The challenge
General Electric (GE) was looking for a solution to support its renewables energy division by discounting its long-tenor trade receivables. GE supplies and installs solar equipment across solar farms in several countries in Asia, such as Vietnam and Indonesia. In such projects, the owners prefer a deferred and progressive payment solution so that they can minimise the capital expenditure outlay and preserve cash flow across the project tenor. Project owners typically issue a deferred payment letter of credit (LC) in favour of GE as a secured means of payment for the construction of the solar farm. The tenors of these LCs tend to stretch from 12 to 48 months, which is a challenge for GE, as the company prefers to be paid upfront. However, the credit appetite to discount long-tenor transactions is limited in the market.
The solution
The company has been working closely with DBS to facilitate faster payment for long-tenor LCs issued by Vietnamese banks. By leveraging the bank’s trade expertise guided by its Sustainable and Transition Finance Framework and Taxonomy, the bank successfully secured the longer tenor limits that were needed in order to confirm and discount the Green LCs. Along with mitigating the credit risk of the issuing bank, GE is now able to obtain immediate payment according to the project milestones by discounting the trade receivables under the LC.
Best practice and innovation
Through close collaboration, GE and the bank identified areas that needed to be streamlined and enhanced in the end-to-end operational process. This goal was achieved through a common vision of reducing manual operational effort, which is usually intensive for LC transactions. Efficiency and a robust process are key attributes for resolving the complexity of these cross-border LC transactions. This process enhancement is an excellent example of how the solution was tailored to meet the operational trade requirements of the company.
A top priority for GE and the bank has been a sustainable agenda. The bank has implemented a holistic framework around sustainability financing to add value to its partners in green initiatives such as solar and hydro power.
“In our partnership to reduce the carbon footprint in the global economy, more than US$48m in green limits have been allocated to support us in our renewable energy business, specifically for the solar farms in Vietnam,” explains Robert Ho, Head of Asian Sales and Syndication.
Key benefits
- Improved working capital and reduced DSO by up to 24 months.
- Risk mitigation structure.
- Adds capacity to conduct more sales to emerging markets.
- Green LC financing.
“The common goal we hope to achieve is to create a positive environmental impact by encouraging renewable energy generation and moving towards a low-carbon economy through responsible financing,” explains Ho.
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