Knowing Investment Banking & the Idea of Engineering the Financial Deal

By Vipoota Trakulhoon

January, 2006

Scope of the Presentation

What is Investment Banking? What is Engineering and Structuring?

Financing Alternative I: Intermediary Concept

Borrower

return $$

Intermediary

return $$

Depositors

Implication
Risk Fully take credit risk Default probability Return Sufficient return to cover - Direct cost - Indirect cost - Cost of inefficiency - ROE

Financing Alternative II: Disintermediary Concept

Issuer

Investors

Intermediary

Secondary Market

Implication
Risk All risk transferred Return Optimal return to justify risk No indirect cost Lower inefficiency cost
3

Understanding Investment Banking Business

Investment Banking Business

Derivative

Issuer

Corporate Syndication Derivative Finance

Investors

Brokerage/Research

Engineering & Structuring the Transactions

Why Engineering & Structuring Overcome regulatory matters Achieve cost saving Create tax planning Open new market

How to Engineering & Structuring Deal

Deep understand
Law & Regulator

Issuer Understanding

Deal

Investors Need

Market Environment

Case Study

Case Study I: Bangchak Petroleum Plc.

Case Study I: Bangchak Petroleum Plc.

Background
The currency devaluation and economic crisis in 1997 had significantly deteriorated financial position of The Bangchak Petroleum PCL. (BCP) Combined with the new domestic supply coming into the market in 1998, BCPs outlook was questioned To finance its debts, BCP borrowed heavily via the issuance of short-dated THB papers This in turn resulted in higher interest expenses and weakened capital structure The State Enterprise Steering Committee (SESC) appointed a working team in late 2002 The two-month study came to the preliminary conclusion that BCP had economic value, notwithstanding the social impacts should BCP be ceased to exist The in-depth study on restructuring commenced in 2003 TURNAROUND was officially appointed as an independent advisor to conduct business due diligence and study on both business and financial restructuring

Objectives
Complete Long-term Solutions BCP must not only survive but also become competitive in the long run Minimum Negative Impacts on Shareholders The restructuring schemes must not hurt its shareholders Obligation of the Ministry of Finance (MoF) to cease

The obligation of the MoF as the guarantor on part of BCPs debts (around THB 8.1 billion) should be reduced and removed eventually BCP must be able to stand on its own
9

Case Study I: Bangchak Petroleum Plc. (cont.)

Restructuring Business
Strengthen the management team by bringing in two prominent persons
- Mr. Pichai Chunhavachira, CFO of PTT PCL. - Mr. Patiparn Sukonthaman, CFO of Banpu Power Co., Ltd.
Previous Structure Refinance Restructuring New Structure Short Term Debt Bt 3,500 Mil. Financial Institution(s) Bt 12,500 14,500 Mil. Working Cap Loan Bt 4,000 Mil.

Refinance Medium Term Debt Bt 16,000 Mil. MOF guarantee via Mutual Fund or SPV Bt 5,000 7,000 Mil. Long Term Loan Bt 8,500 Mil.

Improve Gross Refinery Margin (GRM) by

- Synergising its refinery operation with other operators - Sourcing crude from domestic oil fields

Reinforce marketing operation and its retail network

+
Finance
Capital Injection of THB 7 Billion
- THB 3 billion via Common Stock Depository Receipts (BCP-DR1 or CSDR) - THB 4 billion via Convertible Debenture Depository Receipts (BCP-DR2 or CDDR)

Unwire MOF guarantee + direct loan repayment of Bt 8,000 Mil.

Guarantee

Issuing

Fund Raising Capital Market

Subordinated Convertible Bond Bt 4,000 Mil. Capital Bt 3,000 Mil.

MOF

Committed Working Capital Facility of THB 4 Billion 10-Year Loan of THB 8.5 Billion
- Grace period and repayment profile which match BCPs business nature and projected cashflow

BCP-DR1 Amount (THB Million) No. of Units Life (years) Offering Method Listing Offering Price per unit Conversion Ratio Effective Conversion Price Conversion Period Mandatory Conversion After DR expires 3,000 231 million 10 Public SET THB 13 1 DR : 1 common stock THB 13 Quarterly After 2 years if price of DR exceeds 160% of the offering price for 15 consecutive business days Investors will choose between 1) Convert the DRs into BCP common shares; or 2) Sell back the DRs to the MoF n.a. DR holders can sell DRs back to the MoF if BCP is liquidated

BCP-DR2 4,000 400,000 10 Private Thai Bond Dealing Centre THB 10,000 1 DR : 1 CD THB 14.3 Quarterly After 3 years, if price of DR exceeds 150% of conversion price of CD into BCP shares for 15 consecutive business days Investors will choose between 1) Convert the DRs into BCP convertible debentures and then into shares; or 2) Sell back the DRs to the MoF AA by TRIS DR holders can sell DRs to the MoF if BCP is liquidated or default on interest occurs

Siam DR Company Limited (SIAMDR) was set up as the SPV to

issue BCP-DR1 and BCP-DR2

The funds would be invested in BCP in the forms of common

stocks and subordinated convertible debentures.

Unlike equity warrants, the holders of BCP-DR1 have equivalent

rights to common stock holders plus capital projection from the MoF
BCP-DR2, which is paying 3.00% coupon every six month till

conversion or maturity, is rated AA by TRIS

Both BCP-DR1 and BCP-DR2 contain voluntary conversion and

Credit Rating Additional Issues

mandatory conversion

10

Case Study II: Hilton Hua Hin Resort & Spa

Case Study II: Hilton Hua Hin Resort & Spa

Background
In late 2002, Siam Hotel Properties (Hua Hin) Co., Ltd. (SHP), a professional hotel management company, was exploring the funding opportunities for the Hilton Hua Hin Resort & Spa, the property under its ownership, and appointed Turnaround to be its sole financial advisor At the moment, the issues surrounding the company which made the straight mortgaged loan not a commercially viable transaction are:

From the Creditors Perspective:

The company was managed by the foreigners and was relative new to the industry, although the management already has more than 15 years experience in the field of business Legal process of enforcing the mortgage in Thailand take considerable amount of time (up to 3-5 years) and normally left the creditors with nothing after the ruling

From the Companys Perspective:

The cost of capital is relatively high The shareholders were not ready to put forward any incremental equity nor put forwards any personal guarantee as requested by some creditors since it was believed that the cash flow generated by the hotels business would be more than sufficient to repay financial debt However, SHP also received the EBITDA guarantee from Hilton International in the amount which was sufficient to repay part of interest and principal for the first 5 years
12

Case Study II: Hilton Hua Hin Resort & Spa (cont.)
Issuer Financing Facility of Baht 1.85 Baht
Waterfall Structure (Simplified)
Collection $ from guests / customers Deposit into Security Account* Property Tax Reserve Account Maintenance Reserve Account Interest Payment Accrual Account Interest Reserve Account Sinking Fund Payment Accrual Account
* Net after deducting operating and FF&E costs and fees of bank, facility agent and servicer.

Hilton Management Agreement (Kingdom) Hilton Guarantee Agreement (Kingdom)

SIAM HOTEL PROPERTIES (Hua (Hua Hin) Hin) Co., LTD.

Hilton Management Agreement (Hilton Hua Hin) Hilton Guarantee Agreement (Hilton Hua Hin)

20 yr. lease SIAM HOTEL PROPERTIES FUND (Owns Hilton Hua Hin and The Hilton Kingdom Hotel & Spa)

Hilton Hua Hin Resort and Spa Land (Free Hold)

The Hilton Kingdom Hotel & Spa Lease Hold (50 yrs)

Finding Solutions

Issuer Account

In order to achieve the fund raising objectives of all related parties, the Properties Fund Type II was used as a vehicle by owning the properties while having all unit trust trusted pledged to the debenture holders Benefit to Creditors: Bankruptcy remoteness, Ability to control the property quickly after default via enforcement of pledge unit trust Benefit to Company: Tax planning, lower interest cost

In addition, tight control of cash flow via waterfall system was put in place, including pledge of all agreements, insurance policies, and all related operating accounts to ensure cash flow priority to all creditors before the Company get its benefits

Conclusion
The Secured Debenture issued by SHP was fully subscribed on June 12, 2003 with the total size of 1,250 MB with the interest rate of 5.5%, well below the MLR + 3.25% the Company was currently obtaining In 2003, the Hotel generates EBITDA of 176 million baht, almost 15% higher than the projected figure 13

Q&A

Turnaround Co., Ltd 62 The Millennia Building, Room 2003-2004, 20th Fl. Lungsuan Road, Lumpini, Pathumwan, Bangkok 10330 Tel. 0-2651-9811