17.02.2016

TAEFL structures deal to provide finance for UK company

Securing a contract to supply electricity generating facilities to an African country would be a feather in the cap of any exporter. When the order is placed by a national government in the region, the prestige of winning such a contract increases by an order of magnitude.

A British company recently found itself in that fortunate position after a year of negotiations and competitive tendering. The deal was to supply a turnkey system delivering 200KW of off-grid power to a village community. Strictly speaking, the term ‘generator’ is not wholly accurate in this context, as the installation involves a bank of photo-voltaic cells for converting the abundant African sunlight into sustainable and renewable electrical power.

Winning a sizeable order is only the first step – however prestigious the client may be – as most orders of this type have to be financed. The most cost-effective source of PV panels today is China, where local manufacturers require a down-payment with the remainder paid when the panels are ready to be shipped out. The UK company which secured the contract had to be able to finance the manufacturing and the time it would take for the panels to reach their destination in Africa by sea. Then there is the time to install and commission the turnkey system. All before payment by the client falls due.

Dealing with a stable overseas government – as in this instance –  has at least one attraction. The country’s central bank can issue a Letter of Credit (LC) that is effectively ‘convertible currency’ which can be used to provide the liquidity which the contractor requires to progress the order.

TAEFL recommended as as specialist in field of order finance

The company’s management had researched the marketplace for assistance in financing their order. Trade & Export Finance was identified as a specialist in the field, having negotiated similar financial instruments for deals in countries as diverse as Saudi Arabia, Azerbaijan, the United Arab Emirates and Libya (in less turbulent days).

The Letter of Credit issued by the purchaser has been confirmed by a leading bank in Europe, which means that the value of the LC would be honoured by that bank subject only to the installation being completed. With an instrument of assured value in its hands, TAEFL turned to its specialist funding partner UK EXIM Finance to provide what is effectively an advance against the value of the Letter of Credit.

From the lender’s perspective, the deal offered an acceptable degree of security. UK EXIM Finance is paying the Chinese PV manufacturer and will retain title to the equipment being shipped from there directly into Africa. A debenture over the company completes the security, which is further supported by the directors’ undertakings.

The entire deal will take an estimated 18 months to complete, and UK EXIM Finance is committed to funding each stage of the process as expenditure is incurred. The Letter of Credit has been written for $160,000 (approximately 112,000), and the finance company is making £75,000 available against it.

The deal with the African government is interesting but the circumstances are not unique. There are many UK exporters in a similar position; winning confirmed orders which can make a great deal of difference to their turnover and profitability but lacking the funding to start the ball rolling. TAEFL’s proven expertise is in getting the details right all along the way, with the Letter of Credit as the most important building block.

The company’s skills include ensuring that the LC ‘does what it says on the tin’ so that the confirming bank and the specialist trade finance company can move ahead rapidly and with confidence to help another UK company make a real contribution to the nation’s export targets.

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