ASSESSMENT OF TERM LOAN

WELCOME PARTICIPANTS

TERM LOAN
Term Loans are those debts which have a
fixed term for repayment, as opposed to a loan that is payable on demand.

CLASSIFICATIONS:
Term Loans are broadly classified in three categories :

Loans repayable within three years :

SHORT TERM LOAN Loans repayable three years and above and upto five years : MEDIUM TERM LOAN Loans repayable beyond five years : LONG TERM LOAN

PURPOSE OF TERM LOAN :

Term Loan is sanctioned for acquiring Fixed Assets like, land,
building, Plant & Machineries, Electrical installations , computers, furniture-fixtures etc. in connection with a project undertaken by the proponent.

The various types of projects can be broadly classified as under :

1. New products , Diversification projects by existing units (Green Field) 2. Expansion of existing products (Brown Field) 3. Backward & forward integration projects. 4. Replacement/ Modernization of equipment or buildings 5. Others viz., Research and development and miscellaneous items, such as the expenditure of funds to comply with certain health standards or the acquisition of a pollution-control device.

Gist of papers to be obtained at the time of appraisal :

Loan Application Site Visit Report TEV Study Report/ Project IM /DPR Annual Reports of subject company (last three years) Annual reports of sister concerns Net worth statement of borrowers/ guarantors Credit reports of borrowers from other banks Account statements of existing loans Land papers/Sale-Deeds/ Recent valuation-report of Land/Legal opinion Estimates of civil construction Proforma Invoices of Plant & Machinery , other fixed assets Projected Profitability Statement / Cash-flow Statement / Balance Sheet for the entire period of the loan alongwith underlying assumptions.

BROAD PARAMETERS FOR APPRAISAL OF TERM LOAN :

Banks Policy whether confirming to Banks Policy? Promoters credentials, capability & capacity? Technical Location of project / Availability of inputs/

size of project/ Plant & Process Technology is New/ proven , adequate, chance of obsolescence etc.? Demand for finished goods- adequate / growing / declining? Cost of project estimates are realistic ? Means of finance sources identified? Profitability projections Realistic / adequate to meet debt obligations? Project Risk Mitigations available?

MANAGERIAL COMPETENCE
Background of the promoter- Experience, entrepreneurial talent Composition and quality of the board of directors and Key

Management Personnel Market Reports from existing clients Existing Borrowing Arrangements Also check web site : www.mca.gov.in Borrowing History RBI Defaulter list, CIBIL Site, Dun & Bradstreet Reports, Specific Approval List (SAL) of ECGC, Reports from existing Bankers, Statement of accounts Capacity to bring in the required margin money annual reports of last three years , net worth statement of promoters & guarantors Sister / associated concerns Balance sheets Others

TECHNICAL FEASIBILITY ASPECTS

CRIS-INFAC annual Reports contain details of various types of industries viz., Cement, Steel, Fertilizer, Textiles, Road, Port , Power and about 40 other industries It contains details of manufacturing process, finished goods, demand forecast , players profile etc. Study of the above will help the analyst to assess technical feasibility In addition to the above TEV report of the project to be studied thoroughly for the following : Location Proximity to the source of raw materials/ labor/ market, transportation facilities, provision for future expansion, free hold or Lease hold. For example : Steel manufacturing unit near iron ore mines, Cement factory near lime stone mines/ market (clinker unit near limestone mines and grinding unit near markets), Auto spare parts ( near auto manufacture hubs) etc. Size of the project economical. For example sugar : minimum 5000 TCD per day as per Tuteja Committee Report

Technical Feasibility (Contd.)

Factory building lay-out, area, storage facilities, etc. Plant and machinery capacity of machines vis--vis targets, availability of spares, imported/indigenous machines. Process and Technology New / Proven, technical know-how, payment of royalties, government approvals, R&D efforts. Inputs/utilities Availability of raw materials , power and fuel, water, labor, managerial staff.

DEMAND ANALYSIS
Validation/ acceptance of financial projections to be done after study of following : Demand for the product Gap between supply and demand Export demand Assured Demand PPA for power projects, Annuity for Road projects , captive utilisation, Long Term Contracts etc. Import Substitute

DEMAND ANALYSIS ( Contd.)

Gist from CRIS-INFAC outlook for Hotel Sector as per CRIS-INFAC (Annual Report- Oct, 2010) :

Occupancy rates recovered to 70% in the last quarter of 2009-10

as against 65% in 2008-09, due to an increase in foreign tourist arrivals and business related travel. Average Room Rates (ARRs) on the other hand remained around 20% lower than peak level of Rs.8000.00 in 2007-08, mainly due to 13% increase in supply This resulted in sluggishness in Revenue Available Per Room (RevPARs) With increasing room demand hotel revenues across destinations will increase by a CAGR of 13%. This growth will be mainly driven by increase in ORs as increase in competition will continue to hamper ARRs.

Elements of Project Cost

COST OF PROJECT Land & Development Civil Construction Plant & Machinery Other Fixed assets Preliminary Expenses MEANS OF FINANCE Equity Internal Accruals Govt. subsidy Preference Shares Debentures

Pre-operative expenses
Provision for contingencies Margin money for Working capital

Term Loan
Unsecured Loan

Project Cost ( Contd.)

Project Cost : Land Cost of land to include cost of registration and development charges. In many cases, especially in Commercial Real Estate Proposals (CRE), the company provides the present market value of land already purchased by them , which inflates the promoters contribution. Conveyance deed to be obtained to verify the original purchase price.

Buildings cost of construction to be validated

meticulously. Opinion of empanelled consultants/ architects of repute may be obtained.

Project Cost ( Contd.)

Plant & Machinery - List of the machineries;
quotations cost including provision for escalation, transport, erection charges, power cabling, excise duty , cost of spare parts , reputation of the machinery supplier, etc

Machinery purchased under Export Promotion

Capital Goods (EPCG) Scheme Other Fixed Assets Furniture & Fixture, Office equipments etc.

Project Cost ( Contd.)

Preliminary Expenses ( expenses incurred before
incorporation) : Expenses on drafting & printing MOA & AOA. Consultancy charges on preparation of Project Report Other misc charges viz., capital issue expenses, legal fees, travelling expenses etc.

Pre-Operative Expenses ( incurred after pre-

incorporation but before Commencement of commercial operations) : Interest during construction ( cross check with ROI recommended & TL drawal Schedule) Cost of trial run

Project Cost (Contd.)

Provisions for Contingencies around 5%
10% of cost of relative item.

Margin money for working capital is adequate to

raise WC requirement for the first year of operation

Banks to ensure all costs are covered, no

over/under estimation.

Means of Finance :
Promoters Contribution/Equity/Reserves &
Surplus Government Subsidy Preference Shares Debentures Unsecured Loans from Partners/Directors/ friends & relatives Bank Term Loan

Means of Finance (Contd.)

Check Points : DE Ratio projected is as per policy norms unsecured loan from directors/share holders/ borrowing from friend and relatives / partners may be treated as QuasiCapital for the calculation of TOL/TNW and DER if it is not repayable within the tenor of bank Loan and the loan is interest free Draw Down Schedule for Term Loan to be obtained and verified that DE Ratio is maintained throughout. Arrangements have been made for timely upfront infusion of equity by subject company or its strategic partners, to enable the company to draw TL , so that project is implemented as per schedule. Adequacy of existing reserves for infusion in the project either by subject company or associates. Progress in tie up of Term Loan (Syndication)

Implementation Schedule
Company to submit phase wise implementation schedule
As per RBI Guidelines, For all projects financed by the
FIs/ banks after 28th May, 2002, the date of completion of the project should be clearly spelt out at the time of financial closure of the project. as NPA if it fails to commence commercial operations within six months from the original DCCO, even if is regular as per record of recovery, unless it is restructured and becomes eligible for classification as 'standard asset' . The period is two years fro infrastructure projects

A loan for a non-infrastructure project will be classified

APPROVALS
LAND : Proper title deeds are available for mortgage, Tax
receipts, Conversion of land for Commercial/Industrial use, permission for mortgage in case of lease land, period of lease as per agreement etc.

Environmental Clearance
Raw Material linkage- Coal , iron ore , lime stone etc. Construction/Building approval plan NOC from Pollution Control Board Approval from other authorities as applicable forest
clearance, aviation, water, fire, sewerage etc

Profitability Estimates & Calculation of DSCR

Check Points for Income : Capacity utilisation projected vis--vis Capacity installed and demand for product Capacity utilised will be lower in the beginning due to teething problems , and then gradually increase. Sale price can be validated from various sources viz., past trends, Agreements like PPA and concession agreement for road projects, newspaper data on commodities, CRIS INFAC Reports & forecasts, others Inter firm comparison -Existing Data with similar projects .

Profitability Estimates & Calculation of DSCR (contd..)

Check Points for major items of Expenditure : Cost of raw material can be validated from various sources viz., past trends, newspaper data on commodities, CRIS INFAC Reports & forecasts Power & Fuel Coal Price & Power Tariff Depreciation & taxation as per norms Interest as per terms of sanction
Note : Projections submitted have factored for normal cost escalation

Profitability Estimates & Calculation of DSCR

Calculation of DSCR :
DSCR = (PAT + Depreciation + Int on TL)/ (Int on TL + Instalment on TL)

DSCR for each individual year to be calculated to

ascertain minimum DSCR.

Average DSCR covering the repayment period should be

calculated by dividing total inflows by total outflows ( and not by taking simple average of yearly DSCRs) as a whole to be calculated

DSCR for project on stand alone basis and for company

DSCR (Contd.)
In case of CRE proposals , DSCR is not
calculated. Repayment is assessed based on cash flow.

Sensitivity Analysis :
To have an idea about the impact of the
following on the projected DSCR :
Decrease in capacity utilisation Decrease in sales price Increase in raw material cost Increase in Rate of interest A combination of any two or more of the above

Some major Terms and conditions of sanction

Security : First Mortgage/ Hypothecation of Project fixed assets for which TL has been sanctioned as primary security Second charge on other fixed assets and current assets Assignment of contract, license and insurance agreements Charge on Escrow account and DSRA account Charge on Third Party securities Pledge of shares, if any Any other collateral Personal Guarantees

MARGIN MONEY & RATE OF INTEREST:

Margin : Normally stipulated margin should
be brought upfront ; Otherwise it should be brought in as per accepted DE ratio

Interest on Term Loan: Interest is charged

as per policy of the Bank on monthly rests. RESET CLAUSE stipulation to be explored

REPAYMENT OF TERM LOAN: (After allowing moratorium period )

By equal monthly/quarterly/half
yearly/yearly installments when interests are realized separately on each month By Equal Monthly Installments (EMI) when interests are included in the installments

By unequal installments (Balloon Repayment) By one installment (Bullet Repayment)

Disbursement of Term Loan

Visit to the site to ascertain availability of Completion of mortgage formalities
Contd.

land & other infrastructures/logistics as also to ensure progress of work with own fund.

 Completion of other loan-documentation

formalities including execution of Hypothecation Agreement/ Term Loan Agreement, Agreement with Guarantors (wherever applicable), Execution of Promissory Notes for the Term Loan etc.

Filing Charge with ROC (in respect of joint

stock companies)
Contd

 Payment to Suppliers of Plant & Machineries

and other fixed assets as far as practicable. In cases where direct payment is not possible, payment is made through the borrower.

Payment

to Civil contractors directly wherever practicable/possible or through the borrower. Contd

 In case of large projects, like Infrastructure Projects

of Power, Road, Bridge, Port, Industrial Projects like Steel, Aluminum, Engineering , Automobile etc. which are financed by a consortium of Banks & TLIs , the process of loan documentation is completed by Lenders Legal Counsel who are appointed by the consortium. Contd..

 The disbursement is subject to Draw-down

Schedule submitted by the borrower, satisfactory report of progress of project by Lenders Engineers who are appointed by the Consortium, periodic unit-visit by Consortium members etc.

In case of the said large projects, funds are disbursed through an Escrow Account/Trust & Retention Account (TRA) maintained with any consortium-member Bank as approved by the consortium.

Such Bank, on receipt of loan proceeds from all consortium members as per schedule of drawal, releases the fund to the appropriate agencies and wherever needed directly to the borrower for onward expenditure as per terms of project.

Banks Policy on Term Loan ( Major Guidelines in brief)

Exposure Norms (RBI): 15% & 40% of capital funds for individual & Group
borrowers respectively ( 20% & 50% for infrastructure ) HUF

Exposure restriction on Individual, Proprietorship Firms, Partnership Firms,

Sector wise Exposure ceiling

Eligibility of Borrowers- KYC norms, whether defaulters etc. Restrictions on certain type of advances Risk Grading Hurdles Maturity and Asset Liability Management
contd

Banks Policy on Term Loan (Contd.)

Appraisal of Term Loan
In case of term loans for projects having exposure more thanRs.10.00 Crore, the bank may ask for submission of TEV (Techno Economic Viability) Report duly prepared by our empanelled agencies/ experts (TEV Consultants) or PIM prepared by reputed loan syndicators. DE Ratio : In case of Fresh Term loan, Debt Equity Ratio (DER) should not normally be above 3:1. However, in case of capital intensive industries like exposure to Power Sector, Road and Port Sector, Steel Industries etc the same may be considered up to a level of 5.00:1. In case of loans to PSU it may be considered up to 7.00:1.

DSCR New Projects Min DSCR 1.10 & Average DSCR 1.30 Expansion Projects Min DSCR 1.10 for standalone project & 1.20 for company as a whole Average DSCR 1.30 contd

Banks Policy on Term Loan (contd.)

Sensitivity Analysis: In case of green field projects with exposure of more than Rs.10.00 Cr, sensitivity analysis will be conducted. Minimum Asset Coverage Ratio -Minimum Asset Coverage Ratio (Primary Security/Aggregate Funded Limit) for loans (other than PSU/Government undertaking) should not be less than 1:1 Personal guarantee of promoter directors for the credit facilities, etc. granted to the closely held Public Limited Company or Private Ltd Company, partners of firm etc

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