INDUSTRY INTERNSHIP PROJECT

DEBT SYNDICATION OF CREDIT FACILITIES

SUMEDHA FISCAL SERVICES LIMITED

BY :

B.A NELSON ANTHTONY

2B3-05

BIFAAS

CONTENTS

• Introduction

• Industry Profile

• Company Profile

• Review Of Literature

• Data Analysis

• Findings And Suggestions

• Learnings

Introduction :

Debt Syndication is the process of distributing the money to be

advanced in , generally a large loan to a number of Financial Institutions .

It’s commonly used when the loan required in order to fund a company or

save a company from bankruptcy .

By employing debt syndication , several banks , investment firms or other

companies share both the profits and the risk of making a large loan .

A decline in the number of available lenders has complicated the

syndication process .While banks are often the primary lenders, they can

be involved in deals with less outlay , thus reducing their risk.

Objectives :

• To Understand the conceptual framework of Syndicated Loans.

• To analyze the process of Syndicated Loan processing.

• To apply the learning on a case situation.

• To make suggestions based on the finding of the study.

Scope :

• The syndicated loan market allows a more efficient geographical and institutional

sharing of risk. They allow the sharing of credit risk between various financial

institutions without the disclosure and marketing burden that bond issuers face.

• For junior banks, participating in a syndicated loan may be advantageous for several

reasons. These banks may be motivated by a lack of origination capability in certain

types of transactions, geographical areas or industrial sectors, or indeed a desire to

cut down on origination costs.

• Project finance deals are non-recourse and therefore depend on the isolated and

assigned cash flow from the project. With no recourse to project sponsors, in case of

default, the bank that spread the risk by joining many syndicates faces a lower risk

than one that finances projects individually.

Limitations:

a) The study duration (summer in Corporate Office) is short.

b) The analysis is made for projected data .

c) Limited interaction with the concerned heads due to their busy

schedule.

d) The findings of the study are based on the information

retrieved by the selected unit.

e) Ratio itself will not completely show the company’s good or

bad financial position.

f) Working as a trainee for a period of two months the company

was reluctant to reveal its complete information .

Methodology :

• The Primary data has been collected from Personal Interaction with

Assistant General Manager (Mr. Venu) .

• The secondary data has been collected in the form of financial statements

of the business entities concerned. Apart from the financial statements of

the business entities the secondary data has also been collected from

various websites related to the research topic.

Industry Profile :

• Indian financial services industry has been through the toughest of the times and yet

stands strong and robust among the world economies. Having a deep impact of the far-

reaching changes in the Indian economy since liberalization, the new face of this

industry is evolving in a strong, transparent and resilient system.

• India's syndicated loans totaled $14.1 billion for the period January-May this year,

highlighting one of the few nations to post a 9% year-on-year volume increase (in

proceeds) over the corresponding period in 2008.In fact, India is the only country other

than Spain to have registered an increase in borrowings till May this year. he global

syndicated loan market totaled more than $4.5 trillion in 2007, an increase of 13% over

2006 and 32% over 2005. The largest market was the United States, with $2.1 trillion in

loan activity, an increase of more than 20% over 2006. The second largest market was

the United Kingdom, with $376.3 billion in syndicated lending.

• Over the last few years, financial markets have witnessed a significant

broadening and deepening of service baskets with the introduction of

several new instruments and products in banking, insurance and capital

markets space.

• The sector was opened up to new private players including foreign

companies who embraced international best practices and modern

technology to offer a more sophisticated range of financial services to

corporate, retail and institutional customers.

• Financial sector regulators too have been visionaries to ensure that

new regulations and guidelines are in tandem with global norms. These

developments have given a robust boost to the development and

modernization of the financial services sector in India.

Company Profile : Sumedha Fiscal Services Ltd. (SFSL) is a front ranking

financial services company incorporated in the year 1989. Since inception, their

journey has been extremely focused and demanding.

The company offers a wide bouquet of services ranging from Corporate Finance,

Equities, Commodities, Insurance, Wealth Advisory, Portfolio Management, Personal

Finance, Currency Futures, Investment Banking and Institutional Broking Services.

SFSL ventured into Merchant Banking and was initially registered with SEBI as a

category III Merchant Banker which later on got upgraded to category I. SFSL came out

with a public issue in 1995 and in 1996 Capital Resources International ltd.

(CRIL) group company started stock broking activity as member on NSE in the capital

market segment and as dealer of OTCEI. CRIL was merged with SFSL with effect from

1998 to have synergies in operations, operational efficiency and higher net worth.

Started in Kolkata, it gradually expanded to other cities with a pan India presence with

currently branches at eight locations namely Bangalore, Guwahati, Mumbai, Jaipur,

Chennai, Ahmadabad, Delhi and Hyderabad.

Value Proposition :

• The companies Evolution is the result of the alertness and ability to adapt the

need of changing the World.

Approach :

• Focus on creating long term relationships – a trusted partner

• Significant percentage of business contributed by repeat clients or their

referrals.

Execution Orientation

• High quality execution by an experienced team of professionals.

Professional Integrity

• Strong emphasis on confidentiality and integrity in a sensitive business

environment.

Track Record and Experience

• Proven Expertise in analysing and advising on various business and financial

models.

• Ability, experience and creativity to structure result-oriented financial

solutions.

.

TEAM SUMEDHA :

Led by the Chairman, Mr. R.L. Gaggar, the eminent solicitor, the SFSL team today

has over 70 professionals from various spheres of finance, taxation, law and allied

fields. The Board and the Senior Management Team comprises of eminent

members like Dr. Basudeb Sen, Mr. A C Varma, Mr.Shailesh Haribhakti , Mr. Vijay

Maheshwari, Mr. Bijay Murmuria, Mr.Bhawani Shankar Rathi, Mr. Prashant Panda ,

Mr. Anil Birla and Mr. Rajesh Gupta .

Mr. R. L. Gaggar, Chairman of the Board, is a front ranking and

eminent solicitor. He is on the Board of many Blue-Chip Companies .

Today, he ranks among the foremost legal brains in the country and

his expertise and pre-eminence has been of considerable support to

us.

Services :

Merchant Banking

Category I Merchant

Banker

Mergers & Takeovers

Equity Placement

Portfolio Resolution

of Stressed Assets

Debt Syndication

Financial

Restructuring &

Negotiated Settlement

of Dues

Stock Broking – NSE Capital Market &

Derivative & Currency Member, OTCEI Member

Distribution Services

(RBI Bonds, Capital

Gain Bonds, Mutual

Funds)

Commodity Market

Broking (through

subsidiary) – MCX

Member.

Life Insurance Agency

Business ( through

subsidiary)

KEY

OFFERINGS

Review of Literature :

• Syndication helps lenders to avoid capital requirement constraints imposed by

regulators (Simons [1993]) as well as limit excessive exposure to individual

borrowers.

• A syndicated loan is a loan issued to a firm jointly by more than one financial

institution. As Hitchings (1994) notes, “. . . it is fundamental to syndicated lending

that the terms and conditions of the loan are similar for each of the lenders.”

• The pricing of syndicated loans has become more flexible by adding performance

pricing features, which represent a significant shift from the more established use of

financial covenants. In contracts that include only financial covenants, the lenders

can increase the interest rates only when financial performance deteriorates such

that a covenant violation occurs (Dichev and Skinner [2002]).

AnalysisFinancial Analysis :

Cost of the project is Rs.5359.88 Lakhs

The cost of this new project comes to Rs. 5359.88 lakhs as per our estimates. Major

portion of the costs goes towards plant & machineries (Rs.3748.51 lakhs), Buildings

(Rs.735.00 lakhs). Other big cost components are interest during construction (Rs.460.96

lakhs), preliminary and pre-operative expenses (Rs.108.00 lakhs), contingency (Rs.53.80

lakhs), and land & land development charges (Rs.220.00 lakhs). Majority of the

Equipment and machineries will be purchased indigenously, and the company has

Procured quotations for majority of them. We have verified the costs & found them reasonable .

Bank finance shall be 65.30% of the total project cost

The project will be funded by Equity Contribution and Term Loan from Bank. The

contribution of bank will be 65.30% while that of the equity will be 34.70%. Bank will be

financing Rs.3500.00 lakhs and equity contribution will be Rs.1859.88 lakhs. The debt

equity ratio for this project will be 1.88.

Term Loan shall be repaid in 32 Quarterly installments

• Repayment will be done in 32 Quarterly installments (from Quarter 3 FY 2013to Quarter

• 2 FY 2021) in balloon payment format. The moratorium period is taken as 21 months

• (from April 2012 and ending in December 2013).

DSCR is comfortable in the base case :

• The DSCR (Gross) and DSCR (Net) for the firm is at comfortable level at 1.77 and 2.18

respectively. The project is tested by us in two scenarios and it is found that the Gross

DSCR is above 1.45 in all the scenarios.

Scenarios Gross Net

1 DSCR in Base Case 1.78 2.20

2 Scenario-1(decr in sales by 5%) 1.48 1.78

3 Scenario-2(incr in R.M cost by 5%) 1.56 1.92

Key Ratio’s & Levels

Particulars Low Risk Medium Risk High Risk

Current Ratio > 1.40 1.20 - 1.40 < 1.20

Tol/Tnw < 2.00 2.00 – 3.50 < 3.50

Interest Coverage > 3.50 2.00 – 3.50 < 2.00

PAT/Sales % > 10.00 4.00 -10.00 < 4.00

Inventory (no of days)

< 60 60 – 90 > 90

Debtors (no of days) < 45 45 - 90 > 90

Debt- Equity Ratio < 1.25 1.25 -1.75 > 1.75

DSCR ( fr TL) > 2.00 1.25 -2.00 < 1.25

Data Analysis : • The Projected Net Working Capital of the company is increasing ,the year 2013 has

NWC of 132.14 lakhs the company has Rs 352.65 Lakh N.W.C for the year 2014 i.e

constantly increasing for all the projected years up to 2021. This means the

company is in a positive position & N.W.C has improved very fast as compared to

the previous years which show liquidity Position of the company and it is having

more & sufficient working capital available to pay off its projected current liabilities

• In the projected year of 2013 the current ratio was 1.39 and in 2014 the current

ratio was increased to 1.52 and there is a constant growth in CR . The current ratio

is above the standard ratio i.e. 1.33 .Hence it can be said that there is enough

Projected current assets in this company to meet its current liabilities

• The projected inventory and receivables to Net sales is increasing year to year .

• There is an increase in both sales and total tangible net assets . so the average

collection period is decreasing year by year. That shows that recovery from debtors

is improving.

• A high working capital turnover ratio indicates efficiency in utilization of resources

and the ratio has improved

Project Parameters

2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Net Sales

1113.3

2226.5

2404.78

2452.88

2501.94

2577.00

2654.31

2733.93

2815.95

2900.42

PAT 202.56

428.57

542.33

560.5 573.64

606.15

634.03

656.88

669.05

633.51

BrkEvn

682.04

1303.21

1228.50

1175.56

1120.26

1048.72

972.25

889.63

812.06

849.4

DSCR 1.78 avg (Ideal = 1.75 or above)

Current Ratio 1.52 (2014) (Ideal = 1.33 or above)

TOL/TNW 1.41 (2014)

D/E Ratio 1.88

particulars 2013 14 15 16 17 18 19 20 21 22

Netsales TT

assets

0.20 0.37 0.39 0.39 0.39 0.39 0.39 0.39 0.39 0.37

Pbt/ TT

assets %

3.56 7.12 8.83 8.93 8.93 9.17 9.30 9.31 9.17 8.19

Operating c to

sales

81.81 80.75 77.45 77.15 77.07 76.48 76.11 75.97 76.22 78.16

Bank finance/

%

21.34 19.52 15.81 12.99 11.08 9.69 8.62 7.80 7.15 6.40

Inventory +

rcvb to N.S

50.92 50.92 51.54 52.59 53.70 54.63 55.59 56.60 57.64 58.72

Pbdit 546.59 1087.0

9

1146.3

3

1108.6

6

1066.0

1

1042.9

9

1015.42 982.88 944.94 901.12

Efficiency Ratios :

Findings:

• Current Ratio is in the increasing trend & comfortably above 1.33. TOL/ TNW is

in the decreasing trend as the loan is being repaid.

• PAT is showing increasing trend due to stabilised cost structure and decreasing

interest expense.

• PBDIT/Interest is continuously increasing due to regular payment on loan and

interest amount.

• Operating Cost to sales is showing a decreasing trend.

• Bank Finance to Current Assets is on the decreasing trend.

SWOT ANALYSISStrenghts :• The raw material required for the project is

locally available.• The company is ordering equipment from

reliable suppliers• The company is planning to use latest

technology for production• Most of the generation of power will be used

for the captive purpose of the company.

Weakness :• Even though the promoters of the company

are experienced in cement sector theydoes not have expertise in running the captive power plant. The firm plans to overcome this by hiring professionals to run this operation.

Opportunities :• The company can avail carbon credits and

subsidies from Ministry of New andrenewable energy. For financial calculations

we have not considered the advantagesgained from both these sources.

• In future the company can also explore the option of selling the power to the localelectricity board which can be a additional source of income

Threats :• Changes in government policy on captive

power and its consumption will affect theworking of the unit. However this will affect

all the players in the industry.• The rising prices of steel which is a key input

in the manufacturing of boilers canincrease the cost of the project. The company needs to effectively negotiate withthe suppliers for a discount to reduce the additional burden.

Recommendations :

• Although the company has collected quotations for all the equipment like boiler & turbine, some of them are more than year old and there are chances of price escalation. In this case the company has confirmed to Sumedha that the increased cost shall be borne by the company.

• As the company is new to the field of the power generation they should appoint experienced professionals to run the operations of the Co-generation plant. This will help them in efficiently managing the project. Also the company can explore the option of appointing an operations and maintenance company to manage the operations of the captive power Plant.

• The firm should obtain all the permissions (pollution control board, inspector of boilers, factories department) well before the commercial operations of the company starts. Any delay would lead to obstruction in the project implementation schedule which is not desirable for any project.

• The firm should stick to the project implementation schedule. Delay in implementation may lead to cost escalation as well as delay in the generation of the savings.

Learnings :

• The culture of the Corporate Office

• Understanding the Customer needs and providing the customer with delight

• Understanding Financial Statements and the purpose of using it

• Assessment of Term Loan and Working Capital

• Delivering the task with in the given time .