The document discusses various sources of long term financing for companies including equity, debt through debentures and term loans, warrants, mezzanine finance, and project finance. It also covers capital structure, factors affecting capital structure, and risks involved in project financing as well as how those risks can be managed. Project finance in particular involves creating a special purpose vehicle to own projects and raise funding secured by project cash flows and assets.
The document discusses various sources of long term financing for companies including equity, debt through debentures and term loans, warrants, mezzanine finance, and project finance. It also covers capital structure, factors affecting capital structure, and risks involved in project financing as well as how those risks can be managed. Project finance in particular involves creating a special purpose vehicle to own projects and raise funding secured by project cash flows and assets.
The document discusses various sources of long term financing for companies including equity, debt through debentures and term loans, warrants, mezzanine finance, and project finance. It also covers capital structure, factors affecting capital structure, and risks involved in project financing as well as how those risks can be managed. Project finance in particular involves creating a special purpose vehicle to own projects and raise funding secured by project cash flows and assets.
The document discusses various sources of long term financing for companies including equity, debt through debentures and term loans, warrants, mezzanine finance, and project finance. It also covers capital structure, factors affecting capital structure, and risks involved in project financing as well as how those risks can be managed. Project finance in particular involves creating a special purpose vehicle to own projects and raise funding secured by project cash flows and assets.
Sources of Finance 1. Short term financing 2. Long term financing Sources of Financing
Short term Long term
Financing Financing
Trade Bank Commercial
Equity Debt Hybrid Credit Finance Paper
Term Convertible Debentures Warrants Loan Debentures
Types of Financing Long Term Sources of Financing • Long term sources of financing are used by the companies to fund their long term or permanent fund requirements. • It is most critical source of financing for business as it provides necessary capital investment for sustained growth of the company. • Long term sources of finances are typically costlier the short-term financing, however provides more flexibility to the company. • These are used for funding long term outlays such as, • Purchase of plant and machinery, land, building, investment in permanent working capital, expansion, acquisition, of companies, assets, provide risk capital for new ventures etc. Equity • Equity capital is also called as the ownership capital or shareholders capital. • It consists of funds raised from existing and new shareholders of the company and earnings retained in the company. • Equity shares are also known ordinary shares/ common stock. • Shareholder’s capital is sum of paid up capital, share premium and retained earnings. Debt • Debt capital represents most common source of long-term finance and consists of debentures and term loans.
Debentures: Debentures or bonds are an attractive source of long-term financing for high rated credit worthy companies. Warrants • A warrant is a derivative instrument which provides the holder of warrants right to buy the shares of issuing company at a fixed price called exercise price until the expiry date.
• Warrants can be traded in the secondary market by the investors.
• There are two types of warrants;
• Call and Put warrants Warrants • Callable warrants entitle investors with the right to buy shares of a company from that company at a pre agreed price at a future date prior to expiration. • When a warrant holder decides to exercise the right, company issues the shares to the warrant holder. • A puttable warrants offer investors the right to sell shares of a company back to that company at a specific price at a future date prior to expiration.
• Advantage: • A warrant does not offer any voting rights to investor. Mezzanine Finance • Mezzanine financing is a hybrid between debt and equity which provides the financier right to convert mezzanine debt to equity in case of default.
• It provides company capital to undertake riskier projects and is
typically used in financing risky acquisitions by group of investors on the balance sheet of the company. Project Finance • Project Finance refers to long term financing for infrastructure, industrial projects where funding is mainly provided on the strength of the project cash flows and is secured by all of assets of the project, including any long-term revenue agreements. • Lenders have no recourse or limited recourse to the sponsors (investors) of the project, which means that in case default lenders cannot ask the sponsors to make payment. • Typical examples of project finance are airports, roads, mines, oil blocks, power plant etc. Project Finance • In the project finance, a separate legal entity called as Special Purpose Vehicle (SPV) is created by investors or sponsors. • The SPV owns the project and funding is raised by the SPV. • To mitigate the risk associated with the projects and ensure viability, the SPV generally enter into long term sale agreements with customers or take or pay agreements. • Long term purchase agreements are common in setting up new power plants, where the SPV enters into long term contract with electricity distributions to purchase electricity at pre agreed price. Project Finance • In industrial projects, it is common practice to enter into take or pay arrangements with the customers. • This involves customer agreeing to buy off take from the projects or pay some fixed penalty for any shortfall in off take or purchase from the project. • As the financing amount involved are very large and repayment tenor is long, project finance is provided by a financial institutions. • As the repayment of project finance depends on the success of projects, there are multiple parties are involved in the project financing. Some important parties involved in the success of project are; 1. Sponsors 2. Special Purpose Vehicle (SPV) 3. Contractors 4. Off-takers 5. Banks/Financial Institutions 6. Specialist Advisors Risks involved in project financing and management of risks • Project financing involves multiple risks such as completion risk, cost overruns, market risk, environmental risk, foreign exchange risk, political risk etc. • Sponsors and lenders need to assess these risks and built suitable mitigants to manage the risks. 1. Completion risk 2. Cost Overrun 3. Market risks 4. Environmental/Government risks 5. Foreign exchange risks Capital Structure • Capital structure denotes the way of company finances itself. • Capital structure of the company is the combination of debt and equity in the total capital of the company. • Composition debt between long term and short term debt is also considered in the capital structure. • The use of debt and preference shares is described as financial leverage or trading on equity, as they are raised on the basis of equity position. Capital Structure • The ratio debt to total capital is called as leverage. • Debt capital and preference shares need to be serviced with periodic interest and dividend payments. • To calculate capital structure are debt ratio and debt to equity ratio are calculated as; Dept ratio = Dept to equity ratio = Capital structure has an impact on the shareholder’s earnings and risk and the value of the company. Hence it is important to have optimum capital structure. Factors Affecting Capital Structure of the Company • Stability of business • Cost • Floatation Costs ; costs associated with raising of funds such as processing fees, broker’s commission, expenses on the prospectus, etc. • Control Considerations • Tax Rate • Capital market condition
