Debt finance: Means of project finance contains the combination of Equity –Debt for the project proposal which may requires procuring the project capex items for make the project operative. Debt finance for the project has following ways of finance
a. Capex finance
b. Working capital finance
c. Short term bridge finance
Debt finance will be the rupee term loan for the proposed project for capex and working capital finance will be Cash credit, over draft etc.
Capex finance: Capex finance required to procure the capital items and assets for the project or construct the asset for generating the revenue from the proposed project. Debt finance for the project capex will be determined by the following factors
a. Total Project cost
b. Proposed Debt- Equity Ratio
c. Proposed Interest ratio
d. Debt service coverage ratio (DCSR)
e. Moratorium period
f. Proposed repayment schedule
Total Project Cost: Project cost is the basic factor to understand the means of project finance. Project cost is the total of the each and every capital items which procured for the proposed project. Project cost has to be prepared in detailed manner which explains the each and every capex item procured for the project, purpose, need and use of those items in the proposed project and reasonable cost. Detailed cost vetting report for every capex items has to be submitted with the bankers and the same cost vetting report may require certification by the experts empanelled by the bankers. Project cost may also include some time the associated other cost involving in the project construction stage which may not form part of project capex. Proposed Project cost report should always in line with your detailed project report (DPR) and project implementation methodology submitted for finance with bankers. Sometimes bankers wanted to certification by the project authority for the project cost given by the borrower in the project proposals. If the project is very big and one bank unable to fund for the total project, then one main bank will take lead for funding total project with association of other bank or bankers. It is called consortium financing.
Proposed Debt Equity ratio: Debt equity ratio is the funding combination for the proposed project, such as how much promoter equity for the project cost and balance how much promoter looking finance for the project. Suppose Rs.100 is the project cost, the proposed debt equity ratio by the promoter is 70:30 means Rs.30 is the promoter contribution and Rs.70 is funding looking by the promoter for the project. Debt- equity ratio will be based on the nature of the projects and bankers options. Sometime based on the negotiation, it will be decided.
Proposed interest ratio: Debt finance also depends on the proposed interest rates expected by the borrower as well as bankers. Lending rates will be differing from banker to bankers and also based on the industry to industry for the proposed project which belongs. While consortium finance, interest rate will be decided by the lead bank.
Debt service coverage ratio (DSCR): It is the amount of cash flow available to meet annual interest and principal payments on debt, including sinking fund payments. This ratio should ideally be over 1. That would mean the property is generating enough income to pay its debt obligations.
DSCR will be calculated as under:
= Total operating income/ Total debt service
A DSCR of less than 1 would mean a negative cash flow. A DSCR of less than 1, say .95, would mean that there is only enough net operating income to cover 95% of annual debt payments.
Moratorium period: Moratorium Period is a holiday on repayment which would be for the project period for 1 year or 6 months from the project comes in to operation. Some banks will also allow you a moratorium on payment of interest also based on the negotiation with borrower. Based on the project capacity and level the moratorium period will be also differs, because some of the project construction period will be high.
Proposed repayment schedule: Proposed repayment schedule for the loans will be one of basic factor for the project finance. Generally the project finance repayment schedule will be quarterly repayment and having tenure of 10 to 15 years.
Projected financials: For seeking capex fund finance, we need to prepare and submit the projected financials from the current period to loan settlement period. Projected financials should contain the planned project cost going to be incurred for the project and how and what ways that capex requirements will be meet. Planned bank finance drawdown and how it will be utilized etc. It also contains the interest calculation for the project finance and cash flow for the projected period and how the repayment and interest payment will be meet out of the cash flow need to be shown. Basically no bank will allow meeting the repayment of loan and payment of interest out of bank funding. It should be made out of operations income only. As mentioned above DSCR is the basic factor for your financials.
Projected financial part also will be covered under working capital finance in next part.
CMA Ramesh Krishnan