The Project Finance Law Review: Export Credit Agencies and Insurers
The first export credit agency (ECA) in the world was set up by the UK government in 1919. Its mission statement succinctly summarises its purpose, namely 'to ensure that no viable UK export fails for lack of finance or insurance from the private sector, while operating at no net cost to the taxpayer'. The mission statements of the different ECAs vary in wording and focus, although the substance of their core purpose is that they promote exports to provide jobs domestically and increase the wealth of the country from which they originate. On the basis that increasing exports from one country would typically mean reducing exports from another country, which leaves their role open to accusations of mercantilism, there has been international cooperation to seek to ensure that there is not a race to the bottom or a crowding out of private financing options that could lead to public resources subsidising exporters. In practice, most ECAs tend to regard and refer to their role as levelling the playing field as they operate in a world where other ECAs are active. The international cooperation that regulates their operations has been a mainstay of the market for decades, looking to ensure that competition remains on the quality and pricing of goods and services rather than the financing terms. However, there are increasing challenges to efficacy, although equally there are many more projects that involve multiple ECAs cooperating together, as discussed further in Section II.
Export credit agencies are owned by a government or franchised by a government. For example, UK Export Finance (UKEF) is a ministerial department of the government (known as the Export Credits Guarantee Department), and the Export-Import Bank of China (China Eximbank) is a state bank owned by the Chinese government and under direct control of the Chinese state council. In the Netherlands, the private trade credit insurer Atradius (as a successor entity of a franchise granted in 1932, based in Amsterdam but now with a Spanish parent) acts on behalf of the Dutch government as an ECA for the Netherlands through a subsidiary named Atradius Dutch State Business NV (Atradius DSB). Nevertheless, whatever the organisational arrangements, ECAs are by their nature political and typically created when the government in question is particularly focused on increasing international trade, with UKEF having been established in 1919 to re-establish trade after World War I, the Export-Import Bank of the United States (US EXIM) having been set up in 1934 at the time of the Great Depression and China Eximbank having been set up in 1994 as China re-engaged with the world economy.
The number of official ECAs is also increasing, as there was an approximately 35 per cent increase from 85 in 2015 to over 115 in 2022.2 Nevertheless, the export credit volumes supported by countries is not close to equal, even adjusting for size of economy. For example, looking at medium and long-term (i.e., over two years) (MLT) export credit volumes, which are most relevant to project financings, Atradius DSB on behalf of the Netherlands in 2020 provided US$1.9 billion of support, whereas Turkey provided only US$1.6 million of support, despite Turkey having a larger gross domestic product (GDP) than the Netherlands. In 2020, the 10 largest MLT export credit volumes were from the ECAs for China (US$18 billion), France (US$12.1 billion), Germany (US$8.6 billion), Italy (US$8.4 billion), South Korea (US$5 billion), Sweden (US$4.7 billion), the United Kingdom (US$3.4 billion), Denmark (US$2.8 billion), Belgium (US$2.5 billion) and India (US$2.3 billion). It should be noted that US EXIM, due to domestic debate on its role, was not able to authorise financings larger than US$10 million between 2015 and 2019. However, it is now reauthorised and can be anticipated to have increasing volumes in coming years. For example, in 2012, its total was approximately US$36 billion, whereas in 2021 its total was approximately US$1.8 billion. While down from 2020, this is reflective of the fact that, in 2020, US EXIM agreed to provide US$4.7 billion for the Mozambique liquefied natural gas (LNG) project alone.
Notwithstanding the market turmoil arising from covid-19, during 2020 and 2021, ECAs supported projects that already had momentum and the commercial lending market continued to have sufficient liquidity for its portion of financing packages. For example, the middle of 2020 saw the signing of the gigantic Mozambique LNG project financing that involved an aggregate US$14.4 billion of debt and support, involving direct loan financing by four ECAs (US EXIM, the Japan Bank for International Cooperation (JBIC), UKEF and the Export-Import Bank of Thailand), as well as direct loans from the African Development Bank and 21 private financial institutions, with part of the financing by the private financial institutions being guaranteed or insured by five ECAs: Nippon Export and Investment Insurance (NEXI) from Japan; UKEF; SACE SpA (SACE) from Italy; the Export Credit Insurance Corporation of South Africa Soc Ltd; and Atradius DSB. During 2021, the volume of debt incorporating ECA support was US$104.9 billion, a reduction of around US$10 billion from the preceding year. However, it is anticipated that ECA-backed volumes may rise during 2022, particularly in the energy sector, including as a response to Russia's involvement in Ukraine and associated energy security concerns (although this will be a nuanced response that recognises the commitments made by countries during COP26).
As discussed in Section III, ECAs provide a number of different products in support of their mission (although not all ECAs provide all of these), with the main products being direct loans, guarantees and insurance. While insurance is one category of products offered by ECAs, there are other providers of similar insurance, with the market comprised of a mix of private insurance companies (such as Liberty, Sovereign and AIG) and public institutions (both ECAs and multilateral institutions such as the Multilateral Investment Guarantee Agency (MIGA), which is part of the World Bank Group). While ECAs provide insurance products to facilitate and promote exports for their home country, multilateral institutions have more of a developmental mandate and mission to use public funds to catalyse private investment in developing countries, and private insurance companies provide insurance products on commercial terms for profit. The various types of insurers are discussed further in Section IV.
II The Organisation for Economic Co-operation and Development arrangement and other inter-ECA relations
i The Organisation for Economic Co-operation and Development arrangement
The Organisation for Economic Co-operation and Development (OECD) was established in 1961 as a forum for member countries to discuss trade and development matters, and collectively find solutions to an ever more complex trading world. It currently has 38 member countries, with eight of these having joined since 2010, and a further five key partner countries that also participate in policy discussions. During the 1970s, particularly following the OPEC oil crisis, there were concerns regarding ECAs engaging, or beginning to engage, in overly generous export credits that were leading to competition on financing rather than competition on goods and services, which (from an economic and global trade (but not necessarily individual country) perspective) leads to inefficiencies and a suboptimal global economy.
In 1978, discussions on export credits under the auspices of the OECD culminated in the issuance of the Arrangement on Officially Supported Export Credits (the OECD Arrangement), which stipulates the most generous financial terms and conditions that member countries should give when providing officially supported export credits. The OECD Arrangement is described by the OECD as a 'gentlemen's agreement' among its participants, namely Australia, Canada, the European Union (UKEF will continue to follow the OECD Arrangement post-Brexit), Japan, South Korea, New Zealand, Norway, Switzerland, Turkey and the United States. Nevertheless, despite the voluntary nature of the OECD Arrangement, it has been of primary importance in the evolution of the export credits market since its inception, although (as noted below in Section II.iii) it is currently challenged by 'outside' support.
The OECD Arrangement is a living document and was most recently updated in January 2022. While applying generally to all sectors, there are sector-specific annexes to the OECD Arrangement that are referred to as 'sector understandings'. Currently, there exists a ship sector understanding; an aircraft sector understanding; a nuclear sector understanding; a renewable energy, climate change and water sector understanding; and a rail infrastructure sector understanding. The January 2022 update to the OECD arrangement removed a coal-fired electricity generation sector understanding as, in October 2021, participants agreed to end support for unabated coal-fired power plants.
ii The OECD Arrangement and project financings
The OECD Arrangement sets out criteria that a project needs to satisfy for a transaction to be classified as a project financing. These require that the transaction involves or is characterised by:
- The financing of a particular economic unit in which a lender is satisfied to consider the cash flows and earnings of that economic unit as the source of funds from which a loan will be repaid and to the assets of the economic unit as collateral for the loan.
- Financing of export transactions with an independent (legally and economically) project company, e.g. special purpose company, in respect of investment projects generating their own revenues.
- Appropriate risk-sharing among the partners of the project, e.g. private or creditworthy public shareholders, exporters, creditors, off-takers, including adequate equity.
- Project cash flow sufficient during the entire repayment period to cover operating costs and debt service for outside funds.
- Priority deduction from project revenues of operating costs and debt service.
- A non-sovereign buyer/borrower with no sovereign repayment guarantee (not including performance guarantees, e.g. off-take arrangements).
- Asset-based securities for proceeds/assets of the project, e.g. assignments, pledges, proceed accounts;
- Limited or no recourse to the sponsors of the private sector shareholders/sponsors of the project after completion.
When structuring a project that will be project financed with export credit support, it is thus critical that these criteria be borne in mind, although in practice most project financings naturally fulfil these criteria from a normal structuring perspective. While the OECD Arrangement would not prohibit a project financing that did not meet these criteria per se, the longer maximum repayment term and other project finance-specific guidance of the OECD Arrangement would not apply.
The OECD Arrangement limitations can become complicated in practice as its details are extensive. However, for project financings, these broadly follow the below principles.
The maximum tenor (referred to in the OECD Arrangement as 'maximum repayment term') varies according to the sector of the project and the country in which the project is based (split between Category I countries, being high-income OECD countries, and Category II countries, being all other countries). For project financings, the maximum tenor is usually 14 years, although there are exceptions. For example, where export credit support is more than 35 per cent of the syndication for a project in a high-income OECD country, it is 10 years and, where export credit support is for renewable energy, climate change mitigation and adaptation or water projects, a sector understanding applies, and the maximum repayment term can be up to 18 years in some cases (depending upon whether the project is classified as class A, B or C and some other criteria in such sector understandings).
Repayment of principal and payment of interest
The principal may be repaid in unequal instalments, and principal and interest may be paid less frequently than semi-annually, provided that:
- repayments of principal cannot exceed 25 per cent of the principal in any six-month period;
- the first repayment of principal is made within 24 months of the starting point of credit and no less than 2 per cent is repaid within 24 months after the starting point of credit;
- the first interest payment is made within six months of the starting point of credit and interest is payable no less frequently than every 12 months; and
- the weighted average life of the repayment period must not exceed seven-and-a-quarter years (or five-and-a-quarter years where export credit support is more than 35 per cent of the syndication for a project in a high-income OECD country).
Sector understandings may adjust these restrictions for eligible projects.
Minimum fixed interest rates
Minimum interest rates are calculated in accordance with the OECD Arrangement for fixed-rate loans. These rates are known as commercial interest reference rates (CIRRs) and are intended to reflect commercial rates for creditworthy domestic borrowers in the domestic market of the applicable currency (e.g., for US dollars, highly rated US borrowers in the United States). A further 20 basis points on the CIRR are applied for project finance transactions with repayment terms in excess of 12 years. There are, however, no minimum interest rate requirements for floating rates, which many multi-sourced project financings would involve. Sector understandings may further adjust these restrictions for eligible projects.
Finally, it should be noted that the OECD Arrangement is based on the principle of disclosure between ECAs as to what they are doing, so it is possible for an ECA to offer support on terms that do not conform to the normal financing rules by prior notice, giving the other ECAs an opportunity to match terms. An ECA may also propose a common position in relation to a particular country or class of transaction by notice to other ECAs.
iii The OECD Arrangement: what it does not cover
As recently as the turn of the century, the OECD Arrangement was understood to cover the vast majority of export credits globally, partly given the outsized proportion of activity by ECAs based in the OECD. This situation has changed dramatically and US EXIM estimates that, in 2020, total activity provided under the rules of the OECD Arrangement amounted to approximately US$60.2 billion – only approximately one-third of total export and trade-related finance.
There are two simultaneously growing areas of support that are not covered by the OECD Arrangement: support by countries that are not involved in the OECD Arrangement; and support by countries that do follow the OECD Arrangement, but that enter into support that is not covered by the terms of the OECD Arrangement. This second category recognises that official financing deployed by governments for export promotion, trade facilitation, development and other goals supports exporters, and thus should be considered by a country looking to level the playing field for its exporters.
Of the countries in the top 20 with regard to having the most active ECAs (for export credit support of longer than two years), 18 follow the OECD Arrangement. However, this hides the importance of those that are not following the OECD Arrangement. The most active country is China, at US$18 billion and the 10th-most active is India at US$2.3 billion. In 2021, China alone provided 50 per cent more official export credit support than the next largest country. In 2020, this disparity was even more pronounced, as China provided three times more support than the next country. More generally, while OECD Arrangement-tied export credit activity in 2020 was US$60.2 billion, this is still significantly below the post-2008 global financial crisis high of 2012 at US$129 billion.
Furthermore, some countries that comply with the OECD Arrangement provide trade-related support that is outside the auspices of the OECD Arrangement. This is not a secret or subterfuge and reflects, in part, different philosophies regarding what role ECAs should play. This may indeed be reflected in their mission statements. For example, UKEF states its mission as being 'to ensure that no viable UK export fails for lack of finance or insurance from the private sector', whereas JBIC has a much wider mission:
to contribute to the sound development of Japan and international economy and society by conducting financial operation in the following four fields: Promoting the overseas development and securement of resources which are important for Japan. Maintaining and improving the international competitiveness of Japanese industries. Promoting the overseas business having the purpose of preserving the global environment, such as preventing global warming. Preventing disruptions to international financial order or taking appropriate measures with respect to damages caused by such disruption.
Clearly, JBIC's mission is much wider than the traditional export credit support that the OECD Arrangement captures, as many of the areas focused on do not directly link into exports from Japan.
Areas of trade-related support that are outside the auspices of the OECD Arrangement include the following.
Traditionally, export credit support is tied to the provision of goods and services from the country that an ECA is based in. However, in an increasing number of cases, active ECAs are providing support for projects that is not conditional upon the provision of goods and services from the country they are based in (i.e., it is untied), and is based on a wider national interest. Export credit agencies that are increasingly active in providing untied support include Euler Hermes (Germany), SACE (Italy), EDC (Canada), JBIC and NEXI (Japan), and KEXIM and K-sure (South Korea). An example would be that JBIC has stated that its support for the Mozambique LNG project was (in part) to secure stable supplies of LNG and to diversify LNG supply sources for Japan.
A number of ECAs have been very active in supporting domestic investors in overseas projects in which they have an equity interest. For example, JBIC has a specific programme of overseas investment loans to support Japanese foreign direct investments. China Eximbank, SINOSURE, JBIC, NEXI, K-EXIM, K-Sure and Euler Hermes are all disproportionately active in this space. JBIC's support on the Mozambique LNG project was helped by the involvement of two Japanese equity interest holders in the project.
Development banks often have the laudable aim of encouraging companies to do business in developing countries and, in the case of bilateral development banks, this is typically focused on national interest, and so involves initiatives to support domestic exporters and other domestic companies. There is thus a crossover here with the role of a bilateral development bank in some projects becoming quite close to an ECA. Examples of bilateral development banks that are active in this space include the US International Development Finance Corporation (DFC) (formerly the Overseas Private Investment Corporation), the China Development Bank, the Netherlands Development Finance Company, the German Investment and Development Company, and the UK CDC Group.
The OECD Arrangement does not cover 'market window' programmes wherein ECAs provide financing on terms available in the commercial market. Export Development Canada (EDC) and Belgium's Credendo are the main market window programme providers and EDC in particular has been a mainstay of project financings in a number of regions, but often, in the case of multi-sourced financings, they come under the commercial debt facility rather than an ECA facility (and also not participating in joint ECA meetings during the structuring and negotiation stages).
While not all of the above are export credit support as strictly defined, they reflect some of the challenges to the OECD Arrangement remaining the baseline for ensuring that government-supported export and trade-related finance does not become mercantilist. It should, however, be noted that the OECD Arrangement is voluntary in nature, so countries that have not officially signed up in practice tend to bear these in mind and countries that have signed up also tend to bear these in mind in situations where the OECD Arrangement does not apply (e.g., untied support).
iv The World Trade Organization agreement on subsidies and countervailing measures
In the mid-1990s, as part of the Uruguay round of multilateral trade negotiations, the World Trade Organization (WTO) Agreement on Subsidies and Countervailing Measures was adopted, which regulates use of subsidies by WTO Member States and describes actions that other countries can take if disallowed subsidiaries are used.
The rules are complex, however, as a general principle, a Member State cannot finance at a lower rate than its own cost of borrowing unless the interest rate provisions comply with the OECD Arrangement. The OECD Arrangement thus provides a safe haven irrespective of whether the Member State in question is a member of the OECD and has agreed to follow the OECD Arrangement. The WTO thus takes a pragmatic position towards ECAs, accepting that their actions may constitute state subsidies, but looking to ensure that a level playing field is at the least maintained.
v The Berne Union
The Berne Union is an international not-for-profit trade association representing the global export credit and investment insurance industry. Its mission is to 'actively facilitate cross-border trade by supporting international acceptance of sound principles in export credit and foreign investment'. However, this is not achieved through a set of rules, but rather through networking, sharing expertise and the provision of a forum for professional exchange. Members of the Berne Union include a mixture of ECAs, development banks and private credit insurers, currently numbering 82 members with three guests.
vi Co-financing and other inter-agency cooperation
Increasingly, large-scale projects involve a number of ECAs, which has further resulted in increased collaboration between ECAs as they seek to work together for mutually beneficial outcomes.
Furthermore, a number of countries and ECAs have signed memoranda and frameworks between themselves, either to increase trade between the parties to the memorandum (such as the memorandum of understanding signed by the United Arab Emirates and Indonesia in 2022) or to support projects involving exports from both of the countries that are party to the memorandum (such as the memorandum of understanding entered into between NEXI and US EXIM in 2019).
III Key products and criteria
i Direct loans, guarantees and insurance
While ECAs have a range of products, and indeed in some cases have more recently looked to be innovative in expanding this range, the key products are direct loans, guarantees and insurance.
Direct loans typically involve an ECA providing a loan to the foreign buyer (project company) to facilitate the purchase of goods or services, or both, by the foreign buyer from a seller in the ECA's country.
Guarantees typically involve an ECA providing a guarantee to the commercial lenders for the foreign buyer (project company) to facilitate the purchase of goods or services by the foreign buyer from a seller in the ECA's country. Insurance policies use a slightly different product to produce the same economic outcome as guarantees.
ECAs that provide credit risk insurance generally have coverage requirements and limitations that track those for their guarantee programmes. Insurance products will thus often have the following limitations:
- a tenor of up to 20 years;
- coverage of 85 to 90 per cent of the risk; and
- detailed claims procedures that detail how a claim can be made and usually include a waiting period before a claim can be made.
In a number of countries, separate institutions focus on separate products, particularly in Asian jurisdictions. For example, traditionally in Japan the split is between JBIC providing direct loans and NEXI providing insurance; in South Korea the split is between K-EXIM providing direct loans and K-SURE providing insurance; and in China the split is between China Eximbank providing direct loans and SINOSURE providing insurance. In other countries, ECAs have traditionally provided only one product but have expanded. For example, in 2013, UKEF launched its direct lending facility to support exporters to a greater degree than the guarantee and insurance products it had provided before this time could.
ii Eligibility criteria
Each ECA has different eligibility criteria that will unlock export credit support from that ECA.
For example, for UKEF's products, core eligibility criteria would focus on ensuring that the supported export contract demonstrates how it is conducive to supporting or developing exports from the United Kingdom. Once this threshold is passed, anti-bribery, anti-corruption, environmental, social and human rights due diligence processes must be completed, and a foreign content policy must be satisfied. There are sector-specific restrictions in some cases, such as those relating to the nuclear, military or hydrocarbons sectors.
One particularly critical policy is the foreign content policy, which recognises that large export contracts are part of a global supply chain, so it is a rare product that originates purely from one country. UKEF approaches this by way of three principles, with these being considered in a cascade and support being possible if any principle is satisfied (i.e., if a contract does not satisfy principle one, it may be supported under principle two; if a contract does not satisfy principles one and two, it may be supported under principle three). The first principle is that the maximum level of all foreign content is 80 per cent of the contract value (hence a minimum of 20 per cent UK content). The second principle is the 80:20 foreign content proportions that apply to UKEF's support for a contract or project (which may consist of multiple contracts). This provides flexibility in that UKEF can provide support based on the UK content in a contract if under 20 per cent, or can take account of UK content in related current, past or prospective projects. The third principle is that UKEF may provide support if a wider test is satisfied, being that such support is conducive to supporting or developing UK exports.
Similarly, the ECA may have a cap on the amount of local costs that it can cover, being costs incurred in the host country such as local labour, equipment and supplies. Up until recently, the OECD Arrangement imposed a cap on support for local costs at 30 per cent of the export contract value. However, as of April 2021, this has increased to 50 per cent in Category II countries and 40 per cent in Category I countries, being high-income OECD countries.
iii Risk coverage type and percentage
Historically, export credit support was focused on political risk coverage rather than commercial risk. In a project finance context, a clear distinction was made between a project that could not repay its debt due to market price risk (e.g., in a petrochemicals product, a higher feedstock price or lower product price), which is a commercial risk, and a project that could not repay its debt due to a political reason (e.g., expropriation of the project), which is a political risk. This distinction has become less critical during the 21st century, first due to the increase in direct lending by ECAs (in which ECAs are obviously taking both commercial and political risks) and second because, even when ECAs provide guarantee or insurance products, there has been a move to comprehensive cover that includes both political and commercial risk coverage.
In the case of guarantees and insurance products, ECAs will only cover a certain percentage of the debt that the ECA has agreed to provide cover for, with this cover tending to range between 80 to 100 per cent. In some cases, the percentage cover that an ECA is willing to provide for the same project can differ between commercial and political risks, with a higher percentage typically being available for political cover.
iv Policy matters and intercreditor arrangements
By virtue of being governmental entities, ECAs comply with international, governmental and internal codes and standards, and typically require adherence to various of these policies by the project, the contractors, the suppliers, the project company and its shareholders, which may include widely varying areas such as, among others:
- anti-bribery, anti-corruption and anti-money laundering;
- environmental, social and corporate responsibility;
- military and security;
- sanctions; and
It is worth noting that these policies tend to be much more comprehensive than similar policies of commercial lenders and may require increased due diligence at the outset of the project, as well as increased monitoring and reporting on an ongoing basis.
Given their special status, ECAs, while ranking alongside other senior lenders in payment and security, almost invariably demand special voting and consent rights in respect of certain matters, particularly matters that are governed by their policies, such as environmental matters. In addition, where ECAs have provided guarantees in respect of a loan, the ECA will require the underlying commercial lenders to obtain its consent to a proposed course of action.
IV Other insurance providers
As discussed in Section III.iii, there has traditionally been a clear distinction between political risk coverage and commercial risk coverage, which from a risk perspective is generally more important to financiers than if the covered risks are covered by a guarantee or insurance product.
From a project finance perspective, insurance providers fall into the categories of non-commercial providers – such as ECAs, development banks and multilateral agencies – and private providers that provide insurance for commercial benefit.
Until the 2008 global financial crisis, monoline insurers (typically AAA-rated private commercial companies) would guarantee project finance debt against commercial risks for a fee, but after 2008 many lost their ratings and retreated or exited from the market. There remains a number of insurance companies that will provide political risk coverage in particular for a fee, such as AIG, Lloyd's of London and Chubb. Nevertheless, coverage for commercial or political risks for project debt from commercial providers is very scarce or expensive, or both, in developing markets in particular, so the importance of the non-commercial providers comes to the fore.
The non-commercial providers of insurance for project debt include ECAs, development banks and multilateral agencies. Prominent providers outside of ECAs would include the MIGA, part of the World Bank Group, and the US DFC, both of which provide political risk insurance. More generally, a wide range of development banks provide partial credit guarantees, as discussed elsewhere in this work.
The covid-19 pandemic has had a devastating effect on economies worldwide. In 2020, the OECD reported a reduction of global GDP of 3.4 per cent and a contraction in global trade of 8 per cent. However, economies showed signs of recovery in 2021 with an increase in global GDP of 5.5 per cent and global trade levels rising to near to pre-2019 levels. In light of the energy security crisis caused by the shift away from Russian gas following the Ukraine crisis, the importance of ECA support in energy project financings will once again become critical, taking advantage of ECAs' ability to be countercyclical, with the added complexity that energy project financings must now be viewed through the prism of commitments made by governments during COP26.
In line with the more widespread shift in the financing market, ECAs are coming under increasing pressure to focus their support on sustainable projects. In this regard, the divide between ECAs that are focused on exports and development banks (both bilateral and multilateral) that are often more focused on shaping the global economy (for example, towards renewables) is shrinking.
1 Adrian Lawrence is a partner and Ffion Archer is a senior associate at Ashurst LLP.
2 Figures in this chapter are derived from US EXIM Competitiveness Reports, accessed at https://www.exim.gov/news/reports/competitiveness-reports in April 2022. Various other information referred to was accessed on the official websites of the referred-to ECAs, the Organisation of Economic Co-operation and Development, and the Berne Union in April 2022.