ECAs combined provide billions in cover or direct financing annually around the world, surpassing even institutions such as the World Bank
By Michael Tichareva
This new month of August we begin off by continuing with our discussion on credit enhancement and risk mitigation instruments to facilitate infrastructure investments, a critical need for Zimbabwe.
This week we take a particular look at the role of Export Credit Agencies (“ECAs”).
These are predominantly public agencies and entities that provide government-backed loans, guarantees and insurance to facilitate exports from their home countries.
ECAs provide cover either by means of insurance to the exporters or bankers or by means of a direct guarantee to the bank or other investors covering a loan to an overseas borrower to finance the supply of goods and services.
The guarantees protect the lender in the event of any default in payment by the buyer or the borrower under a loan agreement.
Such insurance cover or guarantees could be a combination of comprehensive cover, covering both commercial and political risks, or only political risk cover.
Commercial risks are typically covered up to 85%, whilst political risk cover can range from 90% to 100%.
By securing ECA cover, a lender effectively credit enhances the transaction and the ECA substitutes the borrower as the counterparty.
Foreign direct investments are then promoted with infrastructure built and jobs created. ECAs are a major and powerful tool in fostering economic development if used more extensively.
There does not appear to be sufficient evidence of extensive use of ECAs in Africa, although a number of large deals involving ECAs have been announced in the past, with China leading the pack through China Exim Bank and Sinosure.
Others are from North America and Europe.
South Africa is also active through ECIC. It is estimated that the ECAs combined provide more than $450 billion in cover or direct financing annually around the World, surpassing even institutions such as the World Bank Group.
This could help Africa if we take bigger slice.
ECAs aim to be flexible, allowing longer repayment terms of up to 15 years, and, depending on the nature of the transaction, allowing repayments to be made in unequal instalments and for interest payments and principal repayments to be made less frequently than semi- annually.
ECAs provide credible alternatives to effectively credit enhance transactions, especially that most are from countries with investment grade credit ratings.
ECAs are potentially one of the best entities to provide cover for the financing of limited recourse projects. We need to keep this in mind when structuring projects, and ensure that project structures meet the requirements of ECAs.
Most ECAs have been operating for many years and have built up considerable experience of supporting a variety of project finance transactions.
The ECAs are also highly seasoned participants in emerging markets, and are less sensitive to political risk than private lenders.
With their flexibility, ECAs are able to provide a variety of cover options in respect of political and commercial risks pre-and post-construction.
They tend to bring considerable value through the independent approach that they take in assessing deals, often raising issues that are arguably too sensitive for the sponsors to pursue.
They also follow a diplomatic approach at Government to Government level to resolve any particularly sensitive issues, most of which are political.
Most ECAs are also able to support financing in local currencies best suited to the project revenue stream – certainly desirable for infrastructure projects not earning US-dollar revenue.
ECAs around the World cooperate extensively in transactions, building on the strengths of each other. Most ECAs cooperate through cooperation agreements that they have signed with each other.
Apart from other ECAs, most ECAs also partner with other multilateral organisations such as the African Development Bank and the Multilateral Investment Guarantee Agency of the World Bank Group who are also increasingly providing similar cover for member countries.
For ECAs to obtain the appropriate approvals from their credit committees or boards, a full due diligence review and appraisal of the project is necessary, allowing consultants, independent of the sponsors, to confirm the validity of the sponsors – assumptions.
ECAs require a lot of information to undertake their due diligence, typically information required by any investor, which includes, but not limited to: (1) description of the project and its location; (2) the sponsors and shareholders; (3) the technical and financial feasibility; (4) the proposed financing structure; (5) a full list of legal agreements envisaged; (6) a summary of the support expected from the ECAs; (7) an understanding of the risk of government interference; (8) an understanding of the security of revenue stream; (9) an understanding of the legal risks and the laws governing the project; (10) an understanding of the extent of host government involvement; and (11) an understanding of how environmental, social, governance and human rights issues are being dealt with.
Michael Tichareva is the Managing Director of National Standard Finance Africa. He can be reached on email@example.com
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