- Jian-Ye Wang, and Márcio Ronci
- Published Date:
- February 2006
Lending arrangement whereby a multilateral institution makes a loan to a private sector borrower in an emerging-market country, thereby becoming the “lender of record,” that is, the sole contractual lender on the books of the borrower, with this status acknowledged by the government of the borrower’s country. However, instead of maintaining the entire loan on its own books, the multilateral maintains only a portion of the loan—the “A” loan—and participates in the remainder of the loan—the “B” loan— to commercial banks and/or institutional lenders, either directly or through securitization.
Generally refers to all forms of financing where the lender has a claim over specific assets of the borrower, whether with or without a general claim against the borrower. An asset-backed security is characterized as an obligation that is supported by cash flow from a specific pool of assets (typically secured offshore); such securitization can involve the future cash flow of receivables related to exports, services or products. See also structured financing.
The International Union of Credit and Investment Insurers. Established in 1934, this organization now includes almost 50 of the largest export credit agencies and investment insurers from both member and nonmember countries of the Organization for Economic Cooperation and Development. Institutions, not their governments, are members. The Union works for the acceptance of sound principles of export credit and investment insurance and the exchange of information and experience. It also has adopted a series of agreements and understandings by which members undertake to abide by certain maximum credit terms and terms for goods. The secretariat is in London, and members hold two general meetings each year as well as specialist seminars and workshops.
One of the two main categories of risk insured by export credit agencies (the other being political risk). The term applies primarily to the risk of nonpayment by a private buyer or commercial bank or a public buyer due to default (protracted or otherwise), insolvency or bankruptcy, or failure or unwillingness to take delivery of the goods (i.e., repudiation). Usually excluded are cases where there are disputes between exporter and importer about product quality, delivery dates, performance, and the like. Claims will generally not be considered until these disputes are resolved. Also usually excluded are commercial risks on sales from exporters in one country to their subsidiaries in other countries.
See letter of credit.
A quantitative limit on exposure set by most export credit agencies and international banks to monitor and control their total commitments on individual countries. Country limits usually apply to medium- and long-term business and rarely include short-term business. They can have various forms, including annual maturities limits and contract limits.
The insurance provided by an export credit agency. Thus, for example, if some insurance facilities are available from such an agency for country X, that agency is “on cover” for that country. Conversely, where no insurance facilities are available, the agency is said to be “off cover.” An agency’s underwriting policy on a particular buying country is usually referred to as its cover policy for that country. But the term “cover” is also used more loosely to embrace insurance against both political and commercial risks.
The principal product of an export credit agency. However, the term can include both export credit insurance and domestic credit insurance (i.e., insurance on sales within a country). Credit insurance protects the insured party (normally the seller), in exchange for a premium, against a range of risks that result in nonpayment by the buyer. In domestic cover, only commercial risks are involved. In export credit cover, both commercial and political risks are normally involved.
The period from the time of delivery or acceptance of goods (for shortterm business) or from the commissioning of the project (in project financing) until repayment is complete. Maximum credit periods are set for repayment periods. The starting point of credit for short-term business is set by the Berne Union agreements, and that for medium- and long-term business by the Berne Union and the OECD Arrangement.
An account, normally in an offshore bank (that is, a bank outside the country of the debtor or importer), into which all or an agreed proportion of the proceeds of export sales from the output of the project are paid. This account is then used first to service the loans that financed the project. Escrow accounts are an increasingly important part of the security package associated with project financing or a limited recourse financing. Normally, lenders and export credit agencies like to see such accounts hold the equivalent of about one year’s debt-service payments. The existence of such accounts is a comfort to foreign creditors.
In a strict sense, cover issued against the risk of movements in the exchange rate between the currency of the exporter (and thus of the export credit agency) and the currency in which the export contract is denominated. It insures against the risk that, when the overseas buyer pays in the specified currency, the payment will be worth less in the exporter’s currency than was expected when the contract was signed (and less than at the exchange rate for the exchange risk cover agreed upon with the export credit agency). However, the term is more usually—and loosely—used to refer to circumstances governing the exchange rate used by the export credit agency when paying a claim. Should it be the exchange rate on the date the export credit agency came on risk, or on the date the goods were shipped, or on the due payment date, or on the date when the claim is paid? There is no one right answer, but exporters and investors should be sure they understand the position they are taking and, in particular, what date the exportcredit agency will use for the exchange rate, before taking out an export credit or investment insurance facility.
A type of export credit agency that normally not only issues insurance but also lends directly. Some export-import banks also act as borrowers for import finance. There is no single or perfect model, and an eximbank’s organization, status, and functions usually differ from country to country.
The main type of facility offered by an export credit agency. The term describes a range of facilities and can mean different things in different contexts. Strictly speaking, export credit refers to the credit extended by exporters to importers (supplier credit) or the medium- and long-term loans used to finance projects and capital goods exports (buyer credit). It includes credit extended both during the period before goods are shipped or projects completed (the preshipment period or precredit period) and the period after delivery or acceptance of the goods or completion of the project (the postshipment period or credit period).
An institution providing export credit insurance facilities. All export credit agencies were at one stage government-owned or controlled or, if they were private companies, operated on government account. This is no longer the case, because the position is now rather more complicated, and so there is today probably no single meaning for the term “export credit agency.” It is probably best to define it in terms of the functions of the organization rather than its status. There is, in any case, no single model for an export credit agency. Their organization, function, status, and facilities differ between countries. Ideally, the structure and function of an export credit agency should reflect the conditions in and the needs of the country in which it operates. These can change as time passes, even within the same country. Attempts to transfer a model from one country to another without appropriate adaptation nearly always cause more problems than they solve. Most export credit agencies belong to the Berne Union or the Berne Union’s affiliate organization, the Prague Club for newly created organizations.
The main business of export credit agencies. These agencies issue insurance policies of various kinds with respect of a range of risks against payment of a premium. For export credit insurance, the risks embrace both political and commercial causes of loss that may arise in the precredit period (before shipment), or during the credit period (after shipment). Policies may be issued to exporters (supplier credit) or to banks engaged in financing trade (buyer credit). For investment insurance, the risks are restricted to political risks. In both export credit and investment insurance, the insurance is against specified risks or classes of risk and is therefore conditional, although individual policies may be loosely referred to as guarantees.
A document issued by a bank guaranteeing payment on behalf of one of its clients when all the conditions stated in the letter have been met. This is a very important mechanism of world trade, including for export credit agencies both in their short-term business and, less frequently, in their medium-term business. Letters of credit can take a variety of forms, but essentially they are a means of payment between an importer and exporter via their banks. The importer is sometimes called the opener, and the importer’s bank the opening bank (or sometimes the issuing bank). The bank in the exporter’s country is called the advising bank, and the exporter is called the beneficiary. A letter of credit may be revocable, which means that it can be canceled or modified by the importer or the importer’s bank without prior approval from the beneficiary. Thus, a revocable letter of credit offers little security to exporters. The more commonly used irrevocable letter of credit (ILC) cannot be modified without the prior approval of the beneficiary. Unless the letter of credit is conditional, the bank issuing it effectively assumes the risk of default by the importer, provided that the terms and conditions of the letter of credit are fully met. The advising bank, on the other hand, is not required to pay the beneficiary unless and until it receives the funds from the issuing bank. Thus, even ILCs do not provide full protection to exporters. Letters of credit can also be confirmed. This is done either on an open confirmation basis, in which case the issuing bank is aware of the confirmation, or on a silent confirmation basis, in which case the issuing bank and the importer or buyer may not be aware. Confirmed letters of credit reduce certain risks for exporters, such as the risk that the issuing bank may fail or be unable to transfer foreign exchange. But a key point is that when the exporter seeks payment from the advising (or confirming) bank, it must meet all the terms of the letter of credit. Thus, it is vital that exporters carefully read all the conditions and requirements, as these can sometimes be onerous and may contain provisions that significantly reduce their benefit from the transaction. As many as 40 percent of applications from exporters for payments under letters of credit are rejected because of mistakes in documentation and the like. Obviously, this leads to payment delays. But even under a confirmed letter of credit, an exporter may be exposed to risks such as those that arise before the letter of credit is opened. Letters of credit are subject to widely accepted practices and procedures under the International Chamber of Commerce’s Uniform Customs and Practices for Documentary Credits.
Traditionally, insurance or financing applied over a period of more than five years. But there is no generally accepted or precise division between longand medium-term business.
Conventionally, business with a credit period of between one and five years. However, under the OECD Arrangement, medium-term business is that with a credit period of two to five years. There are no universally-accepted or generally-applied divisions between short- and medium-term business, or between medium- and long-term business.
Medium-term export financing is an important dimension of trade credit, both for necessary capital goods and project-related imports into a crisis country and for selected capital goods exports from the country. During recent financial crises, medium-term trade financing to the crisis countries also declined sharply. Wider use of structured financing and improvements on the incentive structure governing export credit agencies would help mitigate the decline and facilitate an early resumption of new credits. The latter is important for economic recovery in a crisis country.
A public sector lender or insurer. Some official creditors, such as the international financial institutions, are multinational. Others are bilateral, such as individual creditor governments and their official agencies such as central banks and export credit agencies when writing business on government account.
An export credit supported (usually insured) by an export credit agency on government account, rather than on its own account. The credit may be a supplier credit or a buyer credit. For medium- and long-term business, the extent of permissible official support is set by the OECD Arrangement (normally limited to 85 percent of the exported value plus, where appropriate, the maximum permissible share of local costs, normally 15 percent of the exported value).
Trade finance business whereby goods are shipped and delivered and payment is made on the basis of invoice, usually in cash. There are thus no bills of exchange or promissory notes, and the exporter relies on the importer to pay in accordance with the invoice or terms of the contract. Open account business is thus most commonly used where seller and buyer have a good and longstanding trading relationship. Export credit agencies are prepared to cover open account business if they are content to underwrite the buyer.
Confirmation of a letter of credit in such a manner that the importer and the importer’s bank (the opening bank or issuing bank) and, where relevant, the authorities and the central bank in the importing country, are aware of the confirmation.
The risk of nonpayment on an export contract or project due to action by an importer’s or buyer’s host government. Such action may include intervention to prevent the transfer of payments, cancellation of a license, or acts of war or civil war. Nonpayment by sovereign buyers themselves is also a political risk. Political risk is one of the two main categories of risks insured by export credit agencies (the other being commercial risk). Some export credit agencies cover political risks in their own countries, especially the cancellation of export licenses. In recent decades the most common political risk claims have been due to inability to convert and transfer foreign exchange, but in these circumstances buyers must first have made local currency deposits.
Insurance of risks arising during the postshipment period. Sometimes called credit cover.
The period from the date on which goods are shipped or accepted until the last payment has been received. Sometimes called the credit period.
Insurance of risks arising during the preshipment period.
Credit extended for the preshipment period.
The time from the date of an insured contract until the date of shipment (or of acceptance by the buyer)—in other words, the period up to the time the credit period begins. Most export credit agencies offer cover for risks arising in this period, but it is sometimes handled through a separate policy or as an addition to the policy, rather than as part of the standard policy or facility.
The practice whereby an insurer passes on to another insurer (called a reinsurer) part of the risk (and a portion of the premium income) of a policy it has written. Export credit agencies can be involved in reinsurance both as reinsurers and as reinsured parties. Export credit agencies receive reinsurance from their governments or purchase it in the private reinsurance market. These are several varieties of reinsurance (e.g., facultative, quota share, excess loss), but the basic principle is the same. Some export credit agencies (e.g., in the United Kingdom) are beginning to provide reinsurance to some private insurers on political risks in some countries.
Transactions involving a maximum credit period of, usually, 180 days, although under some definitions it can extend to 360 days and, in exceptional cases, to two years. For purposes of the OECD Arrangement, the medium term begins (and, by implication, the short term ends) at two years. Short-term business represents the bulk of the business of most export credit agencies and normally includes transactions in raw materials, commodities, and consumer goods. There is no universally-accepted dividing line between short- and medium-term credit.
A term broadly synonymous with political risk but particularly relevant to defaults by or actions of host governments.
Refers to financial instruments that are devised to provide funding on the basis of identifiable assets rather than the credit standing of the borrower concerned. Includes securitization and forms of lending where the cash flow of the borrower is secured to pay off the lender. See also asset-backed financing.
Credit extended by an exporter (supplier) to an overseas buyer as part of the export contract. Cover for this transaction may be extended by the export credit agency to the exporter. Such arrangements are much more common in short-term business. When they arise in the area of medium-term credit, the buyer normally makes a cash down payment (up to 15 percent) and then accepts bills of exchange or issues promissory notes for the balance, at some stage before final delivery or acceptance of the goods.
A catch-all term applied essentially to the entire area of short-term business, especially that involving finance provided directly by banks issuing letters of credit.
Insurance written to cover the risk (called transfer risk) that a buyer may make a deposit of local currency to pay for an international transaction but find itself unable to convert the local currency into foreign exchange for transfer to the exporter. A claim issued under such cover is called a transfer claim. Such inconvertibility can happen even where letters of credit exist. The risk normally arises from restrictions imposed by host governments, through laws or through regulations that have the force of law. During the last 20 years, transfer risk has been the most important political risk covered by export credit agencies. This risk is also covered under investment insurance, where investors are unable to convert and transfer profits and dividends. Export credit agencies often stipulate shortfall undertakings in transfer situations to protect against the possibility that, even if transfer is possible, devaluation may have rendered the local currency deposit insufficient to purchase the foreign exchange necessary to effect the full transfer. Transfer risk is more complicated when a currency collapses, so that even though foreign exchange may still be available to purchase, its price will have risen sharply in local currency terms since the insured contract was signed (or the insured investment made). These events are probably best looked at case by case.
See transfer cover.
The financing required by an exporter to start or continue to operate and produce goods and services to be exported. Normally, export credit agencies are not directly involved in providing working capital. But many exporters offer export credit agency cover (including cover of precredit risk) to their banks as security for finance, including working capital. (They often accomplish this through assignment or hypothecation of the insurance policy to the bank.) A few export credit agencies are directly involved in the provision of working capital, offering either facilities or guarantees directly to banks. However, this is a difficult and high-risk area, especially if the exporter fails to perform its contractual duties and as a result is not paid by the importer. The export credit agency is then faced with the (usually politically-sensitive) job of trying to recover from the exporter the money it has paid to the bank under its working capital facilities.