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Number of pages: 4
All questions can be processed separately
IAM AG, International Aerospace Machines AG, is a leading aircraft engine manufacturer created in 1967 in
Dortmund (Germany) which develops, manufactures, markets and supports commercial and military aircraft
engines to aerospace industry. This is a very challenging area as IAM must deliver new engines in all thrust and
power categories, lighter and more efficient from product design, production planning, engineering and execution.
Still headquartered near Dortmund, the firm currently employs a workforce of approximately 75.000 staffs across
all important regions and markets worldwide, mainly in America (IAM Inc. / Portland), South Europe (IAM SA France
/ Toulouse + IAM SRL Italia / Milano), Asia (IAM & Co. / Singapore) and China (IAM Ltd. Cy. / Shanghai).
IAM AG meets a remarkably financial situation. End of 2021, the global annual turnover increased by 9 % and
reached Euros 38.5 billion, for a net profit up to Euros 4 billion. IAM SA France, known as the leading export branch
of the Group, usually exports more than 90% of its production in MEA1
, Qatar and UAE2
particularly, but also in
India, Pakistan, and Indonesia.
Further to brilliant studies performed at UPEC University you’ve been appointed to work in the trade finance team
of IAM AG, particularly (but not only) in charge of Trade Finance operations initiated by IAM SA / Toulouse. Your
knowledge to better secure trade flows with emerging countries is highly expected as IAM’s core strategy aims to
target clients located in countries bearing high risk profiles.
ITFB, International Trade Finance Bank3
is quite proud to have IAM AG group as a VIP relationship, despite sharp
conditions carried out by major financial competitors which all target to provide the company the best services at
the lower price.
1
– Middle East and Africa region.
2
– United Arab Emirates.
3
– ITFB is one of the largest banks in Europe ranked AA1 / AA+ (Moody’s, Fitch, Standard & Poor’s).
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IAM AG group particularly aims to get from its bank all trade services and financings leading to better secure
deals and minimize risks.
Recruited 15 years ago, M. R. Minde is the global head of Finance of the company since 2010. Everyone in IAM
AG Group is aware that M. R. Minde appreciates efficiency, clear explanations, structured diagrams /
flowcharts, and always asks his staff to go right to the point. His agenda is quite busy… Therefore, your work
shall not exceed 7 pages
—————————————————————–
Question 1 (4 pts). Back from an ICC4
seminar dedicated to Basel III requirements, M. R. Minde reports
preferential regulatory treatments applied to the trade finance industry.
a. Based on the ICC Trade Register data outputs what are, according to you, the reasons of such
advantages?
b. To which extent is IAM AG concerned by these preferential regulatory threatments?
c. Last but not least, ITFB forewarns M. R. Minde against a CCF5
increase from 20% to 50% to guarantees
business. ‘’If adopted, the text will trigger severe impacts to the whole Trade Finance industry’’, ITFB
says. M. R. Minde is asking you to elaborate about this threat.
Question 2 (5 pts). Mumbai Aircraft Engines. Ltd Cy. Ltd (MAEL), one of IAM key clients located in Mumbai / India,
is raising an urgent request to obtain a SINUMERA OPX021, a state-of-the-art operator panel which perfectly fits
with latest aircraft technologies. Commercial contract refers to a delivery CIF Mumbai for 5.8MUSD worth. Port of
departure Rotterdam, Netherland. Payment conditions proposed by MAEL, subject to IAM / Toulouse approval,
are as follow.
a. Direct payment up to 5% of the deal (swift payment)6
when signing off the contract against an advanced
payment guarantee to be issued by a first ranking bank and remitted to the beneficiary through its own local
bank7
.
b. Balance representing 95% of the deal to be paid throughout an irrevocable L/C8
available by negotiation,
to be issued by SBI / Mumbai and including a differed payment at 180 days from B/L9
. Documents are to
be remitted to the negotiating bank at the latest 15 open days from departure.
c. Performance bond up to 10% worth of the contract value to be issued by a bank min. rated BBB (direct
guarantee).
– What is the full diagram / flowchart of such deal (a, b & c)?
– Considering IAM’s risks (to specify), would you accept the payment conditions proposed by MAEL?
– What would be your counterproposal(s) in order to better secure the transaction?
– In order to tackle any working capital shortages, how would you finance this deal?
4
– International Chambers of Commerce.
5
– CCF – Credit Conversion Factor – which applies to off-balance sheet commitments to determine their equivalent credit
6
– Correspondent Bank in US: Citibank / New-York.
7
– SBI / State Bank of India, local correspondent bank of ITFB in Mumbai, rating BBB- (S&P)
8
– Instrument governed by the ICC, International Chamber of Commerce, Uniform Customs and Practice for Documentary Credits, latest
version (2007).
9
– Bill of Lading (sea transport)
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Question 3 (4 pts). DAM Cy., Djakarta Aero Motors Cy. Ltd, one of IAM AG key clients located in Indonesia,
Djakarta, is raising an urgent request for specific aircraft spare parts. Commercial contract refers to a delivery
CIF Djakarta for 8.7MUSD worth, 100% throughout an irrevocable and transferable L/C by negotiation at 90
days from Bill of Lading to be issued by Bank Negara Indonesia / Djakarta.
Fully dedicated to increase its current business with MEA region, IAM SA has no capacity to handle this deal
and decides to outsource the transaction to IAM AG’s subsidiary in China, IAM Ltd Cy / Shanghai10, who agrees
to sell IAM AG the goods for 8.5 MUSD worth. All terms, including delivery / Incoterm and all conditions remain
unchanged compared to initial contract as between DAM Cy. and IAM SA.
1) What is the full diagram / flowchart of such deal?
2) What are IAM SA’s risks and how to better secure this transaction?
3) What would you finally advise to M. R. Minde to make this deal more attractive?
Question 4 (7 points). After more than 3 years and several tricky rounds of negotiations, the Eurodefense program
is now entering into its final milestone. This program is indeed very important for the whole consortium IAM
belongs to.
Underlying commercial contract refers to the supply to the MoD11 of India (MoDI) of, respectively.
– Engineering systems: 38 Units of Magnetron radars (including, but no limited to, Antenna,
Transceiver, Processing, Display and Control Units) for 50% of the commercial contract value,
– Infrastructures equipments, 30% of the commercial contract value,
– Logistic support: 3 years of service support, up to 20% of the commercial contract value.
Seller: IAM SRL acting as Prime Contractor Organization (PCO) on behalf of Eurodefense Consortium namely
Eurodefense Unit SPA owned by
– IAM SA (46%)
– British Security UK (33%)
– Spanish Electronics Corp. (21%)
Buyer: Ministry of Defense of India (MoDI) / New-Delhi – India
Commercial contract value: 100.000.000 EUR
Trade guarantee issuance structure:
Applicant / Instructing party: IAM SRL acting as Prime Contractor Organization (PCO) on behalf of
Eurodefense Unit SPA under the a.m. Commercial contract
Counter-guarantors:
– ITFB, Milan branch (20%)
– Lloyds Bank and Trust, London (rating BB+ / Fitch) (20%)
– Santander Bank, Madrid (rating BBB / S&P), (20%)
Issuance jointly through a syndication agreement, ITFB playing the role of Arranger (coordinating, structuring
and documentary bank).
10 – Client of Bank of China / Shanghai branch.
11 – Ministry of Defense
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Note: Arranger Bank (as defined above) keeps the remaining gross corporate risk portion on IAM – before
taking into account the SACE cover (cf. below)
Export Credit Agency mitigant. In light of the components inherent in this transaction, SACE Milano, the Italian
Export Credit Agency, will provide its cover for an amount up to 10,000.000 EUR split pro-rata between each
guarantee. SACE is considered as sovereign Italian risk.
Note: SACE Cover benefits to each of the Counter-guarantors Bank respectively pro-rata their risk
participation percentage
Guarantor: State Bank of India / Delhi (rating BBB / S&P) or alternatively Canara Bank / Delhi (rating BBB- /
S&P) (under negotiation). Guarantor will re-issue the guarantees into 3 separate guarantees, one related to
the APB, one in relation with the Performance bond, and the last one referring to the WB (the primary
guarantees).
Guarantees amounts.
– APB (Advanced Payment Bond): EUR 25,000.000 i.e. 25% of the commercial contract value
– PB (Performance Bond) EUR 10,000.000 i.e. 10% of the commercial contract value
– WB (Warranty bond)12 EUR 5,000.000 i.e. 5% of the commercial contract value
Primary guarantee beneficiary. Ministry of Defense of India / New-Delhi.
Applicable law. Each of the bonds will be ruled by either the law of the State of India or under ICC URDG
75813
.
This deal is one of the most important transactions for IAM this year. Therefore, in order to present the deal to the
top management of the company, M. R. Minde is asking you to:
1. Describe, through a detailed flowchart, the overall Trade guarantee issuance structure of the deal,
pointing out the role of every stakeholder (applicant, beneficiary, guarantor, counter-guarantor, etc.)
2. Mention all financial risks incurred on behalf of IAM and, when relevant, your proposal to mitigate them.
3. Describe, through a chronological sequence what are the steps of a claim, and the financial risks (if any)
for ITFB, as Arranger.
Assumptions:
i. The claim is valid
ii. Eurodefense Unit SPA is defaulting and does not pay the claim
12 – Also called Retention Money Guarantee
13 – Uniform Rules for Demand Guarantees 758 (2010 Ed.)
