distribution network in terms
of extensive branch network across the country due to their high cost structure.
However, these companies, given their size, parent support, managerial talent
and a high credit rating have a much stronger funding capability.
Thus, in a nut shell securitisation will change the project evaluation parameters to
an exposure driven by Credit Rating of a transaction structure rather than overall
project risk and also securitisation will facilitate participation of a large number of
investors by ensuring tradability of issued Negotiable Instrument (Participation
Certificates).
•Thus the whole mechanism results in the reduction in cost of capital for the
Infrastructure Projects.
Port
India has a long coastal line dotted with over 11 major ports and 140 minor ports.
Major Port Trust of India manages the major ports and the minor ports are
managed by State Maritime Boards. The major ports handle over 87% of all India
sea-borne throughput of cargo aggregating million tons annually. The port
infrastructure can effectively handle millions tons of cargo annually and is
operating at optimal levels. It is estimated that India requires port handling
capacity of 540.51 millions tons (2005-06).
The port sector in India is governed under the Indian Port Act, 1908 and the
Major Port Trust Act, 1963. These acts have permitted private sector investment
in the following manner:
1. Setting up of major ports at several locations across the coastline. The states
of Maharashtra, Gujarat and Andhra Pradesh have embarked on development
initiatives in this segment.
2. Privatisation of support services at major ports. Government of Gujarat has
identified 10 Greenfield Port Projects and has seen substantive Investment from
the Private sector for the development of the Port Sector in the sate of Gujarat
The revenues of typical port projects would be in the nature of stowage and
loading revenues levied on ships which stop at the port of call. In addition, ports
tend to provide storage facilities for chemicals, cargo, petroleum products, etc. to
several large companies. The port authority/operator contract such storage
facilities for a long tenure. The port revenues of this nature are amenable to
securitisation.
The following diagram explains structuring of the securitisation transaction for the
Infrastructure Project: -
3. The Project Lenders are paid back by the project cash flow.
a. Legal Issues: -
* Partial Assignment of Debt under the Indian Law.
* Sale of future receivables which operates as an executory contract and
therefore is not covered under the definition of debt under law.
* Rights of "Securitised" asset owners or lenders vis a vis rights of conventional
lenders who take a charge on all book debts "present" and "future". These
covenants make it difficult to consummate "Securitisation" transactions.
* Incidence of Stamp duty on assignment of cash flow and receivables is
prohibitive and therefore renders securitisation transactions fiscally unviable.
b. Taxation Issues: -
*Section 60 transfer of income i.e. is transfer of Income without transfer of assets
Conclusion
1.In case of GAPL right now they don’t have any fixed contracted revenue in
considerable amount but in future they have a great advantage in doing
this types of deals.
2.Securitisation is a very fast and a complex subject in the financial
engineering. It is certainly a very new concept in the emerging market like
India.
4.Already 5 states in India have taken crucial steps in reducing the stamp
duty for the transaction structured on the basis of Securitisation.
5.While certain legal, taxation, accounting and other regulatory issues are in
the limelight and are needed to be addressed soon.
6. With the new instrument becoming familiar to the market and further as the
retail investor takes interests in securitised products, the cost of the capital
will come down over a period of time.
7.In any country, more complex the Capital market is and greater the depth it
has in its Debt Market, the economy of that country is considered to be
Highly Matured.
1)Life Business:
In terms of explanation in Section 27 A of the Act, the Authority has determined
that assets relating to Pension business, Annuity business and Linked Life
Insurance business shall not form part of the Controlled Fund for the purpose of
that section.
For the purpose of this requirement, Infrastructure and Social Sector shall have
the meaning as given in regulation 2(h) of Insurance Regulatory and
Development Authority (Registration of Indian Insurance Companies)
Regulations, 2000 and as defined in the Insurance Regulatory and Development
Authority (Obligations of Insurers to Rural and Social Sector) Regulations, 2000
respectively.
They can invest 15% or more in companies which fall under the definition.
2) General Business:
Without prejudice to Section 27 or Section 27B of the Act, - Every insurer
carrying on the business of general insurance shall invest and at all times keep
invested his total assets in the manner not less than 10% in infrastructure and
social sector companies as per section 2(h):
iii.Telecommunication;
As per the section 2(h) GAPL is falling under the required category but as indicated in
other condition that company will require credit rating of ‘AA’ or guarantee from the
government and GAPL has not acquire credit rating yet so after they get rating they can
exercises this option.
9. MEZZANINE FINANCE
Simply put, mezzanine finance is a cross between a loan and equity in the form
of a call option or convertible that allows the investor to convert the loan into an
equity investment at a previously agreed price. It is usually subordinated to
senior debt but ranks higher than common equity. Some mezzanine finance
investors may not incorporate an equity component. Instead, they may
accept a higher stepped-up interest rate towards the end of the loan or
incorporate some type of formula tied to the performance of the company
(e.g. a percentage of the sales or profit). The borrower will have to pay a
higher interest rate or coupon rate than senior debt, usually at 10-12% p.a., but
suffers less dilutive effect in shareholding compared to pure equity investments.
Moreover, as mezzanine finance is usually a subordinated loan, its loan
covenants are usually less stringent than senior debt. Mezzanine finance has
traditionally been perceived as a bridging loan, but it is increasingly used as a
stand-alone investment in buyouts or as a substantial investment to further
expands a business.
It is expected that this paradigm will soon catch up in a big way. Private equity
players and multilateral agencies are gradually occupying the areas avoided by
Banks & FIs. The focus of evaluation would now be more on cash flows and
earnings. Corporate aspiring for ambitious buy-outs, turnarounds, expansion and
non-asset based borrowings will have a an alternative available.
CONCLUSION
Mezzanine finance is at a introduction stage in India with very few publicized
deals. I want to suggest mezzanine finance deal which is based on GAPL’s
future performance we take loan at lower rate but if we earn good profit we’ll give
share of that profit to lender but as it is less popular and all legal aspect are still
not clear GAPL can consider it after looking at all the legal aspects only. The
benefits offered by this novel method of financing promises alternative options to
the CFOs . M&As, huge expansion (big ticket projects) and turnarounds are
domains where funds are some time required more than what an enterprise can
borrow. Let’s see how mezzanine finance has been useful in such cases where
firms have failed to obtain conventional finances.
INTRODUCTION
Credit rating is essentially, the symbolic indicator of the current opinion of the
rating agency on the relative ability and the willingness of the issuer of a financial
(debt) instrument to met the (debt) service obligations as and when they arise. It
other words, credit rating provides a simple system of gradation by which the
relative capacities of companies (borrowers) to make timely repayment of interest
and principal on a particular type of debt/financial instrument can be noted.
The corporate borrowers can raise fund at a cheaper rate with a good rating. It
minimizes the role of ‘name recognition’ and lesser-known companies can also
approach the market on the basis of their rating. The fund ratings are useful to
the bank and other financial institutions when they decide on lending and
investment strategies.
Although credit rating has been a long established part of the financial
mechanism abroad, it is of relatively recent origin in the country. The first rating
agency, Credit Rating Information Services of India Ltd. (CRISIL), was started in
1988. Initially it played a rather subdued role presumably because the
institutional investors did not require the wisdom of the rating agency. In a
change scenario where corporate are increasingly dependent on the public, the
removal of restriction on interest rate and stipulation of a mandatory credit rating
of a number of instruments since 1991 by the government/ SEBI, credit rating
has emerged as a critical element in the functioning of the India debt/financial
markets. In response to the ever increasing role of credit rating, two more
agencies were set up in 1990 [Information and Credit Rating Services (ICRA)
Ltd. And 1993 Credit Analysis and Research (CARE) Ltd. Respectively.
The first private sector credit rating institution was set up as a joint venture
between the JM Financial, Alliance Group and the International rating agency
Duffs and Phelps in 1995, known as Phelps Credit Rating India Ltd. (DCR). In
addition to the mandated ratings, these agencies are also diversifying into other
instruments/sectors. Unlike abroad, unsolicited rating is still not done in India.
Nevertheless, the increasing recognition to credit rating in the emerging financial
services industry in the country marks a major transition from a corporate culture
where names mattered to one where abstract grading count.
This chapter examines the present status of the credit ratings industry/system in
India. Section 1 of the chapter briefly profiles the credit ratings agencies,
followed by the rating process in Section 2. The rated instruments and the rating
symbols are discovered in the following section. The main points are summarized
in the last section of the chapter.
Rating Process/Procedure
All the four rating agencies in the country adopt a similar rating process. The
steps followed by them in the rating process are illustrated with reference to 1)
new issues/instruments 2) review of rating and 30flow chart of rating.
There is no prescribed format for supplying above information but any format
could be flexibly used to cover all the required information adequately.
Other key factors that the issuer believes will have an impact on the rating,
including business segments analysis, portfolio analysis and so forth, should also
be discussed.
The analytical team then proceeds to have detailed meetings with the company’s’
management. To best serve the interests of the investors, a direct dialogue is
maintained with the issuer as this enables the CRAs to incorporate non-public
information in a rating decision and also enables the rating to be forward looking.
The topics discussed during the management meeting are wide ranging, including
competitive position, strategies, financial policies, historical performance and near
and long-term financial and business outlook. Equal importance is placed on
discussing the issues, business risk profile and strategies, in addition to reviewing
financial data.
Rating Committee
After meeting with the management, the analysts present their report to a rating
committee which then decides on the rating. The rating committee meeting is only
aspect of the process in which the issuer does not participate directly. The rating
is arrived at after a composite assessment of all the factors concerning the issuer,
with the key issues getting greater attention from the rating committee.
For a rating to have to an issuer or to an investor, the CRA must have credibility.
The thoroughness and transparency of its rating methodology and the integrity
and fairness of its approach are important factors in establishing and maintaining
credibility. The CRAs are, therefore always willing to discuss with the
management, the critical analytical factors that the committee focused on while
determining the rating and also any factors that the company feels may not have
been considered while assigning the rating.
In the event that the issuer disagrees with the rating outcome, he may appeal the
decision for which new/ additional information, which is material to the appeal and
specifically addresses the concerns expressed in the rating rationale, need to be
submitted to the analysts. Subsequently, a note is put up once again before the
rating committee where the rating may or may not undergo a change. The client
has the right to reject the rating and the whole exercise is kept confidential.
The rating process, from the initial management meeting to the assignment of the
rating normally takes three to four weeks. However, when required, the CRAs
deliver the rating decision in shorter time frames.
Dissemination to the Public
Once the issuer accepts the rating, the CRAs disseminate it, alone with the
rationale, through print media.
Rating Change
On preliminary analysis of the new data, oif the analysts feel that there is a
possibility for changing the rating, then the analysts request the issuer for a
meeting with its management and proceed with a comprehensive rating analysis.
The rest of the procedure of presenting the rating opinion to a rating committee
and so on is the same as is followed in the cases of new issues discussed above.
The main elements of the rating methodology for manufacturing companies are
outlined below.
Business Risk Analysis: The rating analysis begins with an assessment of the
company’s environment focussing on the strength of the industry prospects,
pattern of business cycle as well as competitive factors affecting the industry. The
vulnerability of the industry to government controls/regulations is assessed.
Industry Risk : Nature and basis of competition, key success factors, demand
and supply position, structure of industry, cyclical/seasonal factors, government
policies and so on.
Market Position of the Issuing Entity Within the Industry : Market share,
competitive advantage, selling and distribution arrangements, product and
customer diversity and so on.
While the CRAs do not have a minimum size criterion for any given rating level,
the size of the company is a critical factor in the rating decision as smaller
companies are more vulnerable to business cycle swings as compared to larger
companies. In general, small companies are more concentrated in terms of
product, number of customers and geography and, consequently, lack the
benefits of diversification that can benefit larger firms.
Financial Risk Analysis : After evaluation the issuer’s competitive position and
operating environment, the analysis proceed to analyze the financial strength of
the issuer. Financial risk is analyzed largely through quantitative means,
particularly by using financial ratios. While the past financial performance of the
issuer is important, emphasis is placed on the ability of the issuer to
maintain/improve its future financial performance.
As rating rely on audited data (the rating process does not entail auditing a
company’s financial records), the analysis of the audited financial results begin
with a review of accounting quality. The purpose is to determine whether ratios
and statistics derived from financial statements can be used to accurately
measure a company’s performance and its position, relative to both its peer
group and the larger universe of companies.
The future debt claims on the issuer’s as well as issuer’s ability to raise capital is
also assessed in order to arrive at the level of the issuer’s financial flexibility. The
areas considered in financial analysis include :
Accounting Quality : Overstatement/understatement of profits, auditors
qualifications, method of income recognition, inventory valuation and
depreciation policies, off Balance sheet liabilities and so on.
Interest and Tax Sensitivity: Exposure to interest rate changes, tax law
changes and hedging against interest rates and so on.
Capital Adequacy : Assessment of the true networth of the issuer, its adequacy
in relation to the volume of business and the risk profile of the assets.
Asset Quality : Quality of the issuer’s credit risk management; systems for
monitoring credit; sector risk; exposure to individual borrowers; management of
problem credits and so on.
Profitability and Financial Position : Historic profits; spreads on funds
deployment; revenues on non-fund based services; accretion to reserves and so
on.
Interest and Tax Sensitivity : Exposure to interest rate changes; tax law
changes and hedging against interest rate.
11.CONCLUSION
Indian port sector has come a long way since last decade or two but still there is
a long way to go as the country becomes more globalised and integrated with the
global economies. The authorities have understood the importance of ports as a
lifeline form an economy. Many steps have been taken to develop the sector but
still they are not enough for the port sector to groom properly.
The biggest problem with the port sector seems to be the availability of funds for
finance. After liberalization process the companies are offered with many type of
different instruments for funding the projects. Different benefits like tax holidays
and subsidies are given to encourage investments in the ports.
It has become easier for port companies to procure funds as interest rates have
come down considerably in last decade or so. The option of procuring funds from
foreign market is also made accessible for the companies.
There are many debt restructuring plans available for the company as mentioned
above. It is upon the higher authorities at the GAPL to decide the tool they will
use in future to substitute high interest loans. Every instrument has its own pros
and cons but we have to properly decide which will be the most beneficial for the
company in the long term by comparing the instrument with the objective, goals
and working of the organization. Borrowing should be made in long term
instrument as the break even period in ports is longer. Instruments should be
such that they give stability as well as flexibility to the organization’s decision
making.
Credit rating as a source for easy procurement for funds is very important. Good
rating by a well recognized institution reduces amount of effort needed in order to
procure funds from the market. Thus it is very important for to have good repo
with credit rating agencies in order to have a smooth fund procuring process if
needed by the company.
GAPL is very dynamic organization which believes in constantly looking for
opportunities and chances to enhance their business. They constantly look for
options to improve their profitability and become more and more competitive. My
experience with GAPL as a trainee will be very useful for me in my future when I
join a company as dynamic and efficient as GAPL.
12. BIBLIOGRAPHY
www.tradeport.org
www.adanigroup.com,
http://www.investorwords.com
http://www.debtonnet.com
“Brochures of HDFC mutual fund, Kotak Mutual fund, Franklin Templeton India”
Mehta, Aman.(Kotak securities) “current bond issues and cost of bond issues”
interviewed by Prakash Notani, 25 February, 2003.
http://www.expressindia.com
http://www.brescon.com
http://www.careratings.com/
http://www.icraindia.com/