Supporting UK Exporters

May 2015

David Ludlow

Introduction

• The UK Government has a challenging aspiration for growing UK exports

• By working with organisations, such as Chambers of Commerce and British Business Groups, we can help make your members aware of the broad range of support they can get from FCO & UKTI’s:

o Extensive presence and recognised status in global markets

o High level contacts with potential overseas buyers/partners, government decision makers, and local management of UK exporters

• …and UKEF’s

o Ability to provide financial support to UK exporters, and overseas buyers procuring from the UK

o Almost 100 year track record of providing that support

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Background To UK Export Finance

• UK Export Finance (UKEF) was formed in 1919 and is the world’s oldest ECA, our primary function being to support the export of UK goods and services

• UKEF is the operating name of Export Credits Guarantee Department (ECGD) and is a government department in its own right

• We provide insurance and other financial support which complements the private market, and can signpost exporters to relevant financial service providers

• We operate within the conditions set out under the OECD Arrangement on Officially Supported Export Credits

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What An Exporter Needs

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• Competitive product/service

• Provide attractive financing terms to buyers

• Capacity to produce/deliver it & meet buyer’s contractual requirements

• Confidence they will get paid (on time...)

• Provide additional financial support / working capital

• Help put bonds in position

• Understanding of market / business counterparties

• Insurance

• Buyer finance

Requirement

How Government Can Support

UKEF’s Product Suite

Products to Support Exporters

• UKEF’s mandate is to complement the private market, not compete with it

o For insurance products, we can step in when private sector unable to provide an appropriate solution; for bank products, when insufficient headrooom available

Trade Finance & Insurance Solutions

• Export Working Capital Scheme

• Bond Support

• Letters of Credit Guarantee

• Export Insurance Policy

• Bond Insurance

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Case Study: Export Working Capital Scheme

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• Page Bros won a two-year contract, worth £3.3m, to supply printed academic material for an educational body in the Far East

• The costs of buying the necessary supplies would have put a strain on the company’s working capital

• UKEF agreed to help Page Bros’ bank to increase the company’s working capital facility by guaranteeing half the amount for three months.

Case Study: Bond Support Scheme

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• In Feb 2013 Micron Sprayers won a £1.2m contract to supply French cotton producer Sodecoton with sprayers for its small-scale cotton farmers in Cameroon.

• The company had negotiated a 40% advance payment to fund the purchase of components, but needed its bank to issue an advance payment guarantee (APG). The company had an existing facility with their bank, however the APG would have used most of it up, making bidding for other export contracts difficult.

• UKEF guaranteed 80% of the liability for the APG, under its Bond Support Scheme, leaving the existing facility untouched and allowing Micron Sprayers to bid for new contracts in Africa, confident they could cover further bonds.

Case Studies: Insurance

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Export Insurance

• UKEF provided an EXIP for 95% of a £130,000 contract value to design and build a two-tier storage solution for mining core samples for the Ethiopian Ministry of Mines in 2011.

• With payment assured, the equipment was delivered in May 2014.

Bond Insurance

• UKEF provided two bond insurance policies (against an advance payment and a performance bond) to London-based Houlder.

• This allowed them to take on a contract to project manage the construction of a floating storage and offloading vessel off the coast of Libya,.

Medium & Long Term Financing

UKEF can either guarantee a loan from a commercial bank or, offer direct lending which

would be administered by a partner bank

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Cost Of Cover/Premium

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• UKEF charges for the services it provides (and arranging banks will also charge fees)

• Premium is determined on a case-by-case basis

• OECD sets the bench mark rates

• Premium is based on credit risk and length of contract performance, and repayment terms

• Can be paid up front or partially financed

• Premium is separate from the interest rate which is paid on the loan:

o Floating rate when bank guarantee

o Fixed rate when direct lending

o Or combination of the two

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Other Criteria

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Environmental Standards

• Projects need to meet IFC (World Bank) standards on environmental assessment

• UKEF will work with borrowers to ensure that any supported project will meet these standards – important to engage early

Bribery & Corruption

• Exporter declarations and representations on how contract was acquired

• Disclosure of activities of any agents or representatives involved

• Required to enter into a formal agreement with UKEF

Sustainable Lending Criteria

• UKEF support to certain low income countries is subject to OECD rules on sustainable lending

• Applies to official export credits with a repayment term of 1 year or more to public / publicly-guaranteed buyers in low income countries

• Export credits should not endanger financial future and long-term development prospects

• UKEF uses a ‘sustainable lending questionnaire’

• DfID recommendation/ HMT approval

The Benefits Of Using UKEF Financing

• Exporter, which has to be UK operating entity, gets payment on ‘Cash Terms’

• Additional source of funding for project sponsor / importer, in range of currencies (e.g. USD, GBP, Euro, Yen, RMB)

• Finance for up to 85% of contract value

• Credit period typically 2-10 years (with some sector specific exceptions); up to 14 years for project finance, plus construction period

• Flexible in terms of UK content – minimum 20% (and up to 30% local)

• Grace period may be considered for interest payments during construction period

• Low interest rate (reflecting UK Government guarantee)

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Case Studies: Oil & Gas

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• UKEF provided US$870m loan for the US $19bn Sadara petrochemical project in Saudi Arabia, sponsored by Aramco and Dow Chemicals, supporting UK based exporters including Jacobs, Foster Wheeler and Fluor

• Initial Letter of Interest from UKEF issued in 2009. Deal signed 2013

• A guarantee for a line of credit from UKEF for Petrobras ensured the company could source up to US$600m of equipment and services from the UK.

• This also meant that Petrobras could continue to benefit from the UK’s established expertise in this area.

Case Studies: Vehicles & Machinery

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• Swift Transport Ltd in New Zealand wanted to refresh their fleet of ageing vehicles and approached Ltd UK manufacturer of buses, Alexander Dennis, for a solution

• UKEF was able to facilitate the transaction by supporting the lending for the project to the value of NZ$107.9m

• UKEF supported JCB in their supply of backhoe loaders to Turkish company, Sif İş Makinaları Pazarlama San. ve Tic. A.Ş. (SIF)

• The guarantee provided by UKEF allowed SIF to source £30m of equipment from the UK

Case Studies: Transport

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Airport sector

• UK Export Finance supported the Tanzanian Airport Authority by financing the construction of a third terminal at Julius Nyerere International Airport in Dar Es Salaam.

• Provided reinsurance on the Eur54m UK element of a total Eur133m contract, financed by global trade credit insurer Atradius

Rail sector

• US$48m contract for supplies and services to the Santiago Metro Railway system in respect of Balfour Beatty

• Development of metro systems for Ha Noi and Ho Chi Minh City, Vietnam for UK companies providing the design, engineering and construction services; US$1bn worth of Expressions of Interest

Aerospace

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• Largest element of the portfolio, accounting for approximately 60% of business.

• Most transactions are co-financed deals between the UK and the French and German ECAs (on the basis of each country’s contribution to the Airbus product)

• Airline customers are allocated a ‘lead’ ECA, based on discussions between the three Airbus ECAs. The general principle is that each ECA will lead for 1/3rd of Airbus’ airline customers, with the other two Airbus ECAs then providing support by re-insuring their national portion

Case Study: Hospital Construction in Ghana

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• In October 2012, UKEF guaranteed a $162.2m loan to the Ghanaian Ministry of Finance

• This financed a $175m contract between the Ghanaian Ministry of Health and NMS Infrastructure for the construction of 7 district hospitals. The contract included medical supplies and an integrated IT system.

• NMS is a small organisation which operates by appointing and managing a series of sub-contractors (mainly SMEs).

• NMS has produced a “Ghanaian solution to a Ghanaian problem”.

• The first of these hospitals is due to be opened in Dodowa later this year.

Conclusions

Key Messages

• UKEF complements the private sector

• UKEF ready to support projects involving UK based exporters of goods and services with tried and tested product suite

• In particular, UKEF financing offers:

o Alternative source of funding

o Very flexible UK content requirements

o Long tenors

o Attractive funding costs

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And Finally!

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UK Export Finance voted

“ECA of the Year” by Global Trade Review in 2014

This document has been prepared for information purposes only and does not constitute legal, financial or investment advice; nor does it constitute an offer or commitment of any kind of the part of the Export Credits Guarantee Department to provide any form of support or assistance; and it is not intended to create any legally binding obligations.

David Ludlow International Business Development Director Tel: +44 (0)20 7271 8122 Email: david.ludlow@ukef.gsi.gov.uk

For further information please visit: www.gov.uk/uk-export-finance

Additional Material

Export Working Capital Scheme

• Intended to be used in circumstances where the exporter needs access to working finance in relation to specific export contracts

• Under the scheme, UKEF risk shares with a lending bank on the loan facility being provided to fund the working capital required for an export contract

• Up to 75% of the export contract can be financed this way, with an 80/20 level of risk share between UKEF and the lending bank.

• Useful where a UK exporter wins an overseas contract that is higher in value than it would usually handle

• Export contracts with EU and ‘rich’ OECD eligible

• The lending bank pays UKEF a proportion of its interest margin

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Bond Support Scheme

• Provides support where an exporter has a bonding requirement in relation to an export contract but its bank may not be in a position to issue a contract bond

• Also relevant where the exporter’s bank has been asked to indemnify another issuing bank

• UKEF is able to risk share with the bank and provide a guarantee on up to 80% of the value of the bond

• In the case of an Advance Payment Guarantee, this can enable the release of 100% of the related down-payment

• In doing so, it allows the exporter to take up contracts which it would normally be unable to pursue due to financial constraints

• The lending bank pays UKEF a proportion of its margin

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Letter Of Credit Guarantee Scheme

• Can provide support when an exporter has a goods or services contract that is being financed by a Letter of Credit issued by an overseas bank

• UK bank is required to add its confirmation to the Letter of Credit but may not have the credit appetite to do so

• UKEF can guarantee between 50% - 90% of the value of the Letter of Credit, thereby reducing the level of risk to the bank

• Goods must be shipped from the UK

• UK confirming bank pays UKEF a guarantee fee, which is typically a proportion of the fee it receives for confirming the Letter of Credit

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Export Insurance Policy

• Insures the exporter against the risk of non-payment or, the risk of not being able to recover the costs of performing the contract due to specified events

• Cover is available for up to 95% of the contract value, with no minimum contract value

• Can be arranged to cover specific buyers as well as individual contracts; contract must be less than 2 years

• Restrictions include EU and ‘rich’ OECD Markets

• UKEF does not compete with the private market but we can work with qualified and approved credit insurance brokers

• UKEF determines premium payable on a case by case basis and charges the exporter directly.

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Bond Insurance

• Taken out by the UK exporter against a bond (tender, warranty, advance payment etc.) that has been issued by a UK bank for the benefit of an overseas buyer

• Provides comfort particularly where the wording of the bond provided by the overseas buyer is wide ranging and callable in multiple events

• The policy is intended to protect against unfair calling of the bond and fair calling of the bond due to capricious / political events

• UKEF determines premium payable on a case by case basis and charges the exporter directly

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UKEF Major Export Contract Process

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