Export credit guarantees for the aircraft industry
- Risk management for aircraft financing with Hermes Cover
- Aircraft as collateral in transactions with long credit periods
- International agreements ensure a level playing field
The export of aircraft can also be covered under export credit guarantees (Hermes Cover). In view of credit amounts which may run into hundreds of millions protection against bad debt losses is of great importance. Long credit periods for the financing schemes add to the uncertainty for banks and other lenders. In principle different types of aircraft transactions of a German exporter are eligible for cover, i.e. the export of both complete aircraft and only parts thereof such as engines or inside furnishings.
Key features of aircraft financing (Airbus Guarantee)
Aircraft are usually exported within the framework of leasing transactions in which a bank is involved. The airline wishing to buy the aircraft looks for a bank which funds the transaction. The bank applies for an export credit guarantee which protects it from bad debt losses. The aircraft are the collateral (asset based finance) without which the transaction would normally not materialize. Insurance under Hermes Cover may advantageous for all involved: banks are protected from the risk of bad debt losses against the payment of a premium and it becomes easier for them to refinance themselves on the capital market with an export credit guarantee. Thus jobs are safeguarded both at the exporter and his numerous suppliers.
Aircraft are normally financed over a period of 12 years. During this time the aircraft generate the monies for the payment of interest and principal through their operation.
Hermes Cover has the effect that the exporter (in most cases Airbus) receives the aircraft's purchase price immediately on delivery. For this the lender has extended a credit to the foreign airline. During the credit period of 12 years the airline repays the loan for the purchase price and pays interest to the lender by instalments.
In the event that the airline gets into financial difficulties during this period the Export Credit Guarantee becomes effective. In such a case efforts are made to stabilize the transaction by means of extending the credit period. In most cases the combination of restructuring and indemnification of the lender by instalments helps to keep the project afloat - though over a longer period of time than originally planned. If all efforts fail and there is finally an event of loss, the aircraft have to be remarketed in order to avoid a loss for the Federal budget accounts or to reduce such a loss as far as possible.
The Export Credit Agencies of Germany, Great Britain (ECGD) and France (COFACE) agreed a close cooperation to provide joint cover for the export of Airbus aircraft. Each of the three agencies involved therefore insures the respective national share in the production.
The three Export Credit Agencies jointly developed an insurance model which takes the specific situation of the aircraft industry into account and makes 100 % cover possible.
The OECD "Aircraft Sector Understanding" (ASU) is an international agreement which establishes rules and minimum requirements for the financing of aircraft transactions through state export credit agencies. In tough negotiations at the OECD in which Brazil also took part this agreement was revised in the course of the year 2010 and adapted to the changes in the environment in which the international aircraft industry operates. The new ASU entered into force on 1 February 2011. As from now the premium which already used to be risk-based will mirror the market situation even better through a surcharge which will be fixed on a quarterly basis. The agreement is a Sector Understanding under the OECD Consensus, which establishes rules for state export credits and has been regarded as a cornerstone of fair world trade for a long time.
The Federal export credit guarantees (Hermes Cover) have been the most important instrument of state export promotion in Germany since 1949. Providing protection against bad debt losses for commercial and political reasons has been the central issue especially in connection with supplies to difficult and risky markets.