Core 3 Corporate Finance

Know Your Trainer
Have advised various corporates and promoters across

Ankit Tulsyan balance sheet management, asset liability management,
debt raising, cost optimization etc.
Senior Manager, EY
Part of NBFC Treasury from 2013 to 2016. Managed
balance sheet debt of $ 3 Bn across borrowings products
such as bank loans, NCD and CP
State level cricket player

Big fan of Liverpool football club
Chartered Accountant, Kyriba and Liquidice Certified

Page 1 23 August 2021
Treasury Analytics
Draft- For discussion purposes only
What We Will Cover Under Corporate Finance
1. Capital Structure - When to raise debt and when to get equity

2. Credit Assessment – How does a bank decides on good quality
credit and does a risk based pricing
3. Debt Market – How a bond is issued today and how will you issue a
bond in future
4. Credit Rating – Importance of credit rating agencies and
demystifying our myth around rating agencies
5. ESG – The next big thing not only in corporate finance but across
functions globally
Corporate Finance
What will we cover under Capital Structure ?
Section Coverage
1(a) Mix of capital sources and its implications
Capital Structure 1(b) Perspective on right capital structure
1(c) Select Experiences
Corporate Finance
Learning Objectives for today
Learning Objectives
Understand the different sources of financing available to a business and learn the different
methods to calculate cost for each source
Understand the effect on income statements and financial ratios of using one or more of the
sources of finance
Deep dive into factors to be considered while deciding the right capital structure
Corporate Finance
Lets Discuss
What do you understand by the term Capital Structure

– An open ended question ?
Corporate Finance
1. Capital Structure
Mix of sources
Mix of Sources Facts to be considered Select experiences
Debt
Equity
Preference
shares
Section reference: 1
Corporate Finance
Mix of sources
1 Cost of debt and Preference shares
𝑹𝑽 − 𝑵𝑷 𝑹𝑽 − 𝑵𝑷
𝑰∗ 1−𝒕 + 𝑷𝑫 + 𝒏
𝒏
𝑲𝒅 = 𝑲𝒑 =
𝑹𝑽 + 𝑵𝑷 𝑹𝑽 + 𝑵𝑷
2 2
2 Cost of equity
Dividend Approach Earnings Approach
𝑫0 𝑬𝑷𝑺
𝑲𝒆 = 𝑲𝒆 = +𝒈
𝑷0 𝑷0
Capital Asset Pricing Model
𝐊𝐞 = 𝐑𝐅 + 𝐁𝐞𝐭𝐚 ∗ 𝐑𝐌 − 𝐑𝐅
3 Weighted Average Cost of Capital - ??
Section reference: 1
Corporate finance
Question – Capital Structure
What is the best form of capital structure ?
• 100% Debt
• 100% Equity
• Proportion of Debt and Equity
• Depends on utilization of money to be raised
• Confused and undecided
Corporate Finance
Facts to be considered
What is the point of dilemma ? How to decide?
1. Trade off between financial

flexibility & fiscal discipline
1. Forecasting financial deficit or
surplus scenario
2. Stable Vs Unstable Cash flows
2. Setting up target credit rating
3. Debt - Discipline & Tax Efficiency
3. Developing target debt level
4. Equity - Financial Flexibility & boost
EPS
Source: Mckinsey’s perspective on corporate finance and

strategy
Corporate Finance
Facts to be considered
The indifference point is the cut-off level of EBIT below which financial leverage is disadvantageous. Beyond the
indifference point level of EBIT the benefit of financial leverage with respect to EPS starts operating
Corporate Finance
Select experiences
Industry Importance of Capital Structure Impact Area
▪ Different borrowing sources (Bank funding, NCD and CP), promoter

1
contribution and equity have a cost
▪ Various lending products like Loan Against Property, Loan Against Funds
Shares, Corporate Loan Book, Unsecured Lending etc. have different Transfer
NBFC Pricing and
risk appetite
▪ Proportion of equity is defined at a business level factoring in various PLR
parameters like ability to raise debt for that particular business,
market competition etc.
Debt Equity
No. Business Vertical Kd Ke Cost of Funds
proportion proportion
1 Unsecured Loans 75% 25% 11% 17% 12.50%
2 IPO Financing 60% 40% 11% 17% 13.40%
3 Loan against Property 85% 15% 11% 17% 11.90%
Corporate Finance
Select experiences
Importance of Capital
Industry Impact Area
Structure
2
▪ EBT analysis post
considering
▪ direct costs, land

cost, construction
cost and
▪ attribution of finance
cost at a project level
Real Project Level
considering
Estate Profitability
utilization of funds
▪ Cash flows post
finance cost
▪ Decision basis revised

Modified Internal Rate of
Return
Corporate Finance
Recent Examples
Corporate Finance
Case Study on RIL Group
Reliance Jio sells Abu Dhabi

1.34% stake to US Investment
US PE firm KKR
RIL raises Rs. equity firm General Authority
buys 2.32% in
5,100 crores via Atlantic buys 1.16%
Reliance Jio
bonds at 7.4% and stake in Jio
CPs at 5.88%-6% US PE firm Silver RBI cuts repo rate
Lake invests Rs. to 4%
RIL raises Rs. 5,565 crores in
8,500 crores Reliance Jio for a
from NCDs at 1.15% stake
7.2% L Catterton
Silver Lake buys purchases 0.39%
additional 0.93% stake in Jio
RIL announces stake in Jio
rights issue of Vista Equity TPG buys 0.93%
RIL allots NCDs
Rs. 53,125 Partners buys Mubadala buys stake in Jio
worth Rs. 3,600
Facebook buys crores of which 2.32% stake in 1.85% stake in
crore via private
RBI reduces 9.99% stake in Reliance Jio Jio
Rs. 39,755 crore placements
repo rate to Reliance Jio will be used for
4.40%
debt repayment
27 Mar 17 Apr 23 Apr 27 Apr 30 April 4 May 8 May 17 May 20 May 22 May 5 June 7 June 13 June
Repo rate – 4.40% Repo rate – 4.00 %
Corporate Finance
Case Study on Future Group
❑ Biyani’s entry into retail business was in 1987, when he launched Manz Wear. It was renamed Pantaloon Fashions, one of
the few fashion and apparel retail chains in the 1990s. The first Pantaloons store opened in 1997 and the brand soon
became popular
❑ In 2001, Biyani launched Big Bazaar, among the first modern big box hypermarket chains. Over the next two decades, he
would go on to establish an empire that spread across fashion, lifestyle, grocery and consumer electronics retailing
❑ Along the way, he made many marquee acquisitions. But, as his empire grew, so did his debt. In 2012, as the debt rose to
Rs7,800 crore, Biyani sold Pantaloons to Aditya Birla Group. That would not deter his ambitions, though. The same year,
he acquired Big Apple, a convenience store chain in the National Capital Region and, two years later, Nilgiris, a retail chain
in South India
❑ The biggest move was in 2015, when he acquired the retail business of Bharti Group. In 2016, he acquired the retail
business of Heritage Foods, a company promoted by former Andhra Pradesh chief minister N. Chandrababu Naidu
❑ The next year, Future Retail acquired hypermarket chain HyperCity from Shoppers Stop
❑But, the debt continued to rise. It is estimated to be around Rs13,000 crore now. After earnings
took a hit because of Covid-19, servicing the debt became a challenge and Biyani was left with
little choice but to sell the retail business
What will we cover under Credit Assessment by Banks?
Section Coverage
2(a) An Overview
Credit Assessment by
Today 2(b) Bank’s internal model
Banks
2(c) Case Study on RAROC
Corporate Finance
Learning Objectives for today
Learning Objectives
Understand the importance of credit risk management function in a bank
Understand the different levers used by bank to assess and maintain adequate credit quality
of its assets
Learn about importance of risk based pricing and aspects related to bank profitability
Corporate Finance
Credit Assessment by Banks
Corporate Finance
What will we cover in this session?
Section Coverage
An Overview
Steps in debt issuance

Debt Market
Technology and Future placements
Libor transition - The next big thing
Corporate Finance
Learning objectives
Learning objectives:
Familiarise yourself with different borrowing products available in the
domestic and global markets
Learn about how debt is raised to from the market
Comprehend the role of role of technology in future issuances
Insights into Libor transition including impact assessment and way

forward
Corporate Finance
Questions
► Name one Bank based borrowing product ?
► Name one Debt Capital market based borrowing product ?
► Name one secured borrowing product ?
► Name one unsecured borrowing product ?
► Name one short term borrowing product ?
► Name one long term borrowing product ?
► Name one INR based borrowing product ?
► Name one FCY based borrowing product ?

Debt market
Overview
Technology and LIBOR

Overview Current Bond Issuance Process
future placements Transition
Various fund based borrowing products:
On
(A) the basis
On the of market
basis – Longer the money tenor, higher the cost
of market:
▪ Banks borrowings - Loans, FCTL, ECBs, STL, CC, WCDL
▪ Debt Capital Market borrowings - NCD, CP
On
(B) the basis
On the of tenor
basis – Longer the money tenor, higher the cost
of tenor:
▪ Long term - Bank loans, ECBs, NCDs, FCTL
▪ Short term - STL, CC, WCDL, CP
On
(C) the basis
On the of security
basis – Unsecured money is will be more costly
of security
▪ Secured
▪ Unsecured Section reference: 2
Corporate Finance
Debt market
Overview

Issuer Credit Investor/

No. Borrowing Product Nature Tenor ~ ROI
Rating Lender
7 days to 365
1 Commercial Paper Unsecured 5% A1+ MFs
days
Generally
2 Cash Credit Overnight ~ 8.5% Banks
Secured
Depends on
Working Capital Demand Generally 7 days to 365 long term
3 ~ 8% Banks
Loan Secured days relationship
with banks
Generally 3 months to 12
4 Short Term Loans ~8% Banks
Secured months
Generally Above 1 year to AAA upto
5 Long Term Loans ~ 8.40% Banks
Secured 5 years BBB -
Generally Above 3 years to
6 NCD/ Bonds ~ 8.10% MFs
Secured 10 years AAA, AA+,
Foreign Currency Term Above 1 year to AA and AA- Global
7 Secured 3m USD Banks,
Loan 5 years
Libor plus (Highly Overseas
External Commercial 200 rated) branches of
8 Secured 3 to 5 years
Borrowing Indian Banks
Corporate Finance
Debt market

Step
Steps to be performed Brief description
Number
❑ Decide internally the commercial terms

1 Pre-mandate ❑ Prepare term sheet including key features like issue
size, asset cover, ROI etc.
2 Approvals and authorisations ❑ Obtain approvals under various regulatory guidelines
❑ Obtain credit rating from one/two agencies basis their

3 Obtaining credit rating
target investor base
❑ Appoint a lead arranger (bank) for the issue who will

facilitate the issue and act as an underwriter
4 Mandate process
❑ Appoint the debenture trustee and registrars to the
issue
Corporate Finance
Debt market

Step
Number
❑ Prepare detailed disclosure requirement containing

details like business financials, outstanding
Preparation of detailed borrowings, major shareholders, particulars of
5
disclosure requirements debenture being issued etc.
❑ Prepare application form outlining key terms and
conditions that the subscribers are required to submit
❑ Decide the issue opening and closing dates with the

lead arranger
6 Execution process for the issue ❑ Secure in-principle approval for listing securities from
respective stock exchange after submission of required
documents
Corporate Finance
Debt market

Step
Number
❑ Allot debentures to successful applicants and inform

7 Allotment of debt securities the lead arranger about the details of successful
allottees
❑ File corporate action form separately with depositories

8 Post-issue process formalities for units credit demat account
❑ Execute listing agreement
❑ Create a security prior to the issue of debenture

certificates and execute the debenture trust deed
Security creation and debenture ❑ Issue debenture certificates within prescribed time from
9
issue process the date of allotment
❑ Confirm the completion of the process to the debenture
trustee
Corporate Finance
Debt market
Technology and future placements

Recent Issuances – Where are we heading ?
1 Asia’s first CP issuance by Yes Bank in July 2019 for Vedanta Ltd. for INR 100 Cr through MonetaGo
2 In Aug 2018,World Bank launched first Global Blockchain bond worth $110 million
3 In Feb 2019,BBVA grp issued first blockchain supported green bond for Euros 35 million
4 In April,2019 Societe Generale issued covered bond on blockchain platform
5 In Sep,2019 Banco Santander launched the first end to end blockchain bond
In June 2019,EIB, Euroclear, Banco Stander and EY together launched blockchain based European Commercial
6 Paper
April 2018,National Bank of Canada & JP Morgan tested blockchain technology over $ 150 million Certificate of
7 deposit
Corporate Finance
Debt market

The Future - Blockchain based transaction
Corporate Finance
Debt market

Benefits across trade cycle

1 2 3 4
Pre-trade Trade Post-Trade Debt Servicing
► Simpler KYC via look ► Secure real time ► Auto execution of smart ► Simplification of fund
through to holdings transaction matching contracts servicing and
and immediate accounting
► Transparency and irrevocable settlement ► Communication to
verification of holdings different stakeholders ► Common reference data
► Automatic reporting &
► Reduced Credit more transparent
exposure supervision for market
authorities
Section reference: Joint study by

Euroclear and Oliver Wyman
Corporate Finance
Debt market
LIBOR transition

LIBOR: Background & Need for replacement What changes?
World’s most widely used benchmark/reference rate USD LIBOR RFR - SOFR
1 underlying loans, mortgages, derivatives, swaps, fixed

income securities etc
Seven tenures upto 1
year
Overnight
Unsecured &credit risk Secured &minimal

Administrated by IBA; Governing bodies are FCA,
2 ARRC & ISDA
perceived
Partial transaction
credit risk
Wholly transaction
Average of unsecured lending rate quoted by panel of based based
3 banks in the interbank according to their funding model

i.e. cost of fund Existing LIBORs New RFRs
USD LIBOR SOFR
Forward looking rate since it is available for different
4 tenors
GBP LIBOR
EUR LIBOR
SONIA
ESTER
CHF LIBOR SAFRON
5 LIBOR phasing out by December 2021

JPY LIBOR TONA
Corporate Finance
Debt market
LIBOR transition

01 02
Credit spread Term spread
• Moving from LIBOR to RFRs • Since RFRs are backward in nature,
need credit adjustment in this will lead to volatile cashflows
existing contracts post phase leading to liquidity risk
out
• Developing a forward looking curve
with term spread
Challenges in
LIBOR transition
03 04
Legal Issues Taxation and
• Choosing between Amended Vs Accounting
Hardwired approach • Managing Arm’s length pricing
• Fallback clause for intercompany lending
• Forward looking loan covenants • Managing basis risk in hedge

accounting
Corporate Finance
Section Coverage
Credit Assessment Techniques
Key Important Terms
Credit Rating
Limitations and disclaimers of credit rating agencies
Rating scale deployed by credit rating agencies
Corporate Finance
Learning objectives
Learning objectives:
Understand the importance of credit rating agencies for businesses and investors
Comprehend key rating terms associated with a credit rating rationale
Learn about the different rating scales employed by global and domestic rating agencies
Corporate Finance
3. Credit rating
Key important terms
Corporate Finance
3. Credit rating
Key trends
▪ Rating firms in India are seeking to

withdraw credit scores as a result
ratings do not fully reflect the credit
health of the issuer.
▪ According to S&P Global Ratings,
with pandemic India’s bad debt will
worsen to the highest since 1999.
▪ The number of ratings where
companies do not provide adequate
information for the assessment are
constantly rising.
Corporate Finance
Section Coverage
Introduction
Environmental, Social and

Governance
ESG Financing and Challenges
Page 47 23 August 2021 Presentation title

ESG – An Introduction
The definition of environmental, social and governance (ESG) criteria has continued to evolve, now intersecting with the concept of fiduciary duty.
Old world corporate Social Responsibility (CSR) New World sustainability and ESG:
• We contribute to society because we are successful • We are successful because we contribute to society
• We give back • We create shared value
Environmental Social Governance
Defining ESG-
• Climate change and carbon
• Labour relations • Board diversity
emissions
The consideration of • Diversity agenda • Corruption and bribery
• Energy efficiency
environmental, social and • Employee safety • Anti-money laundering
• Pollution
governance factors alongside • Product safety • Business ethics
• Use of natural resources
financial factors in the investment • Human rights • Risk tolerance
• Waste management
decision-making process. • Child labour • Compensation policies
• Clean energy and technologies
• Working conditions • Escalation protocols
Biodiversity

ESG - An Introduction
What it means for?
Corporates Financial services Regulatory
Integration of ESG risks along side Green Banking & financial services: By Need for inclusion of ESG-
business and financial risks for ESG-based leveraging technology and ESG, banking framework & risks (“The Green Swan”
integrated reporting & disclosures products & services like green mortgages, event) in central bank’s monetary policy
green project financing, green credit-cards,
underwriting of green bonds, and ESG-
Companies can lower their cost of compliant equity raising and corporate Green fiscal policy-making:
restructuring Governments should lead by example in
funds & earn higher IRR on their capex
by being ESG-compliant adopting inclusive sustainability based
fiscal policy and strive towards making
Capital Markets show increasing trend government finances ESG-complaint
towards green-finance based equity & debt
Increased risk for companies in the
capital-raising
fossil-fuel, tobacco, weapons, gambling ,
adult-entertainment, alcohol, meat &
junk-food industry Increasing development, wider recognition &
usage of green financial products: eg.
carbon derivatives

ESG – An Introduction
ESG Financial Ecosystem
Financial intermediation chain

Issuers End Investors
Rating Asset Inst.
Indices
Providers Managers Investors
All issuers that receive Firms that rate Firms that Firms that rate Entities with
an ESG Rating ESG Issuers construct ESG Construct and fiduciary All issuers that receive
indices. market ESG responsibility an ESG Rating
Funds, ETFs, to manage
etc assets.
Disclosure organization Rules & Requirements Ethical standard Setters
Organisation that determines information to Includes exchange, self-monitoring entities, Includes International bodies e.g. the OECD and the
disclose relevant to ESG and materiality. regulators and supervisors UN, that provides guidelines related to responsible
Includes climate- Specific disclosure conduct and societal value.

ESG Financing
Financing product is based on its

primary objectives for the
Annual Issuance Amount

underlying projects:
• ~55% rise in total
Green bonds issuances across the three
• Proceeds earmarked exclusively product segments
for new and existing projects
that have environmental
benefits. For corporates:
Social bonds • Share of green bonds rose by 9%
• Sustainability bond market share
• Proceeds is directed toward increased to 25% in 2019 from
projects that aim to achieve 5.9% the year previous.
positive social outcomes
Sustainability bonds
Issuer categories
• Proceeds will finance or

refinance a combination of
green and social projects.
Other projects
• Sustainability linked bonds
(non-earmarked) / KPI linked
• Transition bonds

ESG Financing
Treasury’s core ESG focus has been on responsible finance and investments and ecosystem sustenance, however a more holistic approach encompassing
topics such as operational resilience, risk management and regulatory compliance is needed. Below is a potential framework to consider to help empower
treasury to become an ESG champion.
► Treasury steps into the spotlight: Delivering

responsible finance and investments
► Treasury enabling ecosystem sustenance
► Treasury leveraging digital solutions for
operational resilience
► Treasury’s commitment to risk management and
regulatory compliance
► Partnering for sustainability
Source - https://www.citibank.com/tts/insights/assets/docs/articles/The_Role_of_Finance_and_Treasury_in_ESG.pdf

ESG Financing
Key challenges and good practices for financial institutions to deal with ESG risks
Key challenges
► Greenwashing - While there is growing appetite for ESG
products, will it really do well for the planet?
► Lack of consistency, transparency and

standardisation- Is methods of ESG scoring consistent
and accurate or an exercise to tick boxes based on self-
reported statistics?
► Data Quality: lots of noise, little meaning - Over 600

ESG data providers and a continuously growing number
of sustainability indexes with variable levels of
correlation
► Challenge for rating - Computation methodology is

difficult, requires answers to extensive questionnaires
and the analytical rigour in methodologies is being
developed

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Core 3 Corporate Finance

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Know Your Trainer

Have advised various corporates and promoters across

State level cricket player

Chartered Accountant, Kyriba and Liquidice Certified

1. Capital Structure - When to raise debt and when to get equity

1(a) Mix of capital sources and its implications

Capital Structure 1(b) Perspective on right capital structure

1(c) Select Experiences

What do you understand by the term Capital Structure

Mix of Sources Facts to be considered Select experiences

Mix of Sources Facts to be considered Select experiences

1 Cost of debt and Preference shares

Capital Asset Pricing Model

3 Weighted Average Cost of Capital - ??

What is the best form of capital structure ?

Mix of Sources Facts to be considered Select experiences

What is the point of dilemma ? How to decide?

1. Trade off between financial

Source: Mckinsey’s perspective on corporate finance and

Mix of Sources Facts to be considered Select experiences

Mix of Sources Facts to be considered Select experiences

Industry Importance of Capital Structure Impact Area

▪ Different borrowing sources (Bank funding, NCD and CP), promoter

2 IPO Financing 60% 40% 11% 17% 13.40%

3 Loan against Property 85% 15% 11% 17% 11.90%

Mix of Sources Facts to be considered Select experiences

▪ direct costs, land

▪ Decision basis revised

Reliance Jio sells Abu Dhabi

Repo rate – 4.40% Repo rate – 4.00 %

Understand the importance of credit risk management function in a bank

Steps in debt issuance

Libor transition - The next big thing

Learn about how debt is raised to from the market

Comprehend the role of role of technology in future issuances

Insights into Libor transition including impact assessment and way

► Name one Bank based borrowing product ?

► Name one Debt Capital market based borrowing product ?

► Name one secured borrowing product ?

► Name one unsecured borrowing product ?

► Name one short term borrowing product ?

► Name one long term borrowing product ?

► Name one INR based borrowing product ?

► Name one FCY based borrowing product ?

Technology and LIBOR

Various fund based borrowing products:

▪ Debt Capital Market borrowings - NCD, CP

▪ Short term - STL, CC, WCDL, CP

▪ Unsecured Section reference: 2

Technology and LIBOR

Issuer Credit Investor/

Technology and LIBOR

❑ Decide internally the commercial terms

2 Approvals and authorisations ❑ Obtain approvals under various regulatory guidelines

❑ Obtain credit rating from one/two agencies basis their

❑ Appoint a lead arranger (bank) for the issue who will

Technology and LIBOR

❑ Prepare detailed disclosure requirement containing

❑ Decide the issue opening and closing dates with the

Technology and LIBOR

❑ Allot debentures to successful applicants and inform

❑ File corporate action form separately with depositories

❑ Create a security prior to the issue of debenture