The challenge
China Energy Engineering Group Shanxi Electric Power Engineering Co Ltd had credit bills negotiation (CBN) discounting and with limited recourse receivable services (RS) financing against its underlying Engineering Procurement Construction (EPC) contracts.
The EPC sector presents additional risks and structuring requirements given the complex process and uncertainties during power engineering and construction, multiple governing laws and regulations involved, customised legal documents and relatively longer financing tenor required ie normally > two years.
The company had one EPC project in particular, the Phu Yen 257MW Solar Power Plant Project in Vietnam, which commenced construction in August 2018 and was expected to be completed by June 2019. Eighty-five percent of the contract is the interim payment and due for payment on 31st December 2020 and the company is therefore exploring a financing solution to meet its funding needs, for both the receivables under the letter of credit (LC) portion and the open account (OA) portion.
The solution
Standard Chartered offered the company CBN discounting as well as a limited recourse RS solution to purchase the seller/contractor’s 100% interim payment receivables due from the buyer/employer under the underlying EPC project, with a fixed payment maturity date of 31st December 2020.
The bank has both the banking capability and risk-measured appetite for such clean energy projects in the Southeast Asia region.
The Solar Power Plant Project is in Vietnam and the main project sponsor is a Thai company. As such, the LC was issued by Bangkok Bank Limited (BBL) Thailand. Besides, this project sponsor is required to provide a corporate guarantee to cover the buyer’s payment risk under the OA portion.
The transaction is the bank’s first live case for a risk participated CBN in China. The bank’s distribution concept was new to the company, but the bank’s team provided all the necessary details to the company on the solution that meet its financing needs.
The LC is negotiated and paid to the beneficiary by the project milestone. Though it is typical to use LC as a settlement method under EPC projects, such LC normally calls for presentation of a Certificate of Payment issued by an independent third-party engineer (appointed by the buyer/employer), commercial invoice, and payment request letter issued by the EPC contractor, instead of normal trade documents for LC issued under a plain-vanilla goods/service trade scenario.
This is the first RS financing solution successfully implemented by Standard Chartered in China against an underlying overseas EPC project and was arranged through close collaboration between the bank’s internal deal team across China, Thailand, Hong Kong and Vietnam.
This deal team was actively involved from the very beginning before the EPC contract signing. The bank’s financing solutions also benefit the seller to work with the buyer and project sponsor from contract terms negotiation till the project completion and reached Commercial Operation Date successfully and timely in Jun 2019.
The total amount of the LC is approximately US$166m and the OA portion is about US$42m. The discounting percentage is 100% for both CBN discounting and RS solutions, which matches well with the payment schedule of the underlying EPC contract and the seller/contractor’s financing requirement.
Best practice and innovation
The comprehensive trade finance solutions enabled the company to receive the payment prior to the due day. The buyer/employer’s payment obligation is crystalised by its confirmation letter (ie Certificate of Payment) for achieving the project milestones.
Given the underlying EPC contract is governed by the laws of Singapore and the buyer is Vietnam incorporation, both the notice of assignment to the buyer and the buyer’s acknowledgement must be obtained for Standard Chartered China to claim for payment, as well as against the project sponsor’s corporate guarantee to pursue the guarantor should there be any failure of payment by buyer/employer.
Key benefits
The financing solutions are competitive and creative, which have facilitated the smooth commencement and execution of the underlying project, and also demonstrates the seller/contractor’s strong financing capability and its proven track record with the bank, which is usually requested by the buyer/employer under such long-term payment tenor.
Listen to podcast
