Export Credit Agencies (ECAs) play a critical role in promoting and shoring up international trade flows, particularly during times of geo-political upheaval and economic stress. With the general market dislocation and disruption to supply chains caused by the COVID-19 pandemic, the war in Ukraine and the resulting European energy crisis and high-interest rate environment, ECAs really came into their own.
The OECD Arrangement came into being in 1978 and was designed to build a ‘Consensus’ amongst its participants around the financing term of “Officially Supported Export Credits”. The primary aim of the Arrangement is to establish a fair and equal competitive environment for all participants. It seeks to prevent any participant from gaining an unfair advantage in export credit financing by setting specific financing limitations.
With the increasing threat of unregulated financings from “non-Arrangement” ECAs, ECAs that do not adhere to the OECD Arrangement on Officially Supported Export Credits, combined with an increasingly competitive landscape, the Participants to the OECD Arrangement have recently agreed to a reform (billed as a modernisation package) which will broaden the scope of its rules or “Sector Understandings”.
The reforms include:
Additionally, in response to the COVID-19 pandemic, a temporary reduction of the down-payment portion from 15%-5% was agreed for sovereign buyers (in category II countries) providing the transaction is guaranteed by a MoF or central bank.
This measure sought to bridge the funding gap at a time when there was a partial retrenchment or shortfall in the availability of cover provided by the private insurance market and liquidity from commercial banks.
This was no doubt a welcome relief for borrowers, as it essentially provided them with longer-term financing, given that the down-payment loan is often shorter in tenor. This regulation expired on 4 November 2023. However, due to worries about matters like debt sustainability, there were appeals to reintroduce this policy.
Consequently, this has now been extended for a further year to 13 December 2024.
Hailed as a major breakthrough and one which was arguably long overdue, the reform package will certainly deliver in providing more affordable and flexible export financing terms as well as create more ‘climate-friendly’ investments eligible under the Climate Change Sector Understanding (CCSU) and deliver incentives to support the energy transition of the UN Sustainable Development Goals.
The increase in ECA guarantees to 95% must have been seen as a boon for those sitting in the export credit desks of commercial banks. However, this increase might have been met with concern in certain circles, as banks and other financiers involved in down-payment financing could find themselves increasingly marginalised.
Revised repayment terms could also prove to be a challenge for commercial banks, many of whom are facing increasing funding costs, and might struggle to match these longer tenors.
This has also meant that ECAs, as they expand their offerings, have looked to increasingly tap the private insurance market for facultative reinsurance to mitigate their “tall tree exposures” on specific names or countries.
This has not necessarily been at the expense of the commercial banks also seeking to distribute risks into the private insurance market, but it does present some challenges around how capacity is being allocated by insurers between public and private providers.
‘ECA-backed’ transactions are generally well-received by private market insurers and often benefit from more competitive terms, due in part to the perceived halo effect that they provide. ECAs do not, of course, benefit from any form of preferred creditor status, but insurers do place a lot of store in the due diligence that they undertake.
However, the recent sovereign defaults have arguably brought this into sharp relief. It will be interesting to see how some of these debt rescheduling’s go and whether in fact, the commercial banks will get more competitive repayment terms, with ECAs perhaps more comfortable to continue to kick the can down the road.
Additionally, with Participants increasingly seeking to relax their minimum content requirements allied with an increase in untied financings, whereby the financing being provided is not in support of any domestic exporter or trade, but rather a thinly disguised mechanism to promote inbound investments, this lack of domestic interest could reduce an ECAs bargaining power when things go wrong.
Private market insurers may also seek to better support commercial banks where they can get better pricing for their capital employed as compared to ECAs.
Whilst these reforms are very much welcomed, the self-proclaimed ‘gentlemen’s agreement’ is arguably being stretched beyond what was originally envisaged to one that is increasingly being used to expand Participants’ geo-political interests abroad rather than simply support its exporters at home.
This article was originally published in Trade Finance Global and has been republished on our website with their permission.
