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Project Finance from Euler Hermes' perspective

Euromoney Seminars and Trade Finance sat down for an interview with Ulrich Schulte Lünzum, Head of Department Project Finance at Euler Hermes. As a taster before the main event this week, this short Q+A session focused on the main trends in the project finance market, the impact these will have on exporters, and the plans ahead for Euler Hermes in this space.


What main trends have characterized the project finance market in the recent past?

So far, 2016 has seen a number of transactions reach financial close in the worldwide project finance market, however it remains to be seen whether this year will be an equally successful year for the market as 2015 was. In 2015 – and that was almost a little surprising – total volumes in project finance had reached a new high.

Throughout this period, political and economic developments in different parts of the world have had a strong influence on project financings. The slump in oil prices has led to a review of investment decisions in the Oil & Gas industry and related sectors. Generally, low commodity prices have been a challenge for many projects. Also, sanctions – esp. against Russia – have led to difficulties in finding proper financing for projects there. However, other sectors have remained rather stable. For example, 2015 has still seen some major energy and infrastructure deals reach Financial Close. We will have to wait and see what the impact of the global climate deal negotiated in Paris in November 2015 will be – especially whether there will be an additional push on gas-fired power plants and renewable energy projects.

From an ECA perspective, the global developments of this year have resulted in two different dynamics. While some projects have been put on hold altogether, ECAs have become a more relevant source of funding for the remaining projects. This was due to a shift in the risk perception partly accompanied by lesser liquidity – e.g. in the respective local banking markets – in certain project finance markets. In the Middle East for example, where tenors and margins have been way beyond what an ECA can offer, there has been a new appetite to include an ECA portion as ECAs have proven to be able to take big portions.

What have you been dealing with in Project Finance at Euler Hermes specifically?

Historically, we have always had a strong focus on oil & gas, petrochemicals, metals and energy projects. In Energy we have done mainly gas-fired power plants and for the past few years we have developed a very strong focus on renewable energy – esp. wind power but also some solar power projects.

Last year it took some time to fill up the pipeline as there were not so many projects forthcoming in the first half of 2015. But things started to move again in the second half of 2015 and since then we have been very busy and have been able to close five transactions in 2016 so far. There are more to come but I cannot say for sure as to whether this will occur this year or next year. Projects range from quite a few wind farms throughout the world, a petrochemical plant in Oman and most recently we have been able to grant cover for a solar plant in Northern Africa.

What is your typical involvement in a project finance deal?

All in all, I would say that we cover a very diverse portfolio of projects ranging from taking a leading role in big scale multi-sourcing transactions to enabling tailor made smaller transactions. As you know, we are content driven with our involvement being defined by the level of German sourcing of a transaction. For big scale multi-sourcing transactions this means that we are of course supporting German key contractors, e.g. if they act as EPC-contractor. While this is our preferred option, we are aware that – because of the diversity of the German exporting industry – there is always a huge potential to include a substantial amount of sub-supplies from Germany even without a German EPC-contractor being involved. In the Oman transaction I referred to e.g. our involvement is based on sub-supplies from more than 20 German exporters which have been aggregated under one covered loan tranche.

On the other hand, we are keen to support projects in emerging countries, which are often the first of its kind in a new market environment and as such pose specific challenges for the German exporter. A prime example for the latter is the Krnovo wind farm. Once operational, the project financed by a Euler Hermes covered loan of the German KfW-IPEX as well as an EBRD loan will be the first commercial wind power plant in Montenegro and account for 6 per cent of total electricity production in the country.

How do you perceive German exporters and banks in the global projects finance market?

German exporters offer state-of-the-art products and technology and are able to provide full scope solutions in their fields of expertise. However, in providing a full scope, high quality solution German companies are challenged especially when it comes to offering the most competitive price. Against this background, including ECA cover is an essential part in submitting a cost-efficient bid. Recognizing that an efficient sourcing plays an integral part for a competitive offer, the German Federal Government has simplified its foreign content requirements and just introduced “49-Plus”. While on the one hand this allows foreign supplies to be included up to 49 % of the export contract value without further explanation and thereby adhering to its mandate to foster German export and create jobs in Germany this scheme also allows for inclusion of more than 49% foreign content on a case-by-case basis. I hope that this measure helps German companies to be able to take a key role in big scale transactions with key know how from Germany.

The German banking side shows a different picture when it comes to project finance. There are only very few banks that are active in the project finance market and willing to structure complex project finance transactions. It would be great to see more of them taking an active part in structuring major deals, which in turn – I am sure – would have a positive effect on German exporters. I would very much welcome the opportunity for discussing their potential involvement in such transactions as well as how the German ECA can best support them.

Looking ahead: What’s up next in project finance for Euler Hermes?

When I look at current and envisaged projects, there are quite a few things to look forward to. The renewable energy sector in Argentina is surely one to watch over the next couple of months. The new energy program has been one of the main priorities of President Mauricio Macri since taking office in December in 2015. With a new regulatory environment put in place, the market response for the first round of auctions in October this year for one gigawatt of capacity of wind and solar projects has been very positive and the successful bidders have already started to approach exporters as well as financing institutions. Further markets for renewable energy deals will remain Eastern Europe and Northern Africa. Russia will also be a market worth looking at despite the sanctions and last but not least it will also be interesting to see how the market environment in Iran will develop.

Given more recent macroeconomic and political events, I don’t expect the global market for project finance transactions to become easier very soon, both from a commercial and political perspective. However, this will nevertheless not stop individual projects to be undertaken by keen sponsors, enabling financial institutions and political willpower. And in the end, it is also the setting in which ECAs can fully unfold their potential in seeing challenging projects to materialize.

This content is provided by Euromoney Seminars for informational purposes only, and it reflects the market and industry conditions and presenter’s opinions and affiliations available at the time of the presentation.