The Cleaner Production Investment Process Day 1 Prepared by: Gloucestershire Business School, University of Gloucester, UK ROSCAM Strategic Development Consultancy, Zimbabwe FINANZAS AMBIENTALES, Lima, Perú ARMSA, Guatemala For UNEP, Division of Technology, Industry, and Economics

1

Introduction

2

Course Background [15 min]

3

Development of the training materials Content has been developed by:

– Gloucestershire Business School, UK – Finanzas Ambientales, Lima, Peru – The Illinois EPA – The Philippine Institute of CPAs – The Asian Institute of Management – UNEP Cleaner Production Financing National Project Coordinators in Guatemala and Zimbabwe 4

UNEP: Financing Cleaner Production — Support

  

United Nations Environment Programme (UNEP); Division of Technology, Industry, and Economics Course support is from the project: “Strategies and Mechanisms for Promoting Cleaner Production Investments in Developing Countries” Funding provided by the Government of Norway

5

Words of Welcome Introduction of Instructors [15 min]

6

Participant Introductions [30 min]

7

Who is here today?

  

What type of organization do you work for?

– e.g., industry, government, other – If from industry, which sector and what size

What are your job responsibilities and areas of expertise?

– e.g., management, accounting, finance, engineering, production, environmental

What is your investment perspective?

– e.g., developer of investment proposals, one who funds investment proposals 8

Why are you here?



What work issues or concerns motivated you to come?



What are your learning goals for this course?



What are your expectations of this course?

9

Course Overview [15 min]

10

Focus of the course

 

Sustainable banking???

Project financing

In the context of Cleaner Production 

Also to incorporate your experiences, questions, and goals into the presentations, exercises, & discussions

11

Cleaner Production is ...

“The continuous application of an integrated preventive environmental strategy applied to processes, products, and services to increase overall efficiency and reduce risks to humans and the environment.” — UNEP

12

Cleaner Production is different

 

Much of current environmental protection focuses on what to do with wastes and emissions after they have been created, otherwise known as “end-of-pipe” disposal & treatment The goal of Cleaner Production is to avoid generating pollution in the first place

13

Environmental management hierarchy BEST CLEANER PRODUCTION

 

Pollution Prevention On-site recycling/reuse LEAST Desirable Off-site recycling/reuse Control/Treatment Disposal

14

Cleaner Production benefits

  

Reduces costs (of raw materials, energy, waste, emissions) Reduces risk (to employees, human health, and environment) Identifies new opportunities for more efficient operations

15

CP4: Course aims (1) Entrepreneur’s perspective:



Prepare a ‘bankable proposal’ to justify economic feasibility



Manage the relationship with banks and other potential sources of finance

16

CP4: Course aims (2) Banker’s perspective:



Raise awareness on Cleaner Production investment proposals



Raise awareness on sustainable banking trends

17

CP4: Course content (1)

   

CP: a successful strategy towards sustainable banking Introduction to project funding Participants’ experiences with raising funds - problems and issues The banker’s perspective - what banks look for from firms seeking finance

1- Economic viability of the project 2- Financial and economic position of the firm 3- General economic background 18

CP4: Course content (2)



Group exercise

– Developing a bankable proposal – The banker’s response 

Other potential sources of finance



Group exercise

– Alternative sources of finance 19

CP4: Course content (3)



Eco-criteria for investment decision making



Post-funding implementation and control: after the application has been accepted



Group Exercise

– Implementation and management 20

Conclusion



Where to go for more information



Brief review of what we learned



Final questions and comments; Any other issues?



Course evaluation

21

Time for a break!

[20 min]

22

CP: a successful strategy towards sustainable banking

23

Economy is a sub-system of ecology

24

Towards a Sustainable Economy

Growth Eco-efficiency Sustainability

Yesterday Today Tomorrow Mining Oil&Gas Industry Trade-Serv Agriculture

Flora & fauna

$

clean polluting

25

The tools for the sustainable banker of the 21st century

26

A two-way bridge between two worlds

Financial world Environmental world

CP Common language

businesses

27

Current trends in commercial banking

   Financial institutions are becoming increasingly similar Commercial banks’ activities are expanding in developing countries and countries with economies in transition Increasing interest in sustainable banking 28

      

Types of financial institutions (FIs)

commercial banks savings and loan associations life insurance firms state and local government pension funds sales and consumer finance companies mutual funds insurance companies; credit unions 29

Financial institutions increasing similarity

   Traditionally, different types of FI specialized narrowly in their own areas Still true to some extent, but less so Many FI’s are expanding their product-ranges into others’ areas 30

Sustainable banking - (1)

  banks and other FI’s are becoming more aware of their environmental responsibilities - both in banks’ own operations, and in lending 1992 Earth Summit: “UNEP Financial Initiative on the Environment and Sustainable Development” 31

UNEP Finance Initiatives (UNEP FI)



Conceived at the 1992 Rio Earth Summit, UNEP FI has grown from from 6 banks to some 270 financial institutions by 2001.

– The UNEP FI is a voluntary pact between UNEP

and some 270 financial institutions globally

– UNEP FI promotes sustainability excellence

across the finance sector

– UNEP FI builds the business case for Financial

Institutions and Insurers to become sustainability leaders

32

Sustainable banking - (2)

Some banks are moving from a traditional defensive position: - non-active - deny banks’ responsibilities for environmental impacts - resist environmental legislation

towards …..

33

Sustainable Banking - (3)

…. Sustainable banking : - Proactively seek environmental cost savings - Recognize possible environmental effects on project’s and firm’s risks - Set up special environmental funds 34

Opportunities for the clients and FI CP opportunities for client

 

Capital costs Operating costs Market share Reduced assets value Potential legal liability Damaged reputation IMPACT ON FI

 u u

Financial Repay ment Asset value New business



Legal Liability

u u 

Fines Clean up Long term pollution liabilities



REPUTATION

 

efficiency



costs New market opportunities Inherent preventive approach Better reputation

35

Introduction to Project Funding

36

The firm’s business environment - Relevant factors

    

Government policy Fiscal policy and legislation Financial sector Macro-economic developments Past and current practices in project financing

37

Options for project financing

  

Internal funds Private sector:

1. Commercial banks 2. Development corporations 3. Equipment vendors & subsidiary finance Companies 4. Trade finance (suppliers and customers) 5. Equity

Government sector

38

Internal funds Internal funds can be generated from:

– Capital introduced by the owner – Profits & cash flows generated by the business and retained within it 39

Capital from the private sector



Long-term loans to purchase fixed assets: secured or unsecured



Short-term loans (including lines of credits without conditions on use)



Leasing

 

Equity (issue of shares/stock) ...

40

Capital from the government sector



Grants



Subsidies



Government-managed development funds

41

Firms’ criteria in raising finance

   

Profitability Risk of excessive debt (‘Leverage’, or ‘gearing’) Matching duration of finance to duration of project Procedures for application

42

Participants’ Experiences of Financing Projects

43

Project finance - Issues and questions (1)

     

What was the project?

Which sources were considered?

Which sources were then approached? What information did they require?

Could you provide this information?

What were their criteria? (Were these clear to the firm?)

44

Project finance - Issues and questions (2)

  

Was the application successful? If not - why not?

Did any problems arise during the process of applying?

What requirements did the financier set concerning post-funding project management?

45

Project finance - Issues and questions (3)

   

What do you consider the firm did well? … and not-so-well?

Would you do anything differently another time?

What advice can you offer to others from this experience?

Does this experience prompt any questions?

46

Some typical project finance issues and problems ...

   

The project is not considered to be economically feasible (i.e. profitable) The firm is unable or unwilling to issue more shares or to raise debt The firm does not yet have contacts with commercial banks The firm is in public ownership and private sources of finance are not accessible

47

…and some possible solutions (1)

 

Problem: the project is not considered to be economically feasible Solution: Total Cost Assessment of project

 

Problem: the firm is unable or unwilling to issue more shares or to raise debt Solution: Leasing

48

…and some possible solutions (2)

 

Problem: the firm does not yet have contacts with commercial banks Solution: contact chamber of commerce, local accountants, NGOs funds managers, for assistance

 

Problem: the firm is in public ownership and private sources of finance are not accessible Solution: contact local national CP centre for institutional assistance

49

A few general points of advice...



consider the effect of the current business environment



search widely for possible alternative sources of finance



seek advice from experts and from contacts in other firms

50

Time for lunch!

[60 min]

51

The Bank’s Perspective

52

Commercial banks: Purposes and profile (1)

 Transfer funds from ultimate lenders to ultimate borrowers  Acquire funds by receiving money from savers: savings accounts, deposit accounts, etc.

 Provide funds to borrowers through term loans, lines of credit, bonds, etc. 53

Commercial banks: Purposes and profile (2)

   Commercial banks aim to: – Maximize their returns – Minimize the risks they accept Expertise in evaluating borrower credit-worthiness Competition between commercial banks helps to keep down lending rates 54



Project finance from banks: the main options

Term loans: – Related to specific projects – Specific amount and term – Rate will reflect risk – Rate may be fixed over time or variable  Lines of credit: – Limited amounts – Flexible in use – Higher interest rates – Interest charged only on finance actually used 55

Loan application and approval procedure (1)

1. Research and review potential sources 2. Initial informal discussions with bank loan officer 3. Fill out bank’s loan application form; obtain all necessary data 4. Submit to bank the loan application and supporting documents 56

Loan application and approval procedure (2)

5. Review of application by bank 6. Negotiate specific terms of loan 7. Bank sends commitment letter 8. Bank sends a “term sheet” which defines the specific lending terms 9. Sign the loan agreement 10. Receive the funds 11. Proceed to implement project 57

Bank will usually require...

Procedural  completed loan application forms  additional documentation as required, e.g. the firm’s accounts Financial  acceptable repayment plan   proven economic viability (of both project and firm) collateral (i.e. security such as mortgage) 58

Banks’ information needs

To assess loan applications, banks need information on : 1- Economic viability of the specific project 2- The firm’s overall financial and economic situation 3- The general economic and political background of the country and sector 59

Banks’ information needs 1- Economic viability of the specific project

2- The firm’s overall financial and economic situation 3- The general economic and political background of the country and sector 60

Information on the project

     Purpose of the loan Expected cash flows from project Expected profitability of project (NPV, IRR...) Assessment of risks of project How project relates to the firm’s business generally 61

Purpose of the loan:

to demonstrate:

How will the CP Investment produce the perceived...

cost reductions and increase in revenue?

• Reduce energy use • Reduce material input costs • Reduce penalty fees

sales and production levels increase?

• Increase in sales and production and establish increase in demand • Improve product quality

reduced risks?

• Environmental compliance and regulation costs 62

Cash flow forecast/projection •

Look at the likely future cash position of the company.

• Examine the possible effects of

changes in the cash flow components.

63

Profitability analysis: Profitability indicators

A profitability indicator, or “financial indicator”, is: “a single number that is calculated for characterisation of project profitability in a concise, understandable form.” Common examples are:

• Simple payback period • Return on investment (ROI) • Net present value (NPV) • Internal rate of return (IRR) 64

Assessment of risks:

Sensitivity analysis – What could go wrong with the plans for the project?

– What will be the effect on NPV if different assumptions are made re sales demand, costs, length of project life, etc.?

65

Banks’ information needs

1- Economic viability of the specific project

2- The firm’s overall financial and economic situation

3- The general economic and political background of the country and sector 66

Concern about the financial facts of a business includes:

 Organization's ability to meet current obligations  The nature of liabilities  The company’s ability to stand pressure from both internal and external sources  The true worth of the various assets of the business (accurate picture) 67

The bank’s information needs

To demonstrate a company’s credit worthiness, bank will require:   past financial statements (balance sheets, income statements, etc.) forecast future financial statements   past credit history and references information on the firm’s management 68

Business plan: Objectives



To show to outsiders to help to raise money



To use within the business

– As a guide to future action – To control the firm by using the business plan as a benchmark against which to compare performance 69

Business plan: content

        past and forecast future financial statements brief overview of business markets, customers and competitors products and services distribution management sales forecasts how the firm is to be financed 70

Information: what makes it useful

         relevance reliability consistency completeness comparability timeliness understandability materiality feasibility and cost-effectiveness 71

Interpretation of financial statements

RATIO ANALYSIS •Is useful to virtually all readers of financial accounting statements.

•Ratios are like a thermometer which takes the actual temperature of a business in relation to some standard measure.

Ratio analysis can help to identify problem areas but in itself cannot offer solutions: these must be provided by the businessman.

72

Ratio analysis For financial analysis purposes, it is useful to classify ratios under five headings:

Profitability ratios which measure the overall effectiveness of managers as shown by the returns generated on sales and investments.

Liquidity ratios which judge whether a business is likely to run out of cash in the short term.

73

• Solvency ratios which measure the extent to which a business is financed by borrowed money and the risk involved.

•Activity ratios which measure how effectively the business is using its resources.

•Growth ratios which measures the business’s past rate of growth and assess the potential for future growth.

74

Profitability ratios

 key question: at what rate does the business generate profit from its activities?

 Test 1: What is the proportion of direct trading profit contributed by every dollar worth of sales?

 Test 2: What is the amount of profit generated out of every dollar invested in the company?

75

Profitability ratios: Examples

 Test 1: Gross profit percentage on sales : = Gross profit Gross sales  Test 2: Return on capital employed : = Profit before interest & tax Capital employed 76

Liquidity ratios

    definition: ability to meet short term operating liabilities key question: how much is the total of the firm’s short-term liabilities?

Test 1: are the liquid (short-term) assets sufficient to cover adequately these short-term liabilities?

Test 2: are the regular operating cash inflows adequate to cover short-term liabilities, as they fall due for payment?

77

Liquidity ratios: Examples

 Test 1: Current ratio : = Current assets Current liabilities  Test 2: Acid test quick ratio : = Current assets - stock Current liabilities The acceptable ratios depend upon the type of industry in which a company operates.

78

Solvency ratios

 definition: ability to meet long-term liabilities such as debt  key question: how much is the total of the firm’s indebtedness?

 Test 1: what are the relative proportions of (1) equity, and (2) debt?

[“gearing”, or “leverage”]  Test 2: are operating profits adequate to cover the interest that has to be paid regularly on the debt?

79

Solvency ratios: Examples

 Test 1: Debt ratio : = Total debt Total assets  Test 2: Times interest earned : = Earnings before interest & taxes Interest charges 80

Activity ratios

 Key question: How effectively does the firm use its resources?

 Test 1: What is the turnover of stocks?  Test 2: What is the quality of debtors and credit policies of the business? How many day’s sales represented by debtors?

81

Activity ratios: Examples

 Test 1: Stock turnover ratio : = Sales revenue Stocks (at period end)  Test 2: Debtors turnover ratio : = Debtors (Balance sheet) Average daily sales 82

Limitation of ratios (A) differences found among the accounting methods used by various companies, which make comparisons difficult even when talking about the same industry (B) financial statements are based upon past performance and past events, we must project our evaluation from this basis

83

Conclusion

• Though with limitations, ratios still provide guides and clues in spotting trends towards better or poor performance and in finding significant deviations from average or an acceptable standard, if any is available.

• It is in the interpretation of such trends and deviations that the analyst will use his skills and experience to determine what is likely to happen in the organization.

84

Banks’ information needs

1- Economic viability of the specific project

2- The firm’s overall financial and economic situation 3- The general economic and political background of the country and sector

85

General economic background

National and world economy: - forecasts of economic growth - forecasts of inflation - political or economic instability Sector-specific background: - developing new technologies - changes in product markets - new legislation and regulation - level of competition in the sector 86

Conclusions (1)

   Banks have specific demands for information due to their loan application/approval procedures Most information should be provided by applicants Banks will maintain some data themselves (e.g. general economic data) 87

Conclusions (2)

 banks obtain information on firms through: – the application forms and supporting documents submitted by the firms – face-to-face contacts and visits to the firm – the history of the bank’s relationship with the customer  post-funding control enhances the relationship and facilitates future borrowing 88

Conclusions (3)

 Firms should set up and maintain adequate information systems:

Before

They are needed !

89

Group exercise - Acme: Part 1

Preparing a ‘Bankable’ Proposal     

Read the Acme case, it is detailed in your handout You will be working in a small group with others The task is to develop a proposal to a bank for finance for acme’s project Your group will present this to the banker Plan ahead - what points to include?

90

Time for a break!

[15 min]

91

Developing a Bankable Proposal: Acme Electroplaters Part 1

92

Group exercise - Acme: Part 1

The task

1. Prepare presentation to a bank making the case for finance for Acme’s project 2. Complete the standard application bank loan application form, located in your handout 3. Anticipate possible questions from the banker

93

Group exercise - Acme: Part 1

Criteria for success 

firm’s current financial position



history of firm



the project’s expected returns and risks



availability of relevant information



firm’s ability to implement the project

94

Checklist: “Funding Application Format Checklist”

Refers to the checklist document 95

Review of what we have covered today

96

Final questions or comments?

97

The Cleaner Production Investment Process Day 2 Prepared by: Gloucestershire Business School, University of Gloucester, UK ROSCAM Strategic Development Consultancy, Zimbabwe FINANZAS AMBIENTALES, Lima, Perú ARMSA, Guatemala For UNEP, Division of Technology, Industry, and Economics

98

Any questions?



Arising from day 1 ?



Looking ahead to day 2 ?

99

Developing a bankable proposal: Group presentations

100

Time for a break!

[15 min]

101

Developing a bankable proposal: the banker’s response

102

Time for lunch!

[60 min]

103

Other Potential Sources for Project Financing

104

Checklist: “Funding Options”

105



Further potential sources Internal funds

  

Equity (owners’ capital) Leasing / equipment vendors and subsidiary finance companies Trade credit (suppliers, customers)



Micro-credits



Development bank loans



Government finance

106

Internal funds (1)



Internal funds = retained profits (‘reserves’)



Size of reserves depends on:-

– Past profitability of business – Minimizing tax liabilities – Proportion of profits retained vs. Paid out to owners in dividends 107

Internal funds (2)

    

avoids having to approach external sources (and transaction costs) preserve borrowing power for future projects have an indirect opportunity cost not available to new firms must be built up over time

108

Equity capital

 

Equity = ordinary shares, i.e. owners’ capital Potential sources of new equity:-

– more capital from the current owners (shareholders) – new shareholders, by private approaches – venture capital – a public share offering 109

Equipment vendors and subsidiary finance companies

 

Leasing has become a major source of financing that is provided by some equipment vendors and subsidiary finance companies (‘lease-providers’). With ‘financial leases’ (or ‘capital leases’):

– Title to the equipment is held by the firm which operates it (the ‘lease-holder’) – The lease-provider retains a first security interest in the equipment – The lease-holder faces the risks and receives the rewards of ownership 110

Trade finance

  

potential sources

– suppliers of raw materials – suppliers of other goods and services – key customers

their motive: to secure a key customer or source of supply risk: being tied to a particular supplier or customer and unable to develop business freely

111

Micro-Credits (MC)

  

aim: ‘to match appropriate technologies and financing, through the development of packages that build on community values’ local initiatives, depending on MC managers’ knowledge of their own localities and markets an expanding source for socially desirable projects - but little-known

112

    Micro Credit example

Grameen Bank (1) Grameen Bank,Bangladesh: the pioneer (founder: Mohammed Yunus) core belief: the credit-worthiness of the poorest members of a community aim: to break out of the poverty cycle, using innovative technologies a model for many similar banks operating across the world

113

    Micro Credit example

Grameen Bank (2) finance derived from international sources (e.g. development banks) Grameen uses this to make ‘soft’ loans to local borrowers several projects in renewable energy and other environmental investments website: www.Grameen-info.org

114

Micro Credit example

Grameen’s lending policy

   

no requirement for security repayable in weekly instalments eligibility for subsequent loans depends on full repayment of any earlier loans transparency in bank transactions helps to encourage repayments by borrowers, through social pressure

115

Micro Credit example

Grameen - the results

    

2.34 million borrowers in Bangladesh 94% are women loans for projects in 39,000 of 86,000 villages in Bangladesh 1977-1997, total lending - US$2 billion now, 223 Grameen-type programmes in 58 countries

116

Development banks (1)



examples:

– World Bank – International Finance Corporation – Inter-American Development Bank – Asian Development Bank 

wide and diverse range of programmes and projects

117

Development banks (2)



development banks aim:

– to lend large amounts… – … but at lower transaction costs 

therefore, traditionally, mainly large projects in the public sector



stringent guidelines on project characteristics and lending criteria (e.g. to be environmental, social, developmental, technically innovative)

118

Development banks (3) Benefits of development bank finance:



can help with technological and managerial advice on the project



project packaging



liaison with other potential sources of finance

119

  

Raising finance from government schemes identify the available schemes find out:

– the criteria and conditions of the scheme – the procedures for application

develop the firm’s application:

– to match the scheme’s criteria – to identify how the project supports public policy objectives 120

    

Grants low or zero cost of capital may be available for only part of a project, or on restrictive terms preserves borrowing power for other purposes accessible via local brokers and/or international development agencies BUT:

– can conceal true long-term costs – misses opportunity to build long-term relationship with financiers 121

Past funding experience



successful past experiences with financing projects?

 

how might CP projects be different? Why might they be ...

– more difficult to finance?

– easier to finance?

could these further sources be relevant? If so - when and how?

122

Summary

   

a wide range of potential sources means:

– more likely to be able to raise finance...

– … and on better terms

the range varies between countries and over time an early search for a wide range of sources can be very worthwhile each source will have its own criteria and procedures

123

Acme Electroplaters: Part 2

124

Time for a break!

[15 min]

125

Eco-criteria for investment decision-making

126

Criteria (+): activities to encourage

Bio-pesticides Bio-fertilisers Efficient energy Aquaculture Health & safety Pollution control Recycling Reforestation Eco-data access Eco-education Bio-control Renewable energies Clean fuel Organic agriculture Environmental management Pollution prevention Waste management Eco-tourism Corporate eco-donations 127 Nomad forest products

Sectors of major concern:

Where CP can highly contribute to reduce risk and increase efficiency and profitability      

Energy and Mines Petroleum and Chemicals Agribusiness Transportation Recycling Eco-Tourism

128

Energy

 

Risks

– Atmospheric emissions – Water contamination – Acoustic pollution – Safety

Opportunities

– Alternative energies – Cost reduction 129

Mining



Risks

– Environmental: air and water pollution – Occupational: health and safety 

Opportunities

– Genuine wealth creation – Production of quality durable goods 130

Agribusiness

 

Risks

– Solid waste – Water and ground contamination – Public health

Opportunities

– Organic Brands and distribution channels – Exportation opportunities through international standards 131

Banks’ requirements to obtain services in

   Environmental risk assessment of business activities Environmental footprint of investments, guaranties, leasing Training for local bank staff   Development of new eco-products (capital risk investment fund, forest funds) Identification of new business opportunities within client database 132

Competitive banking “In today's hyper-competitive financial services environment, incremental improvement is no longer enough.

To be successful, firms need to undertake massive change - a fundamental reinvention of their strategies and operations that will allow them to delight customers, exceed investor expectations, and attract and retain the best and the brightest professionals.

” Reinventing FINANCIAL SERVICES Succeeding With Corporate Transformation Deloitte Consulting and Deloitte & Touche

Sustainable banking: trends

    Avoid eco-risks, identify eco-business opportunities; Internalise environmental costs & debts in company’s decision-making; Total environmental accounting; Capital markets increasingly value “green” capital;      Use of eco-criteria in decision-making; New financial eco-products (eco-funds, eco-mortgage, renewable energy credits);

CP: prevention is better than end-of-pipe solutions

Efficient use of resources (water, energy); Fewer, bigger banks.

134

Dow Jones Sustainability World Index

330.00

280.00

230.00

180.00

130.00

80.00

12/93 6/94 12/94 6/95 12/95 6/96 12/96 6/97 12/97 6/98 12/98 6/99 12/99 6/00 12/00 6/01 Dow Jones Sustainability World Index Dow Jones Global Index (USD, Price Index)

135

Financial eco-innovations

Personal banking Corporate banking

Eco-mortgage Eco-shares Eco-autos Home-office: 2x1 Eco-savings Eco-financial derivatives ESCO, Energy Service Co Build, Operate, Transfer Eco-leasing Swap for debt Eco-investment funds Eco-loans Eco-credit cards 136

Post-funding management and control

137

Aims

   

ensure repayments are made in full and on time avoid foreclosure / calling in security comply with all loan contract conditions build strong credit history and relationship for the future

138

Post-funding management and control: issues 1-implementation phase 2-security for loans (collateral) 3-other loan contract conditions 4-regular financial information 5-evidence of strong internal management 6-keeping the lender informed

139

1-Implementation

  

need to synchronize:

– receiving the finance – acquiring the new asset(s) – starting the new business activities

project management techniques and skills, e.g. ‘critical path’ analysis clear organizational responsibilities

140

2-Security for loans

   

usually requested by banks, though less crucial than the firm’s ability to repay can include owner’s personal assets as well as the firm’s assets need to protect assets used as security Third-party guarantee

141

3-Loan contract conditions (‘covenants’) Examples: - adequate liquidity - adequate solvency (gearing / leverage) - no significant changes in: - nature of business - ownership - no sales of major assets without the prior agreement of the lender

142

4-Regular financial information

Financial Reports (FR’s): rules   

based on legal rules and accounting standards (‘Generally Accepted Accounting Practice’) required annually by law lenders may require more frequently

– and promptly – with supporting analyses 143

Analyzing FR’s

   

FR’s can be analysed by readers to evaluate the firm’s likely return and risk position, as reflected in: liquidity solvency profitability operating efficiency

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Analyzing FRs: comparators



over time

– ‘vertical’, or ‘trend’, analysis 

against other (comparable) firms

– ‘horizontal analysis’, or ‘benchmarking‘ 

against other standards

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Preparing FR’s: guidelines for management

     disclose accounting policies, especially if different from normal be open where estimates and approximations have been necessary indicate if any amounts in the FR’s are no longer realistic ensure reliability of the accounting systems which collect the data thoroughly review FR’s before sending outside the firm 146

5-Evidence of good internal management



performance indicators



budgeting



costing and cost control



ex-post audit of projects

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6-Keeping the lender informed

    

Keep lenders informed about any significant changes in: trading the firm’s risk factors key personnel nature of the business any other factors relevant to risk and return

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Post-funding experiences



any experience during this phase?



what terms did lenders impose?



were any difficulties met, in complying with these terms?



how did the firm deal with them?

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Acme Electroplaters: Part 3

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Conclusion

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Review of what we have covered in this course

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The CP investment process (1)

   

introduction to the course CP: a successful strategy towards sustainable banking introduction to project funding and participants’ experiences banker’s perspective and information needs

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The CP investment process (2)

    

developing a bankable proposal other potential sources of finance eco-criteria for investment decision making post-funding management and control conclusion

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Final questions and comments?

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Course evaluation

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Thank you for attending!

Please keep in touch with us regarding your Cleaner Production efforts

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