Payment Risk Mitigation in Project Business Flashcards
Payment risk mitigation instruments (4)
1) Letter of Credit
2) Guaranties in favor of Siemens
3) Sale of receivables
4) Export Credit Agency cover
Payment Risk Categories (2)
1) Commercial risks: Customers financial ability and willingness to pay
2) Political Risks: Customer is willing to pay but is prevented doing it
SFS Customer Rating scale
1-5+= Investment grade, 10=in default
Below which SFS rating payment risk mitigation has to be considered?
Below 5+
Letter of Credit - General Definition
Irrevocable and abstract promise to pay given by the issuing bank.
Opening an L/C
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
Handling an LC (6)
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
Guarantee - Definition
Commentment of a guarantor (bank) to pay a beneficiary (Siemens) in case a debtor (customer) defaults
Guarantee - abstract / accessory
Abstract = legally independent from the underlying transaction.
Accessory = bound to transaction
Sale of receivables - advantages (3)
Elimination of payment risk
Increase in liquidity
Positive influence on certain KPIs
Sale of receivables - disadvantages (4)
Siemens is liable for the enforceability of receivables sold
loss of control
costs
risks remain with siemens until obligors acceptance of works
What do Export Credit Agencies cover?
Export risks. Before delivery: Manufacturing risk
After delivery: Credit period, covers risk of customer default
Cover of Euler Hermes
Insures trade receivables arising from export transaction for a certain fee
Euler Hermes - what if risk materializes?
Siemens is indemnified by Euler Hermes, subject to deductables
Advantages of LC (4)
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
Sales Financing - Definition
Financing offer as part of the offer to customer. Can be positive addon to customer
Sales Financing - advantage (3) / disadvantage (2)
+ 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
ECA covered buyers credit
ECA cover credit risks for third party financing institutions that provide funding for export transaction
Alternative Sales Financing Instruments - Performance Contracting
Siemens guarantees improvements (savings) while providing new equipment. These savings are used to finance project. No separate financing contract necessary
Alternative Financing Instruments - Leasing
Lessor grants right to use an asset to lessee for a period of time. Instead of lumpsum, series of payments
Can receivables be sold and under which preconditions? Short term / longterm
Short: Must not be sold
For the LoA Process - which rating is sufficient?
A or B
Main Goal of Sale of Receivables
Mitigate payment risk
True or False - the rating category is defined by the quality of the rating
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
