Types of Cover
The types of cover available are as varied as the export transactions themselves. Cover is not only given for the risks before or after shipment; we also distinguish according to the credit period.
Manufacturing risk cover
Manufacturing risk cover offers protection against risks during the goods‘ manufacture, i.e., from the commencement of manufacture up to the point at which they are despatched. It is available either in isolation or combined with an export credit guarantee. It is particularly to be recommended in the case of customized goods. If such goods cannot be delivered, it may prove impossible to find another buyer for them. The insured event for such pre-shipment cover occurs when political or commercial circumstances prevent the completion or the delivery of the goods. The risk of an embargo being imposed is additionally covered. Manufacturing risk cover includes the actual prime costs incurred by the exporter. These are estimated in advance by him and form the basis for the maximum cover amount given. If an insured event occurs, the actual amount of the loss is ascertained by a specially prepared expertise.
The Federal Government has four different forms of cover for short-term export business with a credit period of up to 24 months: short-term specific cover, revolving specific cover, wholeturnover policies, and wholeturnover policies light.
Short-term buyer credit guarantees are given by the Federal Government for receivables due to German exporters for single transactions with foreign debtors. The goods principally covered here are raw materials, semi-finished goods, components, consumer goods and spare parts, for which the accepted credit period is normally only up to a six months‘ maximum. For high-value components and consumer durables, the acceptable credit period is 12 months, and in exceptional cases two years. Apart from political risks, cover also includes insolvency of the buyer and non-payment within six months after due date.
Basically, cover is available for all countries. An exception to this rule applies to exports with credit periods of up to two years to EU member states and OECD core countries (Australia, Iceland, Norway, Switzerland, Japan, Canada, New Zealand and United States). There is one exception to the afore-mentioned marketable risks: for Greece short-term cover is available for a limited period until the end of 2014.
Revolving buyer credit cover
If the exporter regularly delivers to a foreign buyer on short credit terms the Federal Government can also cover this business with a revolving buyer credit guarantee. This procedure gives the same scope of cover and the same premium rate is charged as for short-term specific guarantees. It is much easier for the exporter to handle, however. The planned turnover with a particular foreign customer during the course of one year is covered here on a revolving basis under a maximum cover amount set in advance corresponding to the expected annual turnover. In addition to the political risks covered, revolving supplier credit cover (407 KB) also includes insolvency of the contractor and non-payment within six months after due date if the receivables are due from transactions with private buyers.
Wholeturnover Policy (APG)
A major emphasis of the state export guarantee scheme is the Wholeturnover Policy. Especially for small and medium-sized exporters, it offers an easily manageable and flexible means of comprehensively protecting their export revenues at a good price. A Wholeturnover Policy is a form of multiple transaction policy under which the exporter can safeguard transactions with several buyers in various countries. Cover can be given at a much more favourable premium rate than for specific risk guarantees. In addition, no administration or processing fees are charged. The Wholeturnover Policy has a currency period of two years. Cover for the individual amounts receivable begins on the respective shipment date of the goods.
Cover includes receivables from business with all private customers in non-OECD and non-EU countries with a repayment term of up to 12 months. On request of the exporter, trade receivables payable to affiliates, amounts receivable from public debtors, r eceivables secured by letter of credit, as well as receivables due from the supply of goods and services to the OECD countries Chile, Israel, Korea, Mexico and Turkey can be included. The particular flexibility of this policy is shown by the fact that the policyholder has the option of including new accounts in the cover per policy period.
The Wholeturnover Policy offers protection against the loss of the receivables due to insolvency of the foreign buyer or due to his failure to pay within six months after due date (protracted default) and also against political risks, such as foreign exchange shortages or restrictions in international payment transactions.
Wholeturnover Policy Light (APG-light)
The Wholeturnover Policy Light (currently in revision) is a form of spread cover for export transactions with repayment terms not exceeding 4 months. It is applied primarily by small and medium enterprises with an annual business turnover of up to EUR 1 million but it is also suitable for larger companies which generate only a small coverable export turnover
All trade receivables eligible for cover must be included in the policy. In the interest of making this cover program as easily manageable as possible, there are no options or possibilities of inclusion. For example, receivables secured by a letter of credit or receivables from the performance of services may not be covered.
There is only a single event of loss: The Federal Government indemnifies a covered amount receivable if it remains unpaid six months after due date.
Cover for medium and long-term export business
Medium and long-term export credits are regarded as those with an agreed payment term exceeding 24 months. We speak of medium-term credits in the case of credit periods up to five years, while long-term credits may run for up to 12 years after commissioning of the plant and only involve power plant projects or the financing of large commercial aircraft. For other capital goods, ten years are normally reckoned to be the upper limit. Spread policies or revolving guarantees are unsuitable for the protection of medium and long-term business. Only specific guarantees are available for this purpose. Transactions with a credit period of more than 12 months generally involve an advance payment of 15 % of the order value and the payment of the remaining 85 % in at least half-yearly instalments.
The OECD countries have agreed guidelines for the cover of export business with credit periods exceeding two years. These are intended to provide a level playing field in international competition. These guidelines - also known as the OECD consensus - envisage certain maximum or minimum preconditions such as differentiated premium rates according to country categories and maximum credit periods for certain types of product or for poorer or richer countries.
Cover policy for the individual buyer countries is fixed nationally by each member country of the OECD. In the case of high-risk importing countries, the maximum amount of all risks to be covered may be limited by a cover ceiling. Cover may also only be given on condition that there is a bank or government guarantee for the foreign buyer.
In practice, four out of five middle and long-term export transactions are financed by banks. The risks involved in such tied finance credits can be covered by a Federal Government finance credit guarantee.
Apart from insolvency and political risk, medium and long-term specific guarantees also insure the risk of non-payment of the covered receivables. This also holds true for guarantees safeguarding transactions with public buyers, which otherwise only cover the political risk. This is because non-payment from a public debtor who cannot be put into bankruptcy generally constitutes a risk for the state budget, and is consequently a political risk.
Structured finance and project finance
Structured finance constructions look primarily at the commercial viability of a project. They are thus a means of granting cover for projects deserving of support even if the level of conventional cover available for the country concerned is limited. A form of structured finance which has long since established itself is project financing.
Project financing schemes are complex export transactions in which the operating costs and the debt service for any loans taken out are generated by the project itself. The credit standing of the foreign buyer plays less of a role here than the project itself. In this type of business, the emphasis is thus on an extremely careful analysis and evaluation of the project risks.
A security package tailored individually to each project guarantees that the revenues from the project are used to service the loans. In countries with a substantial transfer risk, it is essential that the hard currency revenues from the project are paid into offshore escrow accounts outside the country of the project.
Cover for buyer credits
Large-scale export transactions are increasingly bank-financed. In most cases, the German exporter gets in touch with a bank which then extends a loan to the foreign buyer, enabling him to pay the purchase price of the German exporter at the point when the goods are delivered.
The bank thus has a claim on the foreign buyer for repayment of the loan. A buyer credit brings the exporter immediate relief for his balance sheet and increased liquidity.
Buyer credit cover is insurance for an abstract claim under a loan contract, unconnected with the delivery of goods. Particular problems can therefore arise if the repayment of the loan is refused by the buyer on the grounds of some deficiency in the performance of the supplier’s contract. For this reason, the exporter is tied to the contractual relationship with the bank via a so-called Letter of Undertaking. He remains liable towards the Federal Government to provide all information concerning the underlying export transaction, must declare himself ready to accept instructions from the government and undertakes, under certain circumstances, to release the Federal Government from its liability to indemnify under the finance credit guarantee.