Gearing Capital Funding

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Gearing Capital Funding
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First National Bank a division of FirstRand
Bank Limited. An Authorised Financial Services
and Credit Provider (NCRCP20).
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Outline of Presentation
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• 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

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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 entitys
  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.

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Capital requirements and funding thereof

• Three easy debt absorption indicators that
  lenders use

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Funding Mechanisms
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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
Loan Agreement
FirstRand/ INCA
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Project Finance

• Characteristics of Project Finance
• Forms the basic structure of most PPPs
• 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
• SLAs
• Final Ownership
• Credit enhancement by muni
• Compliance with MFMA and PPP Regulations

Municipality
Project/ PPP
Loan Agreement
FirstRand/ INCA
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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 Lessees 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 Lessees
  balance sheet constraints, and/or operational
  budget requirements

Lease Agreement
Lessee/ Municipality
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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.

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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

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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

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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

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Market Trends -Continued
Swap yield curve continued to normalize. Opportuni
ty 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_at_fnb.co.za ko
os.heymans_at_inca.co.za