Sorting out the financing puzzle

Even our most sophisticated customers – and especially local and regional customers – need assistance in arranging financing

Even in times of tight credit, long-term loans for cement plants can be efficiently arranged through cooperation among key players – including customers, FLSmidth, international banks, and export credit agencies such as Denmark’s EKF.

BACKGROUND ASSISTANCE PROVIDED BY:

NINA WIUM,
CHIEF UNDERWRITER, EKF
FRIEDRICH PLASSMANN,
VICE PRESIDENT, COMMERZBANK
ANDREW FRENCH,
DIRECTOR, HSBC BANK PLC 

Before the financial crisis hit in 2008, funding for large projects like new cement plants or major upgrades was relatively easy to get. In those days – for most large, established companies – growth was the mantra. Many companies built debt to grow. When the crisis hit, these same companies had to reschedule debt and paid heavily to do so. There was no longer an easy path to long-term financing, just a struggle to maintain liquidity. Despite the continuing credit squeeze, new cement plants are being financed and built all around the world. Where does the money come from, and how is financing arranged?

Making the right contacts
“Even our most sophisticated customers –  and especially local and regional customers – need assistance in arranging financing,” says Tine Bremholm Kokfelt, head of project and export finance for FLSmidth. “We can help them access international credit markets because we have worldwide experience cooperating with cement plants, international banks and Denmark’s Export Credit Agency (EKF). With our support – and state-of-the-art FLSmidth technology, which meets international environmental regulations – customers can arrange loans to move their projects ahead. We work together with our customers to secure financing at competitive rates by acting as a door-opener to international banks and EKF to bring the package together.”

“We work together with our customers to secure financing at competitive rates by acting as a door-opener to international banks and EKF to bring the package together.”

Bringing a financing package together involves several players, beginning with a customer who wants to finance a project. FLSmidth can help customers navigate the complexities of banks and requirements of export credit financing for the project: not all international banks operate in all areas of the world, and every bank has its own strengths and weaknesses. Many customers already have a local or international relationship bank, but – especially now – even a large bank will not often singlehandedly take on the long-term risk involved in a major project. This is why FLSmidth’s Tine Bremholm Kokfelt sees Denmark’s EKF as the key to many financial packages for FLSmidth´s customers.

Long-term guarantees
EKF is owned by the Danish government. It exists to ensure competitive financial terms for Danish owned business and industry in international markets – just as other nationally owned export credit agencies (ECAs) do in countries worldwide. FLSmidth contracts are in some cases directly or indirectly financed (guaranteed) by EKF. Basically, EKF insures businesses against extraordinary risks not covered by the private credit insurance market. EKF thus makes it possible for companies to finance transactions in expanding markets and plays a key role in helping Danish companies – including major players in industries as diverse as shipping, cement, wind power and construction – develop new markets by providing a guarantee for typically 95 percent of the loan amount for a given project. In 2009, due to the global credit crisis, the government also approved a funding scheme backed by Denmark’s central bank for EKF-guaranteed transactions. This funding scheme has made it possible to lower funding cost and lengthen tenors. It also encourages banks to enter loan transactions because it optimises usage of their balance sheets.

“We can’t work alone to provide financing,” says Nina Wium, chief underwriter for EKF, “but EKF can help banks provide longer >> tenors (length of time) for repayment. Work­ing alone, banks can provide repayment terms of five to – possibly – seven years, depending on the country. EKF guarantees allow them to extend this to ten years or beyond, which the private market is not willing to do. Before extending this support, we do a thorough due diligence on the project company: its shareholders, financials, business case and feasibility study. We also closely examine the general market situation, including the number of new projects on the way, cement prices, cost expectations – anything that could impact a client’s future cash flow.” EKF financing makes it more attractive for international banks to get involved because it is an established and relatively straightforward process that banks understand. It also gives borrowers more comfort because these are standard, well-recognised agreements which can be easier to put in place than some other types of loans.

Friedrich Plassmann, vice president of Commerzbank, one of Germany’s leading banks for private and corporate customers, notes that, “First of all it is the long tenors that can be offered that make ECA financing attractive. Also, because of the long amortisation period of the project at least part of its financing can be covered by depreciations, and that’s good for FLSmidth’s customers. EKF is especially good to work with because of their excellent understanding of commercial risks and covenant structures. But in the end it’s the exporter an ECA wants to promote, not the bank; so to run ECA-covered transactions, an exporter like FLSmidth, which knows all the ins and outs of banks and export credit agencies, is of paramount importance. Especially companies that qualify for direct lending from international banks benefit from EKF-covered financing for projects from FLSmidth. Only recently, for example, we have concluded an EKF-covered export credit with the Russian cement producer OJSC Novoroscement (please see New Orders, p. 4).”

“Especially companies that qualify for direct lending from international banks benefit from EKF-covered financing for projects from FLSmidth.”

Solutions in a cyclical environment
Besides the long tenors that can be offered on ECA loans, the other important consideration for borrowers is, naturally, the pricing. Borrowers typically pay a margin and fee to the lending bank, plus a premium to EKF for guaranteeing the loan – a combination often referred to as the “all-in pricing”. All-in pricing should look attractive to the borrower and should be competitive against alternatives available from either the local banking market or the capital markets. Most ECAs use a matrix in which they look at a country and allocate a borrower risk category, from sovereign risk to bank risk to corporate risk. “The premium is typically higher in riskier economies,” says Andrew French, director of Northern European export finance at HSBC, a leading global bank. “However, in situations where pricing on alternative sources of financing, such as commercial loans, is rising, the all-in price for export credits begins to look more attractive to borrowers. With the current turbulence in financial markets, we’re seeing increasing demand for export credits across the board, from Asia to the Middle East to Latin America to Russia, and we expect this to continue.” In other words, the situation is always changing. The export credit product, by itself, might not always be competitive against the local banks. At other times, local banks might not be able to offer large loans over long tenors or might charge more to lend, making export credits look attractive. Since the credit crunch, liquidity costs in the market have been on an upward trend and all banks are considering how best to deploy their balance sheets. Some find it difficult to take on these long-terms loans and are pulling back from the export credit market, but by no means all. “The fresh round of tightening over last three  to six months has seen pricing edge upward,” says HSBC’s Andrew French, “but the ECA guarantee, typically for 95 percent of the lending, is a significant risk-mitigant and helps us maintain competitive pricing.

“Export credit agencies can also offer other benefits to banks and borrowers, and this is where EKF is especially helpful,” he says. “They are supportive and willing to engage to ensure that financing comes together smoothly, and they are also flexible in terms of looking at new structures and tailor-made solutions. To take one example – local  currency financing – HSBC has recently provided a Russian rouble loan to a Russian bank which on-lends the monies to Kaluga Cement Plant LLC (please see New Orders, p. 5). EKF guarantees the loan, which, being in local currency, removes potential exchange rate risks from the equation. Our strong relationship with FLSmidth is also an important factor in our decision about whether to engage in a project. HSBC sets great store on supporting its clients, and we also value FLSmidth’s long-term relationships with and knowledge of its customers to help us evaluate projects as they arise.”

Illustration of the lending structure

The financing puzzle

In Front: Dmitriev Vladimir Alexandrovich Chairman of Vnesheconombank in Russia, Peter Luketa - Global Head of HSBC’s Export Finance and Global Specialized Division & Anette Eberhard - CEO of EKF

Commerzbank is one of Germany’s leading banks and has a direct global presence in key business and financial centres

Headquartered in London, HSBC is one of the largest banking and financial services organisations in the world

“HSBC sets great store on supporting its clients, and we also value FLSmidth’s long-term relationships with and knowledge of its customers to help us evaluate projects as they arise.”

Banks and borrowers
Because of the deepening financial crisis, even stricter regulations are being imposed on lending and borrowing. The challenge for banks is to identify those projects and borrowers that have the potential to create real value. Borrowers need to demonstrate that they have sufficient own funds, good working capital management and a sound business case demonstrating the project’s profitability. “All of this is part of the due diligence, which all banks carry out,” says FLSmidth’s Tine Bremholm Kokfelt. “Banks do a very thorough background check. They want to know who the shareholders are and to have project transparency. Banks also need to see accounts audited according to international standards. FLSmidth has the experience to help guide customers through this process – not least by stressing the importance of maintaining a sound credit profile. Even if we can’t get properly audited financials, it’s not necessarily the end of the deal.”

Then, there is the question of evaluating a project’s environmental impact, which is a matter of performing an environmental due diligence and demonstrating that the project meets World Bank and IFC (International Finance Corporation) guidelines. ECAs – including EKF – comply with international agreements and follow recognised inter­national standards on the environment. Both EKF and international banks look to FLSmidth’s knowledge of cement processes, technology and emissions for support in environmental evaluations that show a borrower’s compliance with IFC guidelines. For large projects – which most major cement plant projects are – representatives from EKF, the lending bank and FLSmidth also interview the plant owner, meet with local authorities and ensure local community support.

“Working alone, banks can provide repayment terms of five to – possibly – seven years. EKF guarantees allow them to extend this to ten years or beyond, which the private market is not willing to do.” 

What is the time frame for pulling all these elements together? There are, after all, many steps involved, including EKF screening and board approval, bank screening, pre-approval and final credit approval, negotiations and documentation. “In the case of financing covered by ECAs, it can be very time consuming to coordinate among all involved parties with their  diverging or conflicting interests,” says Commerzbank’s Friedrich Plassmann. “While an exporter, such as FLSmidth, is mostly interested in having payment security, the borrower wants good all-in pricing and flexible credit. The ECA and the lending bank want certain environmental standards to be fulfilled and an acceptable credit risk, while the borrower must demonstrate a strong business case, which in international financing is more an intercultural than a commercial issue.”

The result is that, according to FLSmidth’s Tine Bremholm Kokfelt, “It is easy for customers to underestimate the time it takes for financing, which can easily stretch into eight to ten months, even with an available feasibility study and audited financial statements. Maybe six months if you are an experienced customer and have all your documentation available. Proper preparation is the key, and we work closely with EKF and the lending bank to help our customers get through the process as quickly as possible. We often start the approval process with EKF even before our customer has mandated an international bank, in order to speed up the process and to get a better picture of the expected requirements for the specific project.” “Preparation is all-important” agrees HSBC’s Andrew French. “In the case of Kaluga Cement, for example, we were able to move from mandate award to loan signing in less than two months, thanks largely to the groundwork done by all parties – the bank, EKF and FLSmidth – during the early stages of the project. This compares favourably with the timelines that the customer would have experienced if they had opted for alternative sources of financing, and demonstrates that export credits can be closed quickly in the right circumstances.”

Tine Bremholm Kokfelt