Download Gearing Capital Funding

Gearing Capital Funding
First National Bank – a division of FirstRand Bank Limited.
An Authorised Financial Services and Credit Provider (NCRCP20).
First National Bank – a division of FirstRand Bank Limited.
An Authorised Financial Services and Credit Provider
(NCRCP20).
Outline of Presentation
1
2
Definitions of gearing
Capital funding:
What lenders look for
Funding Mechanisms
Loan funding
Project finance
Lease structures
Capital and Basle II
Rate Options
Market Trends
Definitions
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Gearing is a financial ratio that compares
owners equity to borrowed funds;
Gearing is a measure of financial leverage
demonstrating the degree to which an
entity’s activities are funded by owners
funds and creditors funds;
The higher the gearing the more risky the
entity is considered;
Acceptable level normally determined by
entities in the same industry.
Your budget process determines needs and
resources.
Capital requirements and funding
thereof
Three easy debt absorption indicators that
lenders use:
1. External Long Term Debt
Total Operating Income
< 50.00%
2. External interest paid
Total Operating Expenditure
< 7.50%
3. Net Cash Flow
Total External Interest Paid
> 1 times
Funding Mechanisms
OFF
Operating
Leases
ON
Financial
Leases
ON
Municipal
Bonds
OFF
Project
Finance
ON / OFF
Balance
Sheet
ON
Loan
Funding
Loan Funding
Characteristics of Term Debt:

Legal Title with Purchaser

Asset capitilised on balance sheet of Purchaser

Financing decision is based on balance sheet considerations

End of period – assets remain on the books of the Purchaser

Increases gearing
Financing decisions:

Deposit (if any)

Balloon payment (if any)

Frequency of cash flows

Level or escalating profile

Fixed vs. floating interest rate

Term of loan

Ownership

Accounting treatment

MFMA Compliance
Supplier
Purchaser/
Municipality
Cash
Purchase
Loan
Agreement
FirstRand/
INCA
Project Finance
Characteristics of Project Finance:

Forms the basic structure of most PPP’s

Projects pays for itself our of own cash flows

Financing decision is based on project viability considerations

End of period – assets could be transferred to municipalities, or stay separate.

Limited gearing
Financing decisions:

Actual structure

Term
Municipality

Risk margin

SLA’s

Final Ownership

Credit enhancement by muni

Compliance with MFMA and PPP Regulations
Project/
PPP
Services
Loan
Agreement
FirstRand/
INCA
Lease Structures
Characteristics of a Finance Lease:

Title and tax ownership vests with Lessor (INCA)

Lease is capitilised on balance sheet of Lessee

Capital allowances claimed by the Lessor

Financing decision is based on Lessee’s balance sheet requirements
Characteristics of an Operating Lease:

Title and tax ownership vests with Lessor (INCA)

Lease is not capitilised on balance sheet of Lessee – i.e. off-balance sheet
treatment

End-of-term asset risk is passed to Residual Value Investors with no
recourse to Municipality

Efficient funding at attractive rates, with no tax risk

Financing decision is based on the Lessee’s balance sheet constraints,
and/or operational budget requirements
FirstRand/
INCA
Supplier
Cash
Purchase
Lessee/
Municipality
Lease
Agreement
Capital and Basle II
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SARB requires banks to allocate some of their equity or
capital for each lending transactions.
Basle II requires banks to calculate the capital it has to
hold one each deal.
Lending transactions are analysed according to
transaction specific credit (and other) risk.
More capital must be allocated to more risky deals.
Pricing is partially determined by he amount of capital
required – the higher the capital the higher you have to
price to achieve the same ROE/ROC.
If the credit risk goes up (credit rating goes down), the
bank should hold more capital.
Basle II also requires banks to hold capital on
“committed, unutilised” facilities.
To ensure the bank earns a correct ROE on such facilities,
it has to charge commitment fees on these facilities.
Interest Rate Options

Fixed or Floating interest rates

Change floating to fixed interest rates

Rates can be locked for future draw downs

Interest rates are currently in an increasing
cycle
Market Trends
Interest Rate Swap Levels (%NACS)
12 Feb-08
13 Aug-07
1-year
11.32
10.23
2-year
10.85
10.16
3-year
10.48
10.02
5-year
10.15
9.81
7-year
9.93
9.59
10-year
9.76
9.30
Market Trends -Continued
CPIX – DEC 2007 : 8.6% YY
Forecast
Q1
08
-
8.9%
Q2
08
-
7.2%
Q3
08
-
6.9%
Q4
08
-
5.7%
Q5
09
-
5.4%
Market Trends -Continued
Swap yield curve continued to normalize.
Opportunity to take advantage of inverse yield curve is
diminishing
(Source RMB Financial Markets Research)
Theunis Fourie
Investment Specialist
011 371 8810
[email protected]
Koos Heymans
Portfolio Management
011 202 2218
[email protected]