Export Credit

Agencies for
Financing and
Mitigating
Commercial
Risks
CH A P TE R 3 – I BM 2 3 0

10/18/18 PROFESSOR AL-DIMASHKI 1

Overview
1. Export Credit Agencies
2. ECA Corporate Responsibility
3. ECA Financing
4. Short-Term Financing
5. Medium & Long-Term Financing
6. ECA Insurance & Guarantees

10/18/18 PROFESSOR AL-DIMASHKI 2

 Export Credit Agencies
(ECAs)
Export Credit Agencies (ECAs): Are government agencies charged
with supporting the development of national exports. They
provide:
• Financing
• Insurance
• Bonds and guarantees
• Information
• e.g. market conditions, opportunities, challenges, industry
players, collaboration, etc.
Their purpose is to grow international sales and mitigate risk
• Short-term commodity transactions
• Long-term capital projects
• Finance local and foreign importers/exporters
• Build financing partnerships with commercial banks
10/18/18 PROFESSOR AL-DIMASHKI 3
 Private Sector
ECAs: Private • Atradius – Netherlands
insurers with • Coface - France
speciality in • Euler Hermes – Germany
international • Export Risk Guarantee –
trade finance Switzerland
Export Credit products

Agencies
(ECA) Models Public Sector
ECAs: Agencies
governed by • Export Development Canada (EDC)
legislation and • Export Finance and Insurance
subject to Corporation of Australia (EFIC)
periodic • Export-Import Bank of the United
legislative review, States (Ex-Im Bank)
WTO and OECD
scrutiny

10/18/18 PROFESSOR AL-DIMASHKI 4

 The Organization for Economic Co-
Operation & Development (OECD)
•Organization of 35 member countries
• e.g. Mexico, Chile, Turkey, Canada, USA, Japan etc.

•Work closely together to promote policies that improve the

economic and social well-being of people
•OECD details agreements and constraints to “level the playing
field” for ECAs
• Fairness, competitiveness, free market and trade

•Limitations to ECAs:
• Minimum interest rates
• Appropriate risk fees
• Maximum repayment terms

10/18/18 PROFESSOR AL-DIMASHKI 5

 The Berne Union
• One of two organizations to which ECAs and risk
insurers belong
• Forum for exchanges between members
• Supports global acceptance of export credit principles
• Protecting against country and commercial risk
• Leading members generate billions of dollars in
annual revenues

PROFESSOR AL-DIMASHKI 10/18/18

TF Ch 8-6
 Financing

Insurance and guarantees

Investment solutions ECA

Products &
Advisory services
Services
Export and trade promotion

Increasing range of services to respond to evolution in global trade

10/18/18 PROFESSOR AL-DIMASHKI

TF Ch 8-7
Export Credit
Agencies &
Corporate
Social
Responsibility
C H A P T E R 3 – PA RT 1

10/18/18 PROFESSOR AL-DIMASHKI 8

 Export Credit Agencies & Corporate
Social Responsibility
•Sensitive issue of balancing commercial effectiveness with responsible conduct, especially for public sector ECA’s with political
oversight
ECAs are under constant scrutiny related to:
• Corporate social responsibility
• The environment
• Due diligence
• Standards and expectations of business conduct
• Governance standards
• Financial transparency

ECA Watch - A coalition of NGOs monitoring activities of ECAs that include:

• Transparency, public disclosure, policies and projects
• Binding common environmental and social standards
• Clear human rights criteria for ECA operations
• Ending the encouragement of corruption
• Ending the finance of arms
• Cancellation of ECA debt for the poorest countries

10/18/18 PROFESSOR AL-DIMASHKI 9

Export Credit
Agency
Products and
Services
CH A P TE R 3 – PA RT 2

10/18/18 PROFESSOR AL-DIMASHKI 10

 ECA Products: Financing
Financing inventory
ECA Financing: Involves an ECA lending Cash flow
of funds to a party for an international Project financing
Supply chain financing (SCF)
trade transaction Foreign direct investment (FDI)

Important because competitive financing has become an expectation among

foreign importers or exporters

No restrictions on ECA of country – shopping around for optimal solution

10/18/18 PROFESSOR AL-DIMASHKI 11

Financing Solutions: Export
Development Canada
•Cash flow solutions for exporters
• Work in progress or inventory
• Export related capital needs
• Equipment purchases
• Investments abroad

•Global Comprehensive Insurance Service

•Financing up to 85% of contract value
•Lines of Credit for foreign buyers; marketing advantage for
Canadian exporters

https://www.youtube.com/watch?v=BOIuuPeNsag

10/18/18 PROFESSOR AL-DIMASHKI

TF Ch 8-12
 Financing solutions:
Export Development
Canada Cont.
•EDC helps Canadian exporters by:
• Funding foreign buyers who
otherwise might not be able to
make the purchase
• Assuming repayment risks

•Attractive financing once an

advantage; now an expectation of
buyers
•EDC play an important marketing
role

https://www.youtube.com/watch?v=GKYeNlqeBK0
10/18/18 PROFESSOR AL-DIMASHKI
TF Ch 8-13
Short-Term Financing
CHAPTER 3 – PART 3

10/18/18 PROFESSOR AL-DIMASHKI 14

 Trade Finance
Duration
•Depending on industry, trade
finance duration is typically
defined as:
•Short-term: up to 2 years
•Medium-term: 2 – 7 years
•Long-Term: Over 7 years

10/18/18 PROFESSOR AL-DIMASHKI 15

 Short-Term Financing Considerations
•Choosing the right financing
• Duration, structure and terms
• Exporter - paid immediately
• Importer - pay later

•Considering opportunity cost

• The cost of cash is investment in alternatives
• Exporter - offer term payments
• Importer - pay in advanced
• Review country lending rates or partner credit to reduce
costs

10/18/18 PROFESSOR AL-DIMASHKI 16

 Short-Term Financing
•Time and risk closely linked
•Variables:
• Economic downturns, civil unrest
• Currency changes, currency shortages
• Volatility of commodity prices

•Longer term increases financing costs:

• Funds committed for longer term
• Greater risk
• Higher reserve requirements
• Management and monitoring

10/18/18 PROFESSOR AL-DIMASHKI 17

 Short-Term Financing Cont.
• Advanced payment
• Type of financing for exporter
• Could be down payment

• Open account
• Type of financing for importer

• Factoring
• Selling foreign A/R to Bank (about 20% invoice cost)

• Import financing
• Exporter provides importer with financing

• Bank financing
• Line of credit to pay invoices
• Switched with Letter of Credit

• Supply chain financing

• Specific “triggers” where banks provide financing

PROFESSOR AL-DIMASHKI 10/18/18 18

Medium & Long-Term Financing
C H A P T E R 3 – PA RT 4

10/18/18 PROFESSOR AL-DIMASHKI 19

 Nature of Medium & Long-
Term Financing
•Medium-term = 2 to 7 years
•Long-term = 7 to 20 years
•Providers; banks, financial institutions or ECAs
•Financing generally used to support capital for:
• Goods; aircraft, tools, transport materials, oil &
gas, production or communications equipment
• Services; feasibility studies, engineering or
consulting service
• Projects; infrastructure projects

20 10/18/18 PROFESSOR AL-DIMASHKI

 Nature of Medium
& Long-term
Financing Cont.
•Risk assumed or shared by
lender
•Larger value transactions
from $50,000 to millions
•Companies shift to favorable
financing countries
• Eg. Democratic Republic
of Congo (DRC)
•Longer the loan = more risk
and profitability

PROFESSOR AL-DIMASHKI 10/18/18 21

 Forms of Medium & Long-term Financing
10/18/18 PROFESSOR AL-DIMASHKI 22
 Provider Example: NorthStar Trade
Finance
• Canadian company formed in 1994 to meet financing needs of SMEs
(small & medium sized enterprises)
• Provides Buyer Credits and Direct Loans
• Partnership of private and public sector organizations (shareholders
include various banks & EDC (Canada’s Export Credit Agency)
• Provides loans between $100,000 and $5 million for terms of 1-5
years
• Loans are secured by registered liens on exported goods; insured by
EDC
• Loans processed by NorthStar; funded by partner banks
• Adoption of model in other countries

10/18/18 PROFESSOR AL-DIMASHKI 23

 Considerations of Loan
Agreement
•Whether a Buyer Credit or Direct Loan, the lending
agreement has several major components:
• Identity of the borrower and guarantor
• Loan amount and related costs/expenses
• Security and disbursement conditions
• Borrower covenants;
• Financial ratios they need to meet; agreeing not to pledge assets
with other lenders, etc
• Event of default – lender could demand payment
• Jurisdiction and governing law – under laws of lender’s country

10/18/18 PROFESSOR AL-DIMASHKI 24

 Forfaiting
•Exporter sells medium or long-term accounts receivable to lender
•Protects against payment default risk
•Interest for entire term is deducted in advance when discounting
•Higher yield to lender and greater costs to borrower at maturity
•Used for larger transactions covered by series of promissory
notes maturing semi-annually for 2-5 years, sometimes only one
year
•Notes avalized by buyer’s bank and guaranteed
•“Guarantee” must be unconditional, irrevocable and transferable
•Removes debt from financials

10/18/18 PROFESSOR AL-DIMASHKI 25

 Forfaiting: Pros & Cons
ADVANTAGES DISADVANTAGES

• Quick source of cash • Not readily available to small businesses

• No need for export credit insurance • Difficult to arrange for medium-sized ones
• Eliminates collection and administration • Costs often higher than conventional
tasks financing
• Eliminates commercial, political and foreign
exchange risks
• Offers possibility of 100% financing

10/18/18 PROFESSOR AL-DIMASHKI 26

 International Leasing
•Ownership of goods stays with lender (lessor)
•Use of goods transferred to borrower (lessee)
•Retained ownership of goods allows lender to extend lease
financing to otherwise unsuitable borrower
•Leases generally fall into two classes
•Advantages:
• Off-balance sheet financing
• Potential tax advantage

10/18/18 PROFESSOR AL-DIMASHKI 27

Project Financing
•Specialized form of lending for specific circumstances
• Procuring energy resources or raw materials

•Employed for larger capital purchases

•Rarely funded entirely by a single bank
•Lenders secure loans by using cash flow and collateral from project plus undertakings and
guarantees by project sponsors
•Substantial risk
•Typically require project feasibility study

10/18/18 PROFESSOR AL-DIMASHKI 28

 Aid Financing
Programs
•Foreign aid agencies channel
financial assistance to the supply of
products
•Combine, to varying degrees,
elements of aid with political
objectives
•Suppliers (exporters) must
demonstrate technical ability and
competitiveness
•Exporters will usually have previous
experience in commercial or ECA
funded transactions

PROFESSOR AL-DIMASHKI 10/18/18 29

 Multilateral Development
Banks (MDBs)
•Also referred to as IFI’s (International Financial
Institutions) – eg: World Bank
•Stimulate economic activity and foster
development
•Operate with funds contributed by member
countries
•Lend funds to developing countries to purchase
goods and services needed to complete projects
•Finance country development projects or
https://www.youtube.com/watch?v=uJmxEN5fMnA balance of payment problems

10/18/18 PROFESSOR AL-DIMASHKI 30

United Nations Development Program
(UNDP)
•Multilateral development institution affiliated with United
Nations (UN)
•Central planning and funding agency for technical assistance
provided by the UN
•Financing to support international trade in professional
services
•More than 130 countries make contributions
•Developing country issues tenders and reviews foreign
supplier service offers; winner performs services and receives
payment from UNDP

https://www.youtube.com/watch?v=lEIwRV49o-Q

10/18/18 PROFESSOR AL-DIMASHKI 31

 Export Credit Agency
(ECA) Lending
•Traditionally viewed as lenders of last resort,
though roles and mandates are evolving
•No single lending model
•Support exports from their respective
countries when operating as instruments of
public policy
•Privatization of ECA’s is a significant trend

10/18/18 PROFESSOR AL-DIMASHKI 32

 Characteristics
of ECA
Lending
•Focus depends on economic profile
of country involved
•Only finance 85% of export
transaction with balance provided
by buyer or other lenders
•Funds disbursed directly to
exporter as milestones met; lender
collects from buyer
•Loan repayment terms depend on
economic factors
•Direct loans
PROFESSOR AL-DIMASHKI 10/18/18 33
 Obtaining EDC Financing

1. Financing proposal 4. Loan negotiations 7. Acceptance of goods

2. Analysis of proposal 5. Loan agreement 8. Payment to exporter
3. Risk analysis 6. Delivery of goods 9. Repayment to EDC

10/18/18 PROFESSOR AL-DIMASHKI

TF Ch 8-34
ECA Insurance &
Guarantees
CHAPTER 3 – PART 5

10/18/18 PROFESSOR AL-DIMASHKI 35

ECA Products: Insurance &
Guarantees
•ECAs provide insurances and guarantees to facilitate international business
• Insurance on foreign account receivable (AR)
• Confirmed letters of credit (LC)
• Risk and non-payment insurance
• Bonds and guarantees

•Export Credit Insurance: Protects exporters from the risk of importer non-payment. Factors to
consider:
• Type of risk covered by the insurer (e.g. political, commercial)
• Co-insurance ratio (level of risk shared by insurer and insured)
• Insurer services such as credit reports, commercial analysis, market risk, and experience

•Foreign Direct Investment (FDI) Insurance: Insures assets in foreign country from political
situations such as war, expropriation and nationalization

10/18/18 PROFESSOR AL-DIMASHKI 36

 Commercial Risks Political Risks
• Foreign Importer Insolvency: Result of bankruptcy • Blockage of Funds: Foreign government or central
• Default: Does not pay or cannot pay contractual bank policies that block transactions or currency
obligations convertibility
• Refusal to Accept Delivery: Importer refusing to • War, Hostilities or Revolutions: Non-payment due
accept the delivery of goods that are according to to conflict outbreaks in the importer’s country
the contract • Cancellation of Import/Export Permits: Failure of
• Termination of Contract: Importer terminates the party to fulfill contract due to government
contract on their own cancellation of permits

ECA Products: •Usually insurers consider claims after parties have

Insurance & satisfactory resolved the matter through arbitration
or court
Guarantees Cont.
10/18/18 PROFESSOR AL-DIMASHKI 37
 Export Credit Insurance Risk
Premiums
•Premiums are directly tied to:
• Level of transaction risk
• Extent to which the exporter is willing to bear some of the risk with the insurer
•Co-Insurance: Risk sharing with insurer (e.g. 90% of transaction covered by insurer and 10% covered by exporter)
•Deductibles: Exporter takes loss up to a specified amount (e.g. With a $10,000 deductible, loss of $50,000 on a
trade deal would require the exporter to absorb the first loss of $10,000 and would be covered for the rest which
is be $40,000)
•Risk assessment determined by:
• Type of insurance coverage requested
• Spread of risk
• Credit terms
• Buyer’s standing and country
• Exporter’s standing and credit-granting record
• Type of goods being exported

10/18/18 PROFESSOR AL-DIMASHKI 38

 Risk Factor Rationale
Type of insurance covered Commercial or political means more
coverage and cost

Spread of risk A diversified export portfolio means less

risk compared to a portfolio of only 2 big
customers
Reducing
Credit terms Payment terms for exporter such as
advanced payment, DC or LC means less
Risk
Importer and country standing
risk compared to open account

Established customers in stable markets

Premium
s
mean less risk compared to a new importer
in a volatile market

Exporter standing and credit rating Established track-record and good credit
score mean less risk compared to an
exporter with a bad credit history

Type of goods being exported Goods to which their value can be salvaged
easily means less risk compared to goods
that are difficult to sell

10/18/18 PROFESSOR AL-DIMASHKI 39

Guarantee & Wrongful Call Insurance
•A Letter of guarantee is often required by a foreign importer to secure a trade transaction
•This requires from the exporter a 100% collateral to secure the transaction
• Restricts exporter’s working capital

•ECAs offer issuance of letters of guarantee and provide collateral for exporters. Benefits include:
• Allow exporter to acquire more international contracts
• Issue more bonds
• Increase competitiveness
• Free-up cash flow

•Enhances the confidence, creditworthiness, technical and managerial expertise of the exporter
•The cost of this guarantee depends on risk of country, duration and credit rating
•Wrongful Call Insurance: Insurance for the event an importer calls for the letter of guarantee
without any proof, causing automatic payment to the importer’s bank

10/18/18 PROFESSOR AL-DIMASHKI 40

 Case Study: MarineNav Inc.
Benefits of ECA products:
• MarineNav Inc. builds marine traffic control systems with sales in
US, Canada, Tanzania, Libya, Columbia, etc.
• Faced many challenging situations which were solved with ECA
products:
1. Performance Letters of Guarantee: Offered 100%
guarantees to secure international buyers
2. Political Risk Insurance: Lost all assets in Libya during the
Arab Spring and was covered by insurance to replace those
assets
3. Working Capital Financing: Took on 4 contracts at a time
that required additional cash flow to process them
4. Direct Lending: Provided their buyers with competitive
financing to make the purchases

10/18/18 PROFESSOR AL-DIMASHKI 41

 Export Credit Agencies

ECA Corporate Responsibility

ECA Financing

Summary
Short-Term Financing

Medium & Long-Term Financing

ECA Insurance & Guarantees

10/18/18 PROFESSOR AL-DIMASHKI 42