Financing Guarantee

Page updated 3 Jul 2009

Exporters often use letters of credit, bills of exchange or bank guarantees to facilitate their export transaction. The New Zealand Export Credit Office (NZECO)’s financing guarantee can apply to each of these financial instruments.

Under a financing guarantee facility, a NZ bank grants a credit to the international buyer or the buyer's bank in the form of a letter of credit, a bank guarantee or bills of exchange. The NZECO then provides the lending bank with a guarantee, which covers the risk of default on repayment of the credit.

As with all export credit arrangements, the NZECO shares a degree of the risk with the insured (in this case, the lending bank). The lending bank may then seek recourse back to the exporter. The NZECO can insure up to 90% for commercial risk cover and up to 95% for political risk cover.

A description of the financial instruments and use of a financing guarantee are provided below.

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Bills of Exchange

In international trade, a bill of exchange is typically a written order drawn up by the exporter and accepted by the importer, who is then responsible for paying a specific amount on presentation of the bill at a specified time in the future. The total term of credit is represented in a schedule of bills of exchange, often with consecutive six-monthly repayment dates.

Once the bills of exchange have been accepted by the importer, the exporter often sells the bills to a bank at a discounted rate (it’s called forfaiting). In this way, the exporter is paid in advance and is freed from the credit risk that their buyer may not be able to pay a bill of exchange when it falls due. In turn, the bank can insure against this risk of non-payment, pursuant to an NZECO financing guarantee.

This is summarised in the diagram below:

Letters of Credit

Letters of credit are a means of payment between an exporter and importer via their banks. A letter of credit is a document issued by the buyer’s bank guaranteeing payment once all the conditions stated in the letter have been met.

Essentially, the process is that the buyer requests its bank to open a letter of credit in favour of the exporter. The exporter then asks its bank to confirm the letter of credit. The exporter is able to receive the payment specified on the letter of credit by presenting its bank with the set of documents required by the letter of credit (generally shipping and delivery documentation).

The NZECO’s financing guarantee covers the exporter’s bank’s subsequent credit risk that the buyer's bank will not be able to repay this amount the bank has already disbursed to the exporter.

This process is summarised in the diagram below:

Approval Process

This section provides a step-by-step guide through an New Zealand Export Credit Office (NZECO) guarantee process.

1. The exporter makes an enquiry to NZECO

We recommend that an exporter contacts the NZECO as soon as a potential deal is anticipated, and provides as much of the information available on the deal and buyer as possible.

The NZECO team will perform an initial risk analysis, free of charge.

2. Indicative offer from NZECO

The exporter may then receive an indicative offer from the NZECO, which outlines the potential export credit structure, tenor and terms. A formal letter of support can also be drafted by the NZECO for the exporter to present to their international buyer.

In the event that the initial risk analysis shows that the risk is too high, or that the transaction falls beyond the criteria and guidelines of the NZECO products, the NZECO staff may still be able to suggest ideas about how to reduce the risks associated with the transaction, or how to comply with the NZECO’s criteria.

3. The exporter performs background preparation for export credit transaction

The exporter will have already initiated discussion with their bank or financier, and now will take steps to confirm financing arrangements.

The exporter will need to gather financial details of their buyer or guarantor, including recent annual accounts (audited by a recognised auditor), cash flow forecasts, an independent credit report and information about the buyer’s market.

4. The exporter submits an application form

The exporter submits the NZECO application form and pays an application fee, which is the cost of processing the application further (see 'How We Price' below for further information).

The NZECO and its Agent will then undertake a more detailed credit assessment of the risks before finalising the finance offer. The length of this process is dependent on the level of information provided, size of the deal and degree of risk. It can take as little as two weeks or possibly months for large project finance or direct corporate risk deals.

In the case of complex projects, or projects which are large compared to the size of the exporting company, the exporting company itself will be evaluated. For example, is the exporter likely to, and does it have the ability to complete the contract and what is the extent of its experience and expertise?

5. Finance terms finalised and supply contract signed

The NZECO premium is payable in full prior to the term of the NZECO’s cover commencing.

This means that for pre-credit cover, the NZECO’s premium must be paid once the terms of the finance offer have been finalised and the export supply contract is signed.

For post-shipment cover, the NZECO premium is payable on shipment. In the event the exporter wishes to receive disbursements during production (as outlined in the supply contract) or the exporter is selling the “repayments” to the bank prior to shipping, then the premium is payable on the supply contract signing.

Criteria & Guidelines

In relation to NZECO's export credit guarantee, the NZECO must ensure that its eligibility criteria are satisfied before confirming any commitment. The NZECO is subject to a set of international rules as well as its internal operational guidelines. These are described below.

Currency

Cover can be issued in the following approved currencies: NZ dollar, Australian dollar, US dollar, the Euro, Japanese Yen or UK sterling. Approval of other currencies may be sought on a case-by-case basis.

Risk-sharing

A degree of risk-sharing with banks, or the exporters, is expected and the NZECO will provide a standard level of cover, generally between 80% and 95% of the credit amount, depending on the export transaction.

The risks insured are political and commercial.

New Zealand Content

The New Zealand content of an exported good or service must amount to a minimum of 30% of the total value of the export transaction. As a guide, the value of the New Zealand content may include the following components:

• expenditure on materials to manufacture or produce the goods (excluding the customs, excise or other duties and excluding the cost of materials imported into New Zealand)
• cost of New Zealand labour and overheads;
• the cost of transporting the export goods (shipping or airline fees);
• the cost of any services performed in connection with the supply, installation, erection, operation, training, maintenance or repair of capital goods manufactured in whole or in substantial part in New Zealand;
• intellectual property rights / know how (mainly resulting from work or research in New Zealand); and
• trademark (owned, assigned or first used in New Zealand); and
• Profit or marketing cost elements of their goods in their finished state.

If 30% local content is not reached then the NZECO can co-insure with another export credit agency or limit cover to the New Zealand value added component.

NZECO’s Prices

International rules require the NZECO to fully cover its costs.

Accordingly, the NZECO levies premiums and an application fee in relation to each of its products. These prices are set to fully recover operating costs, anticipated losses and the Crown’s cost of capital. There will be no subsidisation to the New Zealand export sector by the NZECO’s operations.

Advance Payment

A minimum cash advance payment of 15% of the export contract value is required to be paid before the starting point of credit. It is a condition of the NZECO’s risk cover that the exporter has received this advance payment from their international buyer.

This advance payment is not part of the guaranteed credit amount.

Term of Credit and Repayment

Along with other OECD export credit agencies, the NZECO is obliged to follow the OECD Arrangement on Guidelines for Officially Supported Export Credits (“the Consensus”) in relation to all export credit transactions greater than two years. The Consensus describes the most generous export credit terms and conditions that may be supported by its Participants, with the aim of achieving a level financial playing field regarding their use.

The Consensus has set maximum credit terms for every country (between 5 – 10 years), as well as for certain industries. Generally, the buyer has to repay the export credit in equal instalments and at intervals no longer than six months. The first repayment must be made within six months from the starting point of credit.

The interest is calculated on the credit amount outstanding on the occasion of the interest payment (which is also at intervals of no longer than six months).

The minimum credit term that the NZECO can normally support is one year, because the NZECO’s operational criteria is to complement the private insurance sector’s short term credit cover by offering medium to long term credit cover.

Local Costs

Local costs are the expenditures incurred for goods or services (excluding any commission payable to the exporter’s agent) in the buyer’s country.

The proportion of local costs that can be supported on credit terms in an export transaction must not exceed 30% of the export contract value.

Collateral for Payment

In certain cases the NZECO may require collateral in order to cover the risk associated with a transaction. As an example, this may apply in cases where it is difficult to assess the buyer’s risk, or where the buyer’s credit rating is not good enough.

Collateral may take the form of a payment guarantee, a letter of credit, or a contract for a bill of exchange from either a bank or company approved by the NZECO.

Sustainable Development

In partnership with other OECD export credit agencies, the NZECO pays particular attention in its underwriting activities to environmental considerations and to combating corruption.

Exporters applying to the NZECO for a guarantee will be asked to briefly describe any environmental effects that their export transaction may involve. The assessment covers both the external environment and socio-economic and cultural conditions. Read more about the NZECO’s environmental policy and guidelines for environmental assessment.

The NZECO also does not accept corruption, and will require every exporter applying for a guarantee to verify that no bribes have been paid in connection with the transaction in question. The NZECO’s guarantee will cease to be valid should it later emerge that bribes were paid. Read more about the NZECO’s anti-bribery policy and procedures.

How We Price

In order for the New Zealand Export Credit Office (NZECO) to be self-supporting in the long-term, the NZECO levies a premium and application fee in relation to each of its products. These amounts are consistent with international practice and adhere to OECD and WTO guidelines.

Premium

The premium you pay for your guarantee is fixed on an individual basis and is intended to cover the risk that the NZECO is taking. Accordingly, your premium is calculated based upon factors such as the credit amount, the percentage of cover, the duration of risk, and upon an assessment of the political and commercial risks related to the transaction in question.

Political Risk

The NZECO’s assessment of political risk primarily focuses on a country’s ability to transfer currency for foreign payments.

This assessment is guided by the OECD’s country risk gradings which attempt to measure the likelihood that a country will default its external debt. The gradings range between 0 (very low risk) to 7 (very high risk).

The NZECO’s individual country gradings are listed under the Country List tab.

Other factors of a political risk assessment include the risk of intervention by a public authority and what effect the country’s regulatory environment may have on your export transaction.

Commercial Risk

The credit worthiness of your international buyer is a very important factor in assessing the commercial risk. This includes an assessment of your buyer’s ability to pay on each due date and to recover funds in the event of default. The NZECO’s assessment is based on your buyer’s financial position, market position as well as their industry and country.

The NZECO has six premium classifications of debtors:

The NZECO premium is payable in full prior to the term of the NZECO’s cover commencing.

Application Fee

The NZECO charges application fees for each offer or guarantee cover issued by the NZECO.

The application fee is 0.1% of the guarantee amount applied for. The minimum application fee per case is NZD 2,000 but will not exceed NZD 40,000 per case. Application fees of NZD 15,000 and over will be rebated against the premium.

The application fee will be invoiced when the NZECO has undertaken an initial review of the transaction and determined that, on the face of it, the transaction meets the National Interest criteria and can be further processed.

Fees are negotiable under special circumstances.