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Gearing Capital Funding

Gearing Capital Funding. First National Bank – a division of FirstRand Bank Limited. An Authorised Financial Services and Credit Provider (NCRCP20). Outline of Presentation. 1. Definitions of gearing Capital funding: What lenders look for. Funding Mechanisms Loan funding Project finance

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Gearing Capital Funding

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  1. Gearing Capital Funding

  2. First National Bank – a division of FirstRand Bank Limited. An Authorised Financial Services and Credit Provider (NCRCP20).

  3. Outline of Presentation 1 • 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 2

  4. Definitions • 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.

  5. 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 Capital requirements and funding thereof Three easy debt absorption indicators that lenders use:

  6. Funding Mechanisms

  7. 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 Loan Funding Supplier Purchaser/ Municipality Loan Agreement FirstRand/ INCA

  8. 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 • Risk margin • SLA’s • Final Ownership • Credit enhancement by muni • Compliance with MFMA and PPP Regulations Municipality Project/ PPP Loan Agreement FirstRand/ INCA

  9. 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 Lease Structures Lease Agreement Lessee/ Municipality

  10. Capital and Basle II • 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.

  11. 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

  12. 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

  13. 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%

  14. 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 Koos Heymans Investment Specialist Portfolio Management 011 371 8810 011 202 2218 Theunis.Fourie@fnb.co.zakoos.heymans@inca.co.za

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