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Role of Export Credit Agencies in Project Finance - Latest Legal Characteristics, Research and Legal Profile

The majority of Europe's government-initiated agencies have established an ECA to encourage, assist and assist the exporting of goods andervices. Drummond Richard, Legal Advisor, General Counsel Bureau, Exportcredits Warranty Department, UK. ECA provides coverage either through exporter or exporter banks insurances or through a credit facility directly to the exporter banks, which covers a credit to a foreign borrowing institution to fund the delivery of goods and provision of service in the case of late payments by the purchaser or the borrowing institution under a credit contract.

This type of coverage or guarantee can be a mixture of either extensive (i.e. commercially and politically) or only politically covered risks. In the past, ECAs encouraged exporting through subventions that helped those who could obtain coverage from them. If credit intermediaries were included, exporter would be likely to provide more favourable conditions.

Use of credit agents was and is useful for exporting firms in those regions where the risk is higher. Loan intermediaries can offer adequate protection if creditors are more hesitant to take policy risk. Each country that has formal ECAs is now a contracting partner of the "Arrangement on Guidelines for Officially Supported Exportcredits".

It aims at harmonising the supply of supportive credit agency products and covers publicly subsidised exports credit linked to sales of goods or service agreements, or both, with a reimbursement period of two years or more. Exports of arms and farm products are not covered by the scheme.

This agreement provides for special provisions for the financing of projects, which deviate from the normal consensus rule and mainly extend the duration up to 14 years, as well as, according to the type of operation, reimbursements in uneven rates and interest and redemption less than half-yearly.

The following provisions apply to more flexibility in the minimal redemption rates for financing projects: - the total amount repayable in any given six-month horizon shall not be more than 25 % of the principal amount of the credit; - the first redemption of the credit shall take place no later than 24 consecutive calendar days after the "starting point of the credit" and shall not be less than 2 % of the principal amount of the credit; - the maximum duration of the payments horizon shall not be more than 7,25 years, calculated as a percentage of the total amount of the credit; - the maximum duration of the payments horizon shall be 7,25 years, or 5,25 years if the lower 10-year redemption horizon is applicable to OECD high-income economies.

One of the most important credit insurance companies with which the ECGD has done transactions is Compagnie Française d'Assurance pour le Commerce Extérieur, France (Coface); Euler Hermes Kreditversicherungs AG, Germany (Hermes); Institute for Credit Insurance for Exports, Italy (SACE); Office National du Ducroire, Belgium (ONDD), Exportkreditnämnden, Sweden (EKN); Atradius, Netherlands (Atradius); and Compañia Española de Seguros de Credito a la Exportación, Spain (CESCE).

Aim of this document is to focus on funding of projects and the relationships between creditors, multilateral corporations, creditors and donors in a typically funded environment. Due to the debt of the emerging countries and significant default on government debt, the finance sector, instead of relying on government guarantee, has sought other sources of finance.

In the mid-1990s, financing of investment was back in fashion when a number of credit insurers established their own financing entities. In the meantime, most schemes would have been funded on the assumption of purchaser credit, often with a guaranty from the borrower's state or an eligible local banking institution.

Exporter would have had to be remunerated in the form of payment in kind in cash at the time of dispatch of their investment goods or by instalment payment against submission to the lending institutions of qualification documents signed by the purchaser. According to the applicant, the competent exporting authority would have ensured this institution that it would take action against the insolvency of the borrower. Since the mid-1990s, many energy project finance credits have been available in various parts of the globe, including Pagbilao and Sual in the Philippines, Shandong in China, San Pedro in the Dominican Republic and Manah Project in Oman.

India also saw several years of significant exposure to high-speed power schemes such as Dabhol, Vizag Magalore and Bhadravati, where export credit insurers rely on a Indian Governments warranty, but these were never concluded except for Dabhol due to restructuring problems. Credit insurers are also heavily involved in the telecommunications sector and in the case of EKGD, particularly in the Philippines, India and Kazakhstan.

It would be natural for the promoters of a typically financed plant to prepare the baseline documents before involving the ECAs and creditors. Similarly, in the case of an O&G scheme, the sponsor may have entered into negotiations with the government regarding a share of output arrangement or a tax on investment arrangement well in advance of the lender's taking up the loan.

Typically, a multi-country pipelined operation may require an inter-governmental contract between the affected jurisdictions, and then require separate inter-governmental arrangements with the different jurisdictions to address specific legal questions such as the licence system, stabilization provisions and assertion laws. Establishing such a complex infrastructure means that the credit insurers may have to agree the necessary documents in advance, so that if they become implicated - in order to safeguard their positions - they will have to negotiate special conditions in the contracts and transfer the corresponding documents to the creditors as part of their collateral packages.

Historically, however, creditors were often first engaged in negotiations with donors on a proposed termsheet, and as they sought to obtain the funding mandates, they often made compromises in the understanding that they would depend on the involvement of EAs and multilateral organisations to reintroduce the terms of the termsheet that were particularly appropriate and of relevance to the CEAs.

As a result, it appears that the earlier the Court of Auditors and multilateral bodies are included, the better. Stakeholders must be aware that the product dossier must be marketed as a sustainable and bank-ready bundle to credit institutions and multilateral agencies. Once the relevant franchise, purchasing or production-sharing arrangement has entered the end of the negotiating phase, it becomes much more challenging for credit insurers and multilateral insurers to re-negotiate material terms when deficiencies are identified.

The ECGD would normally include warnings of conflict, moratoria, expropriation, transfers and revocation of UK licenses in the event of policy coverage. However, according to the type of projects, there may be increased extra policy coverage for breaches of public commitments, legislative changes, tax changes, benefits and non-payment of certain specific pecuniary commitments under a state guaranty by the borrowers' governments.

To this end, if credit insurers were to offer improved policy coverage, they would make sure that the programme documents included certain mitigation measures for such extra policy exposure. Where coverage would be needed for legislative or tax changes or the maintenance or withdrawal of appropriate licenses or both, the credit insurers and the multilateral institutions would endeavour to obtain a declaration of intent or letters of support to make sure that the underlying governments of the projects do not intervene and that there are no legislative changes that would adversely impact the conditions of the projects or that an appropriate license would not be withdrawn, which would impede the building of the projects for a specified period of the year.

There are many different ways in which credit export agencies should be envisaged to fund small-scale recovery work. Most credit insurers have now identified funding programmes for specific types of loans and, over many years, have gained extensive expertise in assisting a wide range of financings.

Credit insurers are also very experienced entrants in developing countries and are less vulnerable to policy turbulence than individual creditors. For many years, the European Coal and Steel Community (ECAs) have had relations with important actors such as hosting government, energy companies and utility companies. Due to the sums of money required to finance large scale ventures, a large number of donors often want a diverse credit infrastructure and a wider distribution of those at stake.

On the other hand, credit insurers acknowledge the need for flexible support for financing projects. Credit insurers are able to provide a wide range of coverage for policy and economic risk before and after construction. Donors and creditors often appreciate the independence of the ECAs' negotiating approaches and often raise questions that are too delicate for them.

Credit insurers may consider providing financial assistance by establishing locally denominated currency that best matches the project's revenues. That can be useful if it is an infrastructural development that does not generate revenues in US dollars. The ECA may provide variable or variable rate of interest facility facilities. Credit insurers are willing to consider prepaying credit from the credit insurer after or beyond the finalisation phase if equity markets debt arrangements are made later.

It can be said in such cases that an ECA is almost the lender of last instance. Donors receive early commitment from the CEAs, while the bonds can only be issued much later after the evaluation of the projects. Auditors will want to play an proactive part in the due-diligence of the project and in the negotiation of conditions for funding the work.

Credit insurers do not lean back and do not respond to suggestions, but are at the centre of discussion, influence and shape the financial packages without delaying them. Leverage can be provided by ECA-supported funding to ease further funding of the ECGD commercially, as ECGD-supported credits are not weighted. As credit insurers have extensive expertise in assisting with both independent and collective funding of projects, they are now used to working as a part of a larger group with the creditors and, according to the type of deal, are able to co-ordinate their activities in the exchange of information and legal counsel.

Credit insurers can keep up with the creditors, but also recognize the capacity of the financial market to move quickly in certain circumstances, especially after completion of most due dilligence reviews of the projects. In the case of intricate operations, the use of an ECA may be used as coverage, but this should not cause any delay.

Providing credit insurers with sufficient information at the beginning of the due diligence procedure can help accelerate the processes and allow credit insurers to assess a given transaction earlier. Export credit insurers are now working together comprehensively, leveraging each individual's strength to cover the enormous need for long terms finance in the years ahead.

Insofar as the credit insurers have concluded various multi-sourcing arrangements, this may in certain cases lead to a reduction in the need for additional borrowings. Credit insurer's policy of policyholders' protection against risks can be a relatively easy and fast means of getting coverage for an uncommitted credit or capital participation for funding aprojects.

In order for credit insurers and multilateral corporations to obtain the appropriate approval from their credit committee (s) or committee (s), a full due diligence check of the proposed transaction is required, and before credit insurers can approve the coverage of the economic and policy risk, a full evaluation of the proposed transaction must be performed so that advisors, regardless of the sponsor, can validate the sponsor's acceptances, which would normally be incorporated into their provisional or definitive information note.

As a rule, credit insurers will nominate a finance advisor to provide guidance on projects' liquidity, bank case and eligibility counsel. Others, such as the Reserve Advisor, would discuss the reserve capacities so that the sponsor and the SPV can meet their commitments in an offshore wind farm, or the TCO would discuss the capacities of corporate and retail electricity providers and whether there are enough resources to make an electricity wind farm eligible for bank lending to creditors, multilateral corporations and creditors.

In particular, the auditors will request the nomination of environment advisors to conduct due dilligence audits to verify compliance with World Bank guidelines, EU guidelines and compliance with applicable laws and regulations, in particular with regard to petroleum and natural gas, pipelines and energy related investments. Lender advisors review the results of sponsor advisors and verify whether the numbers, beliefs and facts make the proposed transaction financially feasible and eligible for coverage.

As large scale ventures typically affect a number of export credit insurers and multilateral enterprises, there has been a trend in recent years to pool advisors to reduce overhead. Creditors have also been involved in the reporting to advisors in order to reduce cost. ECGD and the other European Credit Agencies are pleased to exchange their results with business banking and multilateral institutions.

IASs or multilateral bodies will retain their positions for the appointment of their own persons only if there are disputes or a special due diligence engagement with certain advisors is called for. Usually the first step begins with a road show where sponsor and consultant discuss the type of operation and the benefits of the operation with the ECA; funding scheme detail; type of economy; identification of the operation documents such as fuels supplies, utilities and transport equipment in plants or generation participation arrangements, tax arrangements, guest arrangements and intergovernmental contracts for petroleum, natural gas and pipelines operations.

The ECGD in the United Kingdom should be able to present a Memorandum of Understanding setting out the conditions for the endorsement and negotiation of such documents, once it has received this information and provided that the ECGD is satisfied with the workability, resilience and practicability of the proposed action and the solidity of the respondents, and that there is an appropriate policy, legislative and regulatory framework and financing infrastructure in place that takes into account all eventualities.

ECGD has a £20 million threshold to consider funding a scheme to be cost-effective. ECGDs and other due dilligence auditors would be particularly pleased to continue their duty of care: - describing the site of the investment and its closeness to key assets and infrastructures; - describing the sponsor, shareholder and participation of the home country authorities; - giving full financial breakdown and financial scheme proposal, detailing the full principal expenses of the investment and how the principal expenses of the investment will be shared between the various creditors, credit insurers, share owners and other donors; - what assistance the ECGD and other credit insurers may request.

One of the some of the pivotal questions that were examined before the ECGD and otherECAs could reach agreement on coverage would be: - State intervention hazard; - Liquidity or sensitivity of goods or services for the term of the credit; - Source of income safety; - Regulatory hazards and scope of affected legislation.

Requests for coverage are now assessed for their environmental, societal and HR impacts.

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