How To Map The Financing Routes Open To A Company

Mapping the financing routes means writing down every source of money a company can actually reach, then putting each one through the same seven questions: how much it raises, what it costs after tax, who ends up holding the shares, what it does to leverage, how long it takes, whose permission it needs, and what happens if the plan fails. The cheapest row is rarely the answer.

At the figures shown, four routes stay open and three close. Cash already held raises Rs 140 crore against a Rs 1,140 crore requirement and a shareholder selling raises nothing, so both close on the amount. A placement at Rs 285/- raises the whole requirement at 4.39 per cent after tax, the lowest figure on the sheet, and closes because it leaves the promoter and promoter group at 47.45 per cent against a floor of 58.0 per cent. The cheapest route still open is Rs 140 crore of held cash with Rs 1,000 crore borrowed, at 5.92 per cent, 1.53 points above the row the cost column leads with. Raising the placement price does not rescue it: at Rs 400/- the group still lands at 50.07 per cent.

A company that needs money does not start with a list of instruments. The company starts with a number, a date and a purpose, and the instruments get fitted to those afterwards. Getting that backwards is how a note ends up comparing a coupon against an issue price as though the two were one kind of thing.

Think of a household needing Rs 8,00,000 for a wedding in four months. Nobody there begins by ranking a gold loan against a personal loan against selling a plot. The household begins with the amount, the date, the purpose and how long the money has to be gone for, and the list shortens by itself. Nobody holds seven rows and seven columns in their head, so a financing map does the same work at a scale where the arithmetic has to be written down.

What does the map rest on before a single route is named?

Three things are settled before this starts, and none is rebuilt here. The first is the amount. Harivansh Packaging Limited is buying the whole of Sundarban Polymers Private Limited at an enterprise value of Rs 1,320 crore, and taking off the target's Rs 180 crore of net debt leaves Rs 1,140 crore. The Rs 1,140 crore is the requirement. A map built on the Rs 1,320 crore would be asking for Rs 180 crore nobody has to hand to any seller.

The second is that every leverage figure names the company it describes. Rs 1,740 crore over the acquirer's own Rs 477 crore of EBITDA is one ratio; Rs 1,920 crore over the combined Rs 609 crore is another. A numerator from one over a denominator from the other describes no company at all.

The third is that the cost column is struck after tax and on one base for every row. One common base is what lets a 9.0 per cent coupon and a Rs 285/- issue price sit in the same column. Without those three settled first, a map is a table that cannot be read down any of its columns. A table nobody can read down is no map at all. All three are covered separately.

What is the sequence, from a blank sheet to a shortlist?

Eight steps, and the order matters: two of them decide which rows the later steps may score at all. Running them out of sequence is how sound arithmetic gets fastened to a route that was never available.

1. Write the requirement, all four properties, before naming any route
   Looking at: the four entries on a sheet of their own, and nothing else on it.
   A weak answer: three properties written down and the fourth, how long the money is needed for, left to be inferred.
2. List the routes this company can actually reach
   Looking at: whether every row carries the amount it would raise here, including the rows that fall short.
   A weak answer: the textbook list, scored carefully, carrying routes nobody at this company can use.
3. Put every route through the same seven questions
   Looking at: gaps. A blank cell is filled or the row is struck out.
   A weak answer: one cell left empty because the figure was awkward, which reads as a small cost rather than as a missing one.
4. Work each leverage outcome and name the company it describes
   Looking at: whether every ratio says which company it belongs to.
   A weak answer: a ratio with no company beside it. How a leverage ratio is built is covered separately.
5. Score what each route leaves for the decision after this one
   Looking at: whether the room a route uses appears as a number in a column or as a remark underneath.
   A weak answer: a sentence where the grid wanted a score, which gets read after the cost column has been believed.
6. Search for the test that binds, before ranking anything
   Looking at: whether any row has come off the sheet at all.
   A weak answer: a balanced-looking table with nothing struck out, which usually means the search was never run.
7. Record the date, the assumptions and the rejected rows
   Looking at: whether somebody reading this in six months could say why a row is missing.
   A weak answer: rejected rows deleted rather than recorded, so the same work has to be done again.
8. Say what the map has settled and what it has not
   Looking at: whether the note stops short of naming one row as the answer.
   A weak answer: a recommendation dressed as a finding, with the other rows quietly dropped.

Step one: how is the requirement stated before any route is named?

Write four things down and refuse to write a fifth. How much: the Rs 1,140 crore of equity value, not the Rs 1,320 crore of enterprise value. By when: completion. What for: the shares of Sundarban Polymers Private Limited. And for how long: the stake is being bought to keep, so permanently.

The fourth property gets skipped, and it does as much work as the first: two requirements can match on amount, date and purpose and still point at different rows. Bridging financeShort money taken to cover a gap until longer money arrives, and repaid out of that longer money rather than out of what the business earns. is repaid out of the longer money that replaces it. Permanent capitalMoney that carries no date on which it has to be handed back, so it stays in the business until somebody chooses otherwise. carries none. A route right for a permanent requirement is wrong for a bridging one whatever it costs.

The refusal matters as much as the entries: a requirement statement that also names a preferred route has become a proposal. Devyani Kulkarni, chief financial officer at Harivansh Packaging Limited, writes the four properties on a sheet of their own, and nobody adds a route to it.

Step two: which routes are actually open to this company?

There is a textbook list of ways to raise money and there is the list this company can reach. A route needing a credit standing the company does not have is not a route, and nor is one needing a shareholder base that has already said it will not write cheques. Scoring the textbook list is how a grid ends up with sound arithmetic in rows that were never available.

So the second step builds the list for Harivansh Packaging Limited specifically, and every row carries the figure it would actually raise here. Cash already held covers 12.3 per cent of the requirement and no more; new borrowing covers all of it at the contracted 9.0 per cent; a placement at Rs 285/-, a rights issue of one for three at Rs 190/- and a convertible at 4.0 per cent converting at Rs 375/- each cover it too. Two rows go on with no figure at all, a refinancing that releases capacity and a sale of an asset, and the sheet says why beside each.

One row is worth naming: a shareholder selling shares they already hold. A holder selling raises nothing whatever for the company, and the row goes on the map so the map records why it is not a funding route.

One route stays a single row on purpose. A partner can take a stake in the asset rather than in the company, so the borrowing sits against that asset alone. Tapti Crossing Infrastructure Private Limited is the one line example here: Rs 1,800 crore of project cost, Rs 1,260 crore borrowed against Rs 540 crore of equity. The Rs 1,260 crore is non-recourseA borrowing the lender can chase only against one named asset and what it earns, with no claim on anything else the borrower has. and the asset is ring-fencedHeld inside a separate company so that its cash, its assets and its obligations stay apart from everything the parent does.. Borrowing on those terms is a different row on the map, not a cheaper version of borrowing. How a project financing is put together is covered separately.

Step three: what are the seven questions every route is scored against?

Seven, asked of every row in the same words and the same order. How much does it raise. What does it cost after tax. Who ends up holding the shares. What does it do to net debt and leverage. How long does it take. Whose permission does it need. What does it do if the plan goes wrong.

Each of the seven asks about a different kind of consequence: arithmetic, a charge against profit, a change to the share register, a change to the balance sheet, calendar time, somebody else’s permission, and last the bad path rather than the expected one. The seven are not interchangeable. A route can look excellent on four and be unusable on one.

The cost column carries one rule: struck after tax, on the whole Rs 1,140 crore, for every row. The share route is priced as an earnings yieldProfit per share divided by the price per share, which is the price to earnings ratio turned upside down., the amount the company gives up per rupee raised, and the borrowing route at its coupon after tax relief. Neither figure is a cost of capitalThe blended return a company has to earn to satisfy everybody who has put money into it. Building one is a study in its own right and is covered separately.. A cost of capital is a separate construction and is covered separately.

A blank cell is where a route hides its cost, so the scoring only works if every route answers every question. A convertible with nothing in that column reads as the cheapest thing on the sheet, since 4.0 per cent is what its coupon says. A note saying the conversion right is priced elsewhere belongs in that cell. A note is an answer; an empty box is not.

What does the grid look like, filled in for this requirement?

Seven rows, scored on the numbers already settled. One row leads the cost column, a different pair leads the leverage column, and the last column reorders them again. Three different leaders in three columns is the grid working, not disagreeing with itself.

Three things in that grid are worth stopping on. The cost column runs from 4.39 per cent for the placement to 6.75 per cent for all borrowing. A convertible’s 4.0 per cent coupon is the cash cost and not the whole cost, so that row carries a note rather than a number. The earnings column runs the other way for the two share routes, Rs 13.00/- on the placement against Rs 11.92/- on the rights issue, and what separates them is the issue price: the placement takes a base of 18.00 crore shares to 22.00 crore and the rights issue to 24.00 crore, so a holder taking up no entitlement gives up 25.0 per cent of what they held.

The third is the convertible's earnings line, two numbers rather than one. Unconverted it is Rs 13.99/-, the 4.0 per cent coupon costing Rs 34.2 crore after tax relief. Converted it is Rs 13.59/-, the Rs 1,140 crore having turned into 3.04 crore shares at Rs 375/-. Both are true at different times, and a grid showing one has not scored the row.

Step four: how is the leverage outcome computed rather than described?

Leverage is where a map most often goes wrong, and the error is not arithmetic. The error is a missing label. On the all borrowing row, borrowings go from Rs 740 crore to Rs 1,880 crore and the Rs 140 crore of cash is untouched, so net debt on its own is Rs 1,740 crore. Over the acquirer’s own EBITDA of Rs 477 crore, Rs 1,740 crore is 3.65 times. Sundarban Polymers Private Limited brings its Rs 180 crore of net debt across as well, so together net debt is Rs 1,920 crore. Over the combined Rs 609 crore of EBITDA, Rs 1,920 crore is 3.15 times.

Borrowings of Rs 1,880 crore and net debt of Rs 1,740 crore are two numbers on one row, separated by exactly the Rs 140 crore of cash the route leaves alone. A grid writing Rs 1,880 crore into the net debt cell overstates leverage by Rs 140 crore; one writing Rs 1,740 crore into the borrowings cell understates what has to be serviced.

Now the mix that spends the Rs 140 crore of held cash and borrows Rs 1,000 crore. Borrowings land at Rs 1,740 crore and cash at nil, so net debt on its own is Rs 1,740 crore. Identical. Cash was already netting against debt, so spending it shifts net debt by precisely what borrowing the same amount would have shifted it. Both routes leave leverage at 3.65 times on its own and 3.15 times together. They differ on cost and on earnings, and not at all on leverage.

Step five: why does the effect on the next raise belong on the map?

Most treatments leave this step out, and they can because it costs nothing today. A route taking leverage from 1.26 times to 3.15 times has broken nothing on the day it completes. The bill arrives with the following decision, by which time the note recommending the route has been filed.

All borrowing leaves the two businesses together at 3.15 times; all placement leaves them at 1.28 times. The 1.87 turns between the two rows is room one route consumes and the other does not, and whatever Harivansh Packaging Limited funds next starts from whichever balance sheet today’s row hands over.

The household version is immediate. Two people take the same flat at the same price. One puts down a large deposit and borrows little; the other borrows nearly all of it. Both are fine on the day. Three years later one can borrow for a shop and the other cannot.

A route is chosen for a sequence of decisions and not for one, so the room it uses is a score on the grid and not a remark under it. Written as a score it is compared; written as a remark it is read after the cost column has been believed. Ashwin Rege, whose transaction team does this work, heads that column with what the next decision would start from.

Step six: which test actually binds, and how is it found?

A grid with seven filled columns invites a reader to weigh them, and weighing is usually the wrong move. One test often does not order the rows; it removes them. A covenantA promise written into a loan agreement that the borrower will keep some measure inside an agreed limit for as long as the borrowing is outstanding. already given to lenders, a maturity in next year's calendar, a holder who will not be diluted, or the weeks left before completion. Any one can settle the question before the cost column is read.

So this step is a search, run before anything is ranked: go along the sheet asking of each row not how well it scores but whether it is possible. Here the test that binds sits on the register. The promoter groupThe founding holders of a company together with the people and entities counted alongside them for the purpose of measuring what they hold. holds 58.0 per cent, leaving a free floatThe part of a company's shares held by people other than the promoter and promoter group, and therefore able to change hands freely. of 42.0 per cent, and that holding is not up for negotiation.

Run that test across the grid and three things happen at once. The placement row goes. Issuing 4.00 crore new shares to investors outside the group leaves the promoter group holding 10.44 crore out of 22.00 crore, or 47.45 per cent. A higher issue price means fewer shares and a smaller fall, never no fall, so no price rescues the row. The rights row survives with a number attached. A proportional offer holds the group at 58.0 per cent only if the group finds Rs 661.20 crore of its own. The borrowing rows and the convertible are untouched: until conversion nothing reaches the register.

The promoter holding settles more than the entire cost column does, and the holding appears nowhere in that column. A map handing back a balanced-looking table has usually not looked. The signal is the absence of struck-out rows: if nothing has come off the sheet by the end of this step, the search was not run.

Step seven: what has to be recorded so the map reads again later?

Four entries, and none is a number from the grid. First, the date the map was drawn. Every price and rate on it was true of one particular day. The reference price as an illustration, Rs 300/- a share here, carrying its own as-of date and never presented as a quotation. Then the assumption behind every rate, set down plainly. The 9.0 per cent is this company’s own contracted rate. And the routes that came off, each with its reason on the same line.

The rejected rows are the entry people leave out, and the entry that earns the map its second reading. A shareholder selling was scored and struck, and the reason is one sentence: it raises nothing for the company. Six months later, when somebody asks why a route was not used, the rejected rows are the only part of the map that answers. Without them the question is worked again from scratch.

There is a household version. Anyone who kept the note saying why they turned down a loan knows how much argument that line saves. Internal accrualProfit a business has kept back rather than paid out, sitting in it as cash or as things already bought with that cash. is the household's own savings, and one that wrote down why those savings fell short last year does not have the conversation twice.

Step eight: what has the map settled, and what has it not?

The map narrows. The map does not pick. Seven rows went in, a shorter list comes out, and every row on it has been scored on all seven questions with its arithmetic shown. A scored shortlist is a great deal, and not a decision.

The map cannot hold most of what a decision runs on: what the people around the table intend for the two years after this, what a large holder has said in confidence, what a lender has indicated informally, how much argument the promoter group will have. Intentions and private conversations are held by people, and people turn a shortlist into a choice.

A note presenting one route as the answer has claimed more than a map can support, and the giveaway is that it stopped reporting the other rows. A map ends with a shortlist and the reasons the others are not on it, so the person deciding can disagree with a reason rather than with a conclusion.

Harivansh Packaging Limited, Sundarban Polymers Private Limited, Tapti Crossing Infrastructure Private Limited, Devyani Kulkarni and Ashwin Rege are invented.
Educational material. Not advice on any investment, tax, budget or market position.