Metamorphosis
The Swiss-Swedish ABB Group has been releasing additional financial
information over the course of the year as part of an effort to
make its accounts more transparent. The biggest surprise for
analysts has been the size of the contribution to overall profits
from the ABB Financial Services division.
For the twelve months ended 31 December 2000 Financial Services contributed earnings before interest and taxes (EBIT) of $349 million, or 25 % of total ABB Group earnings. And this percentage is expected to be even higher for the 2001 financial year.
Growing profitability has come as Financial Services has evolved from its traditional role as a captive financing arm, used to help ABB win contracts for products such as electrical transmission systems, oil & gas equipment, and automation systems for process industries. Nowadays Financial Services is primarily engaged in non-captive business, and is providing third parties with financial advisory and structuring services, arranging and syndicating loans, and initiating projects as an equity investor.
These activities are carried out by four business areas; Structured Finance; Equity Ventures, Insurance (which is headquartered in Stockholm, and includes the Sirius company); and Treasury Centers, which is run as a profit centre, but which also raises funds on behalf of other units such as Structured Finance, or Equity Ventures which is an increasingly active sponsor of projects around the world (see box).
ABB Structured Finance operates on the debt side of the business, providing advisory services, originating and underwriting loans, arranging complex domestic or cross border leases. They are also involved in industrial equipment financing, plus small ticket equipment vendor financing in areas such as office equipment. And last year ABB bought a 35% in the Swedish Export Credit Corporation (SEK), the Swedish long term finance provider which has a role similar to that of KfW in Germany. The group already owns ABB Export Bank.
The ABB Group parent company was itself formed in 1988, after the merger of Asea of Sweden and Brown Boveri of Switzerland, and today its shares trade on the Stockholm Stock Exchange, London Stock Exchange, SWX Swiss Exchange, Frankfurt Stock Exchange and in ADR form in New York. Since the mid-1980s there had been in place at Asea a captive financial services unit to support Asea products, but today's operation is much broader.
?In 1996 we decided to add project financing to our existing financial services business, and the reason was that we were involved in big infrastructure projects around the world, and we saw the slow pace in the development of these projects,? Lennart Blecher, President of ABB Structured Finance, told Project Finance in an interview at ABB headquarters in Zurich. ?It might take us one year to sign a contract to build a power station, but the financing could then take three years. We wanted to influence that process, so we decided to become one of the banks that financed projects.?
Today ABB Structured Finance can combine its industry specific knowledge with the ability to make loans and arrange complex project structures including leases, while also providing insurance products such as credit derivatives to hedge project risk, or Political Risk Insurance. And though 90% of ABB Structured Finance is not in support of ABB Group projects, but instead for third parties, very often the relationship with a customer is a by product of an existing ABB Group relationship with that client.
?We prefer to work on large and complex deals,? says Blecher. ?We are not providing money over money, we are providing knowledge over money, so the more complex the better, as long as closing within a reasonable time period looks likely.?
Inevitably many of the more challenging project financings are in emerging markets, and often involve working alongside the ECAs and multilaterals. ?We generally prefer infrastructure projects in emerging markets, because that is where our history is,? Blecher explains. ?Unlike many traditional banks, the ABB Group has people on the ground in countries all over the world. We can use the information and knowledge in our local organisations when we analyse transactions, and this has helped us with our involvement in a number of groundbreaking transactions in infrastructure and industrial projects.?
?We have over the years had very close relationships with ECAs, having been a big exporters ourselves, and we are taking those relationships and providing our external clients with that experience,? he says. ?We divide our clients into three categories, equipment manufacturers and suppliers, operators, and financial institutions. We have a fast credit approval process, and a good syndication network. We are able to underwrite the entire B Loans alongside the multilaterals.?
?On the advisory side of the business, we see a market trend today towards full service solutions. Companies want to do outsourcing, reduce costs and have flexibility, and balance sheet optimisation has become more important. They would like to see performance based solutions, and in many cases they would like to have a partnership with a supplier of equipment,? Blecher explains. ?The impact for companies trying to provide advisory services is that they not only need to provide financing, but also do things such as structure service contracts, and they have to deal with residual value risk, since many buyers do not want to take the risk of technological obsolescence, but want to share that with a supplier. Also performance guarantees are becoming more important, so you need structuring skills and risk management expertise.?
?We work very closely with Sirius, the ABB-owned insurance company, on many transactions, to provide us with political risk insurance and other kinds of credit enhancements, so we are bringing not only our ability to structure, arrange, and underwrite, but also the capability that Sirius has to provide credit derivatives and credit enhancements,? he adds.
ABB Structured Finance also arranges domestic and cross-border leases, which are increasingly becoming a part of many project finance structures. ?I think the balance sheet is of bigger concern today than it used to be, and off balance sheet solutions are one of our key focuses in our advisory group,? says Blecher. ?During the 1980s and 1990s the main driver of lease business was tax considerations, but today people are more interested in off balance sheet solutions, we are moving away from providing tax driven deals to providing balance sheet solutions.?
Debt is normally syndicated through ABB Export Bank, the group's own bank licenced in Switzerland, but it can also be syndicated directly from within the infrastructure group. ABB Structured Finance will underwrite up to $200 million by itself, though in larger deals it will typically work alongside one of the big project finance banks as a co-lead. Having underwritten a loan it will keep a $10 million to $50 million piece on its own books, to show the market and the customer that it has confidence in the transaction. With regard to their own loan book, ABB Financial Services has not followed the trend towards pooling loans and securitising them via Collateralised Debt Obligations (CDOs), mainly because they prefer the steady earnings provided by the loan book. Structured Finance has however done advisory work for third parties looking at the CDO market.
They will also move projects along by providing bridge financing in certain circumstances. ?We are cautious with regard to bridge finance, but sometimes we can take what other market players might regard as unconventional risks to close projects where we have the experience to understand, analyse and price the risk,? says Blecher.
The overall strategy at ABB Structured Finance is to make use of detailed knowledge of specific industries. It provides financial solutions for commercial and industrial customers in areas such as telecommunications, power transmission and distribution, transportation, oil& gas, and power generation.
One deal completed during 2001 was a $43 million credit facility provided by ABB Export Bank for the Kazakh oil pipeline operator KazTransOil, to finance the delivery and installation of a Supervisory Control and Data Acquisition (Scada) system. The deal was notable in that it was completed without guarantees from the Ministry of Finance.
Five financing was put in place without ECA involvement, though the project did benefit from a guarantee for a $7.5 million loan provided by ABN Amro Bank Kazakhstan, which is jointly owned by the IFC, ABN Amro and the local Kazkommertsbank. The close of the deal saw HypoVereinsbank and ING join as co-arrangers and lenders.
Also this year ABB Structured Finance was one of the lead arrangers on the project finance loan for the Manila North Toll Road, where $115 million worth of bank debt was provided to help rehabilitate an 84 kilometre stretch of road. The project concessionaires will have a 30 year concession.
A financing which closed in 2000 was the Cross Sound Cable deal, which was a High Voltage cable connecting Shoreham, Long Island with New Haven, Connecticut. In this case ABB Power Systems and ABB High Voltage Cables were involved as equipment suppliers, while ABB Power Transmission and Distribution was the EPC contractor.
The customer was TransenergieUS, which is a subsidiary of Hydro Quebec. ABB Structured Finance was able to put in place 100% financing for the cable, in the form of a 20-year Swedish cross-border lease. The lessor was ABB Structured Finance Sweden.
In August of this year ABB Export Bank, a unit of ABB Financial Services, disbursed the first tranche of a loan facility totalling Eu14.4 million provided to Lietuvos Energija, the state controlled power generation and transmission utility of Lithuania.
The loan facilities were underwritten and arranged by ABB Export Bank, and carry a tenor of 12 years, and are provided for the financing of the reconstruction of switchgear at Lietuvos' Elektrenai powerplant. Credit enhancement was provided via a Letter of Support issued by the Ministry of Economy of Lithuania.
Other deals over the past 18 months in which ABB Structured Finance has been involved include financings for Gazprom in Russia, Smart Telecom in the Philippines, the Deriner Hydro II project in Turkey, the Ohanet Gas Field in Algeria, the Baku Power Extension in Azerbaijan, and the Bucharest Metro in Romania.
The rapid evolution of ABB Structured Finance over the past few years, and move away from captive finance business, are an example of the new customer driven focus at the ABB Group, which has undertaken a major internal restructuring, and is attempting to create a less bureaucratic company formed around its customer needs, rather than divided up according to products and technologies.
The culture of shareholder value has been reaffirmed at Zurich headquarters, and all the signs are that the Financial Services division is going to play a bigger role in generating profits in the coming years.
For the twelve months ended 31 December 2000 Financial Services contributed earnings before interest and taxes (EBIT) of $349 million, or 25 % of total ABB Group earnings. And this percentage is expected to be even higher for the 2001 financial year.
Growing profitability has come as Financial Services has evolved from its traditional role as a captive financing arm, used to help ABB win contracts for products such as electrical transmission systems, oil & gas equipment, and automation systems for process industries. Nowadays Financial Services is primarily engaged in non-captive business, and is providing third parties with financial advisory and structuring services, arranging and syndicating loans, and initiating projects as an equity investor.
These activities are carried out by four business areas; Structured Finance; Equity Ventures, Insurance (which is headquartered in Stockholm, and includes the Sirius company); and Treasury Centers, which is run as a profit centre, but which also raises funds on behalf of other units such as Structured Finance, or Equity Ventures which is an increasingly active sponsor of projects around the world (see box).
ABB Structured Finance operates on the debt side of the business, providing advisory services, originating and underwriting loans, arranging complex domestic or cross border leases. They are also involved in industrial equipment financing, plus small ticket equipment vendor financing in areas such as office equipment. And last year ABB bought a 35% in the Swedish Export Credit Corporation (SEK), the Swedish long term finance provider which has a role similar to that of KfW in Germany. The group already owns ABB Export Bank.
The ABB Group parent company was itself formed in 1988, after the merger of Asea of Sweden and Brown Boveri of Switzerland, and today its shares trade on the Stockholm Stock Exchange, London Stock Exchange, SWX Swiss Exchange, Frankfurt Stock Exchange and in ADR form in New York. Since the mid-1980s there had been in place at Asea a captive financial services unit to support Asea products, but today's operation is much broader.
?In 1996 we decided to add project financing to our existing financial services business, and the reason was that we were involved in big infrastructure projects around the world, and we saw the slow pace in the development of these projects,? Lennart Blecher, President of ABB Structured Finance, told Project Finance in an interview at ABB headquarters in Zurich. ?It might take us one year to sign a contract to build a power station, but the financing could then take three years. We wanted to influence that process, so we decided to become one of the banks that financed projects.?
Today ABB Structured Finance can combine its industry specific knowledge with the ability to make loans and arrange complex project structures including leases, while also providing insurance products such as credit derivatives to hedge project risk, or Political Risk Insurance. And though 90% of ABB Structured Finance is not in support of ABB Group projects, but instead for third parties, very often the relationship with a customer is a by product of an existing ABB Group relationship with that client.
?We prefer to work on large and complex deals,? says Blecher. ?We are not providing money over money, we are providing knowledge over money, so the more complex the better, as long as closing within a reasonable time period looks likely.?
Inevitably many of the more challenging project financings are in emerging markets, and often involve working alongside the ECAs and multilaterals. ?We generally prefer infrastructure projects in emerging markets, because that is where our history is,? Blecher explains. ?Unlike many traditional banks, the ABB Group has people on the ground in countries all over the world. We can use the information and knowledge in our local organisations when we analyse transactions, and this has helped us with our involvement in a number of groundbreaking transactions in infrastructure and industrial projects.?
?We have over the years had very close relationships with ECAs, having been a big exporters ourselves, and we are taking those relationships and providing our external clients with that experience,? he says. ?We divide our clients into three categories, equipment manufacturers and suppliers, operators, and financial institutions. We have a fast credit approval process, and a good syndication network. We are able to underwrite the entire B Loans alongside the multilaterals.?
?On the advisory side of the business, we see a market trend today towards full service solutions. Companies want to do outsourcing, reduce costs and have flexibility, and balance sheet optimisation has become more important. They would like to see performance based solutions, and in many cases they would like to have a partnership with a supplier of equipment,? Blecher explains. ?The impact for companies trying to provide advisory services is that they not only need to provide financing, but also do things such as structure service contracts, and they have to deal with residual value risk, since many buyers do not want to take the risk of technological obsolescence, but want to share that with a supplier. Also performance guarantees are becoming more important, so you need structuring skills and risk management expertise.?
?We work very closely with Sirius, the ABB-owned insurance company, on many transactions, to provide us with political risk insurance and other kinds of credit enhancements, so we are bringing not only our ability to structure, arrange, and underwrite, but also the capability that Sirius has to provide credit derivatives and credit enhancements,? he adds.
ABB Structured Finance also arranges domestic and cross-border leases, which are increasingly becoming a part of many project finance structures. ?I think the balance sheet is of bigger concern today than it used to be, and off balance sheet solutions are one of our key focuses in our advisory group,? says Blecher. ?During the 1980s and 1990s the main driver of lease business was tax considerations, but today people are more interested in off balance sheet solutions, we are moving away from providing tax driven deals to providing balance sheet solutions.?
Debt is normally syndicated through ABB Export Bank, the group's own bank licenced in Switzerland, but it can also be syndicated directly from within the infrastructure group. ABB Structured Finance will underwrite up to $200 million by itself, though in larger deals it will typically work alongside one of the big project finance banks as a co-lead. Having underwritten a loan it will keep a $10 million to $50 million piece on its own books, to show the market and the customer that it has confidence in the transaction. With regard to their own loan book, ABB Financial Services has not followed the trend towards pooling loans and securitising them via Collateralised Debt Obligations (CDOs), mainly because they prefer the steady earnings provided by the loan book. Structured Finance has however done advisory work for third parties looking at the CDO market.
They will also move projects along by providing bridge financing in certain circumstances. ?We are cautious with regard to bridge finance, but sometimes we can take what other market players might regard as unconventional risks to close projects where we have the experience to understand, analyse and price the risk,? says Blecher.
The overall strategy at ABB Structured Finance is to make use of detailed knowledge of specific industries. It provides financial solutions for commercial and industrial customers in areas such as telecommunications, power transmission and distribution, transportation, oil& gas, and power generation.
One deal completed during 2001 was a $43 million credit facility provided by ABB Export Bank for the Kazakh oil pipeline operator KazTransOil, to finance the delivery and installation of a Supervisory Control and Data Acquisition (Scada) system. The deal was notable in that it was completed without guarantees from the Ministry of Finance.
Five financing was put in place without ECA involvement, though the project did benefit from a guarantee for a $7.5 million loan provided by ABN Amro Bank Kazakhstan, which is jointly owned by the IFC, ABN Amro and the local Kazkommertsbank. The close of the deal saw HypoVereinsbank and ING join as co-arrangers and lenders.
Also this year ABB Structured Finance was one of the lead arrangers on the project finance loan for the Manila North Toll Road, where $115 million worth of bank debt was provided to help rehabilitate an 84 kilometre stretch of road. The project concessionaires will have a 30 year concession.
A financing which closed in 2000 was the Cross Sound Cable deal, which was a High Voltage cable connecting Shoreham, Long Island with New Haven, Connecticut. In this case ABB Power Systems and ABB High Voltage Cables were involved as equipment suppliers, while ABB Power Transmission and Distribution was the EPC contractor.
The customer was TransenergieUS, which is a subsidiary of Hydro Quebec. ABB Structured Finance was able to put in place 100% financing for the cable, in the form of a 20-year Swedish cross-border lease. The lessor was ABB Structured Finance Sweden.
In August of this year ABB Export Bank, a unit of ABB Financial Services, disbursed the first tranche of a loan facility totalling Eu14.4 million provided to Lietuvos Energija, the state controlled power generation and transmission utility of Lithuania.
The loan facilities were underwritten and arranged by ABB Export Bank, and carry a tenor of 12 years, and are provided for the financing of the reconstruction of switchgear at Lietuvos' Elektrenai powerplant. Credit enhancement was provided via a Letter of Support issued by the Ministry of Economy of Lithuania.
Other deals over the past 18 months in which ABB Structured Finance has been involved include financings for Gazprom in Russia, Smart Telecom in the Philippines, the Deriner Hydro II project in Turkey, the Ohanet Gas Field in Algeria, the Baku Power Extension in Azerbaijan, and the Bucharest Metro in Romania.
The rapid evolution of ABB Structured Finance over the past few years, and move away from captive finance business, are an example of the new customer driven focus at the ABB Group, which has undertaken a major internal restructuring, and is attempting to create a less bureaucratic company formed around its customer needs, rather than divided up according to products and technologies.
The culture of shareholder value has been reaffirmed at Zurich headquarters, and all the signs are that the Financial Services division is going to play a bigger role in generating profits in the coming years.
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