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WELLFLEET BANK
Founded in London in 1847
The bank had presence in about 78 nations by 2008 on account of several acquisitions it had undertaken.
Wellfleet main competitor was Global Bank. Corporate Banking (58% of PAT) and Consumer Banking (42% of PAT) were the two main businesses The bank focused more on the syndicated and leveraged loans segment. Syndicated loans were provided to a borrower through combined activities of several banks
16-12-2012
Members in consortium could reduce their overall exposure, each bearing only a part of any loss Syndicated loans help small banks to participate in large transactions Leveraged loans were extended to companies that already had considerable amount of debt As these loans carry a higher risk of default, the lender usually charged a higher interest rate
Corporate Banking division worked as an Investment Bank Hired several employees from IBs Provided a risk perspective to Wellfleet Between 2004 and 2006, the bank took around 40 deals in range of $500 - $750. Net profit in 2006 $2278m
QUESTION 1
The bank had its own internal credit risk assessment model summarized as EL ($) = Probability of Default x Loss Given Default (%) x Exposure at Default ($) Risk of over-reliance upon the model.
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PROPOSAL 1
ASHAR INDUSTRIES US $850 MILLION FACILITY
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Controlled by Amit Ashar and family Have several JVs (like telmak steel) Turnover increase from $5.4bn (2001) to $28.1bn (2005)
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REQUIREMENTS DETAILS
Underwriting upto $850m of EUR 8bn facility Wellfleet bank as sub-underwriter Syndication awarded to Bentleys, Cramer and Dougherty, MetGen (Book runner) joined by Rein Bank, Clouseau Brothers, Global Bank (Non-book runners)
CREDIT ANALYSIS
Challenges:
Integration risk Need for streamlining complex debt structure of the firm Possible failure of hostile take over Political risk high of Zellmont SA
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Rating
Agency Wellfleet Bank Moody S&P 5A Baa3/ review for downgrade BBB+/ watch negative Rating
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RETURN TO BANK
Explicit Return In 1st year: Interest charge of 52.5bps which is $4.46mn Additional 20bps of underwriting fee (10bps on agreement, 10bps on closure of syndication) which is $3.4mn Drop dead fees of 10bps Total possible earning in medium term $1,050,000 comprising of :
Foreign Exchange Wallet Interest Rate Derivative Wallet Commodities Wallet Future Scope
Other opportunities for Project Finance, M&A advisory and Structured finance
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BROADER PICTURE
Company integration track record good Company claimed to have no unconsolidated debt Good track record of turning around underperforming assets Clean audit reports Strong record of leveraging to acquire and then deleveraging Deal: 25% Debt - 75% Equity Wellfleet Reputational Risk Committee cleared name Industry aspects:
Steel companies sensitive to product price movement Supply demand match for last 10years Future growth: Expansion of China and India Pricing supported by Chinas consumption
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PROPOSAL 2
REFINANCE FOR GATWICK GOLD CORPORATION OF $ 1 BILLION- CONVERTIBLE BOND
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A DETAILED ANALYSIS
About Gatwick GC
GCC was worlds third largest gold producer, accounting for about 7% of global gold production. It operates in 21 mining operations in 10 countries across the globe and conducted extensive exploration. 41% of its production came from the deep-level hard rock operations in South Africa.
Agency
Ratings
Rating
Wellfleet Grade
5B
Moody
NA
S&P
NA
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CREDIT ANALYSIS
Credit Challenges
Need to refinance $ 1 billion convertible bond due to expire on 27th February 2009. Total Debt to EBITDA was 800% in 2007. Debt protection: EBITDA to interest expense was 3.1% in 2007, showing a diminishing curve since 2003.
Credit Strengths
The worlds 3rd largest gold producer with 7% of global gold production. Diversified production base. Low-cost producer( in the lower 50% of global cost curves on average across all their mines)
BROADER ISSUES
Commodity Prices/Hedging
The single largest risk for GGC in the long term would be sustained fall in the gold price. The risk trigger is gold price under $ 650/oz. During the recent commodity price turmoil, the gold price has only been below $700 on one day. Low prices would make some of its mines uneconomic and would impact investment capex and exploration.
Mining-Cost Inflation
Electricity: Mines are heavy users of electricity. Electricity costs will increase in line with the energyprice increases. Labour: Labour costs in South Africa are increasing by around 12% PA Equipment: Industry demand for new equipment was very strong from 2004-2007, with sharp price increase, but the pressure is now starting to ease with Capex cutbacks across the industry. Cost inflation in GGCs operations over the past 21 months has been appox. 21% in $ terms. The rate is likely to slow down with the depreciation of the ZAR, fall in disel prices, and fall in demand for mining equipment. Productivity investment will begin to pay dividends.
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BROADER ISSUES
Political Risk Around 72% of current production is in SubSaharain Africa. Gold is a key export and cash generator for all 6 African Countries. Diversification of mines (21mines across 10 countries) mitigates risk. Social, economic and environmental risk: Mining safety becoming increasingly important issue in SA, both politically and operationally
Black Economic Empowerment
BEE is a program launched by the South African Government to redress the inequalities of the apartheid by giving, historically disadvantaged South Africans economic opportunities previously not available to them. In terms of mining, companies are required to convert their existing licences into a new generation of mining licences. Companies that dont comply with BEE legislation, which most importantly includes the provision of transfer of ownership of equity or assets to BEE.
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BROADER ISSUES
Shareholder Distribution Management Team
Good all-round mining experience supported by well-connected African-oriented board. Acquisitions are for shares and not for cash.
BROADER ISSUES
Industry Issues
Financial profile of the gold industry is characterized by: heavy investment in FA; 2+ year development period, very high fixed costs. Due to high fixed costs in their cost structure, gold mining companies display extreme sensitivity to product price movements.
A decision can be taken after comparing the Expected Losses and Risk Adjusted performances for both the proposals. Pay Attention to the excel sheet!!!!
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THANK YOU!
QUESTIONS PLEASE?
16-12-2012
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