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Investments outside Germany: ECA-based export financing

Investments outside Germany: ECA-based export financing

In the past few months, the coronavirus pandemic has severely affected the export business of many small and medium-sized enterprises with international business operations. Issues such as risk minimisation and loan collateralisation are increasingly important in relation to export transactions. But what is the best way to hedge investments outside Germany in times of uncertainty and beyond? ECA-covered transactions are one option for export financing. But how do they work exactly? What are the advantages associated with this form of financing for foreign business? See below for an overview of the key questions and answers.

What does ECA mean?

ECA stands for “export credit agency” and refers to an institution which, on behalf of a country such as the Federal Republic of Germany, promotes exports to emerging markets and developing countries in particular. This involves the assumption of credit risks via credit default swaps. The key purpose of these agreements is to protect against defaults and to safeguard cash flows. Even during the current coronavirus pandemic, which has resulted in an uncertain environment for business in Germany and internationally, this type of export financing represents a useful means for small and medium-sized enterprises to continue to pursue export business, subject to appropriate hedging.

What types of risks does an ECA cover?

An ECA may be established under public or private law. In Germany, Euler Hermes Aktiengesellschaft is the “mandatary”, i.e. the government’s agent. Also known as “Euler Hermes Bund”, it is tasked with the application of insurance instruments in order to hedge the risk of default for export transactions. It mainly covers politically motivated loss events, such as acts of war or the disruption of international payment transactions, as well as economic loss events such as non-payment or the insolvency of the customer of an exporter. The compensation amount consists of the outstanding debts for the loan amount as well as the incidental financing costs (e.g. Hermes premium). As a rule, the ECA will cover 95 per cent of the risks, provided that the preconditions for ECA cover are fully met.

key requirement for this type of international financing arrangement
©  iStock - kupicoo

What is the key requirement for this type of international financing arrangement?

The delivery contract is the key requirement for ECA financing: the exporter will conclude a contract for delivery with its foreign importer, which may include services. In addition, the importer and the exporter will agree that a portion of the order value is to be financed. As early as the quotation phase, it is a good idea for the exporter to get in touch with Deutsche Leasing directly and to request an ECA financing proposal.

Who are the intended beneficiaries of ECA coverage, and is cover also available for smaller financing amounts?

Together with AKA Ausfuhrkredit-Gesellschaft mbH (AKA), Deutsche Leasing offers ECA-covered transactions for an investment volume of EUR 1 million or more. AKA has operated as a specialist provider of export financing for more than 65 years. ECA coverage is particularly suitable for the SME customers of the savings banks and Deutsche Leasing, but also for German manufacturers in trade and industry and their foreign customers. SME customers benefit especially since in the past, ECA transactions were often only offered for significantly larger volumes. AKA is increasingly making use of rapid, digitalised processes for small-volume ECA financing arrangements, with an online portal specially designed for this purpose.

AKA Ausfuhrkredit GmbH

AKA Ausfuhrkredit-Gesellschaft mbH is a bank which specialises in export financing and is seated in Frankfurt am Main.

Which criteria must be fulfilled for this type of financing for foreign business?

The requirements for ECA-covered financing include:

  • compatibility with “OECD Consensus” (agreement which sets out guidelines for government-backed export credits, e.g. financing for not more than 85 per cent of the order value)
  • general requirements for the country-specific ECA
  • the borrower must have adequate credit standing

For what period of time is ECA-covered financing available?

The long-term nature of ECA-covered financing is a particular advantage since this enables forward-looking financial planning for the borrower. The maximum term is prescribed by the government credit insurer. The amount is generally repaid in uniform six-month instalments. The date on which repayments begin will depend on the delivery and/or service period agreed in the export contract. Repayments will commence six months after the start date defined in the credit agreement. The amount is generally paid out to the exporter after it has submitted drawdown requests which document the deliveries made or the services provided.

Is this product also available for small and medium-sized enterprises’ investments in European markets?

While historically ECA inquiries mainly focused on emerging markets and developing countries, where in some cases no cover is available on the private insurance market, ECA providers are increasingly receiving requests relating to European markets such as Italy, Spain and Portugal. ECA cover can likewise be arranged for exports to these markets and others. Particularly in the current situation, this may be a useful tool by which to minimise risks and facilitate business.