UK Export Finance Main Features of the Export Refinancing Facility:

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1 UK Export Finance Main Features of the Export Refinancing Facility:

2 Main Features of the Export Refinancing Facility (ERF) Summary UK Export Finance s Export Refinancing Facility (ERF) will help overseas buyers purchase goods and services from UK exporters. A typical ERF deal would see a bank provide a $150m loan to an overseas buyer in order to purchase UK exports. The buyer will have the option at any time during the term of the loan to request that UK Export Finance guarantees a refinancing of the loan. This would normally be via issuing bonds in the debt capital markets. The UK Export Finance guarantee of the repayment of the bonds will allow the bonds to be priced very competitively, taking account of the UK s credit rating. UK Export Finance will undertake that, if the overseas buyer is not able to refinance the loan within the first year after the final date for its disbursement (the disbursement of the loan is often spread out over 3-4 years), for example because there has been a crash in the financial markets, UK Export Finance will purchase the loan and become the lender until the debt capital markets (or another funding source) becomes available. If UK Export Finance takes over the loan in this way, a higher interest rate will apply. Why has UK Export Finance introduced ERF? Following the 2007/8 international financial crisis and the Euro crisis, European banks experienced severe difficulties in funding medium and long term export finance. Whilst the crisis has eased, the ERF will provide confidence that UK Export Finance will provide funding in the event of future commercial lending difficulties. Equally, ERF provides a mechanism that relieves banks of long term lending commitments which are less attractive in today s funding environment and also provides a means for exploiting competitive funding that is available in the debt capital markets. ERF is therefore designed to address past, current and future export finance challenges. The ERF utilises the most efficient parts of the financial markets, and will help the competitiveness of UK exporters. What it is The ERF is a commitment that, in the event it is not possible to refinance a loan (e.g. through the capital markets), UK Export Finance will take over the loan at a fixed date. With the ERF, banks have increased latitude to provide funding for UK Export Finance backed loans as it allows shorter-term funding of long-dated assets; and ERF allows exporters to utilise the highly competitive funding that is often available in the debt capital markets. 2

3 Size of scheme The ERF has a cumulative ceiling of 5bn - however as refinancings take place capacity is released. Start date The ERF opened for business on 30 April 2014 Eligibility Open to any bank or financial institution eligible to be a lender under a buyer credit facility guaranteed by UK Export Finance. The ERF is most suitable for loan values in excess of $150m and for borrowers with some familiarity of (or desire to be involved in) capital market financing. Type of loans: loans denominated in US dollars, Euros and Yen backed by a UK Export Finance guarantee. Other currencies can be considered (on application). Loans to borrowers in the EU are not eligible under the scheme. Available sectors The ERF is available for all market sectors however any bank with defence-related buyer credit loans may need to confirm there is market appetite for a bond issuance. UK Export Finance also offers a separate refinancing facility for aviation deals. Bank loan features The borrower and the bank determine, within acceptable parameters, the arrangement fees, administration charges, commitment and agency fees. The bank loan must be provided at a floating rate of interest. The bank and the borrower agree the margin during the disbursement period. Refinancing the loan via the debt capital markets This involves the replacement of the buyer credit facility by a bond issue. The proceeds of the bonds are then used to prepay the bank s buyer credit loan. This benefits the lending bank, as their lending commitment under the buyer credit facility is then released and can be recycled via fresh lending. As UK Export Finance agrees to guarantee the repayment of the bonds, the borrower will usually be able to secure a lower cost of funds. This is because the debt capital markets are currently less liquidity constrained than the banks to fund long dated loans, and have historically offered the lowest interest rates. Refinancing timing The precise timing of refinancing the loan is determined by the borrower and the bank. Refinancing can take place on any date under the buyer credit facility but if refinancing does not take place within one year after the final draw-down date, UK Export Finance is required to purchase the buyer credit loan, at an increased interest rate. The borrower may choose to refinance the buyer credit loan in tranches as advances are made. 3

4 BPS Failure to refinance If the overseas borrower is not able to refinance the buyer credit facility within one year of the final draw-down date for example, because there is a crash in the financial markets, UK Export Finance will purchase the loan (at a higher rate of interest) and become the lender until an alternative funding source becomes available i.e. the ERF is designed so UK Export Finance does not hold onto the loan until it matures see illustration below. UK Export Finance s higher rate of interest, will take account the circumstances of the particular transaction, and will be agreed with the borrower on a deal by deal basis prior to signature of the buyer credit loan agreement. An illustrative example of the ERF In the absence of a commercial refinancing, UKEF takes out the loan at higher rate margin on drawdown negotiated by bank and borrower Debt Capital Markets take out 50 0 Drawdown Loan can be refinanced at any time 12 month refinancing window begins after final disbursement but it is possible to refinance early tranches Years Repayment Period Banks compete for mandate setting margins + fees with borrower One off non-refundable admin fee; plus fixed fee payable ( as a % of drawn loan) by all borrowers for the right to an ERF take out. Frequently Asked Questions When did the Export Refinancing Facility open for business The Export Refinancing Facility opened for business on 30 April How do I make an application An application form for an ERF is available on UK Export Finance s website. It is recommended that exporters speak to their bank about ERF before making an application. Can any bank use the ERF? ERF is open to any bank or financial institution eligible for UK Export Finance s buyer credit support. Will UK Export Finance always provide an ERF? ERF applications will be subject to UK Export Finance s buyer credit criteria, as well as its usual underwriting and risk assessment procedures. In some cases UK Export Finance may offer an alternative product. Is the ERF available for small loans? ERF is only available for loan values above 50m. For loans under 50m UK Export Finance s Direct Lending Facility or a Buyer Credit may be more appropriate. 4

5 What is a capital market refinancing? This involves the replacement of the bank loan in a buyer credit transaction with a bond issue. The proceeds of the capital markets bond issue are used to prepay the bank s buyer credit loan. Why do capital markets refinancings deliver significant funding cost savings? Bonds issued under the ERF are guaranteed by UK Export Finance in the case of a default in the payment of principal and scheduled interest. As such, they are intended to be priced competitively in line with the UK Government s credit rating i.e. the credit risk of the borrower is not necessarily a significant factor. How does the ERF compare to products offered by other export credit agencies? If a borrower refinances its bank loan via the debt capital markets, ERF s all-in costs are likely to be extremely competitive when compared against products offered by other export credit agencies. Are UK Export Finance s Direct Lending Facility and the export refinancing facility one product? No. They are two distinct and separate products. The ERF and Direct Lending Facility are intended to be complementary. How long does it take to approve an ERF application? It is not possible to give a one size fits all answer but, if the application is within the eligibility criteria, an answer in principle can be given very quickly. What are the fees? The fees charged by UK Export Finance are in addition to any fees and expenses that may be charged by the banks or the arrangers of a bond issue. An ERF has two fees: an upfront fee and a drawdown fee, which are outlined in an indicative term sheet once an application is made. Premium is also payable on UK Export Finance s guarantee of the buyer credit facility. When does the UK Export Finance s refinancing occur? UK Export Finance s take out is triggered only at one point in time: at the end of 12 months after the final drawdown of the bank loan. If UK Export Finance takes over the loan, what interest rate will it charge? If UK Export Finance is required to take out the loan, a higher rate of interest will apply. The indicative take-out interest rate is currently set at LIBOR plus a margin of 1.75%. The applicable margin will be considered on a deal by deal basis and can vary. UK Export Finance will consider individual submissions from banks or overseas buyer/borrowers when agreeing the final take out margin. Am I stuck with UK Export Finance s take-out interest rate if I have not arranged refinancing before the take-out occurs? 5

6 No. After UK Export Finance purchases a buyer credit loan, its undertaking to provide a guarantee to support a refinancing through a new bank loan or via the debt capital markets will still continue. The borrower therefore retains the option to refinance the buyer credit loan with the benefit of a guarantee from UK Export Finance and that refinancing may be at a lower late of interest.. Notice: This document has been prepared for information purposes only and does not constitute legal, financial or investment advice. Any party entering into a legal agreement should obtain comprehensive legal advice. This document does not constitute an offer or commitment of any kind on the part of Her Britannic Majesty's Secretary of State acting by the Export Credits Guarantee Department ("UK Export Finance") to provide a guarantee, to enter into any form of financing or other transaction or to otherwise act, and is not intended to create any legally binding obligations. Any decision to provide such a guarantee or enter into any such transaction will be subject to, among other things, all necessary internal approvals and consents (including credit approval), satisfactory due diligence and definitive final documentation. The terms set out in this document are indicative only. The final terms of any guarantee or commitment provided by UK Export Finance will be modified to reflect the individual circumstances of the transaction of which it forms part and of the parties thereto and will be subject to the final determination and approval of UK Export Finance. This document does not constitute nor does it form part of an offer to sell or purchase, or the solicitation of an offer to sell or purchase, any securities or an offer or recommendation to enter into any transaction. 6