Delhi International Airport Ltd

DIAL is a joint venture consortium of Bangalore headquartered global Infrastructure major GMR Group (54%), Airports Authority of India (26%), Fraport & Eraman Malaysia (10% each). GMR is the lead member of the consortium; Fraport AG is the airport operator, Eraman Malaysia - the retail advisors.

In January 2006, the consortium was awarded the concession to operate, manage and develop the IGI Airport following an international competitive bidding process. DIAL entered in to Operations, Management and Development Agreement (OMDA) on April 4, 2006 with the AAI. The initial term of the concession is 30 years extendable by a further 30 years.

The development of IGI Airport is taking place under a phased Master Plan. As part of the first phase DIAL has already commissioned a new runway and domestic terminal at IGIA. In July 2010, DIAL commissioned a modern integrated passenger Terminal (Terminal 3).

The Delhi Airport is being developed on the following contractual structure:

The Pecking Order ,Static trade off & signalling theory

The Pecking Order Theory

 The pecking order theory describes how firms raise capital. This theory says that firms are
driven by information asymmetries and transaction costs to use internally generated capital first before turning to more expensive sources of financing. Once their internal sources are used, then firms will use debt (where the information asymmetry problem is less severe)
first and then as a last resort equity.

The pecking order theory is able to explain why firms tend to depend on internal sources of funds and prefer debt to equity if external financing is required. Thus, a firm’s leverage is not driven by the trade-off theory, but it is simply the cumulative results of the firm’s attempts to mitigate information asymmetry.

As per Myer’s Pecking order theory firm will take debt in which they have to give least information to the market

Order

                                                 1.      Retained Earning

      2.      Private debt

      3.      Public debt

      4.      Equity

The Static Trade off theory

This theory deals with the cost of distress and positive effects of tax. According to this theory D/V is optimal when Marginal Benefit of tax shield are not greater than marginal cost of bankruptcy or

PV (Tax Shields) = PV (Expc Bankruptcy Costs)

Using High leverage in the capital structure cannot be explained.

Signalling theory –As per this theory by raising public debt companies provide signal to the market that there are many investors and project is good.

Take out Financing

Take out Financing

As per RBI notification (DBOD. No. BP. BC. 67 / 21.04.048/ 2002- 2003)

•      Take-out financing structure is essentially a mechanism designed to enable banks to avoid asset-liability maturity mismatches that may arise out of extending long tenor loans to infrastructure projects. Under the arrangements, banks financing the infrastructure projects will have an arrangement with IDFC or any other financial institution for transferring to the latter the outstanding in their books on a pre-determined basis. IDFC and SBI have devised different take-out financing structures to suit the requirements of various banks, addressing issues such as liquidity, asset-liability mismatches, limited availability of project appraisal skills, etc. They have also developed a Model Agreement that can be considered for use as a document for specific projects in conjunction with other project loan documents. The agreement between SBI and IDFC could provide a reference point for other banks to enter into somewhat similar arrangements with IDFC or other financial institutions.

 In simple words  It is a method of providing finance for long projects (say 15 years) by sanctioning medium-term loans (five-seven years). It involves an understanding that the loan will be taken out of the books of the financing bank within a pre-fixed period and taken over by another institution, thereby preventing any possible asset-liability mismatch, as most liabilities of banks are in the form of deposits with tenures of less than five years. 

 According to the Reserve Bank of India data, in financial year ended March 2009, Only. Around 7.4 per cent deposits had a maturity period of more than five years. After taking out the loan, the institution can off-load it to another bank or keep it.Although the concept has witnessed teething troubles, a revival is expected given that RBI is expected to allow tapping of external commercial borrowings for takeout

Financing.

 

•       Institution/bank financing the infrastructure projects will have an arrangement with any financial institution for transferring to the latter out standings in respect of such financing in their books on a pre-determined basis.

•       It help the banks in asset liability management since the financing of infrastructure is long term in nature against their short-term resources

Advantages

•       Infrastructure projects will face less financing difficulties arising from the downturns.

•       Incremental lending to infrastructure will provide additional liquidity in the system.        
        Borrowing capacity of project developers will increase and will enable them to participate in mega  projects

Prerequisite for takeout financing

•       A proper yield curve is a prerequisite for takeout financing to succeed.

•       Securitisation framework for selling of the project loans would need to be clarified.

Types of Take out Financing

•  Unconditional take out finance -The unconditional take out finance involves the assumption of partial / full credit risk by the institution agreeing to take over the finance from the original lender  
• Conditional take over: -In this scenario, the taking over institution would have stipulated certain conditions to be satisfied by the borrower before it is taken over from the lending institution. There is, therefore, an element of uncertainty over the ultimate transfer of the assets to the taking over institution.
•  Income recognition and provisioning - The norms of income recognition and provisioning will have to be followed by the concerned bank/ FI in whose books the account stands as balance sheet item as on the relevant date (If risk is lower (based on DSCR) interest rate is lower .

For more detail refer
http://www.iifcl.org/Modified_Takeout_Scheme-7th_Sept_2010.pdf