International Finance for Indian Companies Workshop on Project Finance Organised by WIRC of ICAI Shailendra Jindal C.E.O., Continental Capital Advisors Mumbai, November 12, 2011
Agenda Overview of International Finance Debt for Indian Companies Equity for Indian Companies Convertible Bonds Q & A
Overview of International Finance
Overview of International Finance Debt Equity Convertible Syndicated Loans Private Equity FCCB Project Finance GDRS Mezzanine Debt Overseas Listing International Bonds FDI from other sources Medium Term Notes Floating Rate Notes Short-term Borrowings
Why International Finance? Diversify investor base Saturation of limits with the Domestic investors To reduce financing costs Create International/ Global Profile Preserve scarce Domestic bank lines Flexibility in terms of shifting between fixed/floating rates and switching between currencies Lower costs for servicing the debt Help minimize time commitment from management Refinance existing debt at competitive cost Longer debt maturity profile -10 years and more Create benchmark for future capital markets financing
Debt for Indian Companies
External Commercial Borrowings (ECB s)- Legal Framework External Commercial borrowings are one of the modes for sourcing of funds for corporate. ECB can be accessed under two routes, viz., (i) Automatic Route and (ii) Approval Route. ECB for investment in real sector-industrial sector, infrastructure sector-in India, and specific service sectors as indicated are under Automatic Route, i.e. do not require the Reserve Bank / Government of India approval. In case of doubt as regards eligibility for the Automatic Route, Approval Route may be taken. Automatic Approval
ECB Eligible Borrowers Automatic Route Approval Route Not Eligible Indian Corporate including those in hotel, hospital and software sectors Infrastructure Finance Cos Units in SEZ NGOs engaged in micro finance Exim bank for specific purposes Banks/ FIs for textile or steel sector restructuring package Infrastructure Finance NBFC s FCCBs by HFCs satisfying specified critria SPV s notified by RBI for financing infrastructure Multi-state Co-op Soc in mfg SEZ developers Corporate in service Sector for more than US$ 200 m Erring corporate Cases falling outside AR Banks Financial institutions Housing Finance Companies NBFC s Individuals Trusts Non-Profit making Organizations
ECB s Amount and Maturity Borrower under Automatic Route Hotel, Hospital and Software cos. Other Corporate NGO s in Micro finance Borrower under Approval route Hotel, Hospital and Software cos. Other Corporate Additional ECB by other corporate with average maturity of more than 10 years NGO s in Micro finance ECB in RMB by Infrastructure sector Max amount in US $ million 200 750 5 Max amount in US $ million 200 750 250 5 1000 1. ECB up to USD 20 m in a financial year should have a minimum average maturity of 3 years. 2. ECB above USD 20 m should have minimum average maturity of 5 Years
ECB s and Trade Credits- All-in-cost ceilings ECB Maturity All-in-cost Ceilings over 6 months LIBOR* Between 3 and 5 Years 6 Month Libor + 300 bps More than 5 years 6 Month Libor + 500 bps Trade Credits Maturity Less than 3 years All-in-cost Ceilings over 6 months LIBOR* 6 Month Libor + 200 bps * For the respective currency of borrowing or applicable benchmark. 1. Overseas Borrowings for 3 years or more are ECB s and Less than 3 years are Trade Credits extended for imports. 2. All-in-cost includes rate of interest, other fees and expenses in foreign currency 3. All-in-cost does not include commitment fee, pre-payment fee and fees payable in Indian rupees 4. All-in-cost does not include withholding taxes payable in Indian rupees
ECB End Use Automatic Route Approval Route Not allowed Import of Capital Goods New Projects Modernization/ Expansion Infrastructure sector Service Sector viz. Hotels, Hospitals, Software Overseas Direct investment First Stage acquisition of disinvestment process in PSU s Micro Credit Payment for Spectrum Infrastructure Finance Cos Import of Capital Goods New Projects Modernization/ Expansion Infrastructure sector Service Sector viz. Hotels, Hospitals, Software Overseas Direct investment Refinancing of payment for Spectrum Take out financing for Infrastructure First Stage acquisition of disinvestment process in PSU s and also the mandatory second stage offer On- lending Investment in Capital Market Acquiring a Company in India Money market Mutual Funds Real Estate Sector Working Capital General Corporate Purpose Repayment of existing Rupee loans
Ratings for International Finance Moody s Rating Aaa Aa S&P Rating AAA AA Denotes Extremely strong ability to pay principal and interest Very strong capacity to repay A Baa Ba, B, Caa, Ca C A BBB BB, B, CCC D Strong capacity to repay, somewhat susceptible to change in economic conditions Adequate capacity to repay. Adverse economic conditions could hurt Speculative grade. Major risk exposure In default Moody s appends numerical modifiers 1, 2 and 3 and S & P appends + or - signs to show relative standing within the major rating categories. Fitch has rating parameters similar to S & P
Syndicated Loans - Snapshot Maturity Up to 7 years (Usually 5 years) Lenders Entirely Banks - relationship oriented Pricing The lowest priced option for offshore borrowing Liquidity Low Ratings Not necessary Documentation Mostly standard with some variations Disclosure Basic Timing 6-8 weeks Advantages Lower Costs and Quicker disbursals Disadvantages Only Commercial banks, limited appetite and lower tenure
Project Finance Financing structure for a green field project. Generally Project Specific, SPV level. Can be procured directly from Foreign Banks, Multilateral Financial Institutions. Must be physically isolated and provide the lender some type of tangible security Overseas banks may secure the assets directly or through custodians. Used heavily for high dollar projects in oil, gas, power, infrastructure etc Used extensively in infrastructure and large Greenfield projects
Mezzanine Debt Mezzanine capital, in finance, refers to a subordinated debt or preferred equity instrument that represents a claim on a company's assets which is senior only to that of the common shares. Mezzanine financings can be structured either as debt (typically an unsecured and subordinated note) or preferred stock. Mezzanine capital is often a more expensive financing source for a company than secured debt or senior debt. Mezzanine financings are often used by smaller companies and may involve greater overall leverage levels than issuers in the high-yield market; as such, they involve additional risk. In compensation for the increased risk, mezzanine debt holders require a higher return for their investment than secured or other more senior lenders.
International Bonds Usually refers to a company in Country A issuing bonds in Country B in Country B s currency Country B =? US: Yankee Bonds Netherlands: Rembrandt Bonds Japan: Samurai Bonds UK: Sterling Bonds Can also mean a company in Country A issuing bonds in Country B not in Country B s currency Term Euro may be misleading Not restricted to European issuers/investors
Euro Bonds Bonds issued internationally outside home country s market in own or different currency For example, a US firm issues a dollar bond outside the US A firm issuing yen bonds outside Japan When a Japanese firm issues yen bonds in the Euromarket, it s a Sushi bond Eurobonds are sold in a number of countries by a syndicate of underwriters
Euro Bonds market- Snapshot Maturity Up to 10 years Investors Widespread institutional and retail investor base outside the U.S. Pricing Priced over benchmark U.S. Treasuries. Pricing spread is generally wider for institutional investors Liquidity Potentially good if well syndicated and distributed Ratings Advisable but not necessary Documentation Standard Euromarket Disclosure Sufficient to meet London or Luxembourg Stock Exchange requirements Timing 4-6 weeks Profile Wide international publicity End Use Subject to RBI/MoF approval
International Bonds Issuer Issue Size Issue Format Issue Type Issue Ratings Reoffer Spread Coupon IDBI US$250 Million Reg S Price 99.695% Listing Senior Unsecured Baa3 (Moody s) /BB Stable (S&P) / BB+ Stable (Fitch) 5-year UST + 162.5 bps (Mid-swap + 125 bps) 5.125% (semi-annual) Singapore Pricing Date December 17 2004 Settlement Date December 23 2004 Maturity Date December 23 2009
Medium Term Notes Senior debt securities with fixed coupons and investment grade ratings Non-callable and unsecured Differ from bonds Money raised in small pieces Money raised in a continuous process with a shelf offering Issuers announce a schedule of yields and maturities While not always medium term, they tend to have maturity of 1 to 10 years Market making activity
Floating Rate Notes Maturity Up to 7 years (although 5 years is a more popular maturity) Investors Banks and Institutional Investors Pricing FRN Investors normally demand approx. 20-50 bps more than Syndicated Loans Ratings Not necessary but can help Documentation Euromarket Standard Disclosure Sufficient to meet London or Luxembourg SE requirements (more accommodating than SEC) Timing 4-6 weeks Profile Wide international publicity End Use Subject to RBI/MoF approval
Short-term Borrowings- Trade credits Trade Credits (TC) refer to credits extended for imports directly by the overseas supplier, bank and financial institution for maturity of less than three years. AD banks are permitted to approve trade credits for imports up to US$ 20 m per transaction. Depending on the source of finance, such trade credits include suppliers credit or buyers credit. Suppliers credit relates to credit for imports into India extended by the overseas supplier, while buyers credit refers to loans for payment of imports into India arranged by the importer from a bank or financial institution outside India for maturity of less than three years. It may be noted that buyers credit and suppliers credit for three years and above come under the category of External Commercial Borrowings (ECB) which are governed by ECB guidelines.
Equity for Indian Companies
Eligible instruments for FDI Only equity shares, fully, compulsorily and mandatory convertible debentures and fully, compulsorily and mandatory convertible preference shares, with no in-built options of any type, would qualify as eligible instruments for FDI. Equity instruments issued/transferred to non-residents having in-built options or supported by options sold by third parties would lose their equity character and such instruments would have to comply with the extant ECB guidelines. Other types of Preference shares/debentures i.e. non-convertible, optionally convertible or partially convertible for issue of which funds have been received on or after May 1, 2007 are considered as debt. Accordingly all norms applicable for ECBs relating to eligible borrowers, recognized lenders, amount and maturity, end-use stipulations, etc. shall apply.
FDI limits Illustrative list Automatic Route Approval Route Negative List NBFC * IT / ITes Financial services* Telecom Sector (74% cap)* Insurance (26 % cap)* Real Estate* Special Economic Zones Infrastructure Shipping Manufacturing sector Hotels and tourism Agriculture Existing Airports 100% ARC s 49% Titanium Minerals 100% Tea plantations 100% Broadcasting* Courier 100% Print Media* 26% Single brand retailing 51% Cigars & Cigarettes Atomic energy Retail trading* Lottery, betting and gambling Chit fund, Nidhi company Trading in TDR s * Subject to conditions
Equity for Indian Companies ( FDI) Private Equity American Depository Receipts (ADR s) A negotiable certificate issued by a U.S. bank representing a specified number of shares (or one share) in a foreign stock that is traded on a U.S. exchange. ADR s are denominated in U.S. dollars, with the underlying security held by a U.S. financial institution overseas. ADR s help to reduce administration and duty costs that would otherwise be levied on each transaction Global Depository Receipts (GDR s) A bank certificate issued in more than one country for shares in a foreign company. The shares are held by a branch of an international bank. The shares trade as domestic shares, but are offered for sale globally through the various bank branches. A financial instrument used by private markets to raise capital denominated in either U.S. dollars or euros Overseas Listing FDI from Other Sources
Convertible Bonds
What are FCCBs? Foreign Currency Convertible Bonds (FCCB) are Type of convertible bond issued in a currency different than the issuer's domestic currency. A convertible bond is a mix between a debt and equity instrument. It acts like a bond by making regular coupon and principal payments, but these bonds also give the bondholder the option to convert the bond into stock.
FCCBs Snapshot FCCBs are very effective instruments for raising funds overseas FCCBs represent an unsecured debt obligation for the Corporate. Investors have the option to convert them into GDRs or underlying shares at a predetermined future conversion price. If investors prefer to hold the Bonds till maturity date, the Corporate has to redeem the Bonds on that date. FCCBs are unrated. FCCBs can be issued only by listed companies except those restrained by SEBI, otherwise a prior or simultaneous listing in required on Indian Stock Exchanges.
FCCBs Indian Legal Framework Issuance of FCCBs are primarily governed by following regulations: Foreign Direct Investment (FDI) Policy Relevant provisions of the Companies Act, 1956 Relevant clauses of the Listing Agreements with the Stock Exchanges Issue of FFCB and Ordinary Shares (Through Depository Receipt Mechanism Scheme, 1993 Foreign Exchange Management (Transfer or issue of any Foreign Security) Regulations, 2004 External Commercial Borrowings (ECB) guidelines Foreign Exchange Management (Transfer or Issue of Security by a person resident outside India) Regulations, 2000
FCCB Process Stage 1 ISSUER LEAD MANAGER Decide on FCCB issue Seek Board approval Appoint all participants Liaise with potential investors Offer Memorandum Investor conference calls Obtain FCCB Term sheet Co-ordinate with all participants Prepare Offer Memorandum Listing Circular - in line with Overseas Stock Exchange regulations Vet listing particulars Ensure it complies with disclosure requirements of Overseas Stock Exchange Apply to Stock Exchange for in-principle approval To RBI for obtaining Loan Number
FCCB Process Vetting & Approval Issuer All participants LEAD MANAGER Make changes as required by Stock Exchange Obtain approval Send Draft listing particulars to Overseas Stock Exchange for Comments and Approval Feedback from SE Prepare Final listing particulars Open Escrow Account with overseas Bank to collect FCCB proceeds Circulate Final Listing particulars, subscription letter to all investors Consult Issuer, all participants and Fix FCCB opening & closing dates
FCCB Process Collection of Application Money and Distribution of FCCBs Wire transfer money Investors Transfer Securities Escrow Account Trustee Bank FCCB Money Subscription letter FCCB distribution details Issuer All participants Lead Manager Closing Date Board Approval, Allot Bonds List FCCBs, Authorize release of money to Issuer
About Continental Capital Advisors (CCA) Investment Banking firm based at Mumbai with network partners across the globe Team of Expert PE advisors and Corporate Finance Specialists Services include: - Raising Private Equity - Local and Overseas Debt - Promoter and Acquisition funding - Overseas Listing/ QIP/ Placements - Mergers & Acquisitions - Overseas Business Consulting - Corporate and Business Advisory Services
Communications Any clarifications can be addressed to the following: Mr. Shailendra Jindal Continental Capital Advisors 204 B, Town Centre No.2 Andheri Kurla Road, Andheri (E) Mumbai, India 400069 Email : shailendra@continentalcapital.in
Thanks for your patient hearing and Participation C A Shailendra Jindal