A real estate company in India wants to raise capital by issuing 3 years notes in Hongkong. Hong Kong is a leading bond hub in Asia. The RE company was influenced by the implementation of the Exchange Fund Bills and Notes Programme, Government Bond Programme, Government Green Bond Programme and various tax concessions and incentive schemes that are available for eligible note and bond issuers in Hong Kong. The company intended to use the debt capital for short-term construction projects. The company wants to raise Rs.120 mill of aggregate principal and keeps the issue price at 95.75% of the principal amount. The notes pay an annual interest of 8.5% and coupons are payable half yearly. The maturity date of the notes is on May 15, 2021. The coupon payment dates are on May 15, and November 15, commencing on November 15, 2018. The company incurs a total of Rs. 4.90 million towards the issue cost and marketing expenses for raising debt. For simplicity, all denominations are expressed in Indian currency. The company has decided the following amortization. Payment date May 15, 2020. November 15, 2020 May 15, 2021 The company also presents year-wise Balance Sheet, Income Statement and Cash Flow information which are as follows: Cash and cash equivalents Accounts receivable Inventories Fixed assets Long-term investments. Other long-term assets Total Assets Short-term borrowings Trade accounts payable Advances from customers Payable to employees Other payables Long-term borrowings Total Liabilities Owner's Equity Total Liabilities and equity Sales Less: Cost of sales (Rs. in million) Gross Profit Less: Selling expenses Balance Sheet 2015 145 112 125 70.58 130 30.75 613.33 65.57 10.5 45.25 0.92 7.712 82.25 212.20 401.12 613.33 Amortization amount Rs. 25 million Rs. 25 million Rs. 70 million Income Statement (Rs. in million) 2015 145.58 95.85 49.73 3.65 2016 58 195 158 175.75 215 38.56 840.31 121 35.78 8.57 3.15 30.80 188.75 388.06 452.24 840.31 2016 185.75 95.75 90.00 7.85 2017 195 275 220 250 215 21.39 1176.39 297 22.55 4.15 1.78 13.25 222.25 560.98 615.40 1176.39 2017 425.26 225.85 199.41 9.75 2018 395 350 375 445 275 23.37 1863.37 315.52 65.75 125.75 2.23 30.47 325 864.74 998.64 1863.38 2018 465.57 223.65 241.92 12.59 Add: Financial income Add: Other incomes Less: Financial and Interest expense Net accounting profit/(loss) before tax Les: Tax Net profit/(loss) after tax Scenarios Base scenario Scenario 1 42.25 Scenario 2 2.55 Scenario 3 10.25 75.98 22.79 53.19 42.57 1.25 (Rs. in million) 2015 2016 Net cash inflows(outflows) from operating activities -111.95 -25.21 Net cash inflows/(outflows) from investing -14.68 -92.87 activities Net cash inflows/(outflows) from financing activities 48.98 18.75 95.37 28.61 66.76 Cash Flow Information 19.75 4.57 21.35 176.88 53.06 123.82 2017 125.80 -175.89 -205.08 86.91 127.59 2.54 20.15 319.46 The company faces different dilemma regarding the redemption plan. The different scenarios that they are considering for the redemption are: 95.84 223.62 2018 63.70 -120.00 75.50 Redemption amount 3 redemptions on May 15, 2020, November 15, 2020, and May 15, 2021 at the rate of Rs. 25 mill, Rs. 25 mill and Rs. 70 mill respectively. 45% of the principal amount redemption on November 15, 2019 at 6.75% premium. The rest redemption amount would follow the same date as the base scenario. The company wants to stick with next two redemptions at Rs. 25 million each. 100% early redemption on November 15, 2019 with a premium which is half of the realized yield of a 6.4% annual coupon paying bond to be sold after 3 years (Current market price of the bond is Rs. 950, selling price after 3 years is Rs.975) The company expects that there could be the problem of downgrade by the rating company. Hence, they can go for a 100% redemption on November 15, 2019 with a premium linked to a zero coupon bond which has current market price Rs.900, the face value is Rs.1000 and the bond has 5 years until maturity. i) Analyze the motivation of emerging market companies to seek funding from foreign markets. ii) You are required to estimate the Cash flow due to the notes and cost of borrowing in foreign market under the following: a) under base scenario, scenario 1, scenario 2, and under scenario 3 b) How do you asses the financial health of the company to identify any possibility of future downgrade by the global rating companies. ii) Is the level of borrowing of the RE company going beyond the optimal level? Analyze critically. A real estate company in India wants to raise capital by issuing 3 years notes in Hongkong. Hong Kong is a leading bond hub in Asia. The RE company was influenced by the implementation of the Exchange Fund Bills and Notes Programme, Government Bond Programme, Government Green Bond Programme and various tax concessions and incentive schemes that are available for eligible note and bond issuers in Hong Kong. The company intended to use the debt capital for short-term construction projects. The company wants to raise Rs.120 mill of aggregate principal and keeps the issue price at 95.75% of the principal amount. The notes pay an annual interest of 8.5% and coupons are payable half yearly. The maturity date of the notes is on May 15, 2021. The coupon payment dates are on May 15, and November 15, commencing on November 15, 2018. The company incurs a total of Rs. 4.90 million towards the issue cost and marketing expenses for raising debt. For simplicity, all denominations are expressed in Indian currency. The company has decided the following amortization. Payment date May 15, 2020. November 15, 2020 May 15, 2021 The company also presents year-wise Balance Sheet, Income Statement and Cash Flow information which are as follows: Cash and cash equivalents Accounts receivable Inventories Fixed assets Long-term investments. Other long-term assets Total Assets Short-term borrowings Trade accounts payable Advances from customers Payable to employees Other payables Long-term borrowings Total Liabilities Owner's Equity Total Liabilities and equity Sales Less: Cost of sales (Rs. in million) Gross Profit Less: Selling expenses Balance Sheet 2015 145 112 125 70.58 130 30.75 613.33 65.57 10.5 45.25 0.92 7.712 82.25 212.20 401.12 613.33 Amortization amount Rs. 25 million Rs. 25 million Rs. 70 million Income Statement (Rs. in million) 2015 145.58 95.85 49.73 3.65 2016 58 195 158 175.75 215 38.56 840.31 121 35.78 8.57 3.15 30.80 188.75 388.06 452.24 840.31 2016 185.75 95.75 90.00 7.85 2017 195 275 220 250 215 21.39 1176.39 297 22.55 4.15 1.78 13.25 222.25 560.98 615.40 1176.39 2017 425.26 225.85 199.41 9.75 2018 395 350 375 445 275 23.37 1863.37 315.52 65.75 125.75 2.23 30.47 325 864.74 998.64 1863.38 2018 465.57 223.65 241.92 12.59 Add: Financial income Add: Other incomes Less: Financial and Interest expense Net accounting profit/(loss) before tax Les: Tax Net profit/(loss) after tax Scenarios Base scenario Scenario 1 42.25 Scenario 2 2.55 Scenario 3 10.25 75.98 22.79 53.19 42.57 1.25 (Rs. in million) 2015 2016 Net cash inflows(outflows) from operating activities -111.95 -25.21 Net cash inflows/(outflows) from investing -14.68 -92.87 activities Net cash inflows/(outflows) from financing activities 48.98 18.75 95.37 28.61 66.76 Cash Flow Information 19.75 4.57 21.35 176.88 53.06 123.82 2017 125.80 -175.89 -205.08 86.91 127.59 2.54 20.15 319.46 The company faces different dilemma regarding the redemption plan. The different scenarios that they are considering for the redemption are: 95.84 223.62 2018 63.70 -120.00 75.50 Redemption amount 3 redemptions on May 15, 2020, November 15, 2020, and May 15, 2021 at the rate of Rs. 25 mill, Rs. 25 mill and Rs. 70 mill respectively. 45% of the principal amount redemption on November 15, 2019 at 6.75% premium. The rest redemption amount would follow the same date as the base scenario. The company wants to stick with next two redemptions at Rs. 25 million each. 100% early redemption on November 15, 2019 with a premium which is half of the realized yield of a 6.4% annual coupon paying bond to be sold after 3 years (Current market price of the bond is Rs. 950, selling price after 3 years is Rs.975) The company expects that there could be the problem of downgrade by the rating company. Hence, they can go for a 100% redemption on November 15, 2019 with a premium linked to a zero coupon bond which has current market price Rs.900, the face value is Rs.1000 and the bond has 5 years until maturity. i) Analyze the motivation of emerging market companies to seek funding from foreign markets. ii) You are required to estimate the Cash flow due to the notes and cost of borrowing in foreign market under the following: a) under base scenario, scenario 1, scenario 2, and under scenario 3 b) How do you asses the financial health of the company to identify any possibility of future downgrade by the global rating companies. ii) Is the level of borrowing of the RE company going beyond the optimal level? Analyze critically