Bank Guarantees and Indemnities

Report
Bank Guarantees and
Indemnities
26th August 2013
Abdul Yassim
Vice President
Trade and Working Capital
1 Absa presentation title  Date of presentation
Company confidential use only / Unrestricted distribution
Agenda
• Current Environment
• Types of Guarantees
• Challenges
• Structured Solutions
2 Absa presentation title  Date of presentation
Company confidential use only / Unrestricted distribution
Government infrastructure budget
Strong Infrastructure MTEF
investment ...
... with a strong focus on Energy and
Rail
R844.5bn MTEF
Previous
year
R284.5bn
R297.6bn
R262.2bn
R226.7bn
71
76
Transport
and logistics
31%
Water and
sanitation
9%
64
56
25
25
89
92
26
22
81
Infrastructure
services
25%
75
73
2011/12
92
100
104
2012/13
2013/14
2014/15
Energy
Transport and logistics
Water and sanitation
Infrastructure services
Energy
35%

Increased MTEF infrastructure investment of R845bn over the medium term with pipeline/order book of projects worth R1.2trillion planned by
the Presidential Infrastructure Coordinating Commission (PICC) could steer towards stronger economic growth for SA.

There is clear infrastructure investment towards lagging infrastructure such as Energy, Transport (Roads) and Water.

Concerns remain on the lack of capacity to effectively spend allocated infrastructure budgets. The Construction Industry Development Board
(CIDB) has been mandated to improve the monitoring of government’s expenditure and management of infrastructure projects and
programmes.

Proactive bank solutioning for construction companies is vital – to ensure effective and sustainable relationships in the market
3
Source: National Treasury
Typical IPP Project Structure
Equity and Debt
Balance of Plant
Supplier
EPC Contract
Project SPV
EPC Contractor
OEM
Agreement
OEM Provider
Off taker
4
Corporate Structure
Balance of Plant
Supplier
Subcontracting
Agreement
Solar Equipment
supplier
EPC Contract
Corporate
O&M
Agreement
OEM Provider
5
Current Environment
Project owners often demand
performance guarantees of
about 10% of project value
from contractors.
Project owner
EPC Contractors
Financial needs
Contractor
•
•
•
•
•
Bank provides contractor
performance guarantee
based on equivalent
collateral
6
Guarantees
Working Capital
Supplier Finance
Transactional
Insurance
Types of Bank Guarantees
 Bid Guarantees
 Advance Payment Guarantees
 Performance Guarantees
 Retention/Warranty Guarantees
 Standby Letters of Credit
7
Bid Bond/Tender Guarantee
• Issued at the initial stage of a contract.
• The purpose of this unconditional commitment by the bank is to ensure
that the party to whom a contract is ultimately awarded will indeed
accept the award and proceed with the execution of either the
construction or supply or delivery obligation falling under the contract.
• The beneficiary (employer) can claim against the Bid Bond by making a
simple statement that the contractor has not accepted the award.
8
Advance Payment Guarantee
• In large contracts, the contractors normally take mobilization advances
from the employers to commence work on projects.
• To safeguard the employer, the contractor arranges for its bank to make
a commitment to return to the employer the advance taken by the
contractor if it fails to proceed with the project.
• This commitment is unconditional on the part of the bank.
9
Performance Guarantee
• Normally, once a Bid is accepted, the Bid Bond is replaced by a
Performance Guarantee for nearly 10% of the value of the project.
• This guarantee assures the employer / beneficiary of the
creditworthiness of the contractor or supplier, provides access to funds
for the employer to minimize damages in case the contractor fails to
deliver, and acts as a tool for leverage against the contractor to ensure
due and diligent execution of the contract.
• Such guarantees are payable against a simple claim from the employer
stating that the contractor has not fulfilled its commitment.
10
Retention/Warranty Guarantees
• In most construction projects, by agreement a part of the progress
payments (against running bills of the Contractor) is retained by the
Project Owner to cover any faults that may subsequently show up in the
work performed.
• Such retained amounts may, however, be released against a bank
guarantee.
• The guarantee is payable against a simple claim from the beneficiary
stating that the contractor has not fulfilled his commitment.
11
Standby Letters of Credit
• A commitment issued by the bank to other banks / 3rd parties committing
on behalf of its customers to pay a fixed sum of money in case the
customer fails to fulfill its financial commitment.
• The Standby Letter of Credit is normally issued in respect of transactions
payable under open account.
• Claims are honored against a written declaration from the supplier,
confirming delivery of the goods or services and non performance by the
buyer.
12
Challenges
Project owner requirements:
• Prefer performance guarantees from banks
• Looking for performance guarantees typically between 10% to 20% of project
value
• Tenors on performance guarantees range from between 1 year to 5 years
depending on the project.
Concerns with project owner requirements:
• Create financial strain as facilities are often collateralized.
13
Sub Participation Solution
• Bilateral facility agreed between applicant and Absa
• Absa is the sole issuer of the bond and executes risk
participation agreements with a group of surety companies.
• Although the risk participations are typically disclosed to the
applicant, participants have no direct contractual relationship
with the applicant.
Company confidential
Sub Participation Structure
Surety Co
EPC Contractor
Facility documents
Surety Co
Participation Agmt
Absa
Surety Co
Beneficiary
Bonds/Guarantees
Participation Agmt
Surety Co
15

similar documents