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Working Capital

  • Working Capital represents liquidity available with the company for managing its day-to-day operations.


  • Net Working Capital is Current Assets minus Current Liabilities. Current Assets here refers to cash, inventory, raw material, and account receivables. Current Liabilities include account payable. Lenders always consider Net Working Capital prior to extending working capital facilities.


  • Company aims for a positive working capital (current assets > current liabilities), as it reflects upon its ability to meet its short-term requirements and have an edge in the market.


  • Working capital financing is utilised to finance Company’s investments in short-term assets i.e., accounts receivable and inventory, and fund its day-to-day operations including salaries, overheads, and other expenses.


  • Working Capital Facilities are provided by Banks across multiple financial products to best suit company’s  business requirements. The best fit for your company will depend on its industry, business model, stage of development, and the current assets on its balance sheet.


  • Working Capital facilities are funded as well as non-funded in nature; some of the facilities extended by the Banks are as below:





  • Overdraft facility is utilised to meet with day to day working capital requirements of a Company.

  • The Facility utilisation is to meet with day-to-day expenses, salary payments and other general corporate expenses.

  • Facility can be settled in full anytime and can be redrawn fully up to its sanctioned limit.

  • Overdraft facility is typically set-up in the checking account of Company.

  • Banks typically monitor the aggregate annual debits and credits routed thru the account with the overdraft  facility



Typical terms of Overdraft


  1. Overdraft facility is typically sanctioned for a period of a year and renewed thereafter

  2. Overdraft is extended on a secured as well on an unsecured basis

  3. Overdraft is settled by the general revenue stream of the Company

  4. Interest rate charged is same as charged on the other short-term working capital requirements.

  5. Overdraft facility is extended on a general basis as well as for a specific project or a specific purpose.



Short-Term Loan


  • Short Term Loan facility is utilised to meet with day to day working capital requirements of a Company.

  • The Facility utilisation is to meet with day-to-day expenses, salary payments and other general corporate expenses.

  • Short Term Loans drawn within the Facility are repaid by either the general revenue stream or a specific assigned revenue of Company



Typical terms of Short-Term Loan


  1. Short Term Loan facility is typically sanctioned for a period of a year and renewed thereafter

  2. The Short-Term Loan Facility is typically drawn in 2 to 3 short term loans or more depending on the Facility size

  3. Tenor of individual short-term loan is typically 30 days to 90 days. At maturity, the short term is repaid along with the interest. The short-term loan can also be redrawn immediately or after a cooling period of say 1 to 2 days.

  4. The Facility is extended on a secured as well on an unsecured basis

  5. Interest rate charged is same as charged on the other short-term working capital requirements

  6. The facility is extended on a general basis as well as for a specific project or a specific purpose


Loan Against Trust Receipts (LATR)


  • Loan Against Trust Receipt (LATR) is an advance for a pre-agreed tenure for the sole purpose of financing payments to be made by the customer covering purchase of goods either under a Letter of Credit (LC) established through the bank or by way of documents received on collection without a letter of credit.

  • Trust receipt is a legal document between a bank and customer, stating that the bank will give goods to the Customer however the bank will still retain the title to the goods and can repossess it if the Customer does not uphold the terms decided upon in the trust receipt.

  • Trust Receipt is a deferred payment facility from the Bank under a LC or otherwise. Customer can defer his payment obligation to the Bank, however, is able to get the goods that has already been ordered under an LC or otherwise.

  • The customer simply submits a TR Letter which basically contains a statement of receiving the goods on Bank’s behalf and promising to pay the Bank with deferred payment that includes the total cost along with the interest.

  • Financing by way of trust receipts does not amount to secured financing. However, it does create certain rights and obligations that put the Bank in a better position than most other unsecured lenders.


Typical Terms of Loan Against Trust Receipts


  1. Purpose is to meet with the working capital requirements of a Company by financing their purchases.

  2. Typical tenor of LATR ranges from 45 days to 180 days

  3. LATR is settled by the realization of the sales proceeds by Company.

  4. Interest rate charged is same as charged on the other short-term working capital products.

  5. LATR facility is extended on a general basis as well as for a specific project or a purpose.



Invoice/Bill Discounting


  • Bill Discounting is a trade transaction in which a Company’s unpaid invoices/ bills which are due to be paid at a future date are sold to a Bank/lender.

  • Bill discounting involves a Company  discounting outstanding invoices with a Bank/lender to gain access to short-term financing to strengthen its working capital position. 

  • Bill discounting is a form of loan that is available to the beneficiary of the invoices and has to be repaid if the bank or the lender does not realize the amount of the bill when presented to the buyer at the time of maturity or at the end of the credit period.

  • The discounting provides upfront funds to the Company rather than waiting for the complete credit period extended by them to the buyers. Discounting shortens the working capital cycle of companies as they realise the funds immediately thereby improving upon their liquidity position.

  • Companies can complete multiple cycles because of shortened working capital cycle thereby enhancing their revenue and in turn strengthening profitability.



Typical Terms of Invoice/Bill Discounting


  1. Purpose is to meet with the working capital requirements of a Company by financing their sales.

  2. Typical tenor of Bill/Invoice ranges from 60 days to 180 days

  3. Bill/Invoice discounting is settled by the realisation of the sales proceeds at the end of the credit period.

  4. Interest rate charged is same as charged on the other short-term working capital requirements.

  5. Bill/Invoice discounting facility is extended on a general basis as well as for a specific project or a purpose.



Cheque Discounting


  • The discounting of post-dated cheques is for Companies which accept post-dated cheques from their clients to realise sale proceeds for products or services offered by them.

  • Cheque discounting improves the liquidity position of a Company by shortening its cash conversion cycle.

  • The cheque discounting provides upfront funds to the Company rather than waiting for the complete credit period extended by them to the buyers.

  • Banks accept cheques which are drawn on  acceptable companies  with no record of past unpaid cheques from the drawer.



Typical Terms of Cheque Discounting


  1. Purpose is to meet with the working capital requirements of a Company by financing their sales.

  2. Typical tenor of Cheque discounting ranges from 60 days to 180 days

  3. Cheque discounting is settled by the realisation of the cheque proceeds

  4. Personal cheques, related entity cheques and foreign currency cheques do not qualify for discounting

  5. Typically, Company must have received cheques from the same drawer before and the account must be reasonably active for at least six months to qualify for discounting

  6. Cheque discounting facility is extended on a general basis as well as for a specific project or a purpose.


Letter of Credit



  • Letter of Credit also known as a documentary credit, is a payment mechanism used in trade to provide guarantee from a Bank to a seller of goods.

  • If a buyer fails to pay a seller, the bank that issued a letter of credit must pay the seller if the seller meets all the requirements in the letter of credit. A letter of credit provides protection for sellers. 

  • A letter of credit is essentially a financial contract between a bank, a bank's customer, and a beneficiary. Generally issued by an importer’s bank, the letter of credit guarantees the beneficiary will be paid once the conditions of the letter of credit have been met.

  • Letters of credit are used to minimize risk in international trade transactions where the buyer and the seller may not know one another.

  • The letter of credit outlines the conditions under which payment will be made to an exporter. The issuing bank will generally act on behalf of its client (the buyer) to ensure that all conditions have been met before the funds of the letter of credit are released.



Parties involved in a Letter of Credit


Applicant: An applicant (buyer of goods) requests bank to issue a Letter of Credit


Beneficiary:  Seller who receives his payment under the Letter of Credit


Issuing Bank:  Bank issuing the Letter of Credit at the request of the buyer


Advising bank:  Bank that’s responsible for the transfer of documents to the Issuing Bank on behalf of the exporter and is generally located in the country of the exporter


Confirming Bank: Provides an additional guarantee to the undertaking of the Issuing Bank. It comes into the scene when the exporter is not satisfied with the assurance of the Issuing Bank


Negotiating Bank: Bank that negotiates the documents related to the LC submitted by the exporter. It makes payments to the exporter, subject to the completeness of the documents, and claims reimbursement under the credit


Reimbursing Bank: Bank where the paying account is set up by the Issuing Bank


Process Flow of LC


Step 1: Agreement between Buyer and Seller wherein the Buyer agrees to purchase goods from Seller.


Step 2: Buyer applies for a LC with his Bank (LC Issuing Bank)


Step 3: LC Issuing Bank opens and sends the LC to the Seller


Step 4: Based on the LC, Seller ships/transports the goods to the Buyer


Step 5: Seller prepares and presents the documents required under the LC to the LC Issuing Bank


Step 6: LC Issuing Bank vets the documents and makes payment if the presented documents are in compliance with the LC


Step 7: LC Issuing Bank seeks payment and shares documents with the Buyer (LC applicant)


Step 8: Buyer receives goods from the carrier based on  the documents




Bank Guarantee


  • Bank Guarantee is a promise made by the bank to any third person to undertake the payment risk on behalf of its customers. Bank guarantee is given on a contractual obligation between the bank and its customers.

  • The value of guarantee is called the 'guarantee amount'. The 'issuing bank' will pay the guarantee amount to the 'beneficiary' of the guarantee upon receipt of the 'claim' from the beneficiary. This results in 'invocation' of the Bank Guarantee.

  • The bank guarantee serves as a risk management for the beneficiary, as the bank assumes liability for completion of the contract should the buyer default on their debt or obligation.

  • Bank guarantees serve the purpose of facilitating business in situations that would otherwise be too risky for the beneficiary to engage.

  • A Guarantee is a simple and practical way of ensuring that a business – or its trading partner – receives compensation in the event of a breach of contract. It’s a formal assurance that a borrower will be able to pay its counterparty, irrespective of any financial circumstances.

  • The underlying contract for a Bank Guarantee can be financial or performance based.






Parties to a Guarantee



Applicant:       The party requesting the Guarantee

Guarantor:      The bank that guarantees the agreed compensation amount to be paid in the event of a failure to meet                                        contractual obligations


Beneficiary:      The party for whom the Guarantee is issued




Types of Bank Guarantee


Some of the types of guarantees issued by the Banks are as below:


  1. Bid Bond Guarantee

  2. Advance Payment Guarantee

  3. Payment Guarantee

  4. Performance Guarantee

  5. Retention Guarantee

  6. Deferred payment Guarantee

  7. Shipping Guarantee

  8. Standby LC



Foreign Exchange (FX) Limits


Foreign Exchange Limits are extended by Banks at the request of their Customer/Companies to hedge currency risk and interest rate risk faced by the Companies in their normal business operations. The FX limits are required by the Companies to hedge the risks.


Currency Risk Hedging Limit:

Companies with foreign currency exposure i.e., sales is in other currencies or raw material purchases in other currencies tend to hedge their foreign exchange currency exposure with a Bank to minimize the loss due to fluctuation in foreign currency. Bank offers Foreign Exchange limits at the request of their customers to hedge the currency risk.


Interest Rate Risk Hedging Limit:

Companies tend to hedge the interest rate risk on their borrowings by either converting their fixed rate borrowings to floating rate borrowings or converting their floating rate borrowing to fixed rate borrowing. Banks offer Interest Rate Swap Facility to the Companies to hedge the interest rate risk. 

Funded Facilities


Non-Funded Facilities

Letter of Credit

Short Term Loan

Bank Guarantee

Loan against Trust Receipts

FX Limit

Bill Discounting/Invoice Discounting

Cheque Discounting

Working Capital

Term Loan

  • A term loan is extended by lenders as a means of finance for specific purposes on certain pre-agreed borrowing terms.


  • Term Loan could be for financing purchase of an asset, financing operations of subsidiaries, acquisition finance, strengthening working capital position, refinancing of existing loan, etc.


  • Lender extends Term Loan to a Borrower  for certain specific purposes.


  • Term Loan has a pre-agreed repayment schedule which is typically based on the future cash flow and the repayment capacity of Company.


  • The interest on Term Loan is either fixed rate or floating rate of interest.


  • Generally, Lenders require certain portion of the total financing requirement to be met by the Borrowers from their own sources and the balance amount of total financing requirement is contributed by the Lender as a Term Loan.


  • Typically, Term loan value covers 50% to 80% of the total financing requirement.


  • The tenor of the Term Loan can be short-term of say 12 months to a long tenor of say 12 years. The tenor of the loan is determined by the purpose of the loan, cash generation, borrower financial condition, etc.


  • Term Loans are generally secured. However, term loans are also extended on an unsecured basis.

Term Loan

Real Estate Development

Real Estate Finance is extended by lenders to part finance the construction cost of Real Estate Projects.   

Real Estate Finance covers 50% to 80% of the Project Cost with the balance met by the Company from their own sources.

Real Estate Finance is secured by a charge on the Real Estate Project assets and is repaid from the cash flow generated from the Real Estate Project.

Real Estate Finance transactions are usually classified as either Real Estate Investment or Real Estate Development financing transactions.


Real Estate Investment:        Company develops a property or purchase a property (or a group of  properties) as an                                                              investment.

Real Estate Development:    Company develops a property (or a group of properties) for sale



Real Estate Investment Transactions

Real estate Investment finance transactions could involve finance for:

  1. Commercial real estate such as offices, shops, etc—to be repaid from the rent received from tenants (known as commercial real estate finance), or

  2. Blocks of residential real estate—to be repaid from the rent of individual residential units (known as residential real estate finance), or

  3. Mixed use real estate - to be repaid from the rent of individual residential units, offices, shops, etc


Real Estate Development Transactions

Real estate finance transactions for Development purposes could involve finance for:

  1. Commercial real estate such as offices, shops, etc—to be repaid from the sale proceeds from buyers (known as commercial real estate finance), or

  2. Blocks of residential real estate—to be repaid from the sale proceeds from buyers of individual residential units (known as residential real estate finance), or

  3. Mixed use real estate - to be repaid from the sale proceeds from buyers of individual residential units, offices, shops, etc


Real Estate Project Timelines





Sources for Real Estate Finance






Real Estate Investment: Financing Structure




SPV Structure

  • Parent company forms 100% owned subsidiary for the ownership of the Project.

  • SPV is formed to isolate/ring-fence the project from the Parent 

  • SPV is the owner of Project asset and is also the borrower of Project debt

  • Project assets are mortgaged to the Lenders along with 100% ownership in the SPV

  • The repayment of debt starts after project completion and is repaid from the rental income from tenants.

  • Project debt is long term say 10+ years with moratorium period equivalent to time for project completion


Direct Structure

  • Parent owns and undertakes the project and is the borrower

  • Project assets are mortgaged to the Lenders

  • The repayment of debt starts after project completion and is repaid from the rental income from tenants.

  • Project debt is long term say 10+ years with moratorium period equivalent to time for project completion


Real Estate Development: Financing Structure

SPV Structure

  • Parent company forms 100% owned subsidiary for the ownership of the Project.

  • SPV is formed to isolate/ring-fence the project from the Parent 

  • SPV is the owner of Project asset and is also the borrower of Project debt

  • Project assets are mortgaged to the Lenders along with 100% ownership in the SPV

  • The repayment of debt is from sale proceeds of the units of the Project.

  • Project debt is medium term say 3 to 5 years & is structured based on milestone payments from buyers


Direct Structure

  • Parent owns and undertakes the project and is the borrower

  • Project assets are mortgaged to the Lenders

  • The repayment of debt is from sale proceeds of the units of the Project.

  • Project debt is medium term say 3 to 5 years & is structured based on milestone payments from buyers

Real Estate Development

Project Finance

Project finance includes funding of Industrial Projects, Infrastructure Projects (Energy, Telecommunication, Transport & logistics, etc), Services Projects, and other financial structures. Project Finance candidates include greenfield projects or expansion of existing projects. 

Project finance involves a “ring-fenced” structure, wherein the Project is separated from the Sponsoring company (Project owner) by undertaking the Project in a Special Purpose Vehicle (SPV).


Project Finance Features:

  • SPV Structure: Project is developed in and owned by SPV; hence the lenders/Banks claims are restricted to the SPV and its cash flows, which is a shift from corporate lending structure wherein the Banks have full recourse to the Project Owners.

  • Project Finance is Isolated: Project Finance structure involve lenders having full recourse to the assets and cash flows of SPV. The Project Debt is amortised and repaid from the cash flows of SPV. Project Finance structures ensures that other lenders of the Project Sponsor do not have any recourse to the SPV.

  • Project Debt: The amount of debt that can be mobilised in Project Finance is based on the Projects ability to repay debt from the cashflows generated by that project.

  • Non-recourse or limited recourse:  The project debt is repaid solely from the cash flow of the SPV. The recourse of project debt is to assets and cash flow of SPV. No recourse to Project owners.

  • Structure determination: The structure of project financing relies on future cash flows for repayment of the project finances. The assets and rights held under the project act as collateral for the finance.

  • Terminal Value: Usually there is no Terminal Value in Project Finance which is partly due to the long-term nature of the assets, and the size of the assets.


Advantages of Special Purpose Vehicle (SPV)

  • Ring Fenced Structure: An SPV (Special Purpose Vehicle) ensures that a financial difficulty/default at the Project Sponsor level does not travel to the SPV.

  • Financial independence: Amount of Debt mobilised at SPV is limited to the maximum debt that can be serviced from the cashflow of SPV, which makes SPV financially independent


Project Finance Parties




Why Project Finance?

  • Isolate Project Risk: If a Project is funded as corporate finance; a default at project level could place the corporate at risk. Project financing being riskier than corporate operations; hence, needs to be isolated from existing operations of a corporate to avoid contamination risk.

            Likewise, a default at corporate operations of the  Project owner is isolated from SPV.

  • Off-Balance sheet:  Project Finance usually remains off-Balance sheet for Project owner company

  • Higher IRR: Project finance usually has higher leverage than leverage at corporate level, which has a positive bearing on the Project IRR for the Project owners.

  • No impact on existing cashflow: Project Debt has recourse to project cash flow and does not consume the existing operational cashflow of the corporate (Project owner).

  • Existing Banking limits remain unutilised: Project Finance ensures that the banking limits extended by the banks of Project Sponsor are not utilised for Project Finance.


Stages of Project Finance




Project Finance Risks

Project financing is for projects which carry high risks on the capital employed. There is no revenue for the companies participating until the commencement of operations. During the construction phase, there may be one or two offtake agreements, but no revenue streams. There is no recourse available to the parties funding the projects.

The risks associated with project finance are as below:

  • Construction Risk

  • Operational Risk

  • Supply Risk

  • Offtake Risk

  • Repayment Risk

  • Political Risk

  • Currency Risk

  • Authorisation Risk

  • Dispute Resolution Risk

Project Finance


  • Refinancing involves replacing an existing loan with a new loan that fully repays the original loan. The new loan should ideally have better terms and conditions that justifies the process. Refinancing company's debt in response to market conditions like favourable interest rates can go a long way towards strengthening financial position of the company. 


  • Increased competition among lenders in the corporate debt financing market is leading many companies to evaluate refinancing options. More advantageous terms can extend repayment profile, free up cash flow, or even increase their leverage.


  • Unlike equity, debt can often be refinanced to suit changing corporate objectives and dynamic market conditions. And because debt terms negotiated even one to two years ago can be substantially different from the current environment, refinancing allows companies to “refresh” their debt facilities to current market terms and conditions.


  • It is sound business practice to annually review a company’s debt structure to determine:


  1. if the debt facility maps well to the company’s current business model; and

  2. if the terms and conditions would compare favourably to optimum terms and conditions in the current market.



Rationale for Refinancing


  • Lower pricing: Lower margin on the new refinanced debt for the whole tenor of the debt results in significant interest cost saving.


  • Extra financing: Refinancing is generally accompanied by mobilising debt higher than the original debt, provided it meets with leverage condition of a company, thereby generating additional liquidity.


  • Covenant light structure: Companies with improved credit quality can negotiate debt with less covenants and/or favourable covenant thresholds.


  • Reduced security coverage: An improvement in credit quality results in company able to get a lower security coverage.


  • Increase in tenor: The tenor of debt is usually stretched at refinancing which reduces asset liability mismatch and reduces the annual amortisation.


  • Reducing the number of lenders: Refinancing can also be conducted for changing the lender composition, hence, dealing with a smaller number of banks.


  • Loan Consolidation: Refinancing is also executed to consolidate few loans thereby putting banks on similar terms, which is logistically a better position for the company.


  • Reduced annual outflow: Refinancing is with longer tenor thereby reducing annual amortisation.


  • Shift from project finance to general corporate structure: Debt mobilised on a project finance basis is watertight which after few years of good track record can be refinanced by a general corporate debt which is less onerous.


  • Prevent breaching terms: Refinancing can also be conducted if the company foresees breaching of terms of existing debt.



Cost for Refinancing


  1. Prepayment penalty: Usually, term loans have a penalty for early repayment, which is much harsher for initial years.


  1. Fee: Mobilising new debt will have an incidence of an upfront fee to be paid to lenders.


  1. Unwinding of swaps: If the existing debt has an attached interest rate swap; the swap will need to be unwound which in adverse scenarios (if swap is out of money) has a cost to be paid to the swap counter party.


  1. Relationship impact: Prepaying a bank will generally have a relationship impact unless the existing bank is part of the refinancing exercise.



  • Term loan is extended to part finance the purchase of Machinery/Equipment.


  • Lenders require certain portion of the purchase price of the Machinery/Equipment to be met by the Borrower from their own sources and the balance amount of purchase price is contributed by the Lender as a Term Loan.


  • Term loan amount generally covers 50% to 80% of the total purchase price of the Machinery/Equipment.


  • Lender extends the Term Loan to a Borrower  on certain repayment schedule with a fixed or floating rate of interest.


  • The tenor of the Term Loan for equipment/machinery is 3 years to 7 years. The tenor of the loan is determined based on the future cash flow, borrowers’ financial condition, etc.


  • Term Loan is secured by a charge on the machinery/equipment financed by the said Term Loan.


  • Typically, the drawdown of the Term Loan is made directly to the Seller of the Equipment/Machinery.


Finance Against Shares

Finance Against Shares

Finance against Shares, also known as Margin Loan, is a Secured Facility that allows a borrower to mobilise Facility against the value of securities viz. listed shares, commodities, derivatives, structured products, and other financial products.

  • The Facility allows the borrower to leverage the market value of the marketable securities.

  • The value of the Facility that can be borrowed is determined by the securities in the portfolio, Loan to Value Ratio and a credit limit based on an assessment of borrower’s financial position.

  • It is an interest-bearing loan that can be used to gain access to funds for a variety of reasons that cover both investment and non-investment requirements of a borrower.

  • Buying securities against loan allows borrower to acquire more shares than on a cash-only basis.



Margin Loan Amount

  • Margin lenders allow the borrower to use the value of the shares that the borrower is buying (or own already) as security for the margin loan.

  • Margin lenders specify which shares they are prepared to use for margin lending and the percentage of the share value that can be used as security. The borrower will need to provide cash or other shares to make up the difference between this lending value and the total loan.

  • The amount that a margin lender is willing to lend is determined by the Loan-to-Value Ratio (LVR). For example, if a margin lender extends a loan based on LVR of say 75% and if the borrower wishes to purchase AED 40,000 worth of shares, the margin lenders will lend AED 30,000 to the borrower and the borrower will need to provide the balance of AED 10,000 or other shares.

  • LVR is determined by the type of shares in the portfolio; LVR is set at a lower level if the shares are more speculative or risky.

  • Margin lenders usually have categories of the all the listed shares/other financial securities; the category with the best shares/ financial securities attract the highest LTV and the group with risky shares attract the lowest LTV.

  • The margin lenders also stipulate the diversity of shares within the share portfolio offered as security for the margin loan.

  • This difference between the value of the loan and the current value of stocks offered as collateral is referred to as the "margin"; hence the term "margin lending". This difference must be maintained at a minimum level.


Why Loan against Shares/ Margin Loan

  • Access additional funds for investment which may help the borrower to reach the financial goals faster.

  • Potentially increases the size of investment returns.

  • Interest payable on a margin loan may be tax deductible.

  • Margin Loan provides flexibility to the Borrower to purchase more securities, make a large purchase, or use as a bridge loan for short-term liquidity needs. Basically, Margin borrowing can be used to satisfy short-term liquidity.

  • Margin Loan ensures that the Borrower can access cash without having to sell the investments. Allows the borrower to diversify the portfolio. A larger range of investment choices could increase borrower’s returns and reduce the risk that poor performance in any one investment will drag down the total return.


Margin Loan: Associated Risks

Like any investment, a margin loan involves some risk. While borrowing to invest can potentially increase capital return over the long term, it can also prove to be very damaging when conditions change and if employed incorrectly. Some potential risks associated with margin loan are as below:

  • Risk of a margin call due to share market volatility: Shares are the most volatile out of the main asset classes, rising and falling every day. If the shares offered as security to the margin lender were to suddenly nosedive, borrower could expect a margin call.

  • Risk of having to crystallise losses by being forced to sell into a falling market: Having a margin loan means that the borrower is not as easily able to ride out periods of downturn. This is because when the value of the portfolio dropped which brings down  the LVR above the lenders maximum LVR and buffer, borrower will receive a margin call. If the borrower does not have the cash to meet the margin call, he may be forced into selling the shares at possibly the lowest point of the downturn.

  • Potential to magnify losses: In the same way as a loan has the potential to magnify the gain in a rising share market, a loan also has the potential to magnify the losses in a falling share market.  


  • Risk of LVR changes imposed by the lender: Lenders can adjust their acceptable maximum LVR which can put borrower at further risk of a margin call.

  • Risk of interest rate rises affecting the ability of the borrower to service the debt: If the borrower has a variable rate on the margin loan, an interest rate rise will mean there is more interest to pay on the debt. 


Margin Call

Once the borrower mobilises funds to invest; takes on a risk that if the investments fall in value; the borrower may not be able to repay the loan. As a measure to mitigate this risk, margin lenders take security with a stipulated margin. If required, these investments can be sold to repay the loan (if the borrower is unable to inject additional cash into the loan).

The share prices can move down quite quickly, exposing the portfolio to greater risk. If this happens the shares could be worth less than the loan, creating problems for the borrower and a shortfall of security for the lender. This is the reason why margin lenders limit the amount (LVR) that can borrowed against the shares – that is, to protect themselves against this possible shortfall.

If the value of investments offered as a security fall to a point where the value of the loan exceeds the maximum stipulated LVR by the margin lender; the borrower will be required to top up the security such that the actual LVR is within the stipulated maximum LVR.


If the borrower mobilises a margin loan of AED 30,000 to purchase shares worth AED 40,000 with a maximum LVR of 75% stipulated by the margin lender.

If the value of the above shares fall from AED 40,000 to AED 30,000, the actual LVR would become 100% (AED 30,000/AED30,000) – resulting in breaching the maximum stipulated LVR of 75%.

In the above scenario, a “Margin Call” will be issued immediately by the margin lender, and the borrower will generally only have limited period to correct the maximum LVR to 75%. The borrower’s options in this situation are:

  • inject cash so that the loan balance is reduced

  • lodge additional investments acceptable to the lender to reduce the LVR to 75%

  • sell part of the portfolio and use the proceeds to repay part of the loan

If a margin call is not met the margin lender can sell the shares/investments, pay out the loan and seek payment of the difference between the proceeds of the sale and the margin loan.

Financing To Contractors

The financing to Contractors is extended by Banks based on the Contract awarded to them.  The said financing is specific to the Contract.

Banks analyse (i) the Contract (ii) conduct a due diligence on the Contract Owner, prior to extending Contract Specific Facilities.

The Contract Specific Facilities extended by the Banks are liquidated by the periodic work-based Contract payments received from the Contract Owner. Hence, Banks analyse the feasibility to take payment risk on the Contract Owner.

The Companies need to mitigate the two prime risks that are considered by the Banks prior to extending Contract Specific Facilities:

Performance Risk:       Mitigated by demonstrating to the Bank of the past track record of successfully executing similar                                                contracts and executing contracts for the same Contract Owner.

Payment risk on the Contract Owner:     Mitigated by acceptable financial condition of the Contract Owner and history of timely receipt of payments from Contract Owner on earlier executed contracts. 


The financing typically includes the following Contract Specific Facilities:


Overdraft:                                 A small value of overdraft to meet with project specific day to day expenses

Invoice Discounting:               Facility is extended against project specific invoices certified by Project Consultant (appointed                                                       by the Contract Owner). Meets with the funded project requirements of the Company. Banks                                                       typically extend 70% to 90% of the Invoice value with a tenor of 60 days to 90 days.

Letter of Credit                        LC facility is used to source material for implementation of the contract. The LC could be local                                                     or import.

LATR                                          Loan against Trust Receipts meets with the funded contract specific requirement. The tenor                                                         of LATR is based on the project specific cash flow.

GuaranteesThe following Contract specific guarantees are requested by Contract Owner as part of the Contract from Contractor:

Advance Payment Guarantee:     10% of the Contract Value

Performance Guarantee:              10% of the Contract Value, which reduces to 5% on contract completion

Retention Guarantee:                     5% of the Contract Value

Financing to Contractors


  • Restructuring is a tool to work out the problems of a borrower that is facing financial difficulties, without pursuing collateral execution or legal process.

  • If the borrower fails to repay the Facilities in compliance with the facilities agreement’s terms and conditions, the Bank may request the repayment of Facilities. If necessary, the Bank may initiate legal procedure and/or collateral execution. It is in all parties' best interest the Borrower contacts the Bank as soon as possible when financial difficulties are identified, to start the discussions with respect to restructuring of Facilities.

  • The restructuring should start when the Bank believes that a stable repayment schedule might be established, and the Borrower will be able to pay the restructured Facilities in accordance with the new terms and conditions.


Early Signs of Debt Restructuring

  1. Breach of covenants

  2. Missing debt repayment or interest payment

  3. Refinancing challenges

  4. Unpaid overdue creditors

  5. Unsustainable debt

  6. Operational loss or net loss

  7. Unpaid salaries


Debt Restructuring – Reasons

  1. Absence of financial planning and execution.

  2. Tougher market conditions.

  3. Borrower is not able to generate enough cash flow for debt serviceability.

  4. Spiralling out of control of Debt burden.

  5. Missing repayments and breach of covenants and conditions of banking facilities.

  6. Avoidance of an open and candid engagement with Banks.

  7. The financial situation is not timely managed.


Key Stages of Debt Restructuring

The key stages of a debt restructuring are usually:

  1. stabilising the borrower by ensuring that its creditors enter into a standstill agreement

  2. preparing valuations and the information needed to show that the restructuring will result in a viable borrower – this often includes due diligence, business plans and forecasts etc., and

  3. signing and implementing the restructuring agreement (the form of which will depend upon the type of restructuring which is to be adopted)


Restructuring Takeaways:

  1. Restructuring provides the Borrower the possibility to successfully handle the financial difficulties and continue fulfilling its obligations.

  2. Restructuring avoids the negative macroeconomic effects which might arise from the execution of properties/assets pledged as collateral.

  3. Restructuring reduces encumbered court procedures, by reducing the number of cases and the prolonged court sessions.

  4. Restructuring is more effective than a legal process (the dispute is resolved more rapidly and provides for the recovering of a higher percentage of the debt).


Debt Restructuring Approaches


1. Break-up/Sale of non-core assets:

A borrower may be able to alleviate its position by selling non-core assets or parts of the business and using the proceeds to pay down its debt (leaving the equity in place as is). A secured lender will need to give its consent to any break-up plan and be comfortable that (1) the amount realised from the sale is appropriate and (2) the remainder of the business will generate sufficient profits to repay its debt.


2. New Equity Injection:

The starting point for many borrowers facing financial difficulty is likely to be to look to raise additional equity to fund the business through a downturn. This might be an attractive solution where it is felt that the business is fundamentally viable but is suffering temporarily from poor trading conditions and constrained cashflow. Any existing equity holder that does not participate in the new round risks being diluted as a result.



3. Debt for Equity Swap:

In a debt-for-equity swap financial creditors receive shares in the restructured borrower in return for reducing or cancelling their debt claims. The debt-for-equity swap reduces the borrower’s balance sheet liabilities and potentially allows a lender to take some of the upside once the restructured borrower returns to profit – either through being entitled to dividends or in the event of any subsequent sale or exit. The pre-existing equity holders will, of course, be diluted as a result of the swap. 


4.  Transfer to Newco:

A variation of some of the above ideas is for all debt and equity stakeholders to agree to a plan to transfer the borrower’s good or performing assets or business to a newly formed company (Newco). In return for reducing or cancelling their debt claims against the borrower, financial creditors may take: (i) debt in Newco, (ii) equity in Newco or (iii) both.



Other Restructuring Options


Scheme of Arrangement:


  • It is effectively a court-sanctioned compromise, between a company and its creditors or members. The subject of a scheme of arrangement may cover anything that the company and its members or creditors would otherwise be able to agree between themselves.


  • The scheme of arrangement process allows a compromise to be implemented without the support of all the interested parties. Because of their flexible nature, schemes of arrangement are often used in more complex restructurings involving different tiers of debt and equity that would struggle to achieve agreement otherwise.


  • A valuation in the context of a scheme of arrangement is used to estimate the value that would be obtained for the business if the scheme of arrangement were not to happen. The context and manner in which a business is sold can of course drastically affect the amount, or value, realised in a sale.





  • It is a sale of a company’s business or assets, or both, which has been arranged in advance of a company entering administration.


  • Once an administrator is appointed over the company, they will quickly close the sale so that the company should either not need to incur the costs of trading in administration, or if so, this is for a very limited time. The purchaser is identified, and the terms of the sale are agreed before the administrator is appointed, although the proposed administrator will usually be involved prior to their appointment.

  • Sales in pre-pack situations are generally subject to far less due diligence than a standard corporate sale. Warranties or guarantees are rarely, if ever, given, and assets will be sold as seen. It is commonly used as a way of obtaining value from assets when the publicity of a formal insolvency may devalue those assets, such as goodwill.


Loan against POS receivables

What is POS?

Point of Sale (POS) is a place where the purchase transactions are made by customers by using credit cards or debit cards.

When a customer is buying something from a store, they are completing a Point of Sale (POS) transaction. The point of sale could be a store, hospital, hotel, fuel station, school, or any other location where the POS machines are used to accept payments from customers by using credit cards or debit cards.



The Financing against POS Receivables is availed as short-term to medium term facility against the POS receivables.

Financing is structured either as an overdraft or as a loan with a tenor of up to a maximum of 5 years.

The  finance is amortised and repaid usually in monthly instalments from the POS receivables.

Financing being self-liquidating in nature; the Banks/lenders are agreeable to  extend such financing usually with no collateral.



  • Financing is competitively priced vis a vis other type of loans

  • The credit approval process is simple

  • Banks consider volume of POS transactions, value of transactions, track record of POS operations for last 2 to 3 years.

  • Financing is available as conventional finance or Islamic finance

  • POS receivables are assigned to the Bank/ lender

  • For small value of such financing, the credit approval process is simple and fast with banks largely conducting due diligence around the POS receivables. Banks consider track record of POS receivables of up to last 2 years.

  • For larger financing amounts, credit approval process of Banks includes credit assessment of full operations of the borrower, its past financials, etc along with due diligence around POS receivables.    


End Usage

The  finance against POS receivables can be used for the following purposes:

  • Business expansion

  • Opening another outlet,

  • Financing inventory,

  • Finance fixed assets,

  • Finance debtors

  • Any other operational expense

Loan against POS receivables

Bridge Loan

Bridge Loan provide short-term financing and are a “Bridge” to a certain liquidity generating event.

Bridge Loan is typically short-term in nature say up to 12 months and are paid off by  the proceeds of a liquidity event.

Some of the liquidity events wherein the Bridge Loan could be used are as below:


  • Initial Public Offering/ Rights Issue

  • Bond Issuance

  • Sukuk issuance

  • Syndicated Debt issuance

  • Asset Disposal

  • Sale of a division/unit

  • Refinancing

  • Acquisition Finance


Why Bridge Loan

  • Comparatively quick to mobilise: given the short-term nature of financing, its comparatively quick to mobilise from Banks/lenders.

  • Meet with urgent cash usage: Bridge loans facilitate companies to meet with urgent cash requirements (example: consideration for an acquisition) till  the time permanent financing (IPO, Bond, syndicated debt) is mobilised.

  • Meet with refinancing: Facilitates meeting with a large balloon/bullet payment of an existing loan.

  • Mobilised to defer permanent financing: till the loan market is conducive to mobilise permanent financing.


 Pros & Cons of Bridge Loan


  • Easy and quick to mobilise

  • Facilitates meeting immediate financing requirements

  • Unsecured in nature

  • Typically, bullet repayment with no amortisation

  • Comparatively simple documentation



  • Expensive than permanent financing

  • Short-term arrangement

Bridge Loan

Acquisition Finance

Acquisition Finance is mobilising capital or funds to complete the acquisition of a company by another company. It is the process of obtaining capital set aside for a particular acquisition or for the acquisition purpose in general for companies that regularly undertake acquisitions.

Acquisition finance can take several different forms including Debt, Equity, or some form of Hybrid instrument.

Acquisition financing is rarely procured from one source. Several available financing alternatives are weighed, and an appropriate mix of financing is selected that offers the lowest cost of capital to the acquirer. Further, it gives the acquirer an incentive to go for only those targets which can lead to a positive Net Present Value.

Acquisition financing options available to an acquirer will typically be situation-specific and will depend on, among other things, the acquirer’s current balance sheet, the amount of financing required, the nature of the business being acquired and whether the acquirer is willing to give up an ownership stake.

Companies can derive multiple benefits from acquiring other companies, such as business synergies, economies of scale and increased market share.


Acquisition Finance Options:


 1.Own funds of Acquirer

If the acquirer has enough surplus cash with no other alternative usage of the cash; acquirer  can utilise 100% of own funds to fully finance the acquisition. However, self-funding on a full basis is a rare option unless the acquisition value is not significant vis a vis the size of the acquirer.

2.Acquirers’ equity

Acquirers’ own equity is offered as a consideration to finance the acquisition. This option dilutes the equity interest of the owners of the acquirer. Equity being most expensive form of capital; this option is used if mobilising debt is less probable.


3.Share swap

If the Acquirer as well as Target are publicly listed companies; share swap could finance the acquisition whereby the owners of the target receive shares of the merged company. This financing option could be used to facilitate the owners of Target to remain involved in the business of merged company.  


 4.Acquisition financed by Bank Debt

Financing acquisitions by debt is the most common option; debt being the least expensive form of capital. Mobilising Bank Debt but will be dependent on the acquirer (or the target) having assets that can be used as collateral as well as the acquirer’s ability to demonstrate that it will have sufficient cash flows to service the loan.


5.Acquisition financed by Mezzanine Finance

Acquirer could use Mezzanine Finance to fund an acquisition. Mezzanine finance is expensive in comparison to Bank finance., hence, Mezzanine finance is usually used by acquirers in combination and in addition to the bank finance. If the total debt financing requirement is more than the ability of banks to extend financing, mezzanine finance is moblilised. Mezzanine lenders are more focused on the acquirer’s ability to service the debt based on future cash flow and are less reliant on the acquirer providing collateral.


6.Acquisition financed by Bond/Sukuk issuance

Acquirer could mobilise funds from capital market by way of Bonds or Sukuk, which is a separate pool of liquidity available to companies. Mobilising funds by this option preserve the existing banking limits of acquirer. Bonds/Sukuk do not  amortise and have a bullet repayment structure which provides acquirer with the desired flexibility to manage its cash flow. However, mobilising funds thru capital market could take a longer time.


 7.Leverage Buy Out

Financing option that uses high leverage and marginal equity to finance an acquisition. Aacquirer in a leveraged buyout, typically a private equity firm, will use its assets as leverage. The assets and cash flows of the Target are also used as collateral for the financing. Acquirers like leveraged buyouts as they put marginal equity resulting in a high Internal Rate of Return.


 8.Private Equity firms

Acquirer could join hands with Private Equity firms for the acquisitions. In this option, the PE firms take a stake in the Target along with the acquirer. The PE firms are also involved in management decisions of the Target.

Acquistion Finance

Syndicated/Club Loans

  • Syndicated/Club Facility is typically a large sized Facility arranged thru a group of lenders.


  • All the participating lenders in a Syndicated/Club Facility are on the same commercial terms for the Facility.


  • The participating lenders are bound in the Facility by a common documentation with all the lenders on the same terms and conditions with a common security package.


  • The participation amount of each of the lenders in the Facility could vary significantly.


  • The number of participant lenders is a function of the size of the Facility and the interest evinced by the lenders. However, for efficiency of the Facility administration, typically a minimum participation amount is fixed for a syndication/club.



Syndication Process

Step 1:             Borrower approaches a Bank to arrange a large sized Facility.

Step 2:             Based on the size of the Facility one or more lenders are appointed by the Borrower as Mandated Lead                                       Arrangers (“MLAs”) to the Facility.

Step 3:             of banks, geography to be covered, participation amount, road shows, etc)  among themselves and with the                                consent of the Borrower for the syndication of Facility with other lenders Borrower agrees the Term-                                            Sheet(detailing commercial terms) with the MLAs based on which the Facility would be arranged.

Step 4:             MLAs agree the syndication strategy (detailing type of banks, number.

Step 5:             MLAs divide the syndication work within themselves.

Step 6:             Borrower appoints Facility Agent and Security Agent, lenders legal counsel  and borrowers legal counsel for                               the Facility.            

Step 7:             Information Memorandum, Financial Model, Company presentation, Invitation Letter, and other documents                             are prepared by the Borrower with the MLAs.

Step 8:             A target list of Banks to be approached for syndication is prepared by the MLAs and then consented by the                               Borrower.

Step 9:             Entire Information Pack of the syndicated deal are uploaded to Intralinks/Debt Domain

Step 10:           Deal is launched with invitation sent to potential participants.

Step 11:           Borrower and MLAs facilitate the credit approval process of the participating Banks.

Step 12:           Commitment to participate in the Facility from participating banks is received by the MLAs.

Step 13:           MLAs aggregate the total commitments received from participating banks. In case the total commitment                                   exceeds the Facility size, MLAs along with the Borrower scale down the commitments of participating banks                               such that its aggregates to the Facility size.

Step 14:           Borrowers legal counsel drafts the Facility documentation which is then circulated to all MLAs an                                                  participating banks for their consent.

Step 15:           Facility documentation is signed once in agreed form.

Step 16:           Lenders legal counsel provides confirmation to participating banks once all the Conditions Precedent are                                    satisfied by the Borrower, which leads to the drawdown of the Facility.


Parties to a Syndication

  • Mandated Lead Arrangers (MLAs): Banks responsible to structure and arrange the Facility with participating Banks.

  • Participating Banks: Banks that participate in the syndication of the Facility

  • Facility Agent: Typically, a bank who is responsible for the administration of the Facility viz. advising participating lenders on interest rate, interest period, collecting participation amount of Facility, remitting interest and principal to participating lenders, transfer of facility, etc.

  • Security Agent: Typically, a bank who is responsible to  hold the security on behalf of all the lenders. The role of Facility Agent and Security Agent could be played by a same Bank.

  • Lenders legal counsel: Legal counsel who facilitates the documentation for the lenders.

  • Borrowers legal counsel: Legal counsel who facilitates the documentation for the Borrower.





Advantages of Syndication

  • Mobilises large sized Facilities: Syndication facilitates mobilisation of large sized facilities given several participating Banks.


  • Individual exposure of Banks is limited: Given several participating banks; individual commitment of Banks is limited, which leaves room for them to take additional exposure on the borrower later.


  • Banks tied to a common documentation: All participating banks have a common document, which is administratively easier for a Borrower.


  • Borrower initiates relationship with several Banks: Borrower can initiate relationship with several banks at one go, which can then be enhanced on a bilateral basis.


  • Documentation is LMA standard: Documentation is LMA (Loan Market Association) standard rather than bilateral documentation of individual banks.


  • Dealing with Facility Agent: Borrower needs to deal with Facility Agent rather than individual participating lenders for administration of Facility, which is logistically efficient.

Syndicated Facility

Mezzanine Finance

  • Mezzanine Finance fills the gap between Senior Debt and Equity. It's subordinated to the Senior Debt and could have an option for a conversion to Equity.


  • Mezzanine Finance is used to finance aggressive growth plan, acquisitions or it's utilised to achieve goals that require capital beyond what senior lenders will extend.


  • Mezzanine Finance is expensive than Senior Debt and is priced higher than Senior Debt; given its risk profile vis a vis Senior Debt. Mezzanine Finance is cheaper than Equity in terms of overall cost of capital and is less dilutive than raising Equity.


  • Mezzanine Finance is means by which companies can access capital beyond what they're otherwise able to achieve on a senior basis. Mezzanine financing is also the last stop along the capital structure where owners can raise substantial amounts of liquidity without selling a large stake in their company.


  • Mezzanine financing is usually unsecured and subordinated to Senior Debt both structurally in terms of its right of repayment, as well as time subordinated with a longer dated maturity, which leads most senior lenders to consider mezzanine financing as “equity” like, sitting behind their facilities. 



End use of Mezzanine Finance

Mezzanine Financing is generally used in the following transactions:

  1. Acquisitions

  2. Growth Capital

  3. Refinancing

  4. Recapitalisation

  5. Restructuring

  6. Leverage buyout

  7. Management buyout

  8. Shareholder buyout


As Mezzanine Finance is the most expensive form of debt, it is only used when the alternative would be raising additional equity. 



Mezzanine Finance - Structures

Generally used structure for Mezzanine Financing is a subordinated, unsecured term loan plus warrants. Since the loan is subordinated and unsecured, borrowers should have positive cash flow.  Some of the structures for Mezzanine Financing are as below:

  • Subordinated debt plus an "equity kicker" in the form of warrants to buy Equity

  • Subordinated debt plus an equity co-investment

  • Subordinated debt without equity

  • Convertible debt

  • Preferred equity


Mezzanine Finance – Process

  • Mezzanine debt is typically issued through privately negotiated transactions. A Mezzanine lender’s decision to extend loan to a borrower is usually based on the Borrower’s ability to generate free cash flow (as opposed to being based on asset backing) and on the growth prospects for the business and industry.

  • Mezzanine lenders would require access to company information, such as past audited financial statements, and other information on the borrower. This gives mezzanine financing lenders better understanding of the borrower, negotiate terms and structure loan in way that is appropriate for the underlying business.

  • Mezzanine lenders (depending upon size of Mezzanine Finance) negotiate board observation rights as part of the terms of their lending. Receiving board of director materials and attending the meetings, alongside what is often frequent dialogue with company owners and management, gives mezzanine lenders the ability to closely monitor their loan and stay ahead of potential business issues. It also helps to speed with company performance and knowledgeable should amendments to the credit documents be necessary.


Mezzanine Finance – Advantages & Disadvantages


  • Mezzanine financing is ultimately a way for companies to grow faster than they could otherwise on a senior basis alone

  • Mezzanine financing provides more flexibility in terms of looser financial covenants and fewer conditions than traditional bank loans

  • It allows companies to mobilise liquidity that requires capital beyond senior debt availability

  • Mezzanine Finance is comparatively long term, small amortization during its tenor with a large balloon payment

  • Recapitalisation by Mezzanine Finance results in the existing owner retaining the control of the company



  • Expensive than Senior Debt

  • Mezzanine Finance could have an embedded option to convert into equity resulting in a small level of equity dilution

  • Generally, includes prepayment penalty

  • Full upfront drawdown


Mezzanine Finance – Providers

  1. Private Equity Companies

  2. Hedge Funds

  3. Investment Companies

  4. Banks (very selectively)

  5. Other non-bank lenders


Fleet Finance

  1. Fleet Finance is extended by Lenders to part finance the purchase of fleet of cars/ buses/ trucks

  2. Fleet Finance includes financing of vehicles for commercial purposes

  3. Facilitates companies to source cars/ buses/ trucks; enhance capacity, improve average age of fleet, improve efficiency, etc.

  4. Fleet Finance is for new or old vehicles

  5. Ensures preservation of existing working capital in the business as separate Fleet Finance is mobilised to purchase the fleet.


Typical Financing Terms

  1. Financing amount is generally in the range of 60% to 80% of the purchase price

  2. Medium term financing; typically, in the range of 3 to 7 years

  3. Drawdown of the Facility is in sync with the terms of the Purchase Agreement

  4. Drawdown is directly made to the Seller of vehicles

  5. Amortisation of the Financing is by income generated from the fleet or from other finance sources of the Company

  6. Typical security package includes charge on the vehicles and registration of the charge with the relevant govt. department, assignment of income, guarantees, etc.

  7. Financial covenants/ Undertakings are typically included by lenders as part of the financing terms

Fleet Finance

Loan to Holding Companies

  • Holding Company is the converging company at the top level of a Group Holding Structure that directly and indirectly has majority ownership (largely full ownership) in all the companies of a Group. Usually, the ultimate shareholder owns the Holding Company which in turn has ownership in subsidiaries.


  • Holding Company’s purpose, as the name implies, is to hold the equity interests in other companies. Some of the subsidiary companies it owns do manufacture, sell, or otherwise conduct business. These are called operating companies. Other subsidiaries could hold real estate, intellectual property, vehicles, equipment, or anything else of value that is used by the operating companies.


  • Holding Company consolidates all the operations of the Group. Subsidiaries are formed under holding company to conduct different business activities and sometimes to meet with local regulatory requirements.


  • Typically, Holding Company does not conduct any operational activity. Its sole income is the dividend income from its subsidiaries.


  • Each subsidiary has its own management  who run the day-to-day business. The holding company’s management is responsible for overseeing how the subsidiaries are run.



HoldCo – Where is it used

  • Holding companies are used by businesses of all sizes and in all industries. Many of the best known publicly traded corporations are actually holding companies.

  • A holding company structure is popular with large enterprises with multiple business units. 

  • The company’s trademarks, equipment, and real estate may be placed in separate subsidiaries, with the operating companies paying to use the trademarks, lease the equipment, and rent its offices.

  • Holding companies can also be used by much smaller businesses—even by single entrepreneurs.




Features of Holding Company (HoldCo) Financing

  • HoldCo Financing is provided at holding company level, the debt is structurally subordinate to the Senior Debt, or any other indebtedness incurred at Operating Group Companies (OpCo Group) level.

  • Typically, the lenders under the HoldCo Financing arrangements are different to the lender providing the Senior Debt. However, certain lenders providing Senior Debt to the OpCo Group also make available the HoldCo Financing.

  • HoldCo Financing provides a mechanism allowing the HoldCo and its subsidiaries to increase the leverage of the wider group. Given the debt is being provided above the OpCo Group level, financial and other covenants under the Senior Debt arrangements could be avoided to be impacted because of the HoldCo Financing.

  • The indebtedness incurred by the HoldCo typically falls outside of the OpCo Group, consents or waivers that are required pursuant to the Senior Debt finance documents could be avoided. In addition, intercreditor arrangements are not usually entered into with the Senior Debt finance parties.

  • Given the HoldCo is a holding company only and does not generate cash, it is reliant on distributions from the OpCo Group in order to discharge payments due under the HoldCo Financing. A prospective lender to the HoldCo should be familiar with any distribution conditions under the Senior Debt arrangements and be comfortable that the revenue stream will be sufficient to discharge any payments due under the HoldCo Financing.

  • Undertakings and covenants under the HoldCo Financing usually apply to HoldCo and the corporate group below the HoldCo (including members of the OpCo Group). While members of the OpCo Group will not be party to the relevant finance documents, the HoldCo, as the ultimate parent of these entities, undertakes and covenants that it will procure compliance by these entities with the relevant provisions of the HoldCo Financing arrangements.


HoldCo: Advantages

  • Liability protection

            Placing operating companies and the assets they use in separate entities provides a liability shield. The debts of each subsidiary belong to that subsidiary. A creditor of the subsidiary cannot reach the assets of the holding company or another subsidiary.


  • Control assets for less money

            A holding company needs to control its subsidiaries but doesn’t necessarily need to own all shares or membership interests. That allows the holding company to obtain control of another company and its assets at a lower cost than if it had acquired all of the subsidiary’s ownership interests.


  • Lower debt financing costs

A holding company that has financial strength can often obtain loans for a lower interest rate than its operating companies could themselves avail.


  • Central Control

            Usually, the management of the holding company and the subsidiary companies is controlled by the directors of the holding company. This provides a cohesive and centralised management structure that allows the holding company to maximise its performance and growth.


  • Flexibility for Growth and Development

            Having the assets held by the holding company allows the group to diversify more efficiently, invest in new ventures; and exit ventures if needed.



  • Succession Planning

            A holding company, with a centralised board of directors, can ensure continuity of the business when key people from the operating companies leave.  



HoldCo: Disadvantages


  • Complexity

The use of holding companies and subsidiaries adds an element of complexity not found in the single-entity structure


  • Management challenges

            Holding companies typically prefer to influence the operating company's policies and management decisions. If the operating company does not agree with the parent company's decision, this frequently leads to a management conflict.


  • Cost

            The cost for using such a structure is a bit steep. 



HoldCo Financing: Security


The security package provided pursuant to HoldCo Financings usually consists of one or more of the following security documents:


  • share charge granted by the shareholder / sponsor over the shares in HoldCo;


  • Share charge over HoldCos investment in OpCo Group.


  • all assets granted by the HoldCo (excluding any assets already secured pursuant to the Senior Debt arrangements).

  • account charge granted by the HoldCo over a bank account in which distributions from the OpCo Group are to be made; and


  • bespoke guarantees or security granted by the shareholder / sponsor or related parties.



HoldCo Financing: End Use


 The capital provided pursuant to a HoldCo Financing is often used for one of the following purposes:

  • to make a distribution to the sponsor / shareholder of the HoldCo (usually in circumstances where the ability to make distributions at OpCo Group level is prohibited or restricted pursuant to the Senior Debt finance documents);


  • to finance an investment in the OpCo Group to be made by the HoldCo; or


  • to finance an investment to be made by the HoldCo of certain assets outside of the OpCo Group; or


  • to finance an acquisition.

Loan to Holding Companies

Loan from Export Credit Agencies

  • Export Credit Agencies (“ECAs”) are national government-owned or affiliated entities that support exports of goods and services from their own countries by providing financing to foreign purchasers of those goods and services.


  • The fundamental purpose of ECAs is to increase the volume of exports from domestic producers of goods and services by opening overseas markets for such products through the provision of financing and other financial risk-reducing products.


  • ECAs complement the private commercial banking and credit insurance markets, offering an additional liquidity source for counterparties, usually with longer terms and lower costs.


  • ECA funding is not only a matter of credit risk mitigation, but it also enables projects to access a much larger pool of liquidity.


  • ECAs provide:

  1. Direct funding/loans,

  2. Loan Guarantees,

  3. Export Credit Insurance


  • ECAs principally utilize three methods to provide funds to an importing entity:


  • Direct lending, which is the simplest structure whereby the loan is conditioned upon the purchase of goods or services from businesses in the organizing country.


  • Financial Intermediary Loans, where the ECA lends funds to a financial intermediary, such as a commercial bank, that in turn loans the funds to the importing entity.


  • Interest rate equalization, a commercial lender provides a loan to the importing entity at below market interest rates, and in turn receives compensation from the ECA for the difference between the below-market rate and the commercial rate.


Financing Structure

ECA products can be offered as either a supplier's credit or buyer's credit.


Supplier's credit, the ECA loan or guarantee is made to or benefits the domestic exporter (the supplier of the goods or services) and the supplier is then able to include financing terms to the foreign buyer, assisting their purchase of the supplier's goods or services.


Buyer's credit, the ECA loan or guarantee is made to or benefits the foreign buyer, allowing the buyer to finance its purchase of the domestic exporter's goods or services


ECA participation in major project financing transactions generally use buyer's credit structures and are on a long-term basis (10 to 15 years).


Most exportation credit agencies are structured to provide finance for the medium [2>5 years] to long term [5> 10 years] however some can specialize in short term [<2 years].


The credit, insurance and guarantees risks are almost always under the responsibility of the sponsoring borrower



Buyers Credit Structure







Suppliers Credit Structure






Project Finance


ECAs have the purpose of supporting their own national exports, generally there are domestic content requirements that must be satisfied for an ECA to provide a loan or guarantee.


In project finance, usually the borrower or project company works with the EPC contractors and other suppliers to ensure that domestic content rules are followed.


Project financing always results in certain costs being incurred in the host country. For example, site preparation, concrete and steel installation, and other such activities will require local labour, equipment, and supplies. Such project-related costs incurred in the project borrower's country are referred to as 'local costs' and ECAs will often provide credit support for a fixed percentage of the local costs in addition to the national export costs they are financing. This provides project borrowers with an ability to obtain credit from ECAs for a larger portion of the overall project financing needs and assists project economics by wrapping more of the total project debt into the ECA facilities.


ECA provides through its loan or guarantee to the project company borrower in the range from 80% to 100% of cost of eligible goods and services, depending upon the ECA being employed in the specific transaction.


The most used ECA structures in project financing are as below:


  • ECA direct loan structure: the ECA makes a direct loan to the foreign project company to support the purchase by the project company of the exports supplied under the goods and services supply agreement between the project company and the domestic exporters.


  • ECA guaranteed loan structure: This structure is very similar to the previous one, except that the ECA provides a guarantee of loans made by a bank or banks to the project company for its purchase of the exports supplied by the domestic exporters.


The project company or borrower established for the project financing transaction can borrow the ECA loan (or borrow from banks guaranteed by the ECA) and can pair the ECA-supported financing with other project debt borrowed by the project company, thereby assembling a complete financing package for the project with long repayment terms, enhancing project and sponsor return.



Typical ECA Conditions


  • The sale must involve capital equipment and project-related goods and services.


  • The importer must pay at least 15% of the contract amount in advance.


  • Whilst 85% of the contract amount may be export-financed, the guarantee may also cover certain expenses for establishing the financing, such as the guarantee premium paid to an export credit agency.


  • The maximum period between instalments is six months.


  • The portion of the export from the exporter's home country must be at least 20%-50%, depending on the importer's country and the export credit agency involved.


  • The local part of the contract must be covered by the down payment.



Advantages to Parties




  • Eliminating the risk of non-payment by payment on delivery of goods and services


  • Enhanced competitive position in export markets through access to long-term financing solutions


  • Access to new markets, while substantially mitigating the financial risks involved in the commercial transaction





  • ECA finance solutions allows them to buy capital goods and services


  • Repayment periods that are longer than other term loans


  • Pricing that is often lower than non-ECA loans


  • Value covered by the ECA is generally excluded from a Company's overall credit




Export Credit Agencies

Loan from Export Credit

General Corporate Loan

General Corporate Term Loan provides flexibility to Company in its usage


It’s a balance sheet-based lending; driven solely on the strength of financials of the Company and amortised from general revenue streams of the Company.


General Corporate Term Loan could be utilised for the following:


  • Strengthen the liquidity position

  • Purchase of machinery

  • Purchase of office equipment’s

  • Dividend payment

  • Lending to subsidiary companies

  • Meeting debt servicing commitments

  • Refinancing of banking loan

  • Other corporate uses


General Corporate Term Loan is typically of medium-term tenor and provides the desired financial flexibility to a Company.


Typical Terms:

  • Medium term financing; typically, in the range of 3 to 7 years

  • Unsecured or Secured basis; depending upon the financial strength and background of the Borrower.

  • Drawdown of the Facility to be over 3 months to 6 months to meet with various corporate financing requirements

  • Amortisation of the Financing to be from various income sources available with the Company

  • Financial covenants and Undertakings

General Corporate Loan


Factoring is an asset-based method of financing being the purchase of book debts of a Company by the Factor, thus realising the capital tied up in accounts receivables & providing financial accommodation to the Company.

Contract between the Factor and Supplier that involves:

  • Supplier assigns/sells receivables to the Factor

  • Factor performs the following:

  1. Financing of the invoices

  2. Collection of receivables

  3. Sales ledger maintenance

  4. Credit protection against bad debt

  • Notice for assignment of receivables is given to Debtors


Factoring Process:



How does it work?

  • The Seller makes a sale, delivers the product or service, and generates an invoice. The Factor buys the right to collect on that invoice by paying the Seller invoice’s face value less a discount (say 15% to 30%). The Factor pays 70% to 85% immediately and pays the remains the when the Buyer pays.

  • Factor is more focussed on Buyer’s ability to pay than the Sellers financial status.

  • It’s a financing transaction to generate cash flow for the Seller.


Factoring Features


  • Immediate realisation of cash from Factor

  • No cost to the Buyer

  • Credit Insurance up to say 90% of invoice value

  • Sales ledger maintenance

  • Cost savings


Types of Factoring


1.Recourse factoring

Agreement where a company sells its current invoices to a Factoring Company with the understanding that the company will buy them back if they go uncollected.


2.Non-recourse factoring

Allows a company to sell its invoices to a Factoring Company without the obligation of absorbing any unpaid invoices. Instead, if the customers renege on their payments or pay their invoices late any losses are absorbed by the Factoring Company, leaving the business unscathed.


3.Confidential and undisclosed factoring

Arrangement between the factor and the client are left un-notified to the customers and the client collects the bills from the customers without intimating them to the factoring arrangements.



Reverse Factoring


Reverse factoring is also known as supply chain finance. It is a buyer led financing option wherein both the suppliers & the buyers receive a short-term credit against the invoice.


Under reverse factoring, the suppliers sell invoices to banks or financial institutions at a pre-determined discount rate. By selling invoices the supplier gets immediate access to cash whereas buyers get more time to pay the invoices. We can say that reverse factoring is a three-way financing process wherein supplier, buyer & financial institution, all three are involved in the transaction.





Reverse Factoring Process


  1. The buyer places an order with the supplier

  2. Supplier fulfills the order and makes invoice for the buyer

  3. The buyer then approves the supplier’s invoice and confirms that it will pay the bank/financial institution at maturity of the invoice

  4. The supplier then sells the invoice to bank/financial institution at a predetermined discount rate

  5. Thereafter the supplier receives the payment (funds) against the invoice immediately from the bank/financial institution

  6. As agreed by the buyer, at the maturity of invoice, buyer pays the invoice amount to bank/financial institution





  • Forfaiting is a mechanism where the exporter surrenders its rights to receive payment against the goods and services rendered to the importer, in exchange for a cash payment from the forfaiter.

  • A written letter of credit or a guarantee is made by a bank, usually in the importer’s country.

  • In forfaiting arrangements, the trade receivables are financed up to 100% without recourse. The arrangements can involve dealing with negotiable instruments.

  • Improves exporters working capital requirements.

  • Removes the receivable from your balance sheet in accordance with IAS 39 accounting standards.



Factoring vs Forfaiting



  • Factoring is both domestic and foreign trade finance. Whereas forfaiting is only financing of foreign trade.

  • Factoring provides only say 80% of the invoice. But 100% finance is provided in forfaiting.

  • In factoring, invoice is purchased belonging to the client. Whereas the export bill is purchased in forfaiting.

  • Factoring transaction does not set up in Negotiable Instrument. Forfaiting establishes on negotiable instrument.

  • Factoring may have recourse to seller in case of default by buyer. But there is no recourse to exporter in forfaiting.

  • Factoring may be financing a series of sales involving bulk trading. Only a single shipment is financed under forfaiting.


  • Revolving Credit Facility provides the borrower with the ability to draw, repay, and redraw the Facility. Revolving Facility is a flexible Facility due to its repayment and re-borrowing features.


  • Revolving Credit Facility does not have a fixed repayment schedule vis a vis a Term Loan; the Revolving Facility is fully repaid on a bullet basis on the final maturity date of the Facility.


  • Revolving Credit Facility can have several constituent loans (tranche); drawn on different dates. Each of the constituent loan (tranche) is with a tenor of 30 days to 180 days. On the maturity date, constituent loan (tranche) is either repaid or rolled over. Lender could also suggest a cooling period of say 2 days to 5 days between repayment and redrawing of the tranche.


  • Revolving Credit Facility is typically extended with a tenor of 3 years to 5 years.


  • Revolving Credit Facility could be used by Companies to finance asset purchase, strengthening working capital position, finance the cash flow mismatch, acquisition, dividend pay-out, etc.


  • RCF gives Companies the ability to draw down and repay the loan as often as required over its life for agreed periods, making it ideal for cyclical cashflow challenges.


  • A Commitment Fee is paid on the undrawn amount of the Revolving Credit Facility. Commitment Fee is typically 20% to 30% of the Margin on the Revolving Credit Facility.


  • The borrower is only charged interest on the amount withdrawn under RCF, not on the entire RCF.


  • RCF is typically extended by the lenders to companies with good financials; given the flexibility in its end usage and repayment terms.


  • RCF can be extended on a secured or on an unsecured basis by lenders.

Term Loan

Term Loan instalments once repaid cannot be redrawn


Flexibility to draw, repay and redraw

Term Loan is available for drawdown typically for 3 months; the project finance loans are available for drawdown during construction period

Availability Period

RCF is available for drawdown for its entire tenor

Term Loan has a fixed repayment schedule

Repayment Schedule

RCF can be repaid and redrawn. RCF is fully repaid on a bullet basis on Final Maturity Date.

Term Loan can have a tenor of 18 months to 12+ years depending upon its purpose


Typically, Term Loan does not have tranches. However, Term Loan may have 2 to 3 tranches.


RCF is of medium term with a tenor of 3 years to 5 years

RCF has multiple tranches with different maturities

Revolving Credit Facility (“RCF”)

Revolving Credit Facility
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