NATIONAL INSTITUTE OF CONSTRUCTION

MANAGEMENT & RESEARCH

PROJECT FINANCING AND STRUCTURING

Assignment No- 2

PEM SECTION- II

Submitted by Group 3
Akash Ingale (PP20077)
Ravi Shankar Chaudhary(PP20079)
Harikrishna Vyas (PP20080)

Submitted to
Prof. Vivek Date
 MAX Powers Private Limited:
Sector: Manufacturing Power production equipment’s, installation of small captive
thermal power plants and co-gen plants.

Weighted
Sources of Amount % Of total funding Cost of Capital Average cost
Financing (In Cr) (1) (2) of capital
(1) * (2) (In
%)
Net Worth (Equity) 500 9 5% 0.5
Debt (Term Loan) 4500 82 8% 6.5
Debt (Overdraft) 400 7 8% 0.6
Debt (Secured Bond) 100 2 6% 0.1
5500 100 7.7

The firm has a total Weighted Average Cost of Capital of 7.7%

(i) Extent of find requirements / break up for different purposes.

The company will go for Bank Financing for Solar Panel, Frames and Evacuation &
Current Assets.
It will go for Term Loan for Solar Panel, Frames and Evacuation (4500 Cr) and Overdraft
(400 Cr) for Current Assets. Therefore, MAX Power is going for full fund-based financing
from Bank, say HDFC.
The company will go for Secured Bond Financing for Land leveling, Water Pumps and
Civil Structures (100 Cr). The corporate bond offering will be at 8%.
Therefore, the cost of the project Rs 5000 Cr will be financed.
 (ii) Composition of various forms, type and Sources.
The firm already has an equity of Rs 500 Cr.But with the new requirement, it
will have an Equity component of 9%, Term Loan Component of 82%,
Overdraft of 7% and Secured Bond of 2%.

Sources of Funding:
Term Loan: Assuming the project duration is 7 years, Max Powers can avail a
term loan at 8% for 7 years will at least 75% collateral offering. Meaning to
say, the Actual Market Value of the Solar Panel, Frames and Evacuation will be
at least Rs. 3375 Cr upon completion.
Overdraft: The firm can avail the overdraft at 8% with 75% collateral.
Meaning, the Actual Market Value of the Current Assets, combined will be at
least Rs. 280 Cr.

Secured Bond Financing: It can go for secured bond financing at 6%, since it
has good financials.

(iii) Justification for suggesting the aforesaid forms, types and sources on
the basis of cost of raising funds, advantages, disadvantages, limitations,
costs and time for raising the same.

Bank Financing:
Bank Financing is considered an easy way of raising money. With good rates and long
payment schedules, the company can go to a bank for funding. Also, with AA+ rating,
good financials, the company will pass through Credit department evaluation and
therefore easy sanction.
Term Loan:
A term loan provides borrowers with a lump sum of cash upfront in exchange for specific
borrowing terms. In exchange for a specified amount of cash, the borrower agrees to a
certain repayment schedule with a fixed or floating interest rate. Term loans may require
substantial down payments to reduce the payment amounts and the total cost of the loan.
Overdraft:
Basically, an overdraft means that the bank allows customers to borrow a set amount of
money. There is interest on the loan, and there is typically a fee per overdraft.
• Allow you to grow your business: Bank loans are a convenient way to get extra finance,
without needing to wait until your business has generated enough profit to fund
expansion yourself. Taking out a loan means you can put your plans into action much
earlier and take advantage of any business opportunities that present themselves,
enabling faster and more accelerated growth.
 • You keep full control of the company: The main advantage of a bank loan, as with any
kind of small business loan, is the ability to get an injection to their cash flow without
losing any control of your company.
• No interference from the bank:
One of the other advantages of a small business bank loan is that, as long as you
make the repayments, banks shouldn’t interfere or set restrictions on what you
use the loan for.

Of course, when you first apply for a bank loan, you will need to send in a
business plan outlining how you plan to use the funds so the bank can assess the
risk involved in lending to your business. However, once you have the funding,
you have the flexibility to change your plans without any intervention from the
bank, as long as you carry on repaying the loan.
• Low Cost of Funds
• Competitive rates
• Better servicing of Overdraft and Term Loans.

Disadvantages:
• If the project faces some problems and the company goes low on cash, there is a
possibility of failure and therefore the Assets mortged (Solar Panels, Current
Assets, Frames) will be taken over bank., So, the firm risks not retaining its
assets.

• Bank financing has terms and conditions attached to it. Due to the Credit team's review,
companies with below-average financials are not loaned, while those with somewhat better
financials are provided alternative conditions than previously agreed. In general, a CIBIL score
700-900, both consumer and commercial, is thought to be safer for speedier bank borrowing.

• Lengthy application process: Preparing for a business loan application can also be a
long and time-consuming process. Not only will you need to fill out an application form
for each lender, but you will also need to provide a business plan, your account history,
and your financial forecasts to show your business is a viable lending prospect.

Secured Bond Financing:

Secured Bond financing gives access to the wider market of investors. With a rating of
AA+, the company can easily access the bond market with easier repayment schedules.
Advantages:
• Wider reach, high value investors like QIBs
• Competitive rates other than repo. The company can opt for fixed rate or floating
rate bonds
• The bond amortization schedules are easier for the company to pay off
 Disadvantages:
• Losing popularity of benchmarks like LIBOR.
• Secured financing means the company has locked up its assets with respect to
investors. In priority of claims, secured bond investors need to be paid first, even
in case of default.
• Although investor access is a major advantage, only big investors generally opt
for such large-scale financing and they impose various negative covenants on the
company with respect to bond financing. The company has to be active if it has to
reach retail investors.
The capital structure based on the assumptions looks like this:

Amount (In Cr)

Sources of Financing
Net Worth (Equity) 500
Debt (Term Loan) 4500
Debt (Overdraft) 400
Debt (Secured Bond) 100

• Term Loan has first priority since the amount of Rs 4500 Cr can only be financed by
this. Since the Commercial and Consumer CIBIL both are good, high debtor days and
creditor days are generally ignored. In terms of banks, those banks with high-risk
appetite will fund this project through term loans.
• Overdraft is taken to cover the working capital requirements and will come at 2nd
priority. Overdraft allows companies with large accounts at banks to avail facilities at
even lesser collateral. Here, we can assume that Max Powers Private Limited will have
the advantage of asking for less collateral.

• Bond Financing is the final priority with a means to establish its presence in the market.
Major requirement is secured financing since 100 Cr is usually financed by Secured
offerings at fixed rate, preferably. Fixed rate would be good because, at Floating rate
Bond offerings, LIBOR is used and it is losing significance.
• Other sources of finance can include:

• Quasi Equity: This is money from Directors, Partners and relatives. It is another cheap
source of funding at very low rates. The major disadvantage being, projects with high
costs like that of Max Powers are usually not funded through Quasi Equity due to large
amounts.
• Equity Market Offerings: Raising money at stock markets is a convenient way of
raising funds. It gives the company access to a large amount of capital. The only
disadvantage being, the company risks diluting ownership. Company directors,
generally like to maintain more than 60% ownership in the company, so that they still
exercise control. Large equity offerings like Class A shares, gives shareholders more
power to control the company.
Retained Earnings

• Businesses aim to maximize profits by selling a product or rendering service for a price higher than what it
costs them to produce the goods. It is the most primitive source of funding for any company.
• After generating profits, a company decides what to do with the earned capital and how to allocate it
efficiently. The retained earnings can be distributed to shareholders as dividends, or the company can reduce
number of shares outstanding by initiating a stock repurchase campaign.
• Alternatively, the company can invest the money into a new project, say, building a new factory, or
partneringwith other companies to create a joint venture.

Debt Capital
• Companies obtain debt financing privately through bank loans. They can also source new funds by issuing
debt to the public.
• In debt financing, the issuer (borrower) issues debt securities, such as corporate bonds or promissory notes.
• Debt issues also include debentures, leases, and mortgages.
• Companies that initiate debt issues are borrowers because they exchange securities for cash needed to
perform certain activities. The companies will be then repaying the debt (principal and interest) according to
the specified debt repayment schedule and contracts underlying the issued debt securities.
• The drawback of borrowing money through debt is that borrowers need to make interest payments, as well as
principal repayments, on time. Failure to do so may lead the borrower to default or bankruptcy.

Equity Capital
• Companies can raise funds from the public in exchange for a proportionate ownership stake in the company
in the form of shares issued to investors who become shareholders after purchasing the shares.
• Alternatively, private equity financing can be an option, provided there are entities or individuals in the
company’s or directors’ network ready to invest in a project or wherever the money is needed for.
• Compared to debt capital funding, equity funding does not require making interest payments to a borrower.
• However, one disadvantage of equity capital funding is sharing profits among all shareholders in the long
term. More importantly, shareholders dilute a company’s ownership control as long as it sells more shares.

Other Funding Sources

• Funding sources also include private equity, venture capital, donations, grants, and subsidies that do not
have a direct requirement for return on investment (ROI), except for private equity and venture capital.
They are also called “crowdfunding” or “soft funding.”
• Crowdfunding represents a process of raising funds to fulfill a certain project or undertake a venture by
• obtaining small amounts of money from a large number of individuals. The crowdfunding process usually
takes place online.
• Money from Directors, Partners, and Relatives is referred to as Quasi Equity. It is another another
inexpensive source of capital with extremely low interest rates. The main drawback is that initiatives with
significant expenses, such as Max Powers, are seldom funded using Quasi Equity due to the massive sums
involved.
• Equity Market Offerings: Raising money on the stock market is a quick and easy approach to get money. It
allows the firm to access a significant sum of money. The sole downside is that the company's ownership
• may be diluted. The majority of business directors like to hold more than 60% of the firm so that they can
keep control.