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Export finance banks are urging members of the OECD Arrangement on Officially Supported Export Credits to reinstate the rule reducing the down-payment threshold for emerging market borrowers to 5% amid escalating debt risks.

On November 4, a temporary common line which had allowed export credit agencies (ECAs) to cover up to 95% of the total export contract value on sovereign transactions – involving category II nations – came to an end.

The common line was first introduced in late 2021 to counter reported constraints in the private insurance market, and was renewed last November for a further 12 months.

The temporary rule has now been formally wound down and any new ECA deals involving sovereign borrowers must revert to financing 15% of the contract on commercial terms.

GTR understands the 5% down payment was a key topic of discussion at a recent OECD summit held in Paris, and banks, alongside project developers, are calling on member countries to reinstate the rule.

“Given the current interest rate environment and recent cost inflation in supply chains, EBF members would generally be supportive of the current common line being extended beyond 4 November 2023,” says a European Banking Federation (EBF) memo, published ahead of OECD Arrangement talks this month.

In the document – seen by GTR – the EBF suggests participants should look to temporarily extend the line, or even incorporate it “directly into the OECD Consensus”.

The calls come amid warnings over debt sustainability risks in Sub-Saharan Africa, where ECA activity has been patchy in recent years.  

“Projects such as hospitals, or bridges or for water supply do not generate revenues and must be financed out of a state budget,” says Ralph Lerch, head of export finance at DZ Bank. “Having a lower down payment can be critical.”

He tells GTR that greater down payment flexibility is still needed due to political risk insurance constraints for certain developing nations where governments are battling “high levels of indebtedness”.

“The scope of deals that could use the common line were limited, but it has been useful for infrastructure projects, mainly in Africa, and we have also seen few inquiries for early-stage transactions in Ukraine,” Lerch says.

Infrastructure companies also tout the significance of the 5% down payment flexibility for their business.

Gareth Sinnett, head of trade and project finance at NMS Infrastructure, an Africa-focused project developer, says the firm has seen a “significant acceleration in the development of opportunities from early lead into negotiation stage” since the rule was introduced.

Sinnett declined to specify how many transactions NMS has closed during that period, citing client confidentiality reasons.

However, he says borrowers have been more capable of financing the down payment through their internal budgets or a tied commercial loan. “A number of opportunities may not have advanced at 85% support level,” he tells GTR.

Alarik d’Ornhjelm, head of Middle East and Africa, structured trade and export finance at Deutsche Bank, says the flexibility is crucial in countries placed in the OECD’s two lowest risk categories, groups six and seven.

“We are currently working to support numerous infrastructure projects across Africa. In frontier markets, the 95% is hugely important. There are some discussions between ECAs and banks about extending the rule, and we are trying to put forward arguments to agencies, like UK Export Finance, to convince them to extend the line.”

 

A divisive line?

Despite lobbying by European banks and project developers, there is no guarantee that member agencies of the OECD Arrangement will opt to extend the down-payment line for a further 12 months.

Certain participants, including the Export-Import Bank of the United States (US Exim), have questioned the benefits of the down-payment common line, suggesting it undermines their competitiveness.

In September, US Exim published a report comparing its own offering with that of other OECD Arrangement ECAs, noting it was among a minority of agencies who refrained from “fully” adopting the policy.

The Washington DC-based agency said it is “partially constrained” by its charter, which stipulates that “for medium-term financing Exim may not finance more than 85% of the total cost of the exports involved”.

“Therefore, changing the minimum down payment to 5% for all medium-term transactions would require congressional action to revise Exim’s charter. Furthermore, Exim’s medium- and long-term content domestic content policy effectively restricts its ability to change its minimum down-payment policy.”

As detailed in the report, US Exim staff were “surprised” when the temporary measure was renewed in November 2022 and officials at other OECD ECAs were also not expecting the renewal and “had to pivot accordingly”.

According to Deutsche Bank’s d’Ornhjelm, there has been an “inconsistency in how the down-payment line has been applied”, with some European agencies more willing than others to extend support under the 95% rule.

Should ECAs eventually decide to reintroduce the common line, experts suggest the structure may be tweaked.

A high ranking official in the export credit sector familiar with the recent OECD Arrangement discussions tells GTR that member ECAs may propose a new down-payment rule in the coming weeks or months.

Yet they stress any renewal will “of course depend on whether a consensus can be found among participants”.

Over the past two years, local African banks have criticised the down-payment amendment as well as suggestions of private market constraints, and say the rule has unfairly squeezed them out of a “significant” portion of their business.

“OECD members are sensitive to these concerns,” the official says, suggesting any new down-payment rule may be more restrictive and “focused on markets with no private capacity”.

ECAs are still able to apply the 5% rule to transactions filed pre-November 4, yet are unable to do so for new applications.