Africa Rail 2009 Workshop
Different Types of Financing for Mobile Equipment
23 June 2009
Greg McKenzie
Head of Asset Finance, Investment Banking Division, Rand Merchant Bank
Introduction
Conventional Debt Funding
Alternatives to Debt Funding
Financing Mechanisms
Export Credit Finance
Conclusion
Introduction
Asset Knowledge and
Expertise
Know your
environment, the
market and trends
Understand your
business and financial
strategy
•
how you want to finance
•
understand the risks and rewards
•
impact on your business and strategy
•
unprecedented leverage
•
Complex financial structures
•
Know what is happening to asset prices
•
Diversification was a previous corporate strategy
•
de-leveraging
Strictly Private and Confidential
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Introduction
Conventional Debt Funding
Alternatives to Debt Funding
Financing Mechanisms
Export Credit Finance
Conclusion
Conventional Debt Funding
What is it?
•
Where can you raise it?
Characteristics
Raising finance, pay back the principal, interest as a return.
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shareholder loans
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Banks
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Capital Markets
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Investors
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Third Party Funds
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Fixed or Floating
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Term
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Cash flow profile
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Covenants
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Convertibility
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Senior, Junior, Mezzanine
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Security
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Introduction
Conventional Debt Funding
Alternatives to Debt Funding
Financing Mechanisms
Export Credit Finance
Conclusion
Alternatives to Debt Financing
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share capital in a company, riskiest element of finance used to finance an asset
Equity Financing
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Equity in assets has previously been very low (aggressive)
Mezzanine financing
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unsecured debt, can also be convertible into equity
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Interest serviced, capital being repaid either out of the sale of the asset
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combination of both debt and equity.
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complex financing structures
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inflation linked instruments, derivatives, convertible instruments, perpetual instruments
Hybrid financing
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Introduction
Conventional Debt Funding
Alternatives to Debt Funding
Financing Mechanisms
Export Credit Finance
Conclusion
Financing Mechanisms
Single Bank
Multi-Bank
Underwriting /
Syndication
Club Loans and Third
Party Funds
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transaction is small in value
•
Not necessarily the norm for large exposures
•
funding of larger projects
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compromise on onerous requirements
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engage parties with small contributions
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appoint a lead arranger
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norm in the “previous” financial markets
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provide underwriting position but already have commitments
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secure large funding requirements with one party.
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group of financing parties get together
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Future funding can also be secured through same parties.
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Financing Mechanisms
Instalment sales
Recourse and Nonrecourse financing
Sale and Leaseback
Cash flow flexibility
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Financing is arranged for an underlying asset
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Similar to a loan profile
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asset funding can be arranged on a with recourse or without recourse
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financier / supplier with have further recourse to a company (borrower)
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financiers claim is limited to the asset
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popular mechanism to raise further funding
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sell a locomotive to a financier and then lease it back to you
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Funding is typically linked to the useful life of the asset
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negotiate realistic flexibility in your cash flows
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dependent on interest rates, business cash flows, asset values
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Financing Mechanisms
Finance Leases
Operating Leases
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repay the full capital cost
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Risks and rewards
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Accounted for on Balance Sheet of Lessee
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Rentals normally include a tax benefit
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assessed from a pre and post tax position.
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structured on a triple-net basis
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Ownership
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not a finance lease, then it is classified as an operating lease.
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off balance sheet
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do not repay in excess of 85% of the capital
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required to insure, repair and maintain.
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significant cash flow benefits.
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third parties are assuming asset risk
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acquire ownership by paying market value.
Strictly Private and Confidential
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Introduction
Conventional Debt Funding
Alternatives to Debt Funding
Financing Mechanisms
Export Credit Finance
Conclusion
Export Credit Financing – Export Credit Insurance Corporation (ECIC)
Objective
•
facilitate and encourage exports from South Africa
How does it achieve
this
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Political and Commercial risk cover
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long tenor cover
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Interest subsidy
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Attractive / comparable pricing.
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commercially viable.
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minimum of 50% SA content, scores at least 30 on the BEE score card.
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ECIC charges a premium on its facilities
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15% equity requirement.
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engage with ECIC
Requirements
Conclusion
Strictly Private and Confidential
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Introduction
Conventional Debt Funding
Alternatives to Debt Funding
Financing Mechanisms
Export Credit Finance
Conclusion
Conclusion
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circumstances and strategy
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effects of the various funding options
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Complexity
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interest and available liquidity
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informed decision
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