In this blog post we take a brief look at export credit agency (“ECA”) supported finance in the asset finance industry, and the development of a new template loan agreement by the UK’s Loan Market Association.
The role of the ECAs
ECA finance describes transactions where states (whether by direct sovereign bodies or by separately mandated organisations) provide (financial) support to would-be purchasers of certain goods or equipment constructed in that ECA’s home jurisdiction.
ECA support can make deals both more bankable and more affordable, and has long been a useful feature of asset and project finance. Over the last two decades, a significant amount of export credit support in the form of both guarantees and insurance has been provided to capital-intensive global projects.
With the increased capital adequacy requirements of the Basel III and Basel IV accords, the importance of the sector has continued to grow. ECAs were once seen as insurers of “last resort” and were largely confined to support high risk financings in emerging markets, with much export credit agency insurance having been counter-cyclical. Whilst the perception remains that ECA support increases in importance as traditional financiers become more reluctant to lend (and so provides a bridge where the required debt finance exceeds the available bank liquidity) they just as often will now be found providing specialised products not available elsewhere, for example political risk insurance.
Development of the LMA form of agreement
Earlier this year, the UK’s Loan Market Association (the “LMA”) launched its new form of loan facility agreement for use in export credit-supported transactions, known as the “Export Finance Buyer Credit Agreement”.
The new LMA credit agreement has, as always with the LMA, been developed by consensus and through working groups and anticipates certain provisions that borrowers are likely to request.
Producing a useable template of this nature is an almost impossible task for ECA-supported deals given the number of variables on both the ECA and sponsor side. Accordingly the LMA has made certain key assumptions in putting together this document, in particular:
- cover will be provided by a single ECA;
- there is a single exporter and a single export agreement;
- cover will be by way of a guarantee or insurance policy and not, for example, by direct lending;
- the ECA’s cover will extend to a specified proportion of principal and interest; and
- the borrower under the financing is the buyer under the export agreement.
The new credit agreement has taken standard LMA provisions and made appropriate amendments for an ECA-supported transaction, including for example the borrower may request advances by way of reimbursement (i.e. where it has already paid the exporter) or to finance the ECA premium (as part of the first utilisation) – as well as permitting drawdown to pay the exporter if sequencing so requires.
Helpfully, certain provisions found only in ECA-backed facilities have been included in the agreement, for example it contains an ECA override, being a clause intended to ensure the financing provisions are not inconsistent with the ECA’s requirements and policies, and an Isabella clause, separating the rights and obligations under the credit agreement from those under the contract for the export of the relevant asset(s) thus ensuring that the borrower’s repayment obligation is clean irrespective of any dispute under the export contract.
There are also additional prepayment events not found in other facilities, for example a prepayment event occurs if the underlying ECA cover is vitiated in some way or if the ECA repudiates, cancels or otherwise suspends the cover.
We anticipate that some lenders will need further prepayment rights than are set out in the new template.
Will commoditisation work?
There are sectoral examples where supporting ECAs have their own mandatory forms of transaction documents (for example all European ECA-supported Airbus deliveries have their own pre-existing template agreements).
However, it is difficult to see how the LMA’s new ECA form of credit agreement will really serve as a precedent in the same way that, say, its leveraged credit agreement does. There is such a wide range of ECA-supported transactions, not to mention that each ECA will have its own bespoke coverage requirements as well. Globally, ECAs have increased in number, leading to greater competition in premia and terms, which also serves to make deviation from a template likely. In addition, internal procedures and processes of any individual ECA will always need to be kept in mind.
Globally, ECAs have increased in number, leading to greater competition in premia and terms, which also serves to make deviation from a template likely.
Further, different ECAs have different issues around certain key topics such as: the ability to waive defaults or enforce security, subrogation, whether break costs are covered, and what consent is required to transfer the loan. There will be others, depending on the sector, the borrower, the commercial lender and the ECA(s) involved.
In any event, most ECAs do not agree to take documentary risk and so the supported lenders will need to be comfortable that the ECA’s requirements have been satisfied. It is important to note that documentation risk in ECA-supported transactions is a lender risk and the LMA has stressed that the new credit agreement is not intended to (and does not) change this.
Impact on loan portfolio transactions
Reed Smith are the global leading law firm in the shipping loan portfolio market, acting for buyers and sellers of performing, non-performing and sub-performing debt. Many of these transactions involve the sale and purchase of ECA-supported loans.
In these transactions, the key issues for a potential buyer or seller to consider are:
- the notice to or consent required from the ECA;
- the counterparty requirements of the ECA (not all potential transferees will be a suitable lender for the ECAs);
- the transferability of the ECA guarantee or policy;
- the interplay with any change of agent or trustee roles and any associated consents;
- the speed at which the ECAs may be able to support transfers; given their purpose is to support exports they may not always be incentivised to support later loan transfers as quickly as a commercial lenders would be; and
- the ECA’s potential requirements for express agreements around subrogation.
Richard Hakes is a partner at Reed Smith and a member of its global Asset & Equipment Finance Group. He has significant experience of asset finance, focussing on the ship and aircraft sectors. He has acted on many ECA-supported transactions in these markets for a diverse range of ECAs and supported lenders.