Cession and forfaiting
Cession refers to the transfer of future receivables, such as payments under a contract, from one party (the cedent, which in this case is an ESCO) to another party (the buyer, typically a financial institution or bank). In this arrangement, the original creditor (the ESCO) assigns its rights to claim future payments to the new creditor (the financial institution), who then gains the right to collect these payments directly from the debtor (the ESCO’s client).
There are two main forms of cession:
- Cession as additional security: In this form, cession is used alongside a credit or lease financing agreement. The receivables that are ceded (future payments) act as additional security for the financial institution. Here, the ESCO client is directed to pay the receivables, either fully or partially, directly to the financial institution.
- Pure forfaiting: When cession occurs without an underlying credit or lease agreement, it is known as “pure” forfaiting. In this scenario, the financial institution purchases the future receivables at a discounted present value, which is paid directly to the ESCO. This approach is particularly beneficial when the cash flow from the project can serve as the primary collateral. Forfaiting becomes economically advantageous if the ESCO client has a stronger credit rating than the ESCO itself.
Forfaiting generally applies to receivables that arise from investments, goods, or services with a medium to long-term duration, typically ranging from six months to ten years or more. The receivables must be legally valid, undisputed, and confirmed, meaning that the ESCO has completed its work under the EPC and the amount of the future payments is agreed upon.
Factoring is another financial arrangement similar to cession but is typically used for short-term receivables or individual invoices. Factoring involves transferring the responsibility for payment collection, and in some cases, the financial risk, to a specialized financial institution. However, factoring is not suitable for EPC projects due to the shorter duration of receivables involved.
