Export Credit Guarantees of the Federal Republic of Germany Hermes Cover Hermes Cover Special Refinancing May 2005 Export Credit Guarantees of the Federal Republic of Germany I. Refinancing of officially Banks which finance an export transaction by ex- supported export transactions tending a buyer credit to the foreign buyer are also able to refinance the amounts due under Finance The Federal Government provides Federal Export Credit Cover. What the Federal Government has on Credit Guarantees in favour of German exporters for offer here is a Securitisation Guarantee. It gives a export transactions involving the supply of goods bank which has already received Finance Credit and/or the provision of services to a foreign buyer. Cover from the Federal Government the possibility Export Credit Guarantees safeguard the accounts of obtaining refinancing at favourable terms on the receivable due to the German exporter under the capital market. For more information on securitisa- export contract. tion see our Product Information "Securitisation Guarantees". If the export transaction is financed by a finance credit (buyer credit) which is extended to the foreign buyer, the financing bank can safeguard the amounts II. How can the exporter use his due under the loan by taking out a Finance Credit trade receivables for refinancing? Guarantee . In such a case, Finance Credit Cover will normally be granted in combination with a In the case of transactions involving capital goods Supplier Credit Cover in favour of the exporter. or engineering transactions involving the establish- ment of a plant or installation of equipment with If the exporter intends to finance the export trans- medium and long payment terms, one has to distin- action on credit conditions but not by means of a guish between the financing of the production and buyer credit, the exporter itself extends a so-called delivery phase, i.e., financing before shipment, and supplier credit to the foreign buyer stipulating financing after commissioning. It is standard prac- an individual repayment schedule. The Federal tice that during the production and delivery phase Guarantee is then limited to the safeguarding of the refinancing is accomplished by the exporter's the amounts due under the export contract. If the own resources or by means of a capital loan ex- export transaction is not to be refinanced by the tended by the exporter's house bank. exporter's own resources, the involvement of out- side lenders becomes necessary. For this purpose If it is the exporter who has to provide for the the amounts due under the export contract may financing of the export transaction, apart from the either serve as security for a new loan or be sold "supplier credit" in the narrower sense with which (forfaited) to refinance the supplier credit. The value the exporter’s house bank refinances the buyer of the trade receivables increases if the debt is credit on terms commensurate with the payment officially supported by a Federal Guarantee. terms granted to the foreign buyer, non-recourse financing (forfaiting) is another important option. Whereas in the case of the "supplier credit" extended to the exporter by his house bank the amounts due under the export contract are only assigned to the lending bank as security for the loan, in the case of non-recourse financing the trade receivables are purchased by the bank without recourse to the exporter in the event of deficiency in debt repay- ment. An export credit guarantee will then mitigate the risk of a loss of the amounts owing under the export contract and thereby increase the value of the debt with regard to its recoverability. 2 Open and silent assignment Approval by the Federal of the debt Government for the assignment of the Guaranteed Amount and Both forms of refinancing require the transfer (as- contingent claims under the signment) of the amounts receivable to the bank. Export Credit Guarantee An assignment can be accomplished either in an open or silent form: The assignment of the Guaranteed Amount as well as the assignment of the claims under the Export In the case of an open assignment, the foreign Credit Guarantee does affect the privity of contract debtor is notified that the right to payment of the between the Federal Government and the exporter. claim has been transferred to the bank and that the Therefore, the General Conditions for Export Credit bank, as a consequence, is henceforth entitled to Guarantees provide for special stipulations which collect all debts owing under the export contract. distinguish between the assignment of the Guaran- teed Amount and the assignment of the claims In the case of a silent assignment, the assignment under the policy: of the debt is not notified to the foreign debtor and the exporter remains entitled to collect all outstand- If the exporter assigns the Guaranteed Amount for ing debt under the export contract. Whereas in the purposes other than security or collection arrange- case of forfaiting both open and silent assignment ments without prior approval by the Federal Govern- can be applied, the assignment of claims as secur- ment, the Export Credit Guarantee automatically ity for a loan is carried out only in the form of a silent expires. If, in contrast, the claims arising under assignment. the Export Credit Guarantee are assigned without approval by the Federal Government, the privity of Thus, the following options are available to the the Export Credit Guarantee remains unaffected. exporter when using covered trade receivables for However, in such a case the Federal Government refinancing purposes: remains entitled to discharge its obligation by making a payment to the exporter pursuant to • Silent assignment of the claim as security for a § 354a of the German Commercial Code (HGB). loan (without notification to the foreign debtor) • Forfaiting by silent assignment (without notification As a rule, the Federal Government assumes that the to the foreign debtor) assignment always comprises both the Guaranteed • Forfaiting by open assignment (with notification to Amount and the contingent claims under the the foreign debtor) Guarantee. Art. 19 Assignment of the Guaranteed Amount Assignment of If the Guaranteeholder completely or partly assigns the claim for Forfaiting security purposes the Guaranteed Amount for purposes other than security or collection arrangements, the Export Guaranteed Amount Sale of the Guaranteed as security for a loan Amount without recourse Credit Guarantee automatically expires unless the (silent assignment) Federal Government has given its prior written Silent Open approval for the assignment. assignment assignment 3 Export Credit Guarantees of the Federal Republic of Germany Art. 20 Assignment of the benefit of the As a result of the assignment, the right to receive Guarantee (Par. 1) indemnification under the cover policy is also trans- Assignment of the right to payment of a claim under ferred to the bank; the cover policy itself, however, the Export Credit Guarantee is only admissible with is not part of the assignment. Hence, the amount of prior written consent from the Federal Government. the indemnification will be ascertained in consulta- An assignment made without this approval is never- tion with the exporter, who is also obliged to pay the theless valid pursuant to § 354a of the German premium for the guarantee. Commercial Code (HGB); in this case, however, the Federal Government remains entitled to discharge its obligation by making a payment to the Guarantee- Does the assignment require holder. the approval by the Federal Government? When is the request for approval The assignment of the Guaranteed Amount itself is by the Federal Government to be admissible without any restrictions as the assign- made? ment is done for security purposes only; approval by the Federal Government is therefore not re- The request for approval by the Federal Govern- quired. Although the assignment of contingent ment for the assignment of the Guaranteed Amount claims under the Guarantee is also legally valid (including the assignment of the benefit of the without consent from the Federal Government, in Guarantee) must, in principle, be filed prior to the the event of loss the Federal Government would assignment and by the exporter himself. then remain entitled to make any claims payments to the exporter as the original creditor of the debt and accept the claims application from the exporter III. Assignment of the Guaranteed only (§ 354a HGB). Therefore, in the case of an Amount as security for a loan assignment as security for a loan it is nevertheless advisable to get the written consent from the For banks and other financing institutions to agree Federal Government prior to the assignment. to refinance an export transaction they often require that the exporter safeguards the amount due under the export contract by taking out a Federal Export Conditions for the approval by Credit Guarantee and assigns all contingent claims the Federal Government for the under the Guarantee to the bank. In practice, both assignment of contingent claims the Guaranteed Amount and all contingent claims under the Guarantee towards the Federal Government are frequently assigned to the bank as a whole. The Federal Government's approval for the assign- ment of contingent claims under the Export Credit Although in relation to third parties the bank holds Guarantee is subject to the following conditions: the right to payment of the trade receivables under the export contract, due to an agreement between • The privity of contract between the exporter and the bank and the exporter the bank is only entitled the Federal Government remains unaffected. to the assigned amount if a default occurs, that is, • The amount of the indemnification will be ascer- if the loan extended to the exporter is not repaid tained only between the exporter and the Federal in due time. Government. • In the event of loss, the Federal Government is entitled to set off any sums due to it from other export credit guarantees taken out by the same exporter against the indemnification to be paid. • The approval for the assignment does not include any subsequent assignment. 4 In addition, the following special conditions apply The Federal Government's for Wholeturnover Policies and Wholeturnover approval for forfaiting of the Policies light: Guaranteed Amount • The Federal Government gives its general appro- The forfaiting of the Guaranteed Amount is only val for the assignment to a German financing admissible with prior written consent from the institution, i.e., the approval is not restricted to a Federal Government; otherwise the Export Credit particular bank. Guarantee will automatically expire. As a general • The exporter shall name the assignee not until the rule, the same conditions for the approval by the claims processing has started. Federal Government apply for all forfaiting arrange- • The approval includes any subsequent assign- ments. The exporter is informed about these con- ments to German financing institutions. ditions in a letter of approval in which the Federal Government also states that it acts on the assump- tion that both the trade receivables and the contin- IV. Forfaiting of the gent claims under the Guarantee are assigned to Guaranteed Amount the forfaiter: Forfaiting is the purchase of an exporter's trade receivables by banks or forfaiting houses without Foreign debtor recourse to the exporter. The sale of the trade Trade- receivables, which can be done either with or receivables without notification to the foreign debtor, is also accomplished by way of assignment of the trade receivables. The purchasing bank (assignee) there- Exporter Assignment Bank Seller Assignee by takes the exporter's position as creditor. As a rule, the assignee will pay the forfaiting proceeds Contingent claims under the Export to the exporter after presentation of the required Credit Guarantee documents as stipulated in the forfaiting contract. By this means the exporter is able to immediately Federal Government increase his cash position and relieve his balance sheet. Officially guaranteed debt – within the scope of The most relevant basic conditions for the Federal single or multiple transaction policies – is also Government's approval are: eligible for forfaiting without having to cancel the policy; the privity of the Export Credit Guarantee • As a rule, the complete amounts receivable must will remain unaffected. If a Federal Guarantee has be assigned to the assignee; only in exceptional been taken out, it may facilitate the refinancing of cases is a partial assignment possible. the export credit by means of forfaiting or render it • The approval does not include any subsequent possible at all in the first place: The banks are more assignment by the assignee. willing to purchase trade receivables if the amounts • The assignee is required to notify the Federal due under the export contract are protected against Government of the effected assignment. non-payment by an Export Credit Guarantee, in particular with regard to transactions with high-risk markets. 5 Export Credit Guarantees of the Federal Republic of Germany What type of financing institutions The approval by the Federal Government for forfait- does the Federal Government ing by open assignment is subject to the following accept as assignee? requirements being met: The Federal Government • The foreign buyer must give its approval for the assignment. • generally accepts financing institutions domiciled • The exporter remains the contractual partner of in Germany or the EU, Australia, Iceland, Japan, the Federal Government; however, the assignee Canada, Liechtenstein, Norway, Switzerland and becomes a contracting partner with equal rights the United States; under the Export Credit Guarantee. • accepts other foreign financial institutions and • The amount of the indemnification will be ascer- German or foreign non-banking institutions, in tained between the Federal Government and the particular forfaiting and factoring houses, after a assignee. case-by-case examination. • The Federal Government is entitled to set off any sums due from the exporter (e.g. the premium Apart from these basic conditions there are special payable for the guarantee) against the indem- requirements to be met depending on whether the nification to be paid to the assignee, if these forfaiting is carried out by open or silent assignment. sums are related to the respective Export Credit Guarantee. • The assignee is held responsible for all statements What special conditions apply made by the exporter prior to the receipt of the for the Federal Government's notice of assignment. approval for forfaiting of the claims • To set off payments made by the foreign buyer by open assignment? against a possible indemnification, the contrac- tual relation between assignee and foreign debtor In the case of forfaiting by open assignment, the is applicable. financing institution purchases the trade receivables (or receivables secured by bills of exchange or letters of credit) and the exporter, as a rule, receives pay- What special conditions apply ment of the forfaiting proceeds against presentation for the Federal Government's of the documentation to the assignee as agreed in approval for forfaiting of the claims the forfaiting agreement. The foreign buyer has given by silent assignment? its prior approval for the assignment to ensure that the validity of the assignment cannot be contested The approval by the Federal Government for forfait- by him. ing by silent assignment is subject to the following requirements being met: • The assignment must not be notified without prior consent from the Federal Government. • The exporter remains the contractual partner of the Federal Government. The exporter must ensure that he remains able to fulfil the obligations under the Guarantee towards the Federal Gov- ernment in fact and in law. 6 • The amount of the indemnification is ascertained What special conditions apply between the Federal Government and the exporter; for forfaiting by silent or open payment of the calculated amount of indemnifica- assignment under Wholeturnover tion is made to the assignee. Policies and Wholeturnover • The Federal Government is entitled to set off any Policies light? sums due from the exporter (e.g. the premium payable for the guarantee) against the indem- • As a rule, the Federal Government's approval for nification to be paid to the assignee, if these assignment is restricted to trade receivables due sums are related to the respective Export Credit under a specific credit limit, i.e., to the exporter's Guarantee. whole turnover with one specific foreign buyer. • All risks which may arise from the silent assign- • In the case of forfaiting by silent assignment, the ment are excluded from cover. Federal Government may give its approval for the • The assignee is held responsible for all statements complete assignment of all trade receivables made by the exporter before and after the assign- due from every single transaction included ment. under a Wholeturnover Policy or Wholeturnover • To set off payments made by the foreign buyer Policy light (comprehensive approval). against a possible indemnification, the contrac- • As the monthly turnover report submitted to the tual relation between the exporter and the foreign Federal Government under Wholeturnover Poli- debtor is applicable. cies and Wholeturnover Policies light is broken down only by country, the Federal Government has no notice of the individual amounts receivable Is it possible to change the form due from each foreign debtor. Therefore, other of forfaiting from silent to open than with single transaction policies, the exporter assignment? is required to notify the Federal Government of each assigned debt. The name of the foreign In principle, the Federal Government assumes that debtor, date of invoice, invoice number, as well once a decision has been made with regard to the as amount and due date of the debt must be form of forfaiting to be applied, this decision will specified in the notice of assignment. prevail. If, in individual cases, a change from silent to open forfaiting is deemed necessary, the condi- Gertrud Jacobshagen tions for the Federal Government's approval for Dr. Ingo Junker an open assignment apply, which means that now the foreign buyer's approval for the assignment is required. Only in exceptional cases is the Federal Government willing to give its consent to a simple disclosure of the assignment, i.e., the Federal Government waives the requirement that the foreign buyer must give its approval for the assignment. 7 Information on the Export Guarantee Scheme of the Federal Republic of Germany is available on the Internet at: www.agaportal.de Euler Hermes Kreditversicherungs-AG Friedensallee 254 22763 Hamburg GERMANY Visiting address: Gasstraße 27 Phone +49 (0) 40/88 34-91 92 Fax +49 (0) 40/88 34-91 75 E-Mail: email@example.com www.agaportal.de SMEs will receive special advice under the telephone number +49 (0) 40/88 34-90 08 Branch Offices: Berlin, Bielefeld, Bremen, Dortmund, Dresden, Düsseldorf, Frankfurt, Freiburg, Hamburg, Hanover, Cologne, Leipzig, Mannheim, Munich, Nuremberg, Saarbrücken, Stuttgart 09 1606 1205 engl.