The challenge:

Huawei Tech Investment (HWI), a subsidiary of Huawei Technologies, signed a long-term contract with a buyer for the sale of telecommunications equipment. While the contract value for the supply of equipment was for $100m, the transaction involved financing the supply of the first $30m of sales under this contract. Being a new entity, the buyer wanted long-term financing.

The financing offered by HWI to its buyer comprised two parts. Firstly, Deutsche Bank provided a medium-term financing structure under a three-year Deferred Payment Agreement, signed by HWI and its client. Secondly, a longer-term buyer financing solution was to be arranged by HWI’s banking partner to replace the medium-term financing.

The solution:

HWI’s objectives were met through a well-structured bridge finance solution which allowed the seller to pitch its proposition to its own client and to eliminate competition. This was important to the client given that it was looking for longer-term funding. In addition, organising this without bridging the medium-term financing would have proven to be difficult.

Not only was HWI able to provide a financing solution to its buyer, but the organisation achieved this without taking on any risk in its own books. The deal improved the credibility of HWI in the competitive market for telecommunication equipment in Indonesia and has been given greater traction in that market.

Meanwhile, Deutsche Bank’s objective of mitigating credit and performance risk for HWI was also met through the structure. The performance risk prevalent in standard receivables purchase transactions was eliminated by the issuance of promissory notes and a corporate guarantee, issued by the parent of the obligor which was used as a credit enhancing measure. The issuance of insurance cover for 90% of the exposure and the drawdown of a long-term loan from the other participating bank further mitigated the obligor’s credit risk.

Best practice and innovation:

Notably, Deutsche Bank’s solution implemented for HWI helped to resolve the conflicting requirements of buyer and seller – and the regulators from three different jurisdictions – through the use of customised documentation.

• Detailed legal opinions were obtained to cover issues of booking location and insurance rules of the different countries. Legal documentation was tailored to meet the multiple requirements of the seller, buyer and regulators.

• The insurance coverage from Sinosure was modified appropriately to meet the requirements of Indonesia’s regulators. A new Loss Payee Agreement format – not used previously by the Bank – had to be adopted for this transaction.

The underlying sale transaction occurred under Indonesian law, the financing was structured under Singapore law and the credit cover through insurance was under Chinese law. The legal documentation, which covered multiple jurisdictions, required significant involvement of legal and regulatory teams to ensure that the mandate was successfully implemented for HWI.

The supplier financing mandate had a medium term of three years to be taken over through the buyer’s credit (subsequently through a separate loan from the participant bank).