Payment Risk Mitigation in Project Business

Question 1

Payment risk mitigation instruments (4)

Answer 1

1) Letter of Credit
2) Guaranties in favor of Siemens
3) Sale of receivables
4) Export Credit Agency cover

Question 2

Payment Risk Categories (2)

Answer 2

1) Commercial risks: Customers financial ability and willingness to pay
2) Political Risks: Customer is willing to pay but is prevented doing it

Question 3

SFS Customer Rating scale

Answer 3

1-5+= Investment grade, 10=in default

Question 4

Below which SFS rating payment risk mitigation has to be considered?

Answer 4

Below 5+

Question 5

Letter of Credit - General Definition

Answer 5

Irrevocable and abstract promise to pay given by the issuing bank.

Question 6

Opening an L/C

Answer 6

Customer applies for LC
Issuing bank opens LC sends to to confirming bank
Confirming Bank notifies CF F
Confirming Bank affirms payment obligation to Siemens to presentation of LC documents

Question 7

Handling an LC (6)

Answer 7

1) Siemens delivers in exchange for LC documents
2) presentation to confirming bank
3) confirming bank forwards to issuing bank
4) confirming bank pays siemens
5) issuing bank pays confirming bank
6) issuing bank forwards lc to customer, customer pays bank

Question 8

Guarantee - Definition

Answer 8

Commentment of a guarantor (bank) to pay a beneficiary (Siemens) in case a debtor (customer) defaults

Question 9

Guarantee - abstract / accessory

Answer 9

Abstract = legally independent from the underlying transaction.
Accessory = bound to transaction

Question 10

Sale of receivables - advantages (3)

Answer 10

Elimination of payment risk
Increase in liquidity
Positive influence on certain KPIs

Question 11

Sale of receivables - disadvantages (4)

Answer 11

Siemens is liable for the enforceability of receivables sold
loss of control
costs
risks remain with siemens until obligors acceptance of works

Question 12

What do Export Credit Agencies cover?

Answer 12

Export risks. Before delivery: Manufacturing risk
After delivery: Credit period, covers risk of customer default

Question 13

Cover of Euler Hermes

Answer 13

Insures trade receivables arising from export transaction for a certain fee

Question 14

Euler Hermes - what if risk materializes?

Answer 14

Siemens is indemnified by Euler Hermes, subject to deductables

Question 15

Advantages of LC (4)

Answer 15

1) LCs are standardized instruments
2) If issued by first class bank, payment risk mitigated
3) Confirming bank covers risks of the issuing bank
4) issuing bank covers customer risk

Question 16

Sales Financing - Definition

Answer 16

Financing offer as part of the offer to customer. Can be positive addon to customer

Question 17

Sales Financing - advantage (3) / disadvantage (2)

Answer 17

+ Siemens ability to provide financing can be decisive factor, relationship
+ Sales financing can enable contracts that probably would not be able to
+ Siemens strengthens position in market
- implementation takes time
- for high risk customers countries it might not be available

Question 18

ECA covered buyers credit

Answer 18

ECA cover credit risks for third party financing institutions that provide funding for export transaction

Question 19

Alternative Sales Financing Instruments - Performance Contracting

Answer 19

Siemens guarantees improvements (savings) while providing new equipment. These savings are used to finance project. No separate financing contract necessary

Question 20

Alternative Financing Instruments - Leasing

Answer 20

Lessor grants right to use an asset to lessee for a period of time. Instead of lumpsum, series of payments

Question 21

Can receivables be sold and under which preconditions? Short term / longterm

Answer 21

Short: Must not be sold

Question 22

For the LoA Process - which rating is sufficient?

Answer 22

A or B

Question 23

Main Goal of Sale of Receivables

Answer 23

Mitigate payment risk

Question 24

True or False - the rating category is defined by the quality of the rating

Answer 24

True - the quality of the rating indicates how detailed a rating was carried out. Manually conducted rating > automated rating. Category A or B indicate manual rating