I wrote earlier that the rules from the Arrangement as they applied until recently were outdated. Since its inception in 1978, more and more rules have been added and it has never been carefully examined whether the existing rules were still necessary or up to date.
At the same time the financial sector, with which an insurer like Atradius DSB always cooperates since we cannot grant credit ourselves, was undergoing enormous development. A development that was not reflected in the rules with which export credits have to comply. Finally, more and more competition arose - certainly for European countries - with countries that interpreted or applied the rules from the Arrangement a little more broadly than we do here where the rules are a legal framework. As I explain here, the international system of rules is complicated and the Arrangement rules are de facto part of the ASCM Treaty.
In this blog, I focus on the changes to the terms and conditions of the Arrangement, not on the equally important strong expansion of opportunities to insure climate-relevant projects on extra favorable terms. That is not my specialty.
The most notable change that was well received by the outside world was the far-reaching simplification of the maximum credit terms allowed. This was a confusing jumble and now becomes much simpler. The main rule is that the credit term is a maximum of the useful life of the good with an absolute maximum of 15 years, regardless of destination country or type of good or service. Refreshing, isn't it? Longer maturities than 15 years can be found in the rules for climate-relevant projects (ranging from 15 to 22 years) and nuclear power plants (22 years).
Then the repayment profiles. There the rules are also relaxed and simplified, although it may not look that way. In the old Arrangement, we had separate rules for project financing. Very simply explained: we speak of this when the loan with which goods and services (the project costs) are largely purchased must be repaid in full from the income that that project then generates itself. Those separate rules disappear and revert to the rules for all transactions.
Again, there is one main rule there, and that is that nothing changes: in principle, a loan - whether it is a so-called buyer's credit (provided by a bank) or supplier's credit (exporter is paid over time) - must be repaid in equal semi-annual installments. The good old straight-line repayment. But... If it is clear that the funds available to the borrower do not coincide well with linear repayments then we can deviate from this from now on. Then, for example, it is possible to have the first repayment take place up to two years - instead of six months - after completion, the last instalment may be a maximum of 30% of the loan amount and other non-linear profiles are also allowed within preconditions. This is complicated so be sure to get in touch about it.
Then there is also a change in minimum premiums. The Arrangement has two premium systems. First, there are the premiums for high-income countries (formerly country class 0) - these do not change. Premiums for all other countries - country classes 1 through 7 - do change for loans or financing with long maturities. If the loan is longer than 10 years and the buyer has a so-called non-investment grade profile (rating BB+ or lower), the premium is reduced for a period longer than 10 years. Sounds more complicated than it is and our premium calculator is equipped to handle it.
That's great! Hopefully, this will allow us to better meet the needs of exporters and financiers. Two more topics that need mentioning. First, the rules for co-insuring local costs will not change. It remains possible to include 50% of the so-called export contract value in the amount to be insured or 40% for high-income countries.
Second, the rules for seagoing vessels have not changed. But now it gets complicated. Those rules for ships - laid down in the so-called SSU, Ship Sector Understanding, formerly Annex I, now Annex IV - have always been optional. That is, each export credit insurer could choose whether to apply those rules when insuring a ship or the "normal rules" from the Arrangement. However, the latter made little sense because they were stricter. But that optionality may now offer an interesting option. So now a seagoing vessel can be insured either under the old rules with a minimum 20% down payment, 12 years maximum, linear repayment and not strictly defined premium rules or under the new general rules with a minimum 15% down payment, 15 years maximum repayment, linear repayment but with permissible adjustments but with the exact minimum premiums from the Arrangement.
Hey, the great thing about this business is that it's always challenging and different every time. Assessing risk and setting the right terms and patterns is only going to get more fun with these new options.