A STUDY OF RESOURCE MOBILISATION FROM INTERNATIONAL MARKETS FOR PFCL PDF

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A STUDY OF RESOURCE MOBILISATION FROM INTERNATIONAL MARKETS FOR PFCL Dn Amarendra Kumar ABSTRACT There have been unprecedented developments in the finaneial markets around the world. The boundaries between the national and the overseas markets are disappearing leading to the e?nergence of a global u...

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A STUDY OF RESOURCE MOBILISATION FROM INTERNATIONAL MARKETS FOR PFCL Amarendra Kumar

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A STUDY OF RESOURCE MOBILISATION FROM INTERNATIONAL MARKETS FOR PFCL Dn Amarendra Kumar

ABSTRACT There have been unprecedented developments in the finaneial markets around the world. The boundaries between the national and the overseas markets are disappearing leading to the e?nergence of a global unified financial market' foia) bothihe potential borrowers and potential investors have a wide range of *orirt, to chobse from. The.pace of fi.nancial innovation has also accelerated,

Foreign listed

.gl conpanies :iliationtoUK

thereby

providing varied options to borrowers accessing international capital-

in infrastructure and industrial development in developing economies has put challenges before the financial institution like Power Finance Corporation Ltd" (PFC) and before planners, to think of and evolve new instruments and explore new Sources of finance in the domestic as well as international capltal marke*. The growing demand of investment

Infrastructure prajects require huge funds and the financial market in India is stitt in the stages of infanq. Indian Financial markets donl have the depth to absorb issues of the magnitude of that of international markets. By relyittg on the domestic market alone will not helpfinancial institutions like PFC to cater to the needs of the infrastructure sector Therefore accessing international markets has became atl the more important to raisefunds.

their national statement and on of the U.S. es rnrst follow

limit of the Banks/ Institutions is becoming one of the problems in raising of resources by the companies from the domestic market. It becomes all

The exposure

importantfor companies to raisefinancefrom actemal sources. Accessing international markets builds a profile for the borrower bath internationally and among peer groups and it affords an opportunity to create a benchmark for future capital financing.

conrylanisg 16 ts.

the more

Conpliance

nce

Zimbabwe

al Accounting

s

and related

* Asst. Professor (Financed), Sri Sringeri Sharada Institute of Management, New Delhi, India"

prilJune 2002

Management and Accounting Research

ffiWWWry*'-.-**-

-

April-lune 2002

i:r.:jg:itffi-i.'

RATIONALE

ln a(

Following are some of the reasons for which a company should tap the overseas markets:

' . . . ' . . .

To diversifu its investor base (in terms of both institution and geographic location)" A company wants to diversifu its investor base to intemational because of the exposure constraints with the krdian longterm investor thereby increasing the cost of funding in the domestic markets. Helps in profile building (both international and among peer groups). Helps in preserving the precious on-shore bank lines. Less onerous covenants than in bank market. Helps in flexibility in terms of shifting between fixed/floafing rates and switching

.! fi a

tt n

MET ln car

between currencies.

substt

Helps in lowering administative time required for debt servicing. Helps minimize time commitment from management Refinance existing debt at competitive cost.

perso

of PI secon

o{fici Lengthen debt mattrity profile (out to

l0

years and longer). Create benchmark for future

capital market's financing.

LIM

OBJECTIVE

Reso cons'

'

The necessity of aocessing multiple sources to furance large projects antl the direct impact of borrowing costs on the constuction and operation costs of the projects makes it essential to know the various sources, which can provide fimds, their

relative stength, limitations and costs involved.

'

for

I

EXI 'Iher

The capital requirernents in the power and infrastucture sectors are quite large .As a result of which it is expected that domestic markets are likely to prove insufficient to absorb the total PSU borrowing reguirements. Apart fiom Power Finance Corporation, other Financial Institutions like IDBI ,IFCI ,ICICI and LIC etc are also providing funds to power utilities .So it becomes imperative for the top rated PSUs to tap the international markets and establish benchmarks for other krdian companies

to follow. The decision as to the most appropriate source of external financing is however, dependent on the volurne and pattern of the borrower's ability to generate adequate resources to repay and of course the borrowers existing external debt .It is therefore Management and Acco untlng Research

ApfilJane 2002

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market have reasonably important that organizations thatborrow from the international raising practices' adequate information/ knowledge of international fund accurate and

verseas markets:

sources of external During the study it has bee,n attempted to find out the various in identiffing the PFC finance and different tlpes of insfirments, which will assist of borrowing with a view appropriat" source of finanr" and also e\xaluate it in terms resource tofuiiaing an adequate database which forms the formdation of an effecfive

raphic location). because of the ;reasing the cost

mobilization strategY. s).

METIIODOLOGY s and switching

Lrnark

was used as theoretical kr carrying out this study both secondary as well as primary data from this there was a Apart substance, which was ixtacted from published sources. the experience personal visit to PFC and discussions with the officials of PFC regarding is also based on study The market. of pFC,s reso,rce mobilization from international collected fromthe company's secondary data consisting of publishedreports, magazine data oflicial records of PFCL.

for fufure

LIMITATIONS

r and the direct

of the projects

le

funds, their

so due to Resource Mobilization, is a ve'ry comprehensive and exhaustive subject, mobilization constaints the scope of the study of the subject is limited only to International for PFC. EXPECTED CONTRIBUTION There were certain contributions expected during the study as follows:

quite large .As rve insufficient

.

'ower Finance ,IC etc are also ;op rated PSUs lian companies

rg is however, erate adequate

how The overall study of resource mobilization from the International market and potential the profile amongst pFC can tap the international markets in order to keep a

. . .

investors. To study how pFC can avoidl mitigate the risk of assets liability mis-match. growth. To study the potential of issue to equity instruments for furttrering PFC's and markets Etropean from To study the advantage of raising long-term debt funds

.

US for PFC. a way so How pFC should consider the structuring of financial instruments in such lower cost' as to mitigate interest rate risk and exchange rate risk and

"It is therefore t.prilJune 2002

l[anagement and Accounting Research

April-,Iane 2002

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PT'C PROT'ILE

However,

The Power Finance Corpomtion, as the premier developmental financial institution devoted

to power sector, is playing a pivotal role in bringing about the desired reforms and providing required financial assistance to state power utilities as well as Individual power Producers (IPP's). PFC finances State sector utilities such as State electricity boards

(SEBs) and State generating companies (SGCs). It provides finance through loans, lease and bill discormting. It also extends guarantees on behalf of these entities. Since it commenced operations in 1988, it has fimded the utilities in setting up therma/ hydel

power plants, in renovation and modernisation schemes, system improvements, energy conservation schemes and repair and maintenance of capital equipment. With the o'pening up of the power sector, the PFC has also started funding indepe,ndent power producers (IPPs).

increased

t

planning 1 American the domes

Collectiol

As on Mi crores. WI

its ability renegotiat amount ol escrow c( creating t

FINAI\TCIAL REVIEW OT' PT'C

f inaucial Resource Mix A financial institution like the PFC has to keep augmenting its resources. The Governme,nt of krdia (GOD has actively supported PFC's efforts to raise funds, from Domestic as well as from Intemational sources as a part of its commihnent to boost the investnoent in infrastnrcture. As a financial institution, PFC believes in maintaining a diversified portfolio of resources and seizing every opportunity to raise funds at the most optimum cost. It genrerates most of its loans in krdian Rupees(about gSrA, Borrowings in a foreign curr€ncy are dominated

which is n base. This

byusD

(90%), with yEN (13%), Franc

(7o), and Deutsche Nlark(2o/o) loans completing the list. In the present scenario It becomes more inportant to link PFC's funding base with the world market to ensure stability.

Funding Base The funding base of Power Finance Corporation is dominated by its Iarge equity base Qz%).Taxable bonds floated by PFC come a close second at 2B%o" power Finance Corporation has a paid-up capital of Rs 1,030.45 crore, entirely subscribed by the government and free reserves and surplus of Rs 1,611.16 crore in 2001-02, which can be used to reduce the government's equity. It also has been recommended that power Finance Corporation should consider a minimum public offer of 10 per cent of its equity - capital as the curr€,nt adverse market conditions do not dictate a large public otrering. Manogcnefi aad Accoantlng Research

AprllJune 2002

r,, : ?. a:{€ff.ir:;

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SEBs har the better

institutiot projects p this subsi to mainta

Lending PFC will are passe will also achieve a

Differenl dependir

projects

--t"*

tution devoted

I reforms and ividual Power tricity boards h loans, Iease ties. Since it rermal/ hydel

nerts, energy

nt. With

the

:ndent power

However, the recent trend has been also more towards extemal commercial borrowing, which is reflected in the increasing percentage of foreign currency loans in tlrc funding base. This increased dependence ofunsecured, market -based foreign cur€ncy loans has increased the need for an effieient handling of the market risks involved. Thc company is planning to tap the overseas market through Global Depository Receipts (GDR) and American Depository Receipts (ADR) but that would be only after the IPO and listing at the domestic bourses.

Collection Efficiency

As on March 31, 2001, PFC had an outstanding loan portfolio of nearly Rs. 12,930 crores. While the credit quallty of most ofPFC's borowers is wealg PFC has demonstated its ability to improve its collection effrciency over the years. It has also bee,n able to ranegotiate its outstandings from defaulting SEBs and has been able to recover a zubstantial

it insists on escrow covers for fresh disbtrsements. For the weaker SEBs, it has started insisting on creating escrow covers on the existing loans as well and fresh disbursements to these SEBs have been restricted. In fufure, PFC's lending rates could come under pressure as the better performing SEBs could raise funds directly or from other bants and financial

amount of its dues in a timely nurmer. Besides a State government guarantee,

Government rcstic as well

rvestment in fied portfolio

num cost. It

l3o/o),Franc o

It becomes

stability.

institutions. However, the Government provides 4 per cant interest subsidy on power projects governed under the accelerated generation and supply prograrnme (AG&SP) and this subsidy is routed only through PFC. The study also expects that PFC would be able to maintain its competitive position and retain the better performing SEBs as its clientele.

Lending Rates

will set its lending rates at such levels that full costs of its borrowings and operations are passed on to its borrowers. In addition, a margin that enstres its financial viability

PFC

will

also be built into the lending rates. The lending rates shall be so fixed so as to

achieve at least 15% pre-ta:r and l2o/opost-tax rehrn on its Net Worth.

equity base yer Finance

bed by the 'hich can be rer Finance

Differential lending rates, as fixed by the corporation from time to time, shall be used depending upon the type of project and credit worthiness of the borrower. High priority projects may be given lower interest rate.

uity capital o 5'

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31

Managenent and Aceounfing Research

AprilJune 2002

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SOURCES OF EXTERNAL FINANCE AI{D DIFTERENT TYPES OF INSTRUMENTS

Internatio 1

Syndicated Loans

2

A syndicated loan is a loan, which is provided collectively by a group of ban1s. The basic principle underlying loan syndication is "risk spreading,i- as the size of individual loans increased, individual banks found it difficult to undertake the risk single handed, henoe the practice of inviting other banks to participate in the loan, to forml syndicate came into being, in the absence of the syndication facility, the borrowers would have to negotiate a series of individual loans to meet large requirements. Syndicated curency loanl hare developed into one of the most important sources for international lending. Syndicates of banks grant credit firnds in the form of loans, lines of credit, and other forins of long-term credit.

Loan amounts are normally, a minimum of $ 10 million. The duration of the loans generally does not exceed 7 years. The credits are generally unsecured but in the loan agreement shingent default terms are garerally stipulated. The borrower is also required to maintain certain financial ratios. For a company that has a high credit ratini, the arrangement of a syndicated loan may be a quick job but for new enhants it may take longer' Generally it takes around 2-3 months tL arrange for a syndicated loan. At p;esent cross-county lenders come together to finance borrowers diverse needs viz., amount, multiple currency' flexibility, timing etc. The loans are provided for a wide variety of purposes and major heads being :

. . . .

Euro Bor Euro bon

of issue. are simul issue is d

in hard ct the name

debt sect usually v maximur bonds. E

. .

Larl Bor.

ma)

Foreign A bond i

Project finance Refinancing of existing core borrowings

borrower & syndir

Acquisitions Standby lines of credit

are float markets) that they Euro bor

International Bonds Markets

which th Intemational bonds are those bonds, which are initially sold outside the counfiry of the borrower' These bonds are not being issued in only onenational capital market, but they are underwritten by an international syndicate and distributed worldwide in a bearer form. In the intemational bond market it" doilr, remains a major cwrency.

.

Yat rrofi

loq are Ion;

stu Montgement and Accounting Research

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32

Managet

AprilJane 2002

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International bonds are of the following tlpes: 1. Euro bonds 2. Foreign bonds

The basic vidual loans nded, hence dicate came to negotiate 'loans have yndicates of

Euro Bonds

.s.

rf long-term

rf the loans in the loan

the curency

sold outside the home colmtry of Euro bond refers to the bonds issued and is called euro dollar bond' Euro bonds of issue. For e.g. u aou* io"d issued in E,rope the other than the cormty of currency in which are simultaneously sold in many countries issued in the international market and denominated issue is denominated. These bonds are Euro bonds in particular are bearer securities' in hard currency i.e. dollar, ]en; potmd, elrro. ,r"not r"gi.t"r"a anywhere. Euro bonds are generally unsecured launoh' Egro bonds are long-term loans debt secr.gities maturing at least a year after b:"d.: have a years to 30 years. NoYudYt usually with a mat,rityieriod between 5 "yo

i"*o

;;;;#d,

l':d *

floating rate bonds rnay be maximum mahrity p".i"a of 1.0 years. ih" "*o for operations, whlqh requlrei bonds. Eurobonds are suitable rou** of finance

lso required . rating, the it may take . At present

iz., amount, e variety of

.

exchange contols, which Borrowing not subject to domestic rJgtrlations especially gains' may limit their ability to export capital

Foreign Bond (or) a bond sold by a foreign A bond issued in a particular cormtry by a foreign borro'vvqr in whigh it is sold and is underwritten bonower, denominated in the cwrency of country county' Foreign-bonds & syndicated bv national underwriting syndicate in the lending currency of those domestic the (and are in are floated in the domestio capital marklts different from Euro bonds in the sense markets) by non-resident eirtitiis. These bonds are in which they are issued whereas that they are govemed by the regulations of the country markeJs in on the basis of the Euro bonds axe not. The bonds are generally named ^cgitat bonds are as follows: which they are floated. some of the well-known foreign

mtry of the iet, but they in a bearer

in the U'S by

!""{-

rong

*ut rity periods. The us

sfiuctllres. il-June 2002

ffi

a

bond issued Yankee Bonds: Yankee bond is a dollar denominated arl tlat ttte of Yankee non-u.s. borrower in the u.s. market. The advantages Yankee bond markets iongo maturities of bonds place them outsfde the ECB oeiling' are available at low interest rates for are exEemely deep ana tquia market and funds are not bormd by rigid syndicates and fee

4

Management and Accounting Research

markets

33

AprilJune 2402

"

Samurai bond: Samurai bonds are yen denominated bonds issued in Japan by a non-

'

Bulldog bonds: Bulldog bonds are pound denominated bonds issued in the U.K. domestic market by a non- U.K. borrower.

U. Gloht

Japanese borrower.

Global

l

compan:

foreign

International Equity Marke...