Date: December 25, 2012 Source: 21st Century Business Herald
In the past half year, Ms Li Hongyun was always beset with a problem.
She is the General Manager of Anhui LINTHA Energy-saving Technology Service Co., Ltd. (LINTHA for short). Established in 2011, the company mainly engages in the business of energy performance contracting (EPC), namely a company enters into a contract with an energy consumer, reach the preset energy-saving objectives by providing such services as energy audit, project design, project financing, equipment purchase, engineering construction, equipment installation and commissioning, and personnel training, and finally recover investment and obtain profits from the energy-saving benefits of the consumer.
Since its founding, LINTHA has witnessed good business development, and signed many EPC contracts in succession. Nonetheless, Ms Li encountered difficulty while the company saw vigorous development. As the funds for energy-saving projects in the EPC business should be raised by the company, which only had a limited amount of capital, the development of LINTHA encountered financial bottleneck. Ms Li was quite worried about the problem.
Recently, the problem was solved: LINTHA received financing support of RMB 7.5 million from Industrial Bank (IB) by pledging the future usufruct under its EPC projects, which effectively alleviated the financial bottleneck that limited its development.
In this year, IB released a standard financing product for EPC by using the future usufruct as the pledge. With the product, the bank combined the non-typical future usufruct of projects as authentic rights into standardized guarantee. Meanwhile, with the support of measures for controlling cash flow, it alleviated the financing guarantee problem of asset-light energy-saving service companies. The loan received by LINTHA was the first EPC financing business of IB by using the future usufruct of projects as the pledge in Anhui Province .
Using the future usufruct of projects as the pledge
Due to financing difficulty, Ms Li once almost gave up the EPC market.
LINTHA boasted the technology of electricity-free transformation of cooling tower – “Francis hydraulic turbine for industrial cooling tower”. With the technology, the original electric machine of cooling tower can be removed so that the cooling tower could reach the cooling effect of circulating water fully depending on the potential energy of the water in the system rather than electricity. Ms Li had a great anticipation for the market of energy-saving transformation of cooling tower.
“For instance, a 5000t cooling was originally equipped with a 200kW electric machine. Suppose the machine runs 300 days a year and the electricity costs RMB 0.5 per kilowatt-hour, after electricity-free transformation, 1.44 million kilowatt-hours of electricity can be saved a year, namely, the electricity fare of RMB 720,000 and 580 tons of coal equivalent can be saved.” Ms Li calculated a set of numbers, “In the current market, the capacity of a cooling tower is about 300,000 tons. If all the towers can undergo electricity-free transformation, about 800 billion kilowatt-hours of electricity may be saved. To calculate at the price of RMB 0.5 per kilowatt-hour, a total of RMB 400 billion can be saved roughly. There is a massive market potential.”
In spite of the desirable market expectation, Ms Li fell into deep hesitation, and she even considered not developing the EPC business any more. The reason lies in that the company has owed RMB 5 million to suppliers since this June, caused its capital could not working normally. And then, she went to banks for financing, and presented the signed EPC contracts to several banks. She told them: “We can earn RMB 17 million in the coming five years.”
It's pity that, as a service supplier, LINTHA was established freshly in 2011. The company didn't have real asset for mortgage and guarantee and it had a distinctive “asset-light” feature. Ms Li was refused by most banks, except IB.
“IB is very prudent and professional and knows EPC very well. They discussed with us about the project solution, basic technological data and contract clauses, supplementing materials for us many times,” said Ms Li.
Finally, LINTHA received from IB five-year EPC financing support with a total amount of RMB 7.5 million, which was used to support the three energy-saving transformation projects for cooling towers in Henan, Yunnan and Tianjin. As estimated, after the three projects being put into operation, it is expected to save 11.78 million kilowatt-hours of electricity, equaling to about 4.064 tons of coal equivalent.
“With capital, our company can at last continue signing new contracts and developing new projects. We have reached an agreement with IB that we will invite them for early participation when we sign a new EPC contract the next time. Now, we have two very good projects which are in the stage of negotiation,” said Ms Li.
The fact that EPC financing business of IB is unique lies in that the future usufruct of the three EPC projects owned by LINTHA is taken as the pledge.
However, will it become an air castle to take the incomes not obtained yet as the pledge?
In fact, IB was willing to grant the loan of RMB 7.5 million to LINTHA mainly because that it was sure of the stability of three projects' cash flow based on its analysis and evaluation over their future usufruct.
“This is our advantage. Compared with ordinary energy-saving transformation such as the transformation of frequency conversion and light fitting, which involves the percentage of energy saved, we can save the energy 100%, without ‘wrangling' about any matter.” Ms Li indicated to the reporter of our paper, because the company conducted electricity-free transformation, the electric machine was removed directly, and the power of the removed machine meant the amount of energy saved. In addition, the operating days could also be recorded. Therefore, no customer has wrangled about any case by now, and no third party identification is required.
EPC financing reaching a certain scale gradually
“The EPC financing business of IB will enter into a phase of large-scale development from this year,” the officer-in-charge of the bank's Sustainable Finance Department told the reporter.
In fact, IB has started granting loans to energy-saving service companies on a case-to-case basis since 2007. At that time, the bank didn't take EPC as a specialized business category, and the admittance criteria, risk point control and financing model were all made on an individual basis. In the same period, the commercial mode and operation of energy-saving service companies remained in the exploratory stage, and the market is not mature enough . Therefore, IB has encountered many challenges.
Despite many challenges, with five years of exploration and practice, in this year, IB released the standard product for EPC financing by using the future usufruct of projects as the pledge.
“The reason lies in two aspects: first, IB has mature internal experience; second, under the driving of policies, the external environment for the development of energy-saving companies becomes mature gradually,” the officer-in-charge of the bank's Sustainable Finance Department told the reporter.
It's worth noting that IB has built EPC financing business into standardized product. However, where can the standardization be found?
“We can evaluate it in three aspects: first, the technological capability and service capacity of energy-saving companies; second, the previous successful projects of energy-saving companies; third, technical and financial feasibility of projects. They are major factors for judging whether an energy-saving company meets the credit admittance requirements,” pointed out the officer-in-charge of the bank's Sustainable Finance Department.
“There is enough market room for the growth of energy conservation and emission reduction. If the corporate customers involved in energy-saving service of IB grow bigger and stronger, besides continuing granting loans, the entire corporate finance platform of the bank can also provide more diversified product and service options, including bond issuance, merger and restructuring,” the officer-in-charge of IB indicated to the reporter.
At present, IB targets at the market segment of EPC, but its greater objective is the entire energy conservation and emission reduction market. Starting from EPC, IB can accumulate more practical experiences.
While their financial difficulties were solved readily, energy-saving service companies also actively proposed suggestions on the EPC financing of IB. “Currently, our cooperation with IB is mainly regarding project loan. If the bank can give us certain capital line and offer financial products such as issuance of bank's note (bank's acceptance note), letter of guarantee, and letter of credit, we will have a greater amount of capital and can sign more EPC contracts, thus developing the energy-saving industry to a greater extent,” Ms Li told the reporter.