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International business

Companies are putting protective mechanisms in place for their export activity in order to help them continue internationalising.

Learn about the ideas and tools at your disposal to reactivate your export activity safely.
Exportar con red: así se protege la internacionalización de las empresas
Category
International business
Content type
News
Written by
Editorial Dept
Reading time
10 minutes
Published
20 Jun 2022
Spain has beaten export records. In 2021 alone, it exceeded €300 billion, even beating pre-pandemic levels. This is partly due to the support of financial institutions for the internationalisation of companies and the range of hedging instruments offered by Cesce to minimise risks for both exporters and banks.

The Spanish trade balance is tilted towards the European Union, due to logical economic, political and geographical ties, but Spanish companies are expanding their horizons towards less explored regions. They have their sights on countries where ignorance and risk perception is much greater. This is where the insurance architecture of the Spanish Export Credit Insurance Company (Cesce) comes into play.

Cesce is the Spanish Export Credit Agency (ECA) since 1972, having just celebrated its 50th year of supporting the internationalisation of our companies. As an Official Export Credit Agency, it is a public support instrument that provides a type of coverage for exports that other private entities could not assume due to the high risk, either due to the characteristics of the buyer or the political situation of the importing country: instability, legal insecurity and possible confiscation and nationalisation.

We only have to look at the world today to understand the importance of coverage of this type in times of uncertainty. Cesce intervenes precisely when the market is not capable of assuming these risks, especially when the financing terms associated with exports exceed two years. It provides coverage without minimums or maximums. Cesce guarantees transactions worth thousands or millions of euros.

Export insurance helps companies: access working capital financing to prepare their exports; importers finance their purchases; secure the guarantees required abroad; and minimise the risk of default due to insolvency or political problems in the destination countries. At Bankinter we work with Cesce to offer financing and this type of coverage to Spanish companies. We will now describe the Cesce instruments most used by exporters.

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1. Supplier credit: the coverage that SMEs use the most

Spanish exporters need coverage to minimise the risk in their trades abroad, both due to default and unilateral termination of the contract by the buyer. That is where supplier credit comes in.

Companies have to focus on offering the best products and services and the most competitive price, but sometimes that is not enough: the buyer must be offered a suitable financing option. This option should also allow supplier credit, with the the bank acting as beneficiary of the policy. This factor can be decisive when it comes to securing an export contract.

These are the characteristics and advantages of this instrument:

  • Versatility: it suits a very broad spectrum of countries and customers. In 2021, for example, they covered transactions worth between €13,000 and €10 million.
  • Financing is offered by the bank, if the exporter chooses to do so, via receivable discounting.
  • The policy covers the risk of default by the buyer and even the risk of unilateral termination of the contract.
  • The exporter is compensated for the net loss incurred by not being able to finish the export transaction.
  • The applicant and the insured is the exporter, not the buyer.
  • The bank can be designated as beneficiary of the policy if there has been financing.

In 2021 there were 71 transactions of this type and the destination countries were mainly Mexico, Pakistan, Egypt, Vietnam, Saudi Arabia, Germany and Morocco. To make supplier credit even more attractive and effective, Cesce launched an extra instrument just a few months ago: certificates of coverage.

Certificates of coverage

It is a service associated with the supplier credit policy, not an independent product, which the financial institution can request from Cesce so that it specifies whether the policy terms and conditions are met on the certificate issue date.

The certificate of coverage is the result of years of experience with these policies and feedback that Cesce has received from exporters and financial institutions. For financial institutions, being designated as a beneficiary in the supplier credit caused some amount of uncertainty, which these certificates now solve. The certificate of coverage offers greater security on the receivables presented by the exporter for discount. There may be as many requests for certificates as there are milestones (invoices) in the course of the export transaction.

The certificate will be a boost for supplier credit. This instrument is in fact already changing the way that exporters negotiate contracts with their customers, for example, adding financing expenses to costs or introducing clauses on early termination.

Certificates of coverage

2. Buyer credit: the policy that covers the bank against possible defaults

The main difference with supplier credit is that this policy covers bank financing offered directly to the foreign buyer by the exporter under more attractive conditions than if they had received it in their country. In this case, the Spanish exporter gains in competitiveness by giving the buyer access to ad hoc financing which is covered by Cesce's policy.

These are the characteristics and main advantages of the transactions covered by buyer credit:

  • The bank offers financing to the buyer through a credit agreement to be able to meet payments to the exporter.
  • The foreign buyer becomes a debtor of the bank, not of the exporter.
  • Insurance covers default by the importer on the fees owed to the financial institution whether due to insolvency or external political causes.
  • With this method, the exporter receives payments from the bank and not from the foreign buyer.
  • The insured is the financial institution and the debtor is the importer.
  • The insurance covers up to 99% of the risks, both commercial and political.

It is a more complex product than supplier credit, and is therefore more common in large and longer-term export transactions. In fact, in these instruments there is usually a minimum amount that mitigates the use of a more complex financial structure.

3. Other policies: execution of guarantees and working capital

Execution of guarantees and working capital

Current assets policy.

It has been a widely used formula during the pandemic by giving companies greater access to financing to cover their working capital needs, in other words, to prepare for an export contract. This policy covers 50% of the risk of default on a credit granted to the Spanish exporter to undertake their export projects. The debtor is the exporter.

Guarantee execution policy.

In this case, the insured is also the bank and the debtor is the exporter. This policy, with 50% coverage, covers internationalisation transactions where the exporter must provide guarantees or bonds to the foreign buyer or the public administration. If they execute the guarantee, rightly or wrongly, the policy covers the breach of this payment obligation by the Spanish company.

4. Green policies: sustainability is also being applied to exports

With the recently implemented green policies, Cesce improves the conditions of export coverage for projects that contribute to combating climate change and protecting the environment, in line with the Paris Agreements and global decarbonisation goals.

What can be considered a green objective in an export transaction? These policies adopt the European Union taxonomy and Annexe IV of the OECD Arrangement that envisage more favourable financial conditions for export projects that mitigate the effects of climate change, promote renewable energy, preserve biodiversity and aquifer and marine resources, reduce pollution and foster the circular economy.

Projects that fit these criteria will have access to better terms and conditions for these three coverages:

  • Buyer credit
  • Supplier credit
  • Construction insurance

What exactly are these more favourable conditions? Projects will be considered priority, processing fees will be refunded at the time of signing the policy and the domestic content rule will be relaxed: goods and services of Spanish origin may represent 30% of the credit insured by Cesce, instead of the 50% required as a general rule.

For transactions subject to the OECD Arrangement, the conditions will be discounted. For example, in some cases repayment periods will be extended up to 18 years.

The country risk map and solutions to offset exposure

One of the most interesting features of Cesce is its country risk map. This tool allows exporters to assess whether or not to expand their business based on a series of economic, political and legal certainty indicators. We must not forget that Cesce updates 375 million data daily. The Spanish Export Credit Agency (ECA) monitors not only the country risk but also the risk of thousands of customers of Spanish companies abroad. Their information is used by practically the entire Spanish financial system to assess risks.

Cesce delivers detailed reports by country and calculates country risk weights with a score of 1 to 7, 7 being the worst score. This score currently affects countries such as Russia, Belarus, Moldova, Bosnia-Herzegovina, Montenegro, Argentina, Venezuela and Nicaragua and entire regions such as the Sahel and the Middle East. It acts as an export risk thermometer.

There is also the possibility of consulting the degree of coverage offered by Cesce in the short and long term country by country. This is where the system again proves its strength, by insuring transactions in countries where exports may be more risky.

The country risk map and solutions to offset exposure

Information taken from the webinar“ Tools for the reactivation of exports” organised by Bankinter's CFO Forum with the participation of:

  • Roberto Carrasco: Commercial Head of International Business at Bankinter.
  • Irene Ciria: Senior Operations Analyst on behalf of the State at Cesce.
  • Louis Bleda: Head of International Business Structuring at Bankinter.