Post on 18-Jul-2015
transcript
Outline
Definition of Contract Finance Facility
Parties to a Contract Finance Facility
Types of Contract Finance Facility
Features of Contract Finance Facility
Credit Issues/Concerns
Benefits
Risk and Mitigation.
DEFINITION OF CONTRACT FINANCE FACILITY
This is a type of credit facility offered to
contractors with a valid contract to enable
them execute contract as awarded by a
contractee or an Employer.
FEATURES OF CONTRACT FINANCE FACILITY
There must be an underlying contract where all
terms and obligations of both the contractee and
contractor will be stated.
The following information will be provided in the
contract, The value of the contact, Duration and
scope of the contract, Payment Mode & Period,
Percentage of Advance Payment granted (If any),
Possibility of Reassigning of the contract.
The facility is self liquidating as contract proceeds
from jobs executed by the contractor are
expected to pay off the loan.
The cost of execution must be stated with a Bill of
Quantity, this is necessary to determine the
adequacy of the financing amount being sought
FEATURES OF CONTRACT FINANCE FACILITY
The customer must be willing to provide equity
contribution of 30% of the cost of execution of the
contract. This will enable the customer to have a
stake in the contract.
The equity contribution can either be in form of cash
or evidence of work done which must be valued by
a professional.
The contract finance tenor and repayment mode
for the facility must align within the duration and
payment mode stated in the contract document to
avoid a mismatch.
Repayment source for the facility will be from
Irrevocable domiciliation of contract proceeds to
UBA.
CREDIT ISSUES/CONCERNS
A Bank as a matter of necessity does its due diligence in determining if a contractor is risk-worthy and has the capacity to perform under a given contract/obligation. We must also examine the employers ability to pay after the contractor has performed.
5 Cs of Credit is considered in determining the affordability of the risk.
Character: Refers to the applicant’s & Employer’s reputation of business uprightness and integrity.
Capacity: refers to the professional and technical capability of the customer to perform the contract in line with the specification of the employer. History of the company, types and size of past projects, The company’s financial strength, and the backgrounds of key employees.
Capital: The principal's capital evidences its financial solvency and credit-worthiness to fulfill any obligation .
Collateral: To further solidify Character, Capacity and Capital, a Bank may occasionally require collateral equal to the penal sum from the Principal. This helps reduce the risks to the Bank.
Conditions- Conditions refer to the overall economic climate and external environment surrounding the bank and the business firm
COLLATERAL
Contract Finance Facility must be adequatelycollaterized in line with the Bank’s Collateral policy, thatis, provision of Legal Mortgage with FSV coveringbetween 130% - 200% of the facility amount OR any ortangible acceptable security.
The percentage coverage is dependent on the propertylocation and composition (land & building or debentureon fixed and floating assets).
Irrevocable domiciliation of contract proceeds is asupport collateral, however it can be used as maincollateral for Supply contracts awarded by any of theBank’s approved counterparties. In this instance, thesupplier of the goods will be issued Bank Guarantee,which will crystallize upon confirmed delivery of thegoods by the contract employer.
OTHER CREDIT CONCERNS
Evidence of contracts executed in the past must
be provided by the customer to ascertain its
capacity towards executing such contract.
Documentary evidence of lodgment of proceeds
of past contracts in a bank
The Cost & Benefit analysis must be determined to
ensure that the contract is actually profitable to
the customer after deducting all bank charges.
Are those contracts APG Bounds (If yes evidence
of work achieved on the Advance Payment
received must be provided to justify the Contract
Finance Facility)
BENEFITS
It allows customer’s with valid contracts
access funds for smooth execution of
their contract.
The bank tends to make interest
income and other fees from availing
contract finance facility. The yield for
contract finance can be enhanced if
the contract is short tenured and the
contract is a revolving contract.
RISKS AND MITIGANTS
Counterparty Risk: This is the risk that the Employer/Contractee who issued
the contract may not honor their payment obligation to the customer has as when due.
Mitigation
Assessing the Employer based on track record ofpayment history.
Examine if the company is listed under approvedcounterparties with the bank.
Evaluating whether the employer is a reputablecompany with good payment cycle & Good creditrating?
Evaluate if the customer has executed contracts for theemployer in the past and when such contract proceedsare received.
RISKS AND MITIGANTS
Performance Risk: - This is the possibility that the customer may not be able to execute the contract in line with the specification of the employer.
Mitigation –
Evaluate the customer’s years of experience on the job.
The magnitude of contracts executed in the past and their status whether completed or In Progress, This must be supported by certificate of discharge or completion.
Risks and Mitigants (Cont.)
Diversion Risk:
This is the risk that the customer may divert
proceeds of the Contract. This risk is mitigated by
the fact that employers are expected to domicile
payments into the customer’s account with a
particular UBA Branch.
This is the risk that the customer may divert
disbursed funds for other purpose different from
the contract finance.
This risk is mitigated by ensuring that disbursement
shall be in favour of suppliers of construction
materials in conformity with submitted bill of
quantities.
Risks and Mitigants (Cont.)
Force majeure risk
This risk reflects the occurrence of unexpected and
uncontrollable natural and/or man-madeconditions,
such as earthquakes, typhoons, flooding or war,which
may negatively affect the construction oroperations of
a project.
Mitigation
Provision for extension of term.