Understanding Investment Banking by BeunaventuraLongjas

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									Knowing Investment Banking &
the Idea of Engineering the Financial Deal
By Vipoota Trakulhoon

                                   January, 2006
Scope of the Presentation

•   What is Investment Banking?
•   What is Engineering and Structuring?

Financing Alternative I: Intermediary Concept

               return                            return
  Borrower                   Intermediary                    Depositors
                 $$                               $$

                      Risk                   Return

             Fully take credit risk    Sufficient return to cover
             Default probability        - Direct cost
                                        - Indirect cost
                                        - Cost of inefficiency
                                        - ROE

Financing Alternative II: Disintermediary Concept

        Issuer                                             Investors


                   Risk                        Return

         All risk transferred           Optimal return to justify
                                        No indirect cost
                                        Lower inefficiency cost
Understanding Investment Banking Business

              Investment Banking Business


 Issuer                     Syndication
                      Derivative            Investors


Engineering & Structuring the Transactions

Why Engineering & Structuring…

•   Overcome regulatory matters
•   Achieve cost saving
•   Create tax planning
•   Open new market

How to Engineering & Structuring Deal

“Deep understand”

                      Law &

    Issuer                         Investors
 Understanding                       Need


Case Study
Case Study I: Bangchak Petroleum Plc.
Case Study I: Bangchak Petroleum Plc.

   The currency devaluation and economic crisis in 1997 had significantly deteriorated financial
   position of The Bangchak Petroleum PCL. (“BCP”)
    Combined with the new domestic supply coming into the market in 1998, BCP’s outlook was
   To finance its debts, BCP borrowed heavily via the issuance of short-dated THB papers
   This in turn resulted in higher interest expenses and weakened capital structure
   The State Enterprise Steering Committee (“SESC”) appointed a working team in late 2002
   The two-month study came to the preliminary conclusion that BCP had economic value,
   notwithstanding the social impacts should BCP be ceased to exist
   The in-depth study on restructuring commenced in 2003
   TURNAROUND was officially appointed as an independent advisor to conduct business due
   diligence and study on both business and financial restructuring
   Complete Long-term Solutions
        BCP must not only survive but also become competitive in the long run
   Minimum Negative Impacts on Shareholders
        The restructuring schemes must not hurt its shareholders
   Obligation of the Ministry of Finance (“MoF”) to cease
        The obligation of the MoF as the guarantor on part of BCP’s debts (around THB 8.1 billion)
        should be reduced and removed eventually
        BCP must be able to stand on its own
 Case Study I: Bangchak Petroleum Plc. (cont.)
Restructuring                                                                                       Previous Structure                            Restructuring                              New Structure

                                   Business                                                          Short Term Debt
                                                                                                                                             Financial Institution(s)                     Working Cap Loan
                                                                                                       Bt 3,500 Mil.                         Bt 12,500 – 14,500 Mil.                        Bt 4,000 Mil.
• Strengthen the management team by bringing in two prominent persons
     - Mr. Pichai Chunhavachira, CFO of PTT PCL.
     - Mr. Patiparn Sukonthaman, CFO of Banpu Power Co., Ltd.                                                                                 MOF guarantee via
                                                                                                    Medium Term Debt
• Improve Gross Refinery Margin (“GRM”) by                                                                                                    Mutual Fund or SPV                           Long Term Loan
                                                                                                      Bt 16,000 Mil.                          Bt 5,000 – 7,000 Mil.                          Bt 8,500 Mil.
     - Synergising its refinery operation with other operators
     - Sourcing crude from domestic oil fields
• Reinforce marketing operation and its retail network
                                                                                              Unwire MOF                                                              Fund
                                                                                                                                                     Issuing                                Subordinated
                                                                                           guarantee + direct                   Guarantee
                                         +                                                 loan repayment of
                                                                                                                                                                      Raising              Convertible Bond
                                                                                                                                                                                             Bt 4,000 Mil.
                                    Finance                                                   Bt 8,000 Mil.
                                                                                                                                                               Capital                           Capital
                                                                                                                                                               Market                         Bt 3,000 Mil.
• Capital Injection of THB 7 Billion
     - THB 3 billion via Common Stock Depository Receipts (“BCP-DR1” or “CSDR”)
     - THB 4 billion via Convertible Debenture Depository Receipts (“BCP-DR2” or “CDDR”)
• Committed Working Capital Facility of THB 4 Billion                                                                             BCP-DR1                                   BCP-DR2
• 10-Year Loan of THB 8.5 Billion                                                                  Amount (THB’ Million)          3,000                                     4,000
    - Grace period and repayment profile which match BCP’s business nature and                     No. of Units                   231 million                               400,000
      projected cashflow                                                                           Life (years)                   10                                        10
                                                                                                   Offering Method                Public                                    Private
  Siam DR Company Limited (“SIAMDR”) was set up as the SPV to                                      Listing                        SET                                       Thai Bond Dealing Centre
  issue BCP-DR1 and BCP-DR2                                                                        Offering Price per unit        THB 13                                    THB 10,000
                                                                                                   Conversion Ratio               1 DR : 1 common stock                     1 DR : 1 CD
  The funds would be invested in BCP in the forms of common                                        Effective Conversion Price     THB 13                                    THB 14.3
                                                                                                   Conversion Period              Quarterly                                 Quarterly
  stocks and subordinated convertible debentures.
                                                                                                   Mandatory Conversion           After 2 years if price of DR exceeds      After 3 years, if price of DR exceeds
                                                                                                                                  160% of the offering price for 15         150% of conversion price of CD into BCP
  Unlike equity warrants, the holders of BCP-DR1 have equivalent                                                                  consecutive business days                 shares for 15 consecutive business days
  rights to common stock holders plus capital projection from the                                  After DR expires               Investors will choose between             Investors will choose between
  MoF                                                                                                                             1) Convert the DRs into BCP               1) Convert the DRs into BCP
                                                                                                                                       common shares; or                         convertible debentures and then into
                                                                                                                                  2) Sell back the DRs to the MoF                shares; or
  BCP-DR2, which is paying 3.00% coupon every six month till                                                                                                                2) Sell back the DRs to the MoF
  conversion or maturity, is rated “AA” by TRIS                                                    Credit Rating                  n.a.                                      AA by TRIS
                                                                                                   Additional Issues              DR holders can sell DRs back to the       DR holders can sell DRs to the MoF if
  Both BCP-DR1 and BCP-DR2 contain voluntary conversion and                                                                       MoF if BCP is liquidated                  BCP is liquidated or default on interest
  mandatory conversion
Case Study II: Hilton Hua Hin Resort & Spa
Case Study II: Hilton Hua Hin Resort & Spa


   In late 2002, Siam Hotel Properties (Hua Hin) Co., Ltd. (“SHP”), a professional hotel management
   company, was exploring the funding opportunities for the Hilton Hua Hin Resort & Spa, the property
   under its ownership, and appointed Turnaround to be its sole financial advisor
   At the moment, the issues surrounding the company which made the straight mortgaged loan not a
   commercially viable transaction are:

From the Creditors’ Perspective:

   The company was managed by the foreigners and was relative new to the industry, although the
   management already has more than 15 years experience in the field of business
   Legal process of enforcing the mortgage in Thailand take considerable amount of time (up to 3-5
   years) and normally left the creditors with nothing after the ruling

From the Company’s Perspective:

   The cost of capital is relatively high
   The shareholders were not ready to put forward any incremental equity nor put forwards any
   personal guarantee as requested by some creditors since it was believed that the cash flow
   generated by the hotel’s business would be more than sufficient to repay financial debt
   However, SHP also received the EBITDA guarantee from Hilton International in the amount which
   was sufficient to repay part of interest and principal for the first 5 years
       Case Study II: Hilton Hua Hin Resort & Spa (cont.)
                                                                                                                                         Waterfall Structure (Simplified)
                                                                                                                                                                                    * Net after deducting operating
                                            Financing Facility of                                              Collection $ from guests / customers           Deposit into          and FF&E costs and fees of
                                            Baht 1.85 Baht                                                                                                  Security Account*       bank, facility agent and servicer.

                                                                                                                                                          Property Tax Reserve
Hilton Management Agreement (Kingdom)                                    Hilton Management Agreement (Hilton Hua Hin)                                            Account
                                               SIAM HOTEL
                                                   (Hua Hin)
                                        PROPERTIES (Hua Hin) Co., LTD.
 Hilton Guarantee Agreement (Kingdom)                                     Hilton Guarantee Agreement (Hilton Hua Hin)
                                                                                                                                                          Maintenance Reserve

                                                           20 yr. lease
                                                                                                                                                         Interest Payment Accrual
                                    SIAM HOTEL PROPERTIES FUND
                                       (Owns Hilton Hua Hin and
                                                                                                                                                             Interest Reserve
                                    The Hilton Kingdom Hotel & Spa)                                                                                               Account

                                                                                                                                                          Sinking Fund Payment
                 •Hilton Hua Hin Resort and Spa            •The Hilton Kingdom Hotel & Spa                                                                   Accrual Account
                 •Land (Free Hold)                         •Lease Hold (50 yrs)

Finding Solutions                                                                                                                                           Issuer Account

           –      In order to achieve the fund raising objectives of all related parties, the Properties Fund Type II was used as a vehicle by
                  owning the properties while having all unit trust trusted pledged to the debenture holders
                       •     Benefit to Creditors: Bankruptcy remoteness, Ability to control the property quickly after default via enforcement of
                             pledge unit trust
                       •     Benefit to Company: Tax planning, lower interest cost
           –      In addition, tight control of cash flow via waterfall system was put in place, including pledge of all agreements, insurance
                  policies, and all related operating accounts to ensure cash flow priority to all creditors before the Company get its benefits

           –      The Secured Debenture issued by SHP was fully subscribed on June 12, 2003 with the total size of 1,250 MB with the
                  interest rate of 5.5%, well below the MLR + 3.25% the Company was currently obtaining
           –      In 2003, the Hotel generates EBITDA of 176 million baht, almost 15% higher than the projected figure

  Turnaround Co., Ltd
  62 The Millennia Building, Room 2003-2004, 20th Fl.
  Lungsuan Road, Lumpini, Pathumwan, Bangkok
  Tel. 0-2651-9811

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