Case questions: NAVA BHARAT

1. Explain the benefits of project financing and the rationale behind the creation of NBEIL as a
special purpose vehicle (SPV) of the parent company, NBVL.

a) NBEIL was incorporated on April 8, 2008, as a special purpose vehicle (SPV) that would help
NBVL to implement its power projects.
b) Parent company NBVL had an alternate purpose in creating NBEIL, having established the SPV
with a view to ring-fencing its balance sheet, thereby protecting itself from bankruptcy in the
event of the failure of NBEIL.
c) Also, since the size of NBVL’s operations—total sales of ₹12.81 billion during financial year
(FY) 2008–09—was relatively lower than the cost of the projects (₹13.86 billion), NBVL
created NBEIL as a way to protect the parent company’s assets.

2. Comment on the significance of NBEIL’s cash flow waterfall mechanism.

a) In typical project-financing structure, the interests of a project’s stakeholders (including

lenders) would be protected through a cash flow waterfall mechanism (i.e., priority of each cash
inflow and outflow in a project, thereby ensuring debt service).
b) As such, lenders could derive confidence while financing the kind of large-scale, capital-
intensive projects that were associated with systematic distribution of cash flows among the
project’s stakeholders

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 3. Calculate the debt service coverage ratio (DSCR) and internal rate of return (IRR) of the power
project, and perform a sensitivity analysis on the key financial parameters (fuel expenses, plant
load factor [PLF], interest rate).

Debt Service Coverage Ratio:

Sr Description Page No Referred Value in million USD
The
1 EBIT 12 41895
2 Interest Expense 10 1164
3 Depreciation 12 10200
4 Add (1)+(2)+(3) NA 53259
5 Principal repayment for term loans only 1 9700
6 Interest payment on term loan 12 5809
7 Interest on working capital 12 1882
8 Total Interest payments= (6)+(7) NA 7691
9 Lease Payments NA 0
10 Add (5)+(8) NA 17391
11 DSCR= (4)/(10) NA 3.062
value of DSCR of more than 3 indicates that (i.e. more than 1.5 (refer page 14) indicates a good, risk free
project & loans can be granted). Moreover, the debt service coverage ratio is, therefore, a benchmark used
to measure the cash producing ability of a business entity to cover its debt payments. A higher debt
service coverage ratio (i.e. more than 1.5) makes it easier to obtain a loan.

The calculated IRR is 18.47 %. It is achieved by taking the initial investment of 9.7 billion USD
& from the yearly gross accruals is added using the IRR formula. This referring to page 3, as it
above 15% it is good return & a healthy figure.

Sensitivity Analysis- PAT vs Interest Rate

2500

2000

1500

1000

500

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Year PAT @10% PAT @11%
PAT @ 12% PAT @ 13%

As you can when interest rate is lowest then the PAT is highest in the initial years & but from year
2022 onwards the PAT is same.

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 Sensitivity Analysis- PAT to Cost of Fuel
1800
1600
1400
1200
1000
800
600
400
200
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
PAT when cost of fuel is 87% PAT when cost of fuel is 85%
PAT when cost of fuel is 84% PAT when cost of fuel is 83%
PAT when cost of fuel is 82%

For cost of fuel it is evident that PAT decreases when cost of fuel increases.

Sensitivity Analysis- PAT vs Plant Load Factor

1800

1600

1400

1200

1000

800

600

400

200

0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
PAT when plant load factor is 85% PAT when plant load factor is 80% PAT when plant load factor is 81%
PAT when plant load factor is 82% PAT when plant load factor is 83% PAT when plant load factor is 84%
PAT when plant load factor is 85% PAT when plant load factor is 86% PAT when plant load factor is 87%

As load factor is a measure of the output of a power plant compared to the maximum output it
could produce thus as per the graph above it is evident that as plant load factor increases so does
the output & hence the revenues & thus PAT also increases.

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 4. Evaluate NBEIL’s project by commenting on its managerial, technical, market, environmental,
and financial aspects. Is it wise to proceed to syndicate a term loan for the coal-fired power
project?

Q4. Evaluate NBEIL’s project by commenting on its managerial, technical, market, environmental, and
financial aspects. Is it wise to proceed to syndicate a term loan for the coal-fired power project?

Answer: Part A

Managerial Aspects:

 It was a wise decision to incorporate NBEIL as a Special Purpose Vehicle Entity. This isolates the
parent company, NBVL from financial risk.
 NBEIL was being managed by a team of well educated & highly experienced professionals. A
dedicated committee was formed to supervise the implementation of the projects which shows the
seriousness, focus & dedication of the management towards this project.
 The project sites were strategically chosen since they were well connected by road, rail & port to
ensure a reliable fuel supply.
 The management also capitalized on the commercial viability of selling the by-products generated
during the power manufacturing process.

Technical Aspects:

 Power could be manufactured using various fuels. NBEIL chose to setup Coal Fired Power Plants
as research from reliable organizations showed that 82% of the additional capacities would be
met by Coal fired plants.
 NBEIL selected their contractors for supply of the BTG packages through a transparent &
competitive international bidding process. This procurement model will be a very successful one
as it ensured the participation of international suppliers as well in the bidding process enhancing
competition & ensuring best quality.

Market Aspects:

 Entering the domestic power industry as a manufacturer was a good business decision. Data
shows that there was a power deficit in the country for many years & the demand for more power
was growing.
 Both Industrial demand & household demand would grow rapidly & the current power supply
was insufficient to meet it. Hence NBEILs project would meet opportunities in the B2B as well as
B2C market segments.

Environmental Aspects:

The company acted responsibility towards the environment, in the following ways:

 The technology NBEIL chose for their power plants apart from being cost effective was also less
harmful for the environment due to the low pollution levels.

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  The equipment was to be designed & operated with a maximum noise level of 85 decibels.
 The project sites were situated on non agricultural land without any town, city, forests, parks etc.
located within 20KM radius. Hence the carbon emissions from the plant would have a controlled
impact on any form of life.

Financial Aspects:

 Approaching Development Bank Limited for the term loan (project financing) was the correct
choice since NBVL had a healthy business relationship with this bank. They had secured loans
from this bank in the past & had established themselves as a credit worthy company.
 Securing a term loan for NBEIL would not have been an issue since NBVLs financial health was
strong. They were assigned the highest credit rating by CRISIL & maintained adequate liquidity.
None of the company’s directors were on the defaulter list of RBI or Credit Information Bureau.
 The equity component of the project financing was being met by the parent company’s internal
sources itself. NBVL was a listed company on both the BSE & NSE.
 The terms loan component of the project finance was proposed to be met by a syndicate of banks.
Lenders could be confident of providing as the term loan as their money was safeguarded due to
the cash flow waterfall mechanism.

Part B : Is it wise to proceed to syndicate a term loan for the coal-fired power project?

Answer: YES.
 There was a power shortage in the country which encouraged the setup of new power projects.
 Coal was the favored fuel source for power generation as per the market data.
 With the increasing demand for domestic power, the lenders could be secured that the project if
managed efficiently would turn out a success, so their investment would pay off.
 NBVL had a strong track record so lenders had a certain level of confidence on financing their
project.
 The Government too was launching new initiatives in the Power Sector which meant that for the
lenders to provide finance in this sector was a good decision.
 A group of banks could come together to loan so risk got shared amongst the banks instead of just
one single bank, thus forming a syndicate.

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