YOUR banker as YOUR business partner
The current expert opinion with Daniel Hatvani, Head of Structured Finance at CIB Bank, originally appeared in the October 31 - November 13 edition of Budapest Business Journal.
BBJ: How would you summarize the gist of structured financing?
Daniel Hatvani: In many instances, structured financing can be a synonym for project financing. A project or an instrument is being financed, and the debt is repaid by the revenue generated from the project. It is essential to note, that in case of structured financing we always talk about long-term pay-off and usually long term contracts securing incomes for the project. For structured financing a classic example can be the financing of an office building, where the rent paid by tenants cover the debt expenses, or the financing of a power plant, where the generated and sold energy covers such expenses, or even the financing of a highway, where the state is paying an availability fee to the project company. In these projects the borrowers are most of the time special purpose vehicles, or project companies in other words, who have no employees. Their balance sheet is usually very simple, as on the assets side they have the project itself — which is the real estate or the asset — and on the liabilities side they have the owners’ equity and the bank debt provided for the project. One more important thing: in most cases of structured financing, the leverage, the asset and the cash-flow itself are the most important collaterals, it rarely happens that the project owner gives additional financial assurances behind the credit.
BBJ: What does the structured financing department do inside CIB?
D.H.: Basically our department has two chief functions: dealing with and handling the cases concluded in the last 5-10 years and recruiting new partners — as I always refer to our clients and investors — and acquisitions. I would like to spend more time with the latter, though it is an essential part of our everyday job to serve our existing portfolio.
BBJ: What kind of services does CIB offer for clients in structured financing?
D.H.: Our (potential) partners approach us with project ideas, which means that they bring their own business models and concept on the planned structure of their project. We provide them with a financial model, which contains the assumptions and requirements of the bank, and we try to find the common basis with their ideas: a concept that is still acceptable to our partners and already acceptable for the bank. Practically, this is the very first step for deciding whether it is interesting from the bank’s point of view to cooperate in the project. In the following steps of acquisition, negotiation and contracting, we take somewhat of an advisroyrole, again aiming to complete the ideas of our partners with our own experiences, and creating a sustainable deal. In all our businesses we have a back and forth communication, exchanging experiences and making decisions bilaterally in order to establish a structure that is sufficient for both the bank and our partner.
BBJ: Bank experts and analysts are carefully optimistic about the global economy, what do you see in the sector of structured financing?
D.H.: In my opinion, a change has started in 2013 and been ongoing in 2014. We are now experiencing a growing trend in demand regarding project loans, mostly real estate loans. I believe that this trend will continue in 2015. We have seen foreign, institutional investors re-entering the market, who are not only seeking prime asset investments but are also a bit more opportunistic, and are looking for deals with potential upsides. Also, we have seen some Hungarian individuals who — with the end of the crisis — slowly dare to invest their savings. We strongly believe that through learning from the experiences of the last couple of years the market can make secure business decisions. Of course we can not yet afford to get immediately involved in projects that are not in line with our lending policies, but we can definitely make recommendations for our potential partners regarding changes in the business model or their project concepts that would make their concept more attractive to CIB and more efficient for them. Again, I’d like to point out our somewhat advisory role in this process.
BBJ: Could you mention an example without stating names?
D.H.: We have recently signed a new credit line for the acquisition of an office building. The significance of this deal is that our management has consented to financing a project that would have clashed with our risk sensitivity a couple of years ago. “We investigated the asset and found its value and cash flow to be sufficient enough for us to finance it, so basically this is close to a pure loan-to-value based deal.”
BBJ: What about the consciousness of your partners?
D.H.: I believe that those investors who could survive the crisis could do so because they were able to learn from their experiences — even from their failures — and this indicates awareness. We are also aware enough to see ourselves as investors rather than creditors, and see our clients as partners. Before the crisis in the banking sector this attitude was rare. We believe that, if our partners are unable to make revenue on their investments aside from paying their debt, then the deal is insufficient and is not worth it for our partners. A bank should never speculate in a way that their debtors use all their available cash from the project on paying the debt back first. Of course the credit risk importance of the initial leverage (debt-equity ratio) must not be harmed, but if we followed the path of getting all the credit back first, and let our partners make revenue only after that, we could not talk about success stories.
BBJ: What should your partners keep an eye on to minimalize risks?
D.H.: Basically, a project has three pillars to rest on. If any of these pillars collapse, or are not properly represented from the beginning, the whole project is ruined. These three pillars are: (1) an asset with a sufficient quality, (2) a cash flow that predicts pay-off according to the most conservative approaches and (3) a project sponsor who provides the initial equity, and who can coordinate the project by satisfying all the emerging needs. Without nurturing all of these pillars we cannot talk about a successful project. In my view all those projects that broke down during the crisis lacked essential attention on one or more of these pillars. These are the three pillars to consider in order minimalizing risks.
BBJ: How does it help you in your everyday business to have the know-how of an international parent bank in the background?
D.H.: It gives security for us, that our owner has declared their commitment to stay in Hungary, regardless of how difficult it has become for banks to operate in the country recently. We have an approved program until the end of 2017. We are given clear and achievable goals by our parent, and this evidently drives growth. We have local competence to make decisions, though whenever we have questions we can turn to our parent bank, which offers many decades of international experience and can support us in making a deal. We are committed to the country, and we are available for our future partners with a vast array of services.
SUPPORT THE BUDAPEST BUSINESS JOURNAL
Producing journalism that is worthy of the name is a costly business. For 27 years, the publishers, editors and reporters of the Budapest Business Journal have striven to bring you business news that works, information that you can trust, that is factual, accurate and presented without fear or favor.
Newspaper organizations across the globe have struggled to find a business model that allows them to continue to excel, without compromising their ability to perform. Most recently, some have experimented with the idea of involving their most important stakeholders, their readers.
We would like to offer that same opportunity to our readers. We would like to invite you to help us deliver the quality business journalism you require. Hit our Support the BBJ button and you can choose the how much and how often you send us your contributions.