Financing of Power Projects

Sunil Gupta
Dy. General Manager (Int. Fin) NTPC

PROJECT COST
NTPC adopts packaging concept to obtain optimum price. Resorts to competitive bidding for attaining least cost International Competitive Bidding (ICB) for major packages
earlier approval of packages was required from administrative ministry

Domestic Commercial Bidding (DCB) for other packages

PROJECT COSTS STRUCTURE

Cost of Thermal Power Project (indicative)
Direct Capital Outlay Working Capital Margin & Start-up Costs Interest During Construction & Fin. Charges Establishment & Consultancy Physical Contingency 72 % 3% 16% 6% 3%

POWER PROJECT CHARACTERSTICS

Long gestation period- 4 to 8 years Long Operating life- 25 to 35 years High Construction Risk on the project company High off take risk in case of Merchant plants Low credit of offtakers- Indian scenario

POWER PROJECT -FINANCING

Project Financing Balance Sheet Financing

FINANCING A POWER PROJECT - Issues

Optimal financing mix (Debt Equity Ratio) Debt
Domestic Market International Market

Instruments of Debt Managing Fx variations Equity

Fresh Equity from Market Internal Resources

FINANCING MIX
Power projects traditionally had DE ratio of 1:1 Private power policy announced in 1991 permitted project funding with maximum D/E of 80:20. CERC Tariff Regulation 2004 stipulates a maximum Debt Equity Ratio of 70:30
CERC tariff regulation effectively reduces generation of Internal resources which could be used as equity Leading to increased reliance on debt

NTPC also switched over to Debt Equity ratio 70:30 from earlier 50:50 even before advent of CERC.

OPTIMAL DEBT EQUITY RATIO

Optimal debt equity ratio depends on
Debt Servicing capability of the organisation / project
Debt Service coverage ratio (DSCR) Interest coverage ratio (ICR)

Depth of loan market Exposure norms Cost of borrowed capital compared to cost of Equity Regulatory Requirement Internal resources generation & requirement
Key to capacity addition Enables leveraged borrowings Increases confidence in lenders \ Investor Earning potential & stability in cash flows under regulatory tariff environment

EQUITY
Fresh Equity- IPO/FPO
ADRs/GDRs

Promoters Contribution Convertible Bonds/ Preference Shares/ FCCBs Internal Accruals

Dividend policy

COST OF EQUITY & LEVERAGING

Principally cost of Equity is the opportunity cost of deployment of funds to equally risky investment. It is generally higher than cost of Debt funds being riskier investment; Leveraging refers to use of low cost debt funds to provide increased returns to high cost Equity participants.

SOURCES OF DEBT: AVAILABILITY & CONSTRAINTS

SOURCE SELECTION-CRITERIA
Selection of instrument of borrowings will depend upon availability, Regulation, Exposure norms, cost of funds and maturities needed Maturities to match with cash flows
Present regulatory environment in nascent stage thus un-predictive

Long term loans with moratorium period of four years or more preferred. Risk Mitigation
Exchange Rate Risk Interest Rate Risk

COMPARISON OF TERM LOAN & BONDS

Bond have Easy Transferability , hence preferred by Investors Bonds are secured hence preferred by the Investors. Corporate Bonds are bench marked with G.Sec of comparable maturity Spread over G sec depending on market conditions. Exchange Traded bonds indicate the existing yields

COMPARISON OF TERM LOAN & BONDS Contd

But Bond Issue has to be timed with requirement of funds where as term loan can be drawn in small lots requires rating by CRISIL/ICRA/CARE requires creation of Charge over Assets upto 1.25 times involves high administrative work w.r.t. Trustee agreement, Transfers etc. are costly in case of Public Issues ultimately fall into exposure issues when subscribed by Banks etc.

RATE OF INTEREST
Factors effecting interest rate decision
The rate of interest on any debt instrument is determined by demand and supply mechanism. The market is indifferent to the option of interest rate i.e. floating or fixed since there are a large number of players for both these options. The fixed rate quotes are available on Reuters screen etc. for different maturities of the loan with respect to LIBOR which set once in a day at 1100 hours GMT in London. Any lending decision is based on two factors
(a) Credit risk Specific to a corporate and depends on debt rating, capital structure, etc. (b) Liquidity risk Higher the tenure higher will be liquidity risk.

FIXED vs FLOATING INTEREST RATE

Floating Rate of Interest
Interest Rate subject to change for every interest period based on the benchmark. A fixed spread is added to the benchmark rate to arrive at effective rate of interest which remains fixed for a interest period. A floating rate of interest is cheaper typically by about 1.80 to 2.25% per annum (for a 7 year term).

Advantages of floating rate of interest

Interest Rates are market aligned Lenders are most comfortable since their risk is eliminated with regard to interest rate fluctuations due to demand and supply in the market. Efficient way of borrowing in a declining interest rate scenario.

FIXED vs FLOATING INTEREST RATE

Fixed Rate Loans
The rate of interest is decided upfront i.e. at the time of signing of the Loan. In case of Export Credit, CIRR is locked at the time of signing the Loan Agreement. In case of Syndicated Loans, the rate is agreed two days before drawdown is made. In case of Bonds margin over UST decided thru Book-building

Advantages of fixed rate of interest

Eliminates interest rate risk for borrowers. Such a borrowing is possible only if there is an underlying liability i.e. where draw-down is of a fixed size and is known to occur on a specific date(s) for loans to fund capex it is difficult to predict with certainty the exact amounts and exact dates of draw-downs so that loans can undertake the swaps. Funding on fixed rate loans is challenging for loans having many draw-downs.

DOMESTIC DEBT EXPOSURE ISSUES

PRESENT EXPOSURE NORMS OF ALL INDIA FINANCIAL INSTITUTIONS (AIFIs) & BANKS
Exposure to a particular borrower are presently fixed at 15% of the lenders Capital Funds. For companies in infrastructure sector, limit is 20% of lenders Capital Funds. Group is 50% of the lenders Capital Funds incl. Infrastructure Maximum exposure can be enhanced by 5%exceptional circumstances-Board Approval

DEBT - POSSIBLE LT SOURCES IN DOMESTIC MARKET

Indian Capital Market (Direct Market Borrowing)
issue of bonds/debentures
Private Placement: which are subscribed by Provident Fund, Pension Fund, Gratuity Fund, Insurance Cos, Regional Rural Banks, Foreign Banks, Corporates, Non-profitable institutions, Mutual Funds and Commercial Banks Public Issues

Term Loans from the Banks & FIs Term Loans from LIC, GIC The Loan could be
Secured Unsecured

MEETING FUNDS REQUIREMENT DOMESTIC V FOREIGN

Domestic debt preferred as revenues in INR Exposure limits of domestic lenders Profile building Preserving precious on- tap lines Available tenure of debt. Rates in international market Exchange Rate Variation Liquidity in Domestic & International Markets

ADVANTAGES OF RUPEE BORROWINGS

Cost Competitive Free from Exchange Fluctuations Generally Higher Credit Ratings leading to reduced cost Known to the lenders- less due diligence With Basel II norms coming into forcebetter quality credit preferred Natural Hedge as INR revenue

LIMITATIONS OF DOMESTIC BORROWINGS

Exposure norms limit the market- reduced availability of funds despite being preferred borrower Banks which have large quantity of funds at their disposal can not generally meet the tenor requirement of the power projects (in regulatory context) Undeveloped pension fund market unlike US Security issues in case of Bonds despite highest rating

WHY INTERNATIONAL FINANCING

Fund availability subject to sectoral ceilings and existing exposures are also to be kept in mind. Issue of creating security @ 1.25 times of the loan amount is also there in case of Bonds. Availability of cheap funds in International Markets-6m- Libor for USD 2.71 % p.a., Foreign investors have started viewing India favorably. Investors are now willing to lend / invest in good Indian Corporates. To meet the cost of imports

Credit Rating

CREDIT RATING
Why Rating
Each investor can not go into the details of management, accounts, prospects, risk factors etc.; A holistic view generally acceptable amongst lenders; Legal/customary requirement in certain casesDomestic Bonds/USPP/Domestic Loans; Makes credit distinction- to some extent Provides comfort to the lenders

CREDIT RATING
Domestic Credit Rating Agencies
The credit rating information services of India ltd. (CRISIL) Investor credit rating agency (ICRA) CARE Fitch

International Credit Rating Agencies

Standard & Poors (S&P) Moodys Investor Service Ltd. (Moodys) Fitch Ratings

RATING PROCESS

Preliminary meeting Analyze material- prepare initial write-up Detail information package Meeting/ Discussion/Formal presentation Rating committee meeting Disclosure of Preliminary rating Appeal process Issue of final rating Rating rationale/ Full credit report Monitoring / Review / Surveillance

RATING CRITERIA
Sovereign risk
Political climate Credit worthiness of country Govt. Policies

Industry Risk
Demand supply Regulatory restriction

Organisation risk
Long term planning and Strategic direction Quality of senior management Market share & competitive position Operating position Financial requirement Capital expenditure management Employee relation Liquidity concerns

CREDIT RATING Contd

Rating Definitions
AAA

Highest Rating Capacity to meet financial obligation extremely strong AA Very Strong A Still Strong BBB Exhibit adequate protection parameters BB/B Speculative CCC/C Speculative D Payment Default, filing of bankruptcy petition Plus(+) or Minus(-) sign is added to show relative standing with in the major rating categories

SOVEREIGN RATING Long Term Issuer FC Credit Rating

AGENCY
S&P MOODYS FITCH

INDIA
BBB-/Stable Baa3 / Stable BBB-/Stable

NTPC
BBB-/Stable Not Rated BBB-/Stable

REQUIREMENT OF CREDIT RATING

Mandatory for:
Rupee Bonds US Yankee bonds US 144a offerings Sec- registered bonds
Optional for: Euro bonds Samurai bonds Dragon bonds US private placements Syndicated loans

FUND RAISING -NTPC Perspective

MAJOR TERMS & CONDITIONS OF RUPEE TERM LOANS- NTPC Perspective

Tenor - 10 years door to door Drawl over 3-4 years Rate of interest negotiable based on prevalent market conditions and individual Banks PLR / MTLR/SBAR Financial Covenants
The ratio of total liabilities to net worth will not at any time exceed 2:1; and The ratio of EBITDA to interest expenses shall not at any time be less than 1.75:1

Prepayment possible with notice generally without prepayment fee or breakage cost

Covenants Continued
Negative Lien on the Assets. Restriction of sale, transfer or otherwise disposal of assets in excess of 25% of book value of last annual accounts; Restriction on change of business Restrictions on issue of bonds in excess of prescribed amount;

What is Negative Lien ?

A Commitment to the Lender for not doing certain acts without prior written consent of the Borrower eg.
Except the charges and encumbrances already created on the assets (movable / immovable) by the Borrower for availing financial assistance, as disclosed in writing as of date by the Borrower, the Borrower shall not without prior written consent of the Bank: create or permit to arise or subsist any mortgage, charge, pledge, lien encumbrance or security interest whatsoever over all or any of its undertaking, assets present or future (including un-called capital) of the Borrower as security for any obligations now or hereafter existing in favour of any person, however, subject to following exceptions: The Borrower may create security interests on its assets to secure the issue of its secured long term bonds with a maturity in excess of one year. The Borrower may create security interest on its assets to secure any rupee loan, the repayment of which is due within 12 months or less from the date of the said loan including working capital financing and The Borrower may create security interest on its assets to secure any foreign currency borrowings from multilateral and bilateral agencies like IBRD, JBIC and KFW etc. Sell, transfer or otherwise dispose of, by one or more transactions or series of transactions (whether related or not) the whole or any substantial part of its fixed assets, the book value of which is 25% or more of the book value as shown in the latest audited financial statements of the Borrower.

Recent Rupee loan- PFC

Amount Rs 100 Bn- largest single loan for both organisations Interest Rate 3 Yr AAA Bond yield + Spread Moratorium 4.5 Yrs from first drawl Tenor- 16 years Door-to-Door Drawl over 4 years

SOURCES OF FINANCE UPTO 31/03/2008

INR/MLN

Sources of Funds
1. - Equity Share Capital-GOI - Loan from GOI - Grant-in-Aid
Bonds issued in domestic market Loans from domestic financial Inst. Foreign Loans Private Equity Internal Resources & Share Premium

Amount
78126 36730 33
79806 174501 154790 4329 22860

2. 3. 4. 5. 6.

Total Investment

756913

MULTILATERAL AND BILATERAL FUNDING IN NTPC

Italian 1% Saudi 1% West German 9% UK 2% French 3% Japan 24%

Russian 9%

World Bank 51%

Total Resources raised INR 106.227 Billion

(Routed through Govt. of India as Equity / Loans)

E C B as on 31-03-2008
K-Exim 0.06 Euro Bond 7% Swedish 0.01 MTN 0.07 ADB II 0.07

Total Mobilisation Rs.165.55 Billion

JBIC-B 0.00 NIB 0.00 KfW 0.01 SCMB 11%

JBIC 21%

BTCO 2%

ADB 5% WORLD BANK 16% EXIM,JAPAN 13%

IBJ 10%

BELGIAN 1%

FRENCH 9%

SBI 5%

MEMORANDUM OF ASSOCIATION
- Borrowing power conferred upon the company under objects incidental or ancillary to the attainment of the main object - Borrowing Power are stated as to borrow money or to receive money or deposits for the purpose of financing the business of the company either with security or mortgage or other security charged on the undertaking on all or any of the assets of the company including uncalled capital and to increase, reduce or pay off any such securities.

ARTICLES OF ASSOCIATION
- Subject to the provisions of Section 58A, 292 and 293 of the Companies Act, and Government Guidelines issued from time to time, the Board may be means of resolution passed at meetings of the Board from time to time accept deposits or borrow and/or secure the payment of any sum or sums of money for the purpose of the Company.

COMPANIES ACT 1956 SECTION 292

The Board of Directors of a company shall exercise the following powers on behalf of the company, and it shall do so only by means of resolutions passed at meetings of the Board :The power to make calls on shareholders in respect of money unpaid on their shares ; The bower to issue debentures ; The power to borrower moneys otherwise than on debentures ; The power to invest the funds of the company ; and The power to make loans.

a) b) c) d) e)

COMPANIES ACT 1956 SECTION 293

As per section 293 of the Companies Act, the company can borrow any amount which does not exceed the aggregate of the paid up capital of the company and its free reserves (free reserves means reserves not set apart for any specific purposes). Any borrowing which exceeds the above limit can be made only with the consent of such company in general meeting.

INTERNATIONAL FINANCING

WHAT IS INTERNATIONAL FINANCING

Sourcing of funds from international markets Management of funds so sourced Servicing of external debt/equity Exchange risk management

SOME COMMONLY USED JARGONS

LIBOR- London Inter Bank Offer Rate MIBOR- Mumbai Inter bank Offer Rate G Sec- Government Securities Direct Quote- A quote of One unit of Foreign Currency in Domestic Currency eg 1 Usd = INR 45 UST- Treasury Rate of US Securities Cross Rates- Quote of one Foreign Currency in another Foreign currency generally USD

SOME COMMONLY USED JARGONS Contd.

Arbitrage- an opportunity to buy at one place or time and sell at another place or time with possibility of profit and no possibility of loss. Spread- the additional amount (generally in %) charged by the lender/seller over the Benchmark Rate Basis Points- 100th part of a Percentage i.e. 1% = 100 Basis Points SWIFT- Society for Worldwide Inter-bank Financial Telecommunication

SOME COMMONLY USED JARGONS Contd.

Euro Bonds- Bonds issued by a non-resident in a currency other than domestic currency e.g. $ bonds issued by NTPC in Europe and Asia. Spot- Forex Quotation for two business days hence TOM- Forex Quotations for next business Day Forward- Forex Quotation for any day beyond two business days.

SOME COMMONLY USED JARGONS Contd.

European Quote- Number of FC units per $ American Quote- No. of $ for 1 Unit of FC CIRR- Commercial Interest Reference Rate used by OECD member countries of ECA

RAISING DEBT FROM INTERNATIONAL MARKET

SOURCES
Syndicated Loans Export Credit Bonds Multilateral and Bilateral funds Development Banks-through GOI

SYNDICATED LOANS
A syndicated loan deal generally consists of :
An arranger or lead manager, generally one (or more) banks chosen by the borrower Members of the syndicate or consortium The remaining syndicate, or consortium, of banks generally simply provide funds for the loan. A syndicate, or consortium, of banks act as a single financier, based on a single loan agreement. The participating banks split and allocate the risks connected with the loan.
In case of disputes, all banks must concur with the majority vote

SYNDICATED LOANS
SALIENT FEATURES Easy to raise
Little pre-marketing requirement Less formalities Can be arranged within 6-8 weeks Interest rate

Fixed Floating
Rating not required Lowest margin Tenure of loan and Amount- Limiting factors

SYNDICATED LOANS
CHARACTERSTICS Contd..
Agencies involved
Arranger(s) Lenders Lenders Agent Process Agent

Formalities of prepayment
Prepayment charges Notice Prepayment in part or full

Covenants Events of default including cross default

SYNDICATED LOANS
CHARACTERSTICS Contd..
Material Adverse changes
Changes in business conditions operation, performance of borrowers, syndication market, financial / capital market that materially impairs syndication of the facility.

Taxes
All payment free and clear of all present & future taxes, duties of whatever nature. In case of any such deduction , borrower will suitably gross up the payment in such a manner as if no deduction levied.

SYNDICATED LOANS
CHARACTERSTICS Contd..
NEGATIVE LIEN (PLEDGE)
Borrower shall not create any security interest over any of its present of future revenues or assets for any loan/ indebtedness. With the exception Working capital needs Long Term bond of Maturity more than 1 year Multilateral Loans may or may not

CLEAR MARKET
From the date of the acceptance of the offer until the date of

the signing of the facility agreement no borrowing or guarantee facilities shall be discussed, syndicated or privately placed by the borrower where the prior consent of the lead arranger , which would have the effect of competing with or adversely affecting the successful conclusion of the proposed facility.

SYNDICATED LOANS contd

COVENANTS IN LOAN AGREEMENT
FINANCIAL RATIOS Total liability to total net worth Ratio of EBITDA to Interest Expenses Debt Service Coverage Ratio Months Debtors MANAGEMENT COVENANT Company A will continue to have management control over the Borrower during the life of the Facility SHAREHOLDER COVENANT Company A/GoI will hold 51 % more of the issued or paid up capital of the Borrower.

SYNDICATED LOANS contd

EVENTS OF DEFAULT
Failure to pay under the facility (with in __Business Day) Unable to pay debts (Cross Defaults) in excess of ceiling amount To any creditors / lenders Commencement of negotiation for re-scheduling Corporate action for Winding up Reorganisation Legal proceeding for winding up (which proceeding are not frivolous or vexatious) material litigation Acquisition / Nationalisation Change of Business

SYNDICATED LOANS contd

Material Adverse Change in the financial condition of the borrower Unlawfulness Incorrect Representation Failure or Repudiation : Borrower fails to perform and observe any of its obligations under the loan agreement

RESULTS OF OCCURRENCE OF EVENT OF DEFAULTS

No further drawing under the loan agreement Loan and all interest accrued become immediately payable Reimburse all losses and expenses including loss of profit consequent to event of default.

ADVANTAGES TO THE BORROWER

May negotiate a higher total sum of borrowed funds It is not necessary to enter personal negotiations with each and every one of the financing banks The terms and conditions agreed in the syndicated loan agreement equally bind all of the participating banks.

ADVANTAGES TO THE LENDERS

Banks split, or syndicate their large loans with each other to avoid a single large loss. Participating banks are usually entitled to transfer their proportion of the loan to a third party without the borrower's consent. Quite often, banks that participate in syndicated deals later sell their interest in those loans to other investors. The market for loan participation is so brisk that borrowers sometimes do not know exactly which bank is financing them White & Case

EXPORT CREDIT
Financing for goods originating from the respective countries and in some cases, for local/third country goods Usually upto 85% of the value of goods imported, individual agencies have different limits Funds are usually provided by a commercial bank which gets guarantee for political and/or commercial risk from the export credit guarantee agency Sometimes ECA also provide finances

EXPORT CREDIT ...CONTD.

Loans are available for tenors ranging from 5-12 years and repayment are in semi-annual installments Interest rates are usually fixed and are determined on the date of submission clear proposal to ECA
Minimum subsidized interest rates (Commercial Interest Reference Rates-CIRRs) are applicable

Interest rates are notified as OECD consensus rates. OECD is Organisation for Economic Cooperation and Development and has 30 members.

EXPORT CREDIT .CONTD.

Interest rates are effective from 15th of every month; All the OECD member lend at the rate and tenure notified by OECD. OECD lending guidelines pay special attention to Environment and compliance with Environment guidelines. Loans are generally to be guaranteed by the government or the borrowers country-not in case of NTPC. Expenses include guarantee fee payable to the export credit guarantee agency, commitment fee, agency fee and other out of pocket expenses.

EXPORT CREDIT
EC AGENCIES
ECA ECGD Coface Hermese SACE OND US Exim Korea Switzerland JBIC & MITI Country U.K France Germany Italy Belgium USA K-Exim SERV Japan

Govt. agencies that exist to support the export from each OECD country. They guarantee bank finance, supplier Finance, provide direct loans, provide political risk insurance ECA work within an established set of guidelines called the OECD consensus (April 1978) Arrangement places limitation on the term of export credit Minimum premium benchmark Minimum cash payment Maximum repayment Minimum interest rates

EXPORT CREDIT (OECD CONSENSUS)

Consensus is the basis for the actions of ECAs.
An agreement for level playing field. Consensus rules relate to both terms of covers and terms of funding Borrower countries are classified under two categories Category - I World Bank graduation list e.g. 1996 - GNP per capita labour $5435 Category II -other than Category I An ECA can support finance or guarantee maximum of 85% of the export content Minimum of 15% of contract to be paid before the use of the ECA facility Exporter have to win contract on product quality and price competitiveness and not on beneficial finance terms Interest can be capitalized (drawn out of loan proceeds) during drawdown period

EXPORT CREDIT Contd

Minimum interest rate: CIRR (Commercial Interest Reference Rate) is declared in different currencies.
It is based on Govt. bonds yields of different durations A fixed margin of 100 bp is added As available to first class domestic borrowers Exception is Yen CIRR i.e. LTPR 20 bp

Interest Rate - Fixed (CIRR based) or Floating (LIBOR based)

Also possible to convert to fixed rate after disbursement period or once draw-downs accumulates to agreed level.

EXPORT CREDIT Contd

Repayment terms
for category I
5 years to 8 years 10 years (for power Cos. 12 Years)

For category II

Insurance
Sovereign credit risk Country credit risk- whether a country will service its external debt political event, legal provision. Participant to charge minimum premium bench marks

INSURANCE COVER FROM ECA - ADVANTAGES

Protects lenders against non payment caused by War, civil war, Rebellion Prevention or delay in payment of external debt Cancellation or non renewal of license Failure of Last Govt. to honour written undertaking

EXPORT CREDIT COST

Application fees (25000 USD) Commitment fee
0.125% to 0.50% p.a.

Insurance premium
Depends on tenure, type of borrower country,% age of cover, drawdown period etc., typically 3.00% to 6.00%

Presently CIRR rates are greater than 8.5 years USD 4.19% Euro 5.00% JPY 2.14%

EXPORT CREDIT NTPCs RECENT EXPERIENCE

Export Import Bank of Korea (KEXIM)
Facility amount USD 354.25 million Maturity 16 Years (Repayment in 12 years) Rate of Interest (CIRR) 4.31% p.a. Exposure Premium Management Fee Arrangement Fee All- in- Cost 5.06%

Swedish Export Credit (EKN)

Facility amount USD 41.55 million Maturity 7 Years (Repayment in 5 years) Rate of Interest 3.851% p.a. Insurance Premium Arrangement Fee All- in- Cost 4.736%

INTERNATIONAL BOND ISSUE : EURO BONDS

Term Euro is misleading and not restricted to European investors Bond issued internationally outside home countrys market in own or different currency. e.g. a firm issuing yen bonds outside Japan e.g. - a US firm issuing dollar bonds outside US. Long tenure possible up to 30 years even perpetual Huge depth of market Primary market for first issue of securities Secondary market trading after issue Public issue eg. 144A Private placement- Recent product USPP

INTERNATIONAL BOND ISSUE : EURO BONDS CONTD

Book building Fixed coupon Vs Zero Coupon (Deep Discount) Section 144 A issue Credit rating not essential- however good rating enhance the success of issue Listing either at London, Luxemburg or Singapore stock exchange A prospectus / offering circular is prepared by independent legal adviser containing Details of issue Financial position of the issuer (4 year data) Purpose of the issue Terms and Conditions of the issue Unsecured do not require borrower to create pledge

NEGATIVE PLEDGE
Borrower agrees not to create charge on Assets which are unencumbered on the date of signing of Loan Agreement without the permission of lenders. Borrower may negotiate for certain exclusions depending upon the terms of agreement such as: No requirement of seeking permission if charge is to be created on Assets in tune with requirement of trade credits/working capital requirement No permission required for creating charge on Assets for borrowing in INR Generally no permission required for creating charge on Assets for borrowings from Multilateral Agencies.

EVENTS OF DEFAULT
Non payment Misrepresentation Cross default breach Insolvency Repudiation Material Adverse Change( MAC) Illegality Change in Business

RESULTS OF OCCURRENCE OF EVENTS OF DEFAULTS

No further drawing under the loan agreement Loan and all interest accrued become immediately payable Reimburse all losses and expenses including loss of profit consequent of event of default. Other Loans may also become payableCascading effect

CURRENCY MOVEMENT FOR LAST 5 YEARS

EXCHANGE RATE DATE
Mar 07 Mar 06 Mar 05 Mar 04 Mar 03

% CHANGE IN Y to Y

USD
40.19
43.86 44.95 44.07 44.31

JPY
0.4037
0.3731 0.3837 0.4113 0.4238

EURO USD
63.60
58.66 54.84 56.98 54.28

JPY
8%
-2.76% -6.71% -2.95% 5.92%

EURO
8.42%
6.97% -3.76% 4.97% 4.75%

-8.37%
-2.42% 2.00% -0.54% -7.36%

Mar 02

47.83

0.4001

51.82

NTPC Context -Recent Experiences

ADB II- CFS

First Loan by ADB with A & B Loan Structure For entire loan, ADB is Lender of Record First time tapped Taiwanese Capital Market 30% contribution by 12 Banks Exempt from Withholding and Service Tax Stress on Environmental and Social aspects No Sovereign Guarantee

JBIC-Syndicated Loan
Loan Guaranteed by JBIC-Principal Four Japanese Banks participated Total amount of USD 380 mn. Exempt from Withholding Tax Stress on Environmental aspects No Sovereign Guarantee

MEDIUM TERM NOTE (MTN) PROGRAM

Established in February 2006

MTN PROGRAM
An EMTN program is essentially a documentation platform which provide the issuer an opportunity to enter frequently, efficiently and economically the international debt capital market: Can be used for large and small issuances; Multicurrency and Structured notes Any number of times with the cap on the aggregate amount Investor may initiate issuance- Reverse Enquiry

PROS OF A MTN
Cost efficient if used regularly Allows easy and timely access Once set-up minimum additional Documentation Facilitates both private and public placements Advantage of Reverse Enquiries Broadens Investor Base Reverse Enquiries

LIMITATIONS OF A MTN
Expensive if not used; Requires Annual update thus cost Loss of goodwill if not used and surrendered

DOCUMENTATION
Offering Circular Program Agreement Issuing and Paying Agency Agreement Trust Deed Agency Agreement Listing Application Subscription Agreement Pricing Supplement Legal Opinion Auditors Comfort Letters

ESTABLISHMENT PROCESS
Internal Management Approval RBI Approval (in case of Approval Route else in-principle approval is required) Appointment for Arranger(s) Appointment of various intermediaries
International legal counsel- Lender and Borrower Indian Legal Counsel- Lender and Borrower Trustee and Agent Rating Agencies Process Agent Stock Exchange

ESTABLISHMENT-CONTD.
Commencement of Due Diligence with legal counsels Obtaining schedule for Road Shows and Signing from JBRs Finalising the Offering Circular, Trust Deed, Agency Agreement, Program Agreement, Subscription Agreement, Signing Memorandum, Closing Memorandum, Comfort Letters

ESTABLISHMENT-CONTD.
Appointment of NTPC representatives for :
Liasoning with Stock Exchange; Operating Bank Account

Opening of Bank Account-getting SWIFT code etc.; Obtaining all documents relating to MTN establishment; Signing of MTN Documents; Finalising the Road show presentation including preparation for prospective questions from prospective investors;

ESTABLISHMENT-CONTD.
Finalising the deal Signing the subscription agreement; Seeking RBIs loan registration number thru AD; (before money is transferred to our account approval
should be in place)

Furnishing Bank account details to the Trustee and the Agent to effect the fund transfer; Getting the money , utilise it, furnish CA certificate to RBI along-with ECB 2

FEATURES OF USD 300 Mn. ISSUE UNDER MTN

Bond was issued in Feb 2006 The issue evoked an overwhelming response order book over subscribed by over 5 times attracting 105 investors The deal was sold 50% in Asia, 42% in Europe and 8% to offshore US accounts. 42% issue was sold to banks, fund mangers took 38%, insurance took 15% and retailer subscribe to 5% The coupon is 5.875%, maturity is 10 years bullet

EURO BONDS

Issued in March2004

EURO BONDS TYPICAL FEATURES

Bearer form, freely negotiable debt instruments; Issued and underwritten through an international syndicate of banks and investment banks (issuing houses) Held principally by investors outside the country in whose currency the issue is denominated; And, Issued for long maturity.

USD 200 MLN 5.5% BONDS DUE 2011

Size of the issue Date of issue of Bonds Denominations Coupon Issue price Security Listing Repayment Final Maturity Transaction fee to Joint Lead Managers USD 200 million 10.03.2004 US$ 1,000 , US$ 10,000 and US$ 100,000 5.5% per annum, payable semi-annually 99.37% Unsecured At Singapore Stock Exchange Bullet, after 7 years 10.03.2011 0.20% flat of the face value

Expenses

Not to exceed the overall cap of USD 700,000 approved by Ministry of Finance

EUROBOND -DOCUMENTATION
1. 2. 3. 4. 5. Mandate Letter Offering Circular Subscription Agreement Trust Deed Paying Agency Agreement

EUROBOND SEQUENCE OF EVENTS

1 2 3 4 5 6 7 8 9 Presentation by prospective Managers Finalize Committee Report and issue Mandate Letter Appointment of Legal Counsel(s), others Due diligence process Finalize OC File OC with SGX-ST Road shows Pricing Signing of Subscription Agreement 1 Week 3 days 3 days 3-4 days 7 days 3 days 3 days 1 day (T) 1 day

10
11

Signing of Trust Deed and Fiscal Agency Agreement

Settlement of proceeds

Within 5 days
T+5 days

PRICING
UST 3.56% + 2.05% = 5.61% p.a. Adjusted to 1/8th of a percent to arrive a coupon of 5.5% p.a. Issue price discounted at 99.37% In terms of Libor : 3.965% + 1.645% = 5.61%

DISTRIBUTION OF INVESTORS
US Offshore 8% Asia 45% Europe 47%

Insurance / Pension 17%

Retail 12%

Asset Managers 39%

Banks 32%

By location

By type

DISTRIBUTION
79 Accounts participated 45% of the issue placed in Asia, 47% in Europe, 8% to US Off-shore Accounts. Assets Managers took 39%, Banks 32%, Pension / Insurance 17% and Retail / others 12%

OTHER LOANS

JBIC LOANS
Faridabad : through GOI Simhadari : Direct about JPY 66 billion Terms - Interest rate - 2.6% p.a. (Faridabad) - 2.3%,1.8% p.a. (Simhadari) - service charges-0.1% of amount disbursed - Repayment period 20 years excluding grace period. - Grace period 10 years - Currency - Jap. Yen North Karanpura- Direct JPY 16 billion
Interest Rate 0.75% p.a. Repayment in 10 Years with grace period of 5 years GOI Guarantee 0.75% p.a.

JBIC LOAN (OTHER FEATURES)

Assistance available upto 85% of eligible component of project cost. Items ineligible - Cost of land - Compensation/rehabilitation cost - Taxes and duties - IDC (idc on JBIC loan can be covered) Procurement generally on untied basis.

ADB LOAN FOR UNCHAHAR -II

Disintermediation by GOI Interest rate-cost of qualified borrowings+spread (presently 1.69% p.a.) Commitment fees - 0.75% p.a. Repayment period 15 years excl. Grace period of 5 years Pool currency : major portions Jap. Yen. Now converted to Yen Loan

COMPOSITION OF NTPCS FOREX LOAN BASKET

Fixed (%) 31.03.2008 31.03.2007 31.03.2006 31.3.2005 69 75.17 79.16 81.76 8.52 Floating(%) Variable(%) 31 16.31 20.84 18.24

31.3.2004
31.3.2003 31.3.2002

74.58
72.27 66.37

7.59

25.42
27.73 26.04

31.3.2001
31.3.2000

63.00
60.95

6.25
9.36

30.75
29.68

COMPOSITION OF NTPCS FOREX..CONTD.

NTPCs Forex debt is predominantly carries fixed rate of interest. Out of a total of Rs.54.4 billion of Forex debt, an amount of Rs.24.5 billion represented by loans have Floating rates of interest. As of March 08- 32% is JPY, 67 % USD and 1% Euro exposure

Regulatory Framework in India for raising ECBs

Regulatory Framework of ECBs in India

Reserve Bank of India-Nodal AgencyIssues ECB guidelines Last review of guidelines issued on 2209-2008 Covers Export Credits-Suppliers Credit, Buyers Credit, Syndicated loans, Bonds, FRNs, MTNs ECBs can be assed by either Automatic Route or with the Approval Route

ECB GUIDELINES-RBI
Eligible Borrowers- Corporates can borrow under this route.
Financial intermediaries are exempt such as banks, FII, housing finance companies.

Recognized Lenders
International Banks, International capital markets, Multilateral institutions such as IFC, ADB, IBRD etc., Export Credits etc. Suppliers of equipment, foreign collaborators, foreign equity bidders financial

Amount & Maturity

ECBs upto USD 20 million with avg. Maturity of 3 years. ECBs above USD 20 million and upto USD 100 Million with avg. Maturity of 5 years. ECBs upto USD 500 million with avg maturity of over 7 years for Infrastructure under approval route

ECB GUIDELINES-RBI
End Use
- For import of capital goods, new projects - For infrastructure sector-power, telecommunications, roads including Bridges, railways, ports, industrial parks, urban infrastructure and Mining, exploration and refining - For Investment in JVs and WOS - Not permitted for on-lending or investment in capital market by corporates - Not permitted for real estate except integrated township

ECB GUIDELINES-RBI
All-in Cost ceilings
- 3-5 years - 5-7 years - More than 7 years 200 bps plus 6m Libor 350 bps plus 6m Libor 450 bps plus 6m Libor

ECB GUIDELINES-RBI
- Parking of Funds abroad-allowed
actual use of funds in India. till

- Prepayment-permitted upto USD 400 mn - Refinancingpermitted provided

outstanding maturity is maintained and the cost of raising fresh loan is lower

- Guarantee- guarantee or letter of comfort

from by banks , FIIs etc not permitted

SOME COMMONLY USED JARGONS Contd.

Foreign Bonds- Bonds issued by a nonresident in the domestic currency- eg Bonds issued by an Indian Company in $ in US Yankee Bonds- Foreign Bonds issued in US i.e. $ bonds in US Samurai Bonds- Foreign Bonds issued in Japan i.e. bonds in Japan Bulldog Bonds- Foreign Bonds issued in UK i.e. Bonds in UK

TOTAL FOREIGN LOANS AS ON 31.03.07

Source 1
2

Amount (Rs. Mln) 145,579

106,227 251,806

Direct foreign loans

Through Govt. Of India Total

VARIOUS INSTRUMENTS
Vanilla-Fixed or Simple Floating Rate-non callable Inflation Linked-Coupon linked to designated measure of Inflation Bermudan callable- Callable at discrete intervals throughout life of notes European Callable-Callable at single date Fixed Rate step-up callable- coupon increases over life- stated at the time of setupcallable

VARIOUS INSTRUMENTS
TEC-10-FRN linked to constant Maturity 10 yr Fench Govt. rates CMS linked- FRN linked to Constant Maturity Swap rate Callable Zero coupon Range Accrual- Fixed coupon that accrues every day that a designated index (say 3 m libor) is trading within specified range. In case index is trading outside the range, the note does not accrue interest. Inverse FRN- bears a Fixed minus float coupon

COST OF CAPITAL
Cost of Debt
Pre Tax Post Tax = Pre-Tax*(1-t)

Cost of Equity
Present value of expected returns with market value of shares

WACC
Book value vs Market value of Weights

COST OF CAPITAL-CONTD.
Issues concerning International Financing in the Cost of Capital
In addition to the Interest Cost impact of FERV and Tax need to be considered