SME Connect Structured Finance

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An initiative for SMEs that goes ‘beyond banking’ – ‘ICICI Bank presents SME Connect’ is a unique series featured in the Times of India. It explores new and innovative avenues of growth for SMEs and Emerging Corporates setting the platform for the big corporates of tomorrow; featuring topics of interest that will surely benefit you and your business. SME Connect seeks to empower SMEs with the know-how and skills in order to be globally competitive. Feel free to tap the expertise of our panel. Please write to us at smeconnect@icicibank.com.

ur first feature on ‘Structured Finance’ appeared in the Times of India on July 16, 2010, and was well-acknowledged by readers post which we received many queries on Structured Finance. Following are some of the questions asked that have been answered by our expert.

     
  Q: What are the typical situations which call for structured finance options?  
     
  A: Major situations which call for structured finance are:  
 
  • Pre-IPO expansion plans, wherein the company goes for placement for convertible instruments like convertible debt for a period of around a year before IPO. The debentures are converted at a price normally at a discount to IPO price.
 
 
  • Overseas acquisitions and overseas projects, wherein the company would require funding in different currency or where the bank would need to tailor a product in the midst of different assets in different countries, with a typical nature of cash flows, etc. with structure like vendor funding, convertible debt, etc.
 
 
  • Large-scale expansion projects can also have components of structured finance products like mezzanine funding, hybrid and equity linked loans, etc.
 
  Q: What is typical cost of structured finance?  
     
 
A: Cost of structured finance vary depending on the level of risk the bank is expected to assume, currency of funding, nature of security offered, etc. Costs are the highest in equity-linked structures such as optionally convertible loans/debentures which are typically bridge funding arrangements or pre-IPO funding arrangements. On the other hand, funding in dollars, on existing operations or strength of the balance sheet of the target company in a country which has a low interest regime tends to be very low.
 
     
  Q: How is structured finance different from normal term loan?  
     
 
A: Structured finance has a wider scope than normal term loan. Structured finance matches funding option to the nature of cash flows of the company or proposed venture. All three features of the loan viz. loan currency, repayment structure and collateral are tailored to the needs of the borrower. Structured finance is quite common in special situations like acquisition, overseas projects, massive expansion projects, etc. where normal term loan option may not serve the purpose.
 
     
  Q: I am an exporter and want to acquire one of my distributors in the Middle East. What funding options do I have?  
     
 
A: Assuming that the distributor does not typically have a large asset base, you would not be able to access funding from overseas based on the target company's assets. You can avail of foreign currency loan for a specified term on strength of your current financials and business operations and utilise the proceeds in making the overseas acquisition.