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.

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