Term Loan and Project Appraisal
Term Loan and Project Appraisal
Term Loan and Project Appraisal
Fixed and Floating Charge (Oct 2002, Oct 2005)- lenders lend money to the borrower
against the security. A lender can have either a fixed or a floating charge on the securities.
In case of a fixed charge lender can recover his dues from a certain predecided asset only
in case of default by the borrower. On the other hand, a lender who has a floating charge
can recover his dues from a gamut of fixed asset. The lender who lends on a fixed asset
has to bear a higher risk than the one lending on a floating charge
Lien- is the right of retention. Right of retaining goods/securities until the debt due is
paid off as per the statutory agreement. The lien can be of 2 types: Particular lien and
General lien. Particular lien is the right to retain goods until the claim pertaining to these
goods is fully paid. On the other hand, general lien can be applied till all dues of the
claimant are paid.
Hypothecation- means securing repayment against movable property. In hypothecation
goods continue to remain in the possession of the owner. Generally, bank gives loan
against hypothecation of stock of raw materials. Although the lender does not have
physical possession of the goods. It has a right to sell the goods to realize the outstanding
loan.
Pledge- means securing repayment by transferring possession of goods in favor of lender.
Bank gives loan by keeping in possession of shares and debentures. The borrower who
offers security is called pawnor (plegor), while the lender is called
pawnee(pledgee).The lodging of goods by plegor to the pledgee is a kind of bailment.
Therefor e pledge creates some liabilities for the lender. It must take reasonable take
reasonable care of goods with it. The term reasonable care means care of goods pledged
with it. The term reasonable care means care which a prudent person would take to
protect its own property. He would be responsible for any loss or damage if he uses the
pleged goods for his own purposes. In case of non-repayment of the loans, the lender
enjoys the right to sell the goods.
Pari Passu (with equal pace) (April 2003): On equal footing or proportionately. Pari
Passu is equal rights over the asset by two lending institution. It means equally without
preference,e.g. a series of debentures may be issued subject to the condition that they are
to rank Pari Passu as a first charge on the property charged by the debentures.
Moratorium (Oct 2004): Financial institution may allow for a delay in the payment of
the principal installment to the borrowers. The period between the sanction of the loan
and first principal installment repayment is known as moratorium. The bank studies
profitability statement and cash flow projections prepared by borrowing unit and arrives
at a conclusion regarding as to length of moratorium period.
Re- Schedulement: In the event of a borrower not being able to pay their installments as
as per the repayment schedule, the financial institutions may restructure the repayment
schedule of the borrowers to prevent the term loan turning bad.
Flash report (April 2007): The Bank prepares flash report . The flash report is the guage
whether it is feasible to provide the loan to the applicant. It determines the feasibility of
the project by looking the financial, economical, technical, marketing, managerial
aspects. It determines the amount of money that bank will earn after providing loan. It
The financial ratios for appraisal of the project includes: (April 2005, OCT 2007)
1.
2.
3.
4.
During the operational stage, the project is monitored with the help of (i)
quarterly progress report on the project (ii) site inspection (iii) reports of nominee
directors (iv) comparison of performance Vs promise
The most important aspect of monitoring, of course, is the recovery of dues
represented by interest and prince
BOARD PAPER
What is difference between Fixed Charge and Floating Charge? (Oct. 2002)
What is Flash Report? (April 2007)
Explain primary and collateral security with examples. (April 2002)
Pan Passu Charge. (April 2003)
Technical Appraisal. (Oct. 2003)
What is margin money? (April 2004)
What is Term Loan? (Oct 2004)
What is Moratorium Period? (Oct 2004)
What are the matters coy red in a Marketing Appraisal of a Term Loan Appraisal? (April
2005)
What do you mean by economic appraisal of a Term Loan Project? (Oct 2005)
What is a charge? What is the difference between a Fixed and a Floating charge? (Oct.
2005)
Discuss any five ratios which will have bearing on sanction of loan by Bank of Baroda.
(Oct. 2007)
Discuss the financial ratios used for appraisal of Term Loan Proposals. (April 2005)
What are the important covenants of a Long Term Loan agreement? (Oct. 2005)
What are the contents of a Project Report? (April 2008)
What are the steps involved in the Project Financing? (Oct. 2008)
Sums and Case study
1) Calculate the important ratios for granting Terms Loans and give recommendations
from the given projections:
(Rs in millions)
Year
2006
2007
2008
2009
2010
EBIT
560
630
700
735
805
Additional Information
a) Tax Rate@30%
b) Principal amount of loan is repayable equally along with interest payable on
outstanding loans at the end of each year
c) Loan amount in consideration Rs.1750 million to be contracted @9%
d) Repayment tenure 5 years
e) Total Capital Investment in Project: Rs 2,500 million depreciable equally over 5
years
2) Prepare an amortization schedule from the following information assuming that the
Principal amount of loan is repayable equally along with interest payable on unpaid loans
Amount Borrowed
Rs 12 lakhs
3) Prepare an amortization schedule from the following information assuming that the
amount is an equated annual installment
Amount Borrowed
Rs 650000
Compound Annual Interest @10%
Repayment Period
8 years
4) Prepare an amortization schedule from the following information assuming that the
amount is an equated annual installment
Amount Borrowed
Rs 22000
Compound Annual Interest @12%
Repayment Period
6years
CASE STUDY
( OCT 2006)
5)Mr. Chawte, GM of FICOM, a Financial Institution, was in relaxed mood. Just thought
of having a walk around went out grabbed peanuts to munch. As he was about to throw
the wrapping paper in dust bin, he noticed something! The paper was a part of old flash
report of FICOMs appraisal process. Only partial data was visible. GM could make out
that the report was of Chemexperts Ltd of Nasik, a manufacturer of bulk drugs and whose
directors were IIT Gold Medalist. Total loan sanctioned was Rs1200 lacs@13% rate of
interest of reducing balance, against the total cost of the project at Rs.1850lacs. Principal
amount to be repaid in 24 equal quarterly installments. Loan sanctioned against the
security of Plant and Machinery, collateral security of RBI Bonds and Personal Guarantee
of the directors. You are required to list any eight items of the flash report
Solution:
Name of the Term Lending Financial Institution: FICOM.
Name of the Borrower: Chemexperts Ltd.
Set up at: Nasik.
Nature and Type of Business: Manufacturer of bulk drugs.
Loan Amount: Rs. 1,200 Lakhs.
Tenure of Loan: 6 years.
(i)
Market Appraisal:
(1) Manufacturing of bulk drugs which has a huge demand.
(ii) Technical Appraisal:
(1) Directors are IIT Gold Medalist therefore they have the required engineering
know-how.
(2) The site and location is at Nasik.
(iii) Financial Appraisal:
(iv)
(v)
Rs. In lacs
27
155
1604
24
10
20
Contingencies
67
Margin money for working capital
93
Total
2000
Means of finance
Promoters fund
Additional equity share capital
300
Internal cash accrual
500
Term loan
1200
Total
2000
k) The term lending institution has interest rate of 13% for similar risk project and loan is
repayable in 5 years with installment and interest repayable at the end of each yea
General Manager of the Term Lending Institution has requested you to
a) Prepare flash report from the point of view of the Term Lending Institution
b) Evaluate the project for profitability in the next 5 years
c) Calculate the Debt Service Coverage ratio for the Term Loans
Solution
(I) Facts:
Name of the Borrower: Jay Textiles Ltd.
Incorporated: in 1982
Present and Proposed Set up: at Silvassa
(I) Market Appraisal:
(1) Brand Leader in micro yarn.
(II) Technical Appraisal:
(1) Higher production due to yarn speed being faster due to latest generation
machine.
(2) Best quality due to the modernized machine.
Purpose of Term Loan: To increase the installed capacity by 3,600 IPA.
(3) Capacity: 6,000 TPA + 3,600 TPA = 9,600 TPA of Polyester Texturised Yam.
(III)
Financial Appraisal:
(1) 15% of the fund should be raised through issue of equity shares. 25% of the
required funds can be arranged through internal accurals and only 60% is required
as borrowings in the form of term loan. Since set-up in a backward area therefore
it enjoys a tax holiday. Income-tax holiday for 5 years.
(3) Term Loan under TUFS (Technology Upgradation Fund Scheme) Rs. 1,200 Lacs.
(4) Investment
Rs.
2,000 Lacs
Expected ROl @ 18%
Rs.
360 Lacs
Depreciation
Rs.
400 Lacs
Life 5 years
(5) GIIC, GSFC and SBI financed the present unit.
(IV)
Economic Appraisal:
(1) Economies of scale resulting in reduced cost of production.
(V) Managerial Appraisal:
(1) Promoters having an experience of more than 35 years in the textile field.
10
Term Loan
Rs.
1,200 Lacs
@ 13%
Year
Principal + Interest = Total Repayment
1
240 +
156.0 =
396.0
2
240 +
124.8 =
364.8
3
240 +
93.6 =
333.6
4
240 +
62.4 =
302.4
5
240 +
31.2 =
271.2
1,200 +
468 =
1,668
Debt-Service Coverage Ratio
PBIT
Investment
100
Investment ROI
100
1
Calculation of interest
Loan outstanding at the beginning
Less: Repayment yearly in 5 years
Loan outstanding at the end
Interest @ 13% on loan at beginning
Calculation of Profitability
PBIT
Less: Interest
Profit Before Tax
Less: Tax
Profit After Tax
Calculation of DSCR
Profit After Tax
Add: Depreciation
Interest
Funds Available for Repayment(A)
Repayments
Loan Repayment
Interest Repayment
Total Loan and
InterestRepayments(B)
Debt Service Coverage Ratio =
(A/B)
Total
1,200
240
960
156
960
240
720
124.8
720
240
480
93.6
480
240
240
62.4
240
240
0
31.2
N. A.
1,200
N. A.
468
360
156
204
0
204
360
124.8
235.2
0
235.2
360
93.6
266.4
0
266.4
360
62.4
297.6
0
297.6
360
31.2
328.8
0
328.8
1800
468
1,332
0
1,332
204
400
156
760
235.2
400
124.8
760
266.4
400
93.6
760
297.6
400
62.4
760
328.8
400
31.2
760
1,332
2,000
468
3,800
240
156
396
240
124.8
364.8
240
93.6
333.6
240
62.4
302.4
240
31.2
271.2
1,200
468
1,668
1.92
2.08
2.28
2.51
2.80
2.28
11
April 20037) You are approached by a Financial Institution to appraise the following
project
Name of the borrower: Blue Lines Chemicals Private Limited
Proposed loan is taken to set up a chemical unit for processing industrial waste into a
marketable product XYZ. The product has a demand for 50,000 Liters. The processing
costs include variable cost Rs.5 per Liter and fixed cost (excluding depreciation)
Rs.30,000 per year. Advertising expenses are also expected to be Rs.20,000 per year
XYZ can be sold at Rs10 per liter. Raw Material (industrial waste) is available at Re 1 per
liter. The capital cost of chemical units is Rs.7,50,000.
The company has applied for a loan of Rs.6,00,000 for term of 10 years that is over the
life of the asset. The promoters are young and doing the venture for the first time. The
promoters are unable to provide any collateral security for the loan except Personal
Guarantee of their parents
They have thought of this research after market research. The said research has stated the
risk factors about invasion of South Korea in Chemical Market and drastic reduction in
Selling Price of similar products
The above unit is a SSI unit and its average tax rate is 20%
Interest rate 12%
Loan is repayable equally in 10 annual installments along with interest at the end of each
year
You are required to
a) Give the cash flow generated by the above project for the first three years
b) Calculate the Debt Service Coverage Ratio for the above 3 years
c) Prepare Flash Report presenting the above information to the Financial Institution
Solution
Facts
Name of the Borrower
Proposed Loan
Tenure of Loan
Purpose
12
(3) The unit is a Small Scale Industrial (SSI) unit and therefore it enjoys a lower tax
rate of 20% along with other government incentives.
(IV) Economic Appraisal:
(1) The project involves making proper resource utilization in the nation.
(2) The project will result into reduction of waste and recycling it into usable product.
(V) Managerial Appraisal:
(1) Promoters are young, dynamic and highly qualified people.
(2) Promoters are doing the venture for the first time.
(I)
Observation and Analysis:
Rs. pa.
Projected Sales 50,000 litres Rs. 10 per litres
5,00,000
Less: Variable Costs:
Processing Costs:
Variable Cost Rs. 5 per litres 50,000 litres
2,50,000
Raw Material (Industrial Waste) Re. 1 per litres 50,000 litres
50,000
Less: Fixed Cost
Fixed Cost (Excluding Depreciation)
30,000
Advertising Expenses
20,000
Profit Before Depreciation, Interest and Tax
150,000
7,50,000
75,000
75,000
Years
(Rs.)
Calculation of Interest:
Loan outstanding at the beginning
Less: Repayment in 10 annual installments
Loan outstanding at the end
Interest 12% pa. on loan at beginning
Calculation of Cash Flows:
PBIT
Less: Interest
Profit Before Tax
Less: Tax @ 20%
Profit After Tax
Calculation of Debt Service Coverage Ratio:
Profit After Tax
Add: Depreciation
Interest
Funds Available for Repayment (A)
Repayments
Loan Repayment
Interest Payment
Total Loan and Interest Repayments (B)
Total
6,00,000
60,000
5,40,000
72000
5,40,000
60,000
4,80,000
64800
4,80,000
60,000
4,20,000
57,600
N. A.
1.80,000
N. A.
1,94400
75,000
72.000
3,000
600
2,400
75000
64.800
10,200
2,040
8,160
75,000
57,600
17,400
3,480
13,920
2,25,000
1,94,400
30,600
6,120
24,480
2,400
75,000
72,000
1,49,400
8,160
75,000
64,800
1,47,960
13,920
75,000
57,600
1,46,520
24,480
2,25,000
1,94,400
4,43,880
60,000
72,000
1,32,000
60,000
64.800
1,24,800
60,000
57,600
1,17,600
1,80.000
1,94,400
3,74,400
13
1.13
1.19
1.25
1.19
April 2006
8)Mr Anil Sane wishes to start a Manufacturing Unit from his ancestral factory premises.
He has Rs1,05,200 in his bank account. His parents have promised to gift him
Rs.3,50,000.He has estimated the project cost at Rs18,00,000 of which machinery will be
Rs15,25,000 and the remaining amount will be for furniture and fittings. The bank
finance is available to the extent of 80% of the project cost. He expects first years sales
at Rs40,00,000 with the annual increase of 20% every year over previous year. The cost
of sales will be 80%of sales. The rate of interest on loan will be 10% on reducing balance
method. The loan is repayable @ Rs300000 at the end of every year. He charges
depreciation @20% on his fixed assets under straight line and his other overheads for
three years are Rs240000, Rs300000 and Rs360000 per year respectively. You are
required to prepare the Projected Profit and Loss account and Projected Balance Sheet for
the first 3 years of operations to be presented to the bankers, assuming that the first year
is also a full year of 12 months activities and rate of income tax is flat @30%
b) Also find out any five plus points of the above loan proposal from Bankers Point of
view.
Solution
(1) Bank balance
Gift from parents
Owned funds available
(2)
Rs.
1,05,200
3,50,000
4,55,200
Total Project Cost
Rs.18 lacs
Bank Loan
Rs. 14.4 lacs
(3)
Machinery
Furniture and Fittings (Balance)
Project Cost
Rs.
15,25,000
2,75,000
18,00,000
20
80
100
14
T-0
Additional investment in working
capital will be required to the
extent of Rs. Given Amount
T-1
The project will require working
capital of Rs. Given Amount
during the year 1.
Balance at
the End
11,40,000
8,40,000
5,40,000
1
40,00,000
32,00,000
8,00,000
3,60,000
2,40,000
2,00,000
1,44,000
56,000
16,800
39,200
Years
2
48,00,000
38,40,000
9,60,000
3,60,000
3,00,000
3,00,000
1,14,000
1,86,000
55,800
1,30,200
Rs.
15,25000
3,05,000
2,75,000
55,000
Rs.
3
57,60,000
46,08,000
11,52,000
3,60,000
3,60,000
4,32,000
84,000
3,48,000
1,04,400
2,43,600
Rs.
12,20,000
2,20,000
14,40,000
99,200
15,39,200
Rs.
12,20,000
3,05,000
2,20,000
55,000
Rs.
9,15,000
1,65,000
15
Rs.
10,80,000
2,89,400
13,69,400
13,69,400
Balance Sheet Year 3
Liabilities
Rs.
Owned Funds
5,29,400
(+) NPAT
2,43,600
Bank Loan
8,40,000
() Repaid
3,00,000
Rs.
Assets
Rs.
Rs.
Fixed Assets:
7,73,000 Machinery
9,15,000
(-) 20% Depreciation
3,05,000
6,10,000
5,40,000 Furniture and Fittings
1,65,000
(-) 20% Depreciation
55,000
1,10,000
Not Fixed Assets
Working Capital
(Balancing Figure)
13,13,000
(b) 5 positive points from Bankers point of view:
(1) Fresh MBA: Young qualified person.
(2) Ancestral Factory Premises: No gestation time. Production can start immediately.
No charge on factory premises.
(3) Gift from parents of As. 3,50,000: No burden of repayment and no charge on
companys assets.
(4) Own bank balance As. 1,05,200. No repayment burden.
(5) 25.28% of the project cost can be contributed by him from his own bank balance
and gift from parents. This can be his margin money and only the balance amount
is required in the form of bank borrowings.
(6) Projected increase in sales every year by 20%.
(7) High Profitability Ratios [i.e. Gross Profit Ratio, Net Profit Ratio, etc.]
(8) Sound DSCR and Interest Coverage Ratios indicating loan instalment repayment
ability.
Comments:
The company will utilise the entire bank loan and enjoy the benefit of Trading on
Equity since cost of debt is lower than the profit percentage and the companys sales and
operating profits are on an increasing trend. If the company will utilise the entire owned
funds available and take the balance by way of bank loan then it wont be able to
maximise the returns on its owned funds and enjoy the benefit of Trading on Equity
and the Return on Net worth will be low in alt the three years.
OCT 2007 9) Mr. Hemendra Dane is carrying out retail business in electronic items.
After observing trade practices, he has decided to start a small scale manufacturing
unit to produce electrical fittings. His Balance Sheet as on 31 -3-2007, before starting
manufacturing activities, is as under:
Liabilities
Assets
Capital
5,55,500 Furniture
40,000
Computer
60,000
Investments
1,50,000
Fixed Deposits with bank
2,00,000
16
Rs.
7,20,000
5,93,000
13,13,000
1,05,500
Rs.
5,55,500
Rs. 5,55,500
In order to carry out new activity he will take factory premises on rental basis @ Rs.
10,000 p.m. from 1.9.2007 and from 1.4.2008 the rent will be Rs. 15,000 p.m. He is
confident of setting up manufacturing unit by 30.8.2007 and start manufacturing and
selling from 1st September 2007.
The cost of machineries will be Rs. 10,00,000 for which he will be approaching Bank of
Baroda for term loan of Ps. 8,00,000, balance being his own contribution. The loan
repayment will start from 1.4.2008, in the quarterly installment of Rs. 50,000 payable
on 1st April, 1st July, 1st October and 1st January every year.
He will have no income in financial year 2007-08 till setting up of the unit i.e. upto 308-2007. Thereafter he expects his Sales to be Rs. 80,000 p.m. from 1-9-2007 to 31-32008 and afterwards every year Rs. 18,00,000 with yearly increment of 10% over
previous year.
His cost structure will remain more or less unchanged upto 31-3-2010 and Cost break
up on Sales will be: Direct Cost @ 40%, Office Overheads 20%; Selling and Distribution
5%, Depreciation will be charged on all fixed assets @ 10% under W.D.V.(full years
depreciation even if the assets are used for a part of the year) and interest for first year
ending 31 -3-2008 will be Rs. 59,000 and thereafter it will be at Rs. 70,000, Rs. 54,000
and Rs. 43,000 respectively for subsequent years.
You are required to prepare Projected Statement of Profit and Loss for the
financial years 2007-08 08-09 and 2009-10.
Solution:
Projected Profit and Loss Statement
(All figures in Rupees)
Particulars
2007-08
2008-09
2009-10
Sales
5,60,000 18,00,000
19,80,000
Less: expenses:
Direct Cost (40% Sales)
2,24,000
7,20,000
7,92,000
Office Overheads (20% Sales)
1,12,000
3,60,000
3,96,000
Selling and Distribution Overheads (5% Sales)
28000
90,000
99,000
Factory Rent
70,000
1,80,000
1.80,000
PBDIT
1,26,000
4,50,000
5,13,000
Less: Depreciation on:
Furniture
4,000
3,600
3,240
Computer
6,000
5,400
4,860
Machinery
1,00,000
90,000
81,000
PAIT
16,000
3,51,000
4,23,900
Less: Interest on Term Loan
59,000
70,000
54,000
NPBT
(43,000)
2,81,000
3,69,900
Working Notes:
(1) Factory Rent:
01/09/200710 31/03/2008 (7 Months) @ Rs. 10,000 p.m. = Rs. 70,000
01/04/2008 to 31/03/2009 and 01/04/2009 to 31/03/2010(12 Months) @ Rs. 15,000
p.m. = Rs. 1,80,000 p.a.
(2) Sales:
17
18