Virtual Equity


wealthymattersHave you ever wondered how billion dollar infrastructure projects are financed by the private sector in India? Here is the story:

Say there is a Rs.10,000-crore project, with a 70:30 debt-equity ratio. The promoter needs to put up Rs 3,000 crore as equity . Suppose he can scrape together Rs 1,000 crore. He will inflate the project cost to 15,000 crore.

His required  equity contribution now goes up to Rs 4,500 crore but he gets credit worth Rs 10,500 crore, more than enough to finance the entire project.

During implementation through promoter-owned companies, money will be taken out of the project, to fund a part of his equity contribution and to grease the palms that allow such an inflated project cost to go not just unchallenged, but actually blessed.

While implementing the project, he will start another project, take money out of it to fund the remaining part of the original project’s equity contribution and to service the loan on the first project once its construction is over. Then he will start yet other projects, to actually finance the second project, and so on. The first project will turn into a cash cow, if this string of loan-financed projects can continue to mushroom long enough for the loan on the first project to be fully paid off. Read more of this post

Happy New Year


Apple’s Negotiating Formula


WealthymattersApple wants what Apple wants, when Apple wants it and how Apple wants it. And Apple will pay for it. If they don’t get what they want, they just say no. And they typically don’t come back a second time. And they may declare war on you. - Ryan Lokey

Lost Fortunes


Lost Fortunes

Emerging Market Crises:1998 Vs.2014


 

wealthymattersOil prices were tanking. Emerging market currencies were in a freefall.Venezuela was mired in a financial crisis and Russia had sunk into debt default and devaluation. The year was 1998.Emerging markets today, look a lot like they did back then. Here’s a look at the similarities and differences between now and then.

SIMILARITIES

Falling Oil Prices

Crude has dropped 48% since June to about $55 a barrel, squeezing exporters from Venezuela to Russia and Nigeria.Credit default swaps show a 97% probability Venezuela will default on bonds within five years, according to data compiled by Bloomberg. The Russian economy , which is under sanctions by the US and the European Union over the Ukraine conflict, will contract as much as 4.7% next year if oil remains at $60.

Currencies Sink

A Bloomberg index tracking 20 of the most traded emerging-market currencies fell to the lowest since 2003 on December 15. The ruble tumbled past 64 per dollar for the first time, Turkey’s lira fell to an all-time low while Indonesia’s rupiah retreated to levels last seen in 1998.During the Asian financial crisis in 1997 and 1998, countries from Thailand to Malaysia capitulated on defending their currency pegs, leading the Thai baht to lose half its value in six months. Read more of this post

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