ECGD cancels fixed rate export scheme

The UK’s export credit agency ECGD has announced that it will close its fixed rate export finance (FREF) initiative by March 30, 2011.

The scheme may even close earlier if its budget is used up before the closing date.

“The closure decision is consistent with the government’s long-standing aim of abolishing the scheme,” says the ECA in an issued statement.

According to ECGD, the scheme has had little uptake and its closure should not aversely affect UK exports.

However, Hugh Bailey, director of the British Exporters Association (BExA), claims to GTR that the amount of people using FREF may be misleading: “Even though little used, it is important for UK exporters to be able to offer their customers the option of FREF at the bidding stage, because failure to do so may count against the UK exporter in the tender evaluation process, or indeed, disqualify the UK exporter for being non-compliant.”

Furthermore, Bailey says that there is a strong argument for the scheme to remain in place because it hasn’t had much uptake: “On the basis that it has been little used, retention of the facility will incur little cost for ECGD, whose positive operating income as a whole can easily cover it.”

The FREF scheme was designed to boost UK exports by providing fixed rates of interest on medium and long-term finance to overseas buyers.

ECGD provides FREF support through interest equalisation arrangements between itself and the lending bank.

This means that a bank can offer fixed interest rates to overseas buyers by ensuring that it will, at the end of each interest period, receive from ECGD any shortfall between the amount of interest at the agreed fixed rate and the amount that would have been receivable if the interest rate had been set to Libor, plus the bank’s margin.

The scheme was initially due to end just on January 30, 2008, but the raging liquidity crisis meant that the UK’s ECA reassessed and opted to prolong its support.

“We believe that without such FREF support from ECGD, these deals could not be concluded. We have no reason to believe that this market requirement will change in the near future, particularly against a background where other ECAs continue to offer FREF support to their exporter base,” wrote James Caldwell, executive vice-president of export finance at BAE Systems, in 2008 in a response, seen by GTR, to ECGD’s 2007 public consultation.