Order Financing and Financial Engineering

Abstract

Increasing global trade has led to a considerable increase in the importance of major industrial projects and infrastructure projects over recent decades. For the parties involved this means continually having to face new challenges, in particular with regard to issues concerning the financing and handling of the projects. Major capital investments, long project terms and financially weak buyers necessitate bespoke financing concepts without which the implementation of major projects would often not be possible at all. Order financing consequently becomes a major marketing task. One of the key elements of order financing is the management of a large number of risks which are inherent to the project. This concerns not only the risks of construction delays and payment defaults, but also the political and financial uncertainties arising from the international nature of the projects. Due to this increased complexity, a series of options has therefore been created in the field of plant manufacturing for mitigating risks, and consequently for minimizing them from the point of view of the project management organizations. Apart from public and private financial intermediaries, it is above all export credit insurance companies which offer special products without which the financing of major projects cannot generally be ensured. In particular, the so-called Hermes cover is a popular type of export guarantee which is used especially in conjunction with the ‘classic’ financing instruments of supplier credit, buyer credit, or forfaiting. Apart from these instruments, further financing options increasingly play an important role. Here the focus is on export leasing and compensation transactions in the form of a bilateral agreement between the contractor and the principal, as much as on state-supported mixed and co-financing, where the domestic export sector is supported by special risk guarantees and financing conditions. Project finance is especially important. Its aim is to service debts from the net receipt surpluses generated by the project. The inherent profitability of the project is therefore crucial to its financing, and ultimately its implementation. This paper provides an overview of the components which make up order financing, and of the most important players in the field, and it shows the fundamental methods of operation of conventional and other financing options.