Understanding how and when to contribute with relevant solutions to a customer’s business challenge is a crucial part of meeting cement industry demands today. In an upgrade project for Yanbu Cement Company in the Kingdom of Saudi Arabia, FLSmidth has demonstrated the ability to support the cement producer’s growth strategy through a combination of technical expertise and financing know-how.
The story began in 2017, when FLSmidth entered into discussions with Yanbu Cement Company (YCC) about the retrofit of burner systems for two of its cement lines at its plant located northwest of the Yanbu Al Bahr harbour on the Red Sea. As one of the largest cement manufacturers in the Kingdom of Saudi Arabia, YCC has ambitious plans for growth based on production efficiency gains.
During early discussions about the burner upgrade, it became apparent that FLSmidth could not only provide the equipment and know-how that Yanbu Cement was looking for, but also assist with financing for the project. This means that FLSmidth would supply a total equipment and commercial solution supporting the customer’s growth strategy.
Although FLSmidth has extensive experience in equipment supply for this type of efficiency project as well as mediating financing for large projects, this project stands out. In this case, the financing amount required is smaller than most projects financed by FLSmidth.
FLSmidth has a long history in supporting clients with attractive financing solutions worldwide. This is partly because of the extensive network within the financing community and partly due to strong experience in identifying and facilitating suitable financing structures.
When looking at the specific project for Yanbu Cement, Tine Bremholm Kokfelt, Head of FLSmidth’s Project & Export Finance for Cement, immediately saw a potential financing solution that could benefit Yanbu Cement: a simplified financing structure with deferred payments at reasonable financing cost.
YCC is a solid, well-established and listed company in Saudi Arabia, and FLSmidth found it natural to involve one of its key financing partners EKF, the Danish Export Credit Agency. Financing structures with EKF normally require a banking partner to provide the funding. This project was notable, partly because it was the first time FLSmidth would partner with Jyske Bank, one of Denmark's largest banks, but also because it was the first time FLSmidth would engage in financing for a customer in Saudi Arabia.
Opening up opportunities
Yanbu Cement Management realised that financing via FLSmidth was not just an option, but that it was at highly competitive terms. They were quick to explore the potential for further plant optimisation. The scope was increased beyond upgrading the burner systems to include process, analysis and automation systems. So, what started as a relatively simple retrofit grew into a comprehensive productivity and quality enhancement project in line with YCC’s digitisation strategy. The contract, finalised in late 2017, was amended to include a range of new FLSmidth equipment and systems to a total value of EUR 4.2 million.
“The special financing arrangement made the upgrade project much more appealing to management and made the decision to proceed with the expanded upgrade project much easier."
Generally, Mr. Amr Nader, Advisor to the CEO of Yanbu Cement, is extremely positive about the financing arrangement. He sees it as a unique offering and a great advantage that FLSmidth can provide this type of service to customers. He explains that the financing process went very smoothly and without unexpected complications.
“EKF and FLSmidth has cooperated for more than 90 years with projects all over the world. As a result, FLSmidth is one of our highly valued customers. We find it important that we can support FLSmidth’s global business with financing solutions for both large and small projects and even with equipment supplies, which may not necessarily be suited for a typical bank loan”, says Christian Ølgaard, Deputy CEO at EKF.
For Jyske Bank, this partnership on financing has offered an opportunity to get closer to FLSmidth and EKF. Claus Birn Jensen, Director at Jyske Bank, says: "We see this transaction as an important milestone in our cooperation with FLSmidth and it contributes to our increased focus on international financing supported by EKF. We are delighted to partner with FLSmidth and EKF, who both bring enormous experience and competencies in this area."
The financing structure
The financing is based on FLSmidth providing Yanbu Cement with a supplier's credit by using bills of exchange instead of a regular bank loan or credit facility.
A bill of exchange is a simple financing document between the supplier and the customer, typically for smaller export contracts, which enables the customer to defer payments under the supply contract. The bills of exchange are discounted by the supplier’s bank enabling payment to the supplier on an agreed future date based on the estimated time of deliveries. The customer starts payment for the contract and financing costs after six months and over an agreed period of time.
The financing covers typically up to 85 percent of the contract price as well as the financing cost, which is fixed upfront and includes bank fees, funding costs as well as insurance premiums to EKF for taking a major part of the risk. A down payment of minimum 15 percent is a requirement for the financing
The strength of a bill of exchange derives from its legal status, although each country has its own legislation and it cannot be used in every country.
For FLSmidth, this is a relatively new financing method applied in its business. The financing is well-matched to a cement producer such as Yanbu Cement and for smaller supply contracts below EUR 5 million.
The major benefit for Yanbu Cement is a result of the simplified financing solution with deferred payments. YCC gains a grace period of one year with a three-year fixed repayment schedule aligned to the expected future revenue generated by the efficiency project. The bills of exchange appear as a supplier’s credit and not as a bank loan, and the financing cost were attractive. No additional collateral has been requested.
EKF, being the major guarantor, was willing to participate in the financing project because of its excellent history with FLSmidth, and because Yanbu Cement is seen as a transparent, reputable, and successful company. “The cooperation between EKF, FLSmidth and Jyske Bank has worked out very well,” says Tine Kokfelt.
For FLSmidth, it is another good example of the unique project financing value proposition we can bring to the table, says Tine Kokfelt. "It also supports our strategy to be close to local markets and help drive customers' productivity. It is a tangible way in which we can add value beyond supplying equipment and know-how."
"There seems to be a good potential to offer more of this type of financial support in other markets. We are willing to consider offering financing solutions to other similar productivity enhancement projects or small project sales."