The Role of Export Credit Agencies Financing in Construction Projects | Vinson & Elkins LLP

Export Credit Agencies (ECAs) are institutions that undertake official export credit activities on behalf or on behalf of governments and whose main objective is to promote the competitiveness of a country by supporting the export of goods and services from their jurisdiction of origin. When considering sources of funding for large-scale construction projects, an owner should not overlook funding from, or supported by, OCE (s).

The role of an ECA in supporting home country entrepreneurs by providing finance for construction projects can be vital. A strategy that solicits bids from contractors in different jurisdictions, each backed by an ACE that provides direct or hedged financing, can lead to increased competition, lower prices, and strengthen an owner’s bargaining power in contract negotiations. .

Due to the eligibility conditions of ECAs and the mandates in which they operate, financing ECAs is unlikely to be as straightforward as traditional bank loans. Below, we outline some key considerations for a homeowner when considering ECA financing in the context of a construction project.

Funding structure

There is no single approach to funding ECA; an ECO can participate in a project through the granting of a direct loan, through insurance coverage or through a guarantee. Some ECAs offer a combination of these options. In cases where insurance coverage or a guarantee is offered, commercial banks (or other financiers) participate in the financing through this ECA facility. This coverage or guarantee offers lenders a significant level of protection against commercial and political risks, and ECA financing can therefore give a homeowner access to a larger pool of financiers than would be the case with bilateral loans or not covered. Most ECAs are also able to extend credit to an exporter by guaranteeing the working capital provided to the exporter by his or her bank (s).

Financing conditions

A number of ECAs that support the financing of construction projects adhere to the terms of the Arrangement on Officially Supported Export Credits (the Arrangement). This aims to promote fair competition between participating ECAs and their governments; the emphasis being placed on the quality and price of goods and services to be exported and on the minimization of competition on credit terms. The Arrangement is not binding but, by virtue of the ‘Comply or Explain’ approach, provides the general framework within which the relevant ECAs will support a construction project, in particular outlining the credit terms to the contract. most generous export that a participating ECA should offer. An owner should therefore keep in mind that while there will be flexibility in the terms and conditions of financing a transaction, there will likely be certain business conditions, such as the maximum loan term, premium rates and the ability to finance local costs, which cannot be waived at. On the other hand, the involvement of an ECA in the transaction can offer invaluable credit terms, including longer loan terms, grace periods for principal repayments through to commercial operation of the project, the capitalization of interest during construction; and the ability to mold the debt repayment profile into a project financed operation. Loan terms will also be influenced by the security structure and the extent to which ECAs draw on income and assets beyond the project.

Eligibility

In most cases, an ECA will only support (i.e. where the project is built (local goods and services) and / or other jurisdictions (third country goods and services). Every project will be different, but an owner should consider Carefully upfront the procurement under the construction contract against the project financing strategy. Any misalignment between the two can result in a financing gap as an owner cannot use the loan facilities for payment of some ineligible project costs a potentially disastrous scenario in a construction project In addition, due to the long lead times of some equipment or materials, it is imperative that a homeowner’s construction and financing strategies be developed in parallel.

There are also project costs that an ECA will not fund and therefore the owner may need to consider other sources of funding. An ECA will also expect that a minimum level of equity capital will contribute to the development of the project by its sponsor and in some cases a portion of that equity must be financed and used for down payments (based on a certain percentage value of the export contract, excluding local costs) before the loans are available for disbursement.

Use of ECA loans

The proceeds from the use of direct or covered loans from ECA may be paid directly to the contractor as payment for the delivery of eligible goods / services and / or as reimbursement to the owner for eligible goods / services already paid for, in each case in accordance with the terms of the construction contract. Regardless of the debit method, detailed documentation is required for each loan use to demonstrate that the goods / services to which the proceeds from the use will be allocated are eligible under ECA policy. Preconditions for uses may include export contracts (i.e., transport documents such as bills of lading, rail waybills or air waybills and any other documents requested under the export contract or by ECA policy.

Price

An owner should be aware that lenders (whether ECA or financiers lending under the guise of an ECA) require payment of upfront fees and commitment consistent with the financing approach. more conventional. As is the case with standard insurance policies, ECAs that provide insurance coverage or a guarantee charge a premium. The level of the premium is determined on a project-by-project basis and takes into consideration a number of factors such as country credit risk and the duration and terms and conditions of the loan (s). Likewise, the availability of the ECA’s political and commercial risk cover should reduce the pricing for commercial banks participating under such cover or guarantee. An owner should ensure cost transparency up front to avoid unforeseen charges once the financing is in place.

Diligence

As is customary for external funding arrangements, the ECAs (themselves and through the appointment of independent advisers) will undertake due diligence, including legal, technical, market, insurance, and environmental and social, prior to ” commit to financing a project. The detailed level of diligence required by an ECA can improve the perceived viability of a project and help an owner attract potential co-investors or other forms of funding. However, the due diligence phase should be factored into the project schedule and an owner should appoint independent advisors at an early stage so that reports are available as soon as the ECA and any covered lender express their interest.

There are obvious benefits to involving an ECA to increase competition, reduce construction costs, and demonstrate long-term support for a project. ECAs play a central role in the development of energy and infrastructure construction projects and, despite some of the more stringent ECO funding requirements highlighted in this article, offer a level of capital and a unprecedented access.

Originally posted in Construction Law – August / September 2021.