Loan Syndication through Structuring New Product Mixtures

The main objective of this report is to analysis Loan Syndication through Structuring New Product Mixtures. Other objectives of this reports are to find out the possible financing solution for a client, to find out the best possible mix for the client and to analyze income behavior of the bank in connection to cash out flow behavior of the client. Finally this report make swot analysis Loan Syndication through Structuring New Product Mixtures.

Introduction

Syndication loans represent a substantial portion of the commercial and industrial loan portfolios of large banks. A syndicated loan involves two or more banks contracting with a borrower, typically a large or middle market corporation, to provide funds at specified terms under the same credit facility.

The average commercial syndicated credit is in excess of TK100 million. Syndicated credits differ from participation loans in that lenders in syndication participate jointly in the origination process, as opposed to one originator selling undivided participation interests to third parties. In a syndicated deal, each financial institution receives a pro rata share of the income based on the level of participation in the credit.

Additionally, one or more lenders take on the role of lead or “agent” (co-agents in the case of more than one) of the credit and assume responsibility of administering the loan for the other lenders.

Syndication deals have been increasingly growing in last few years because of risk diversification. Instead of investing huge money in one industry, financial institutions are now focusing on financing small amount of money in different industries. Besides, due to many participating lenders, control and monitoring over credit and client gives the lenders additional satisfaction. Thus, banks mitigate risks through syndication.

Objective

For the purpose of this report, a client is assumed to whom funds can be provided though syndication. Then with the available products in EBL Structured Finance Unit, few mixes are selected to test on the model. The main objectives are –

• To find out the possible financing solution for a client
• To find out the best possible mix for the client
• To analyze income behavior of the bank in connection to cash out flow behavior of the client.

Methodology

The final research report will be a mix of library research, internet research, interviews, observations etc. For the research we hope to get all the guidance from our course teacher.

In general, Methodology is the systematic description of sequence of activities required to manage a project. Extensive web research will be conducted to gather as much secondary data as possible. In this report, both the descriptive and exploratory method will be used. In depth interview along with historical data from different archive will be used to write the report.

The primary source of the data will be the model that had been developed exclusively for this research report. Different input will be given to obtain different results. These results will be analyzed and understanding will be provided within the report.

Majority of secondary data will be collected from in-house report, official memo and the websites. Annual Report and the Internal Website for employees may come handy while preparing the company overview.

The Organization

The emergence of Eastern Bank Limited in the private sector is an important event in the banking industry of Bangladesh. Eastern Bank Limited started its business as a public limited company on August 8, 1992 with the primary objectives to carry on all kinds of banking business in and outside of Bangladesh and also with a view to safeguard the interest of the depositors of Erstwhile BCCI (Bank of Credit and Commerce International [Overseas]) under the Reconstruction Scheme, 1992, framed by Bangladesh Bank.

In 1991, when BCCI had collapsed internationally, the operation of this bank had been closed Bangladesh. After a long discussion with the BCCI employees and taking into consideration the depositors’ interest, Bangladesh Bank then gave permission to form a bank named Eastern Bank Limited which would take over all the assets, cash and liabilities of erstwhile BCCI in Bangladesh, with effect from 16th August 1992. So, it can be said that EBL is a successor of BCCI.

Eastern Bank Limited (EBL) is a second generation commercial bank with 34 online branches across major cities in Bangladesh and 790 full time employees as of now. It offers full range of commercial banking products and services to the corporate, mid-market and retail segment. Under the corporate banking segments the Bank has comprehensive range of financial products including corporate deposit accounts, syndicated financing, export-import financing, working capital and other finance, bonds and guarantees, investment and business counseling, infrastructure finance, cash management services etc. With urban banking focus, the Bank is offering various alternative delivery channels like ATMs, Bills Pay Machines, Kiosks, and Internet Banking etc. The bank has set up a brand image attributable in part to its policy of continuous customer service excellence, innovative products and services and maximum technology utilization. Unlike conventional branch banking, credit proposals as well as business operations are processed centrally at EBL. Besides Main Operation, EBL has an Offshore Banking Unit (OBU) set up in 2004 which gives loans and takes deposits only in freely convertible foreign currency to and from non resident person/institutions, fully foreign owned EPZ companies etc.

EBL and Its Departments

After 2004, EBL has transformed gone through process re-engineering. The earlier “Branch Banking” system has changed into a centralized system. Instead of doing the same job in many different places, these jobs have been centralized into concerned departments. For example in traditional banking, every branch has different account opening system, different books for day to day transactions, each branch deals with corporate clients, each branch has credit department and so on. In EBL, this scenario changed after 2004. For instance, Branches only give account opening entries to server while the whole processing of account opening is done from Central Head Office. Similarly, Corporate Banking Division has different existence to co-ordinate all corporate clients. These individual departments are specialized in respective jobs. A link between the jobs and these departments co-ordinate these workflow into a complete solution for the clients.

Consumer Banking Division

The consumer banking activities are being carried out through the 34 branches of Eastern Bank Limited operating countrywide. Previously these branches used to conduct all kind of business activities, including processing credit issue, conducting trade service, consumer service etc. But after the restructuring process, all these branches are now mainly focusing only on delivering service to individual and corporate customers and are therefore termed as “Sales & Services Centers”.  This helps EBL to put more focus on customer service since the operation activities are done in back office. The persons sitting in “Sales & Services Centers” are specialized in dealing with customers and handling front office business. The main activities in a Branch are –

• Cash Transactions in Teller Unit
• Customer Support – Account Opening, Credit / Debit Card Facilities, Moneygram, FDR, Fund Transfer, DPS etc
• Loan Facilities through Relationship Unit

All transactions in Teller Unit are directly sent to the central server. As a result, the previous concept of accounts being related to certain branch does not hold true anymore. In EBL, any account opened from any EBL branch can operate in every EBL branch.

In customer support unit, Account Opening forms are filled up and an initial entry into the server is given. Later, the form is sent to head office and rest of the formalities is completed there.

Relationship Units are mainly concerned about finding prospective consumer and provide loan facility. These loans are mainly personal loan – car loan, home loan, any purpose loan etc. Like before, relationship units are concerned only about maintaining relation with clients. Once a client is booked, this unit gives the input into the system and a central consumer credit department does all the processing of these loans.

Service Delivery

Service Delivery is very closely connected to Branch Banking. The earlier common activities in different branches have been centralized into this department. This department is responsible for collecting all the cheques from all the branches and then process them for inter-bank clearing. All account opening forms are collected here and processed centrally. These forms are then checked extensively for verification. When all verifications come out to be alright, photos and signatures are uploaded and account instructions are written. This department is also responsible for preparing cheque books for all the accounts and then delivering them to concerned branches.

SME Banking Division

SMEs are indispensable partners in national economy and social development. Their major contribution is towards creation of new enterprise, employment generation and poverty alleviation. Accordingly, EBL has given special focus on SME- Banking since its launch in June, 2006. Year 2007 was the year of spiraling the entire SME Banking Business Unit like Process, Policy, Product development, Capacity planning and ultimately triggering the focus on the growth of the business taking all the risk factors into consideration. SME being one of the high priority sectors, remained buoyant in terms of loan and deposit. Adding new products considering clients’ needs and by establishing different SME Centers across the strategic locations of the country in 2008 and 2009, EBL SME is well on track in achieving desired growth.

Currently, EBL has taken the following strategic movement towards SME banking –

• Preparing to deploy Electronic Loan Processing System to make loan processing easier and faster.
• An array of innovative products is going to be launched to accommodate the SME Customers’ financial needs with least possible paper requirement from customers.
• Ease of payment method, expansion of distribution channel to give better access to the business community
• Conducting national seminar to grow awareness to the society on the prospect of this segment.

Human Resources Division

The employees are Eastern Bank’s most valuable resource. Having competent and professional employees is becoming increasingly important in today’s competitive world, and EBL has a significant competitive advantage in this respect. Many of its employees have worked here since the BCCI area and therefore have vast experience in their respective fields.  Also the new employees are recruited with sound academic background and given proper training after recruitment to groom up for their responsibilities.

The Mission of HR Division is –

To Make EBL the Employer of Choice.

EBL plans to inculcate a high performance culture where the employees will work with fun and pride

Audit and Compliance Division

The main function of this division is to provide legal assistance to the branches and to ensure strict adherence of rules and policies by all concerned officials of the bank through routine and surprise inspection and audit.

Finance and Accounts Division

Finance and Accounts division is a very important division for any Bank, because its task is to –

• Maintain daily liquidity positions, treasury bills, call money, debentures, placement of funds etc
• Monthly-accrued interest calculation of all interests bearing accounts, inter-branch calculation for Head Office, amortization of all fixed and other assets.
• Preparation of statement of accounts and profit and loss account for the bank.
• Weekly deposit and advance analysis of the bank.
• Cost of fund analysis.
• Maintenance of accounts, preparation of annual report of the bank, maintenance of provident fund accounts, maintenance of income and expenditure posting, maintenance of salaries and wages of the employees etc.
• Fulfilling reporting requirements of Bangladesh Bank.

Information Technology Division

Previously, Eastern Bank had a very low level of automation. There were hardly any PC in the whole Bank before 2001. But when the new management took over in 2001, they gave huge emphasis on computerizing the bank’s operations. After 2 years, almost all the operations in the bank are now automated. The Bank is also shifting to a new IT platform, which aims at maintaining, operating and strengthening the technology base of the bank to enable error free production of information that ensures ongoing efficiency and profitability of operation. A world class banking software called FlexCube has been installed which will centralize operations and provide Online Banking, Internet Banking, Automated Teller Machine, Telephone Banking, Point of sale dispenser, Credit Card facility etc.

As for new movement, EBL is moving into a new system called UBS (Universal Banking System) to further automate all its processes and operations. UBS contains better flexibility and usability than FlexCube. Due to continuous increase in competition and market expansion, EBL has taken this initiative, proving once again that EBL is transforming the way they do business.

Administration Division

This department looks after the administrative matters and procurement and supply of all tangible goods to the branches. Some of the main functions of this division are described as follows:

• Make arrangement for branch opening such as making lease agreement, internal decorations etc.
• Print all security papers and bank stationery.
• Purchase necessary stationery items.
• Distribute this stationery to the branches.
• Purchase all sorts of furniture and fixtures for the branches.
• Install and maintain different facilities for the branches etc.
• Issuance of power of attorney to the officers of the branches.
• Issuance of different circulars of Bangladesh Bank and other banks.
• General correspondence with Bangladesh Bank and other banks.
• Advertise in the different media about tender notice, general meetings and public interests.

International Division

International Division is responsible for assisting the authorized branches to deal in foreign trades, that is, import and export businesses on account of the customers of the bank by giving approval for transactions and controlling them at various stages.

It deals with all correspondents of foreign banks having arrangement with the bank. Every year new agents are added. The larger the number of correspondents and the wider the coverage area, the richer will be the international connections of the bank.

The functions performed by this division are as follows:

• Correspondent banking relationship
• Supervision of foreign exchange transaction of other units
• Monitoring on compliance of Bangladesh Bank regulations
• Supervise sale / purchase of foreign currencies
• Reconciliation of Nostro Accounts

Consumer Finance Center

This department is responsible for processing all the consumer loans – the loan applications that are sent from different branches are centrally processed here. From individual loans like car loan, home loan, personal loan to credit cards – every application is processed. The financials, client’s strength and conditions are judged. Considering all these, the applications is either approved or declined. The result is communicated to the applicant through branches where the initial relation was established.  If the application is approved, this department then disburses the loan amount in the client’s bank account with EBL. The client can then, withdraw that money from any branch of EBL.

Credit Risk Management

Like Consumer Finance Center, this department is too, responsible for analyzing credit worthiness of a client. But unlike CFC, this department processes the applications for SME and Corporate Clients. The primary objective of this division is to evaluate the credit worthiness and debt payment capability of present loan customers and loan applicants. Applications from SME Centers or Corporate Relationship Units are sent to this department for extensive checking of clients’ capability. These applications include – new loan, export / import loan (L/C), revolving loan, overdraft, limit enhancement or limit reduction etc.

The Credit Risk Management Department is assisted by the Credit Administration Department, which is mainly concerned with the post-approval functions of the division. Credit Administration is involved in basically 2 broad functions:

• Loan Monitoring
• Documentation

Corporate Banking Division

Corporate Banking Division came into existence because of the restructuring of EBL’s business processes. Previously all the loan disbursement and monitoring activities were carried out by the officers of individual branches, which resulted in poor management and control of the process. To check this trend, EBL decided to centralize its loan disbursement and monitoring activities in line with the model followed by the foreign banks in the country. As such, EBL was the first private commercial bank in the country to have a separate Corporate Banking Division which started operation on 10th January of 2002. This division is responsible for bringing in profitable new corporate clients and retaining present clients by meeting their various needs. Corporate Banking delivers banking services like products, credit facilities, tailored financial solution to the specific needs of clients, resolves credit issues, and develops the relationship between the clients and the bank. At present, corporate Banking Division is the main revenue earner of EBL, generating about 70% of the total revenue.

EBL Corporate Banking comprises of 9 Relationship Units (6 in Dhaka and 3 in Chittagong) and four specialized units –

• Project Finance Unit
• Structured Finance Unit
• Cash Management Unit
• Investment Banking Unit

There are four Customer support units under Corporate Banking: three in Dhaka and one in Chittagong.

Syndication Products

The success of EBL as a Syndication Arranger lies in its ability to provide cheaper fund to the client as par their needs. SFU team continuously looks for different sources of fund to match with clients’ requirements, to serve their purpose and to give them better and efficient services. SFU maintains liaison with different institutions and investors. It helps the unit to explore new ways to collect cheaper funds easily – to provide cheap funds to clients meeting their demands. All of these funds have special conditions, limitations and pre-requisitions. Understanding the client’s business and suggesting a suitable product is a major part from SFU.

BDT Term Loan

BDT Term Loan is the most general category of financing. This is the most widely used financing solution for most of the approaching clients. The Characteristics of this term loan are –

• Does not need to meet any special criteria from any other organization, just general set of rules set by Bangladesh Bank.
• The Financial Institutions are solely responsible for setting the Interest Rate and analyzing the credit worthiness of the client. Whether the funding will be feasible or not depends upon their own judgments. A client may not get fund from one Bank but the same client for the same project / purpose may get fund from another Bank.
• The banks / financial institutions use their own source of fund for lending. Since these funds are acquired at a high rate, the fund is disbursed to the client at a high rate. Earlier clients availing term loan had to pay interest rate as much as 16%. Due to Bangladesh Bank’s Circular regarding putting a ceiling on the rate, now the rate is 13% – which is still high enough.
• Single Borrower Exposure Limit puts a ceiling onto how much a Bank can lend to a single client. Normally, 15% of Bank’s Capital can be disbursed as funded facility. For example, if the capital of a Bank is BDT 10,000 Million, it can provide up to BDT 1,500 Million funded facility to one single client.
• 1% Provision is needed to be kept on the outstanding loan amount in the Bank’s yearly financials.
• Usually, the tenor is not long enough (less than 10 years, usually 7 years).

IPFF

IPFF stands for “Investment Promotion and Financing Facility”. It is a World Bank Fund to promote Infrastructure Build-ups. In 2007, this 5 year term IPFF endowed with USD 50 million was set up in Bangladesh Bank by World Bank to finance government approved PPP based infrastructure development projects to be implemented by the private sector. This is a much cheaper source of fund, available to be financed to specified sectors, meeting specified criteria.

PPP Stands for “Public Private Partnership”. Usually any public construction work or supplies are purchased or obtained from contractors or suppliers following tender and competitive bidding process. These types of purchases are one‐time and the contractors or suppliers are not responsible after the construction time or supplies are over. Under the PPP initiative the government and public pay contracted prices or fees to the private sector for purchasing services of the infrastructure that is financed, built, managed, and maintained by the private sector with the approval and support from the government. The government, the private sector investors, and public can all benefit if private sector can be enticed into infrastructure development under PPP.

The IPFF makes available partial debt financing through private sector financial intermediaries for eligible, government-endorsed infrastructure projects to be developed by the private sector. The developmental goals reflect key priorities, namely accelerating private-sector led growth; supporting an integrated approach to rural development; and strengthening government and building institutions. The project consists of two components, a lending component and a technical assistance component. The former provides long term finance in Taka to qualifying financial intermediaries to lend to eligible, government-sponsored infrastructure projects developed by the private sector. The latter funds technical assistance to include:

1. Capacity building for Bangladesh Bank to develop its financial infrastructure for oversight over local markets and the sector
2. Promoting private financing for infrastructure;
3. Implementing environmental impact assessments.

After the first Phase of financing of USD 50 million, an additional financing of USD 75 million is on process for the Second Phase of this project.

Objectives

The objectives of IPFF are –

• Increase competition and transparency in infrastructure finance through supporting private sector participation and market-based solutions
• Supplement the resources of the Bangladesh financial markets to provide term finance, particularly in scarce foreign currency, for infrastructure and other investment projects beyond the capacity of local finance institutions
• Promote the role of private sector entrepreneurs in the development of capital projects, especially infrastructure, including those benefiting from donor funding
• Allow transparent allocation of social grant funding so that projects which are economically attractive but not commercially viable would be developed by the private sector

Conditions for a Project to Fall in this Category

For a project to be able to avail this facility, it has to fill-up the following conditions

• The entrepreneur is selected by a GoB authority (i.e. a Line Ministry) through international competitive bidding (ICB) procedures of The World Bank (WB). All subsequent procurement will follow applicable rules of said entrepreneur.
• The Procurement Plan, Bidding Documents and Bid Evaluation Report have to be collected and forward to World Bank (with a copy to Bangladesh Bank) for their review and confirmation.

Project has to be related to Infrastructure Development. In the year 2009, the following types of projects have approached IPFF –

• Small Power Plants
• Captive Power Plants
• Inland Container Terminal
• The company must have 51% or more private partnership to be eligible under PPP

Conditions to Maintain For Project Disbursement

Once the project fills up the criteria to be eligible to receive the IPFF fund, the following conditions have to be met –

• Disbursement under the financing facility would require clearance from the Department of the Environment for those industries which are classified as potentially damaging to the environment.
• The fund is disbursed to Participating Financial Institutions (PFIs) through Bangladesh Bank. Onlending to the client is done through these PFIs. The PFIs are bearing 100% risk of debt financing.
• For the total project cost, atleast 30% have to be equity whereas, the debt portion can be of maximum 70%.
• Among the Debt portion, 80% will be financed through IPFF whereas the rest 20% needs to be financed through Financial Institutions in the form of Term Loan.
• Since this fund is for Infrastructure Development, for the repayment to be done from the project, the project has to be established and come into operation first. Since the development will need time, the client is offered a ‘Grace Period’. Tenor of this Grace Period is minimum 3 years and maximum 10 years.
• The project has to be for a longer tenor, usually 10-15 years and can be upto maximum 20 years.

The PFIs have to meet certain criteria set by World Bank and Bangladesh Bank. That means, not all Financials Institutions can avail this fund to disburse to their clients. Currently, the following PFIs have signed agreement with Bangladesh Bank and are eligible to receive IPFF fund –

• National Credit and Commerce Bank Limited
• Jamuna Bank Limited
• Dhaka Bank Limited
• Eastern Bank Limited
• Dutch-Bangla Bank Limited
• Prime Finance & Investment Limited
• United Leasing Company Limited
• IDLC Finance Limited
• Uttara Finance & Investments Limited
• International Leasing & Financial Services Limited

So, for any syndication to avail the IPFF fund, the participating Financials Institutions have to be from of these 10 in the list.

Why IPFF

• It provides the PFIs a cheap source of fund. As a result clients can also get fund at a cheaper rate than market. The cost of normal fund for PFIs is high and the client has to pay a high interest rate. But under IPFF, the PFIs are receiving a very cheap source of fund; which can be onlent to the clients at a cheap rate. Under IPFF a client can avail fund at a rate as low as 10%.
• Local investors do not have access to long-term taka loan, typical infrastructure loan tenure is 5-7 years, whereas IPFF provides for 12-15 years.  Projects with belated return benefits from long tenure.
• The risk is borne totally by PFI, but PFI hedges this risk by obtaining 80% of debt financing through low-interest government rates.

Preference Share

Preference Share is part of the share capital of a company that ranks after secured creditors but before ordinary shareholders in the event of liquidation. Preference rights are defined in the articles of association of the relevant company but may relate to dividend, voting rights, or distribution of surplus assets.

EBL Structured Finance Unit offers Preference Share as an Equity Product and an alternate financing method. Previously mentioned products were mainly debt products – increasing the amount of debt a client is having. On the other hand, preference share increases the equity portion of the client. For the Financial Institutions, Preference Share is treated as “Investment” and not “Loan”.

Since this is treated as investment, the “Investors” get tax benefit by investing in preference share. In normal term loan, the Corporate Tax Rate for interest income is 42.5% where in for preference share, it is 20%. As a result, the banks can invest in preference share at a lower rate than Term Loan.

For example, let us assume, the Cost of Capital for a bank is 6%. In a financing, the bank would like to earn a net profit after tax of 4%.

To earn 4% margin in General Term Loan financing [after 42.5% Tax], the bank would have to charge the client

A margin : 4/(1-0..425) = 6.95%

Total Interest Rate to be Charged : 6% Cost of Capital + 6.95% Margin = 12.95%

Now, if the bank wants to earn the same net profit by investing in preference share, it would have to charge the client

A margin : 4/(1-0.2) = 5%

Total Dividend Rate to be Charged = 11%

So, the client is getting fund at much lower rate. The highlights of Preference Share are –

•  Has lesser claim than debt in case of liquidation.
• Not every Financial Institutions would want to invest in preference share because of lesser claim
• Tax Benefit for the Investors
• Can provide fund to client at a lower rate.
• Dividends are paid to lenders periodically and the full amount of principal is paid on maturity.

USD Term Loan from Foreign Sources

Structured Finance Unit is also maintaining liaison with some foreign investors. These foreign investors provide funding facility in Foreign Currency (USD) at a very cheap rate which is tagged with LIBOR (London Inter Bank Offering Rate).  These financings are in the form if Foreign Direct Investment (FDI). Unlike IPFF, these funds are not disbursed via any PFIs but directly to the client. Like IPFF, these investors also have different set criteria as to where to invest. Among the characteristics, the following are to be mentioned –

• Provide Fund mainly for Expansion Projects. When a client is expanding his current industry for bigger exposure or extending the line of production – they can be eligible under this criterion.
• Infrastructure type projects, can also be financed if found to be feasible.
• Prefers export based companies with good credit reports or projects that have direct involvement in business with foreign companies – like importing machineries or raw materials etc.
• A Maximum Funding of USD 8 million can be provided to one project. A project needing more funding has to avail the rest of the funding from other sources like general term loan etc.
• Interest Rate is as low as 5%

Loan From Offshore Unit

Offshore Banking Unit (OBU) is a separate business unit of a Bank, governed under the Rules and Guidelines of Bangladesh Bank It may accept deposits from other foreign banks, OBUs and non-resident persons / institutes; may provide loans in foreign currency, but do not accept deposits from (or make loans to) local parties. Not every bank or non bank financial institutions have Offshore Banking Units. This unit mainly helps the export based industries – where the loans are made in foreign currency and the repayment of loans are done in foreign currency. The banks having OBU has separate financials (balance sheet, income statements) for Offshore Unit which is kept completely separate from the normal financials. The characteristics for Offshore Units are –

• Each Bank has different limit loaded by Bangladesh Bank upto which the bank can provide funding facility to clients.
• The interest rate is tagged with LIBOR (and some margin) and the banks provide a very low interest rate to Bangladesh Bank for the foreign currency loan.
• Banks can Onlend this loan to export based industries. Bangladesh Bank regulates in which industry the financing can be made and where not.
• Total transaction is in foreign currency – from loan disbursement to repayment.

The Product Mix : Client Consideration

For product mixing, we have already discussed about the available products that SFU delivers –

• BDT Term Loan
• USD Term Loan from Foreign Investors
• Preference Share
• IPFF
• USD Term Loan from Offshore Banking Unit

For our analysis purpose, we will be assuming such a company, where major products are available. The following assumptions are made for the company –

• Small Power Plant Project
• Selected by a Government of Bangladesh authority through international competitive bidding procedures of The World Bank.
• Total Project Cost is BDT 2,000 Million
• Estimated time of project’s completion : November 2012
• Has agreement with Government to sell power for 10 years.

Considering the assumptions, the following products are available –

• IPFF
• General Term Loan
• Loan from Foreign Offshore Investors (FOI)

Product Mix : 1

This mix incorporates IPFF and General Term Loan. According to the conditions of IPFF, maximum of 70% would be debt financing while 30% from equity. And among the debt portion, 80% will be financed by IPFF while 20% has to be from General Term Loan financing.

Key Points

Key Points for the mix are –

• For this syndication deal, interests will be paid when accrued. Interest will be calculated quarterly on the outstanding principal balance.
• The whole Principal amount will be paid on number of equal installments. Principal payments will also be made quarterly. Principal Payment and Interest Payment will be made individually.
• It is assumed that the fund will be disbursed from January 15, 2010
• Since the project will be completed at the end of the Year 2012 therefore, it will generate cash for repayment after the project starts its operation. For this reason, the company will be offered a Grace Period for Principal Payment of not more than 3 years. This three years Grace Period is for IPFF portion only. A Grace period means, the company does not have to pay the principal installments for a certain period of time. It is assumed that, the first principal payment for IPFF portion will be made on 15 April 2013
• The Grace Period for General Term Loan principal payment is 1 year. The principal installment for General Term Loan will start from 15 April 2011
• The Grace period for Interest Payment (both IPFF and General Term Loan) is 1 year. Interest Payment for both facilities will start from 15 April 2011. These interest amounts will be calculated on the Outstanding Balances of 15 January 2011.
• Interest Rate for IPFF is 9% and for General Term Loan is 13%
• There will be different fees and expenses associated with closing this deal – Arranger Fees and Agency Fees (Fees of SFU for fund management), Legal Expenses and other miscellaneous expenses attached with this fund arranging.  Fees and other expenses will be assumed accordingly.

Treatment during Grace Period

During the grace period, the interests that will be accrued in every quarter, is not paid. This interest amount will be added to the principal outstanding balance – increasing the total outstanding. For next quarter, interests will be calculated for this increased amount. Thus, during the grace period interests are capitalized with principal. It increases the exposure the PFIs are taking.

For example, if the total BDT 1120 million is disbursed to the client, then during the grace period, the outstanding amount will be increasing in every quarter. Before the interest payment starts, the PFIs are taking an exposure of BDT 1227 Million (Approx). But the exposure can never be greater than the total Facility Amount. Therefore, the exposure can not exceed BDT 1120 Million (For IPFF)

Summary Cash Outflow of Mix 1

Apart from the interest payments, there are some other fees associated with the deal. For example, SFU charges some arranger fees for raising the fund for the client. Also, since the team will be working with the client for rest of the tenor, there will be an agency fees per year. Besides, for preparing the legal documents and agreements, there will be lawyer fees. Considering all these, the client is paying a total of BDT 2,173,745,439 in 10 years against the cash disbursement of 1,267,000,000.

Product Mix : 2

In this mix, there will be three products, IPFF, General Term Loan and FOI (Foreign Offshore Investors)

Key Points

This mix is similar to the Mix – 1; where IPFF and General Term Loan were disbursed in January 15, 2010. Grace Period, Interest Payment Mechanism, Dates will remain the same.

In Mix 1, Term Loan and IPFF both had a tenor of 10 years. In this Mix, FOI investment will be added at a later point to take over the IPFF portion only. Since it is already mentioned that, FOI invests upto USD 8 million so, it is needed to calculate from the repayment schedules to find out when the outstanding principal balance is below that amount.

Considering an approximate exchange rate of BDT 71/$, the approx. BDT amount of USD 8 million is 568,000,000. From the Repayment Schedule of 10 Years IPFF, it can be seen that, the outstanding balance of 15-Jul 2016 is just below that amount. But since fraction of a year cannot be considered, the FOI facility will be take over IPFF on 15-Jan-2017 for an amount of BDT 479,824,853

The General Term Loan schedule will remain unchanged and end on 15-Jan-2020.

The FOI facility will be for 3 years ending on the same date as the General Term Loan; not extending the actual facility tenor.

Interests and Principal payment will start from 15-April-2017. The payment and calculation mechanism will remain unchanged.

The interest rate for FOI facility is assumed to be 5.2%

There is a Front-End Fee associated with FOI Loan. This amount is roughly assumed to be BDT 5,400,000

Product Mix : 3

In this mix, there will be three products, IPFF, General Term Loan and FOI (Foreign Offshore Investors)

Key Points

This mix is similar to the Mix – 2; where IPFF and General Term Loan were disbursed in January 15, 2010 and IPFF loan were taken over by FOI loan in January 15, 2017 while General Term Loan was unchanged.

But in this mix, both the IPFF and General Term Loan will be taken over by FOI loan. In January 15, 2017; the combined outstanding is BDT 572,929,528 [from Table 6], which is just above the USD 8 million limit for FOI investment. So, the earliest time this take over can take place is 15 January 2018.

So, on 15 January 2018, after both IPFF and General Term Loan ran for 8 years, the remaining outstanding amount of BDT 381,953,019 will be taken over by FOI.

The FOI facility will be for 2 years ending on the same date as the previous Facilities would end if had not been taken over.

Interests and Principal payment for FOI will start from 15-April-2018. The payment and calculation mechanism will remain unchanged.

The interest rate for FOI facility is assumed to be 5.2%

Like before, the Front End Fee is roughly assumed to be BDT 5,400,000

Product Mix : 4

In this mix, there will be three products, IPFF, General Term Loan and FOI (Foreign Offshore Investors)

Key Points

IPFF and General Term Loan both has a 12 years life – ending in 15-Jan-2022

But Both the IPFF and General Term Loan will be taken over by FOI loan after 9 years. In January 15, 2019; the combined outstanding is BDT 449,373,660 will be taken over by FOI.

The FOI facility will run for further 3 years ending on the same date as the previous Facilities would end if had not been taken over (ie, January 15, 2022).

Interests and Principal payment for FOI will start from 15-April-2019. The payment and calculation mechanism will remain unchanged.

The interest rate for FOI facility is assumed to be 5.2% and the Front End Fee is roughly assumed to be BDT 5,400,000

Product Mix : Lenders Consideration

Earlier, 4 product mixes were analyzed to find out the cash outflow and effective interest rate for the client. Product mix is as important to the Lenders (Banks / NBFIs) as to the clients. By finding a good product mix, the lender can earn more profit and at the same time provide the clients with appropriate financing solution for their projects.

Before going into analysis, first the products have to be analyzed interms of profitability.

General Term Loan

• Margin is higher than IPFF due to high risk involved in the business. Normally 5~7% margins are kept.
• 1% Provision is needed to be kept on the outstanding amount as par Bangladesh Bank Guideline.
• Corporate Tax Rate is 42.5%.

IPFF

• Margin is much lower than general term loan, normally between 3~4%. This is because the cheaper source of fund and the project characteristics – being a PPP category project.
• PFIs are working on to get exemption from 1% provision on outstanding amount. As a result, their balance sheet will show slightly higher income.
• Corporate Tax Rate is 42.5%

Preference Share

• Margin is low – generally 3~5%
• Since this is a form of investment, no provisions are needed to keep.
• Tax rate is 20%

The Model

For this purpose, the earlier Model’s Mix A will be used with an additional Mix of Preference Share.

The Tenor of IPFF and General Term Loan will be as it was in Mix A – 10 Years. For analysis Purpose, Preference Share of different tenor will be taken to see the effect in income. For each year, the amount of preference share will be changed to see how it affects the net after tax income.

It is to be noted that, since Preference Share is an Equity Product, it will increase the equity portion of the Client. As a result, earlier when the client needed a BDT 1400 million debt financing will now need less debt with increase in the amount of preference share. The reduced debt amount will then be distributed to IPFF (80%) and Term Loan (20%)

The following assumptions are made –

• The Cost of Fund for IPFF is 6%. So, at 9% interest rate, the PFIs are having 3% margin.
• The Cost of f\Fund for General Term Loan is 8% – yielding a margin of 5%
• The Cost of Fund for Preference Share is the same as Term Loan as the Lender is using its own source of fund.

Conclusion

Among the 5 available products mentioned, the application of only 4 are analyzed and described. Loan from Offshore Banking Unit could not be Mixed with any other products as it can be offered to a very limited sets of clients. The clients who are eligible to avail this facility, will not need any other products mixed with it as OBU offers the lowest rate.

Apart from these, SFU also provides Bond – which is another equity product like Preference Share.

Findings

IPFF seems to be a lucrative product due to cost efficiency and lower risk. It is a good solution for both the client (for lower rate) and for the banks (for cheaper source and 1% provision exemption). But since not all projects are eligible, this product cannot support those industries.

Foreign Direct Investment through FOIs provide good solution with cheaper rate and covers broader selection criteria. But since it is a direct investment, banks cannot profit from it. Also, due to strong checks and analysis, many clients lastly fail to avail their fund.

Preference Share is another good alternative. But due to lesser claim than debt, only small amount of lenders would participate in a syndication like this. Also, since the clients are not getting amortizing effect and paying interest for the full amount, they may not choose to avail it.

No one mix can be said the best as every mix has positive side and negative side. Besides, matching with client’s cash flow, a bad mix may be found to be the only good solution for that particular client.