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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? 1 Financing Alternative I: Intermediary Concept return return Borrower Intermediary Depositors $$ $$ Implication Risk Return Fully take credit risk Sufficient return to cover Default probability - Direct cost - Indirect cost - Cost of inefficiency - ROE 2 Financing Alternative II: Disintermediary Concept Issuer Investors Secondary Intermediary Market Implication Risk Return All risk transferred Optimal return to justify risk No indirect cost Lower inefficiency cost 3 Understanding Investment Banking Business Investment Banking Business Derivative Corporate Issuer Syndication Derivative Investors Finance Brokerage/Research 4 Engineering & Structuring the Transactions Why Engineering & Structuring… • Overcome regulatory matters • Achieve cost saving • Create tax planning • Open new market 5 How to Engineering & Structuring Deal “Deep understand” Law & Regulator Issuer Investors Deal Understanding Need Market Environment 6 Case Study Case Study I: Bangchak Petroleum Plc. Case Study I: Bangchak Petroleum Plc. Background 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 questioned 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 Objectives 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 9 Case Study I: Bangchak Petroleum Plc. (cont.) Restructuring Previous Structure Restructuring New Structure Business Short Term Debt Refinance 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 Refinance - 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 MOF 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 occurs mandatory conversion 10 Case Study II: Hilton Hua Hin Resort & Spa Case Study II: Hilton Hua Hin Resort & Spa Background 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 12 Case Study II: Hilton Hua Hin Resort & Spa (cont.) Waterfall Structure (Simplified) Issuer * 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 Account 20 yr. lease Interest Payment Accrual Account 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 Conclusion – 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 13 Q&A Turnaround Co., Ltd 62 The Millennia Building, Room 2003-2004, 20th Fl. Lungsuan Road, Lumpini, Pathumwan, Bangkok 10330 Tel. 0-2651-9811
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