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1 practical information hermes cover special Permissible payment terms in connection with the granting of export credit cover march 2012

2 practical information hermes cover special Permissible payment terms in connection with the granting of export credit cover i. what rules apply to permissible payment terms? During the negotiations leading up to an export trans - action, the exporter and the importer also agree on the method and date of payment. Although the parties to the contract are relatively independent in determining the payment terms, their respective interests play a major role in this respect. The exporter has a strong interest in being paid for its goods before or upon delivery so as to minimize the payment risks. On the other hand, it is in the importer s economic interests to delay payment as far as possible. If the exporter is willing to accommodate the importer by agreeing to a certain payment period or offering credit terms and if it additionally intends to cover the risk of payment default by means of an export credit guarantee issued by the Federal Republic of Germany ( Hermes Cover ), certain rules must be observed in the determination of the payment terms. These rules par - ticularly arise from the international context in which the cover instruments operate. This context is chiefly determined by two international institutions: the Berne Union and the OECD. In addition to the rules issued by the Berne Union and the OECD, other factors such as the decision-making practices of the Interministerial Committee responsible for granting Hermes Cover also influence the determination of the payment terms. Similarly, certain customary practices on which export credit agencies base their decisions have arisen over the years as a result of the multilateral consultations with other export credit agencies. A distinction must be drawn between the agreed credit period for an export transaction and the total execution period. The length of this period may differ substantially from the credit period as it also includes manufacturing and warranty periods. However, the allocation of transactions described in Sections II and III is based solely on the credit period, i.e. the period from the delivery of the goods or the provision of the services until the date on which the receivable falls due for payment in accordance with the applicable contract. ii. what types of goods can only be covered with short-term credit periods? Export transactions with a credit period of less than two years fall within short-term payment conditions. Payment terms can be agreed on a non-progressive basis, i.e. free of any restrictions with respect to prepayments and the repayment profile, for a period of up to 360 days. Credit periods of up to a maximum of 180 days can be accepted for the following categories of raw materials and semi-finished goods Materials in their natural or original condition prior to processing or production or goods in a semi-finished state. (e.g. sheeting, wires, pipes, papers, paper pulp, timber for production and consumer goods Goods of a generally short economic lifespan for use by consumers. (e.g. food, textiles, paints) 2 Export Credit Guarantees of the Federal Republic of Germany

3 Berne consumer durables Goods with a relatively long economic lifespan ac - quired for personal and repeated use. They are not utilized in an industrial process (e.g. refrigerators, bicycles, tents). If the order has a high value, credit periods of up to two years may also be spare parts and components Finished goods (e.g. bearings, insulators, rollers) which are integrated without any further modification in capital goods (e.g. machinery, equipment, plants). By way of exception, credit periods of up to five years may also be granted in the case of high individual values or large contracts. If spare parts are regularly delivered as preliminary equipment together with capital goods or plant equipment, the same credit terms may be applied to these spare parts as part of the overall project as for the machinery. Credit periods of up to a maximum of 360 days can be accepted for the following categories of goods: The International Union of Credit and Investment Insurers, which is more commonly known as the Berne Union (BU), was established in 1934 in Berne and currently (as of July 2011) comprises 48 export credit and investment insurers which are either privately or publicly owned or which operate on behalf of a state. Among other things, the BU is committed to ensuring reasonable credit periods in international trade. In order to achieve this goal, the members have accepted rules governing the maximum permissible credit periods; in this connection, the main focus is on these types of goods traded using short-term payment terms (credit periods of one or two years). These rules are embodied in the General Understanding and particularly comprise rules for individual categories of goods defined according the economic service life. In addition, there are special rules for certain types of goods. The Fertilizers, insecticides, Breeding livestock (except for breeding cattle see Agricultural produce and seed The service transactions covered by the Federal Government mostly provide for cash payment terms. However, there are generally no problems in ob taining cover for a transaction providing for credit terms if it has the characteristics of an investment. Evidence of this may include the extent to which it is possible to write off the value of the transaction on the balance sheet or the fact that it is customary practice in the sector in question for credit terms to be granted. The Organization for Economic Cooperation and Development (OECD) is an international organization which was founded in Paris in 1960 and currently (July 2011) has 34 member states. In connection with export credits, it pursues the goal of creating as far as possible a level and transparent playing field among official export finance providers. To this end, it adopted an agreement ( Consensus ) in 1978 which defines rules for the support of export credits, including permissible payment terms, in the form of a guideline and an inter - governmental agreement between the member states. The Consensus covers all transactions with credit periods of two years or more excluding export credits for military equipment and agricultural produce. In so-called sector agreements, the Consensus provides for longer credit periods, among other things, for certain kinds of goods (e.g. renewable energies, aircraft, ships). Export Credit Guarantees of the Federal Republic of Germany 3

4 practical information hermes cover special Permissible payment terms in connection with the granting of export credit cover If the credit period is greater than 360 days but less than two years, a prepayment or part payment of at least 15% must be made as a basic principle. Repayment of the remaining amount is graduated, i.e. in identical (semi-annual) instalments. iii. under what conditions may longer payment terms be granted? 1. are longer payment terms available for certain categories of goods? If the export transaction covers machinery and equipment of a relatively low unit price for use in an industrial process, production or trading (e.g. commercial vehicles for industry or agriculture), a maximum permissible credit period of five years is available for these quasicapital goods. However, the credit period depends on the value of the order (net of interest) as three-year credit: for an order with a value of over USD four-year credit: for an order with a value of over USD five-year credit: for an order with a value of over USD 400,000 In addition, there are special rules derived from practical experience for the following types of for breeding cattle: two-year credit for orders with a value of USD 150,000 or less three-year credit for orders with a value of more than USD trucks, buses and containers as well as related chassis and trailers Maximum five-year exports of passenger vehicles: two-year credit to private customers five-year credit to commercial customers Credit periods of more than five years can be covered provided that the transaction involves capital goods, i.e. high-quality machinery and equipment for industrial production or commercial purposes or complete production plants in which extensive use is made of capital goods. 2. what other rules apply to long-term payment terms? The provisions set forth in the OECD Consensus apply to credit periods of two years or more. The export credit agencies organized in the OECD have agreed on a number of harmonized conditions for government-backed export credits. With respect to the payment terms agreed upon in the export/loan contract these are chiefly as downpayments and interim payments of at least 15 % of the value of the order must be made at the beginning of the credit period. Interim payments are payments made upon delivery or, in the case of transactions for plant, pending commissioning. In connection with manufacturing risk cover, a downpayment of at least 5 % of the value of the order must be made prior to the commencement of manufacturing. 4 Export Credit Guarantees of the Federal Republic of Germany

5 @ The starting point of the credit period is defined in accordance with the scope of delivery. Specifically, the Consensus makes the following distinctions: If the goods can be used independently of each other, the credit period commences either when the buyer physically takes possession of the goods, i.e. pro rata for each delivery or as of the weighted mean delivery date. If the supplier delivers equipment for entire plants or factories but is not responsible for assembling these, the credit period will commence upon the buyer taking physical possession of the entire equipment. This is generally deemed to occur upon completion of the last material delivery. If, on the other hand, the exporter is also respon - sible for assembly, an agreement may be made providing for the credit period not to commence until the plant in question is ready for commissioning. Leases In the case of leases, the repayment profile can be applied either to the capital alone or the capital plus the interest. In addition, certain sectors are subject to special rules, which are described in Section IV. With leases, it is also fundamentally possible to agree on annuity-based repayment profiles, i.e. the financing costs are included to produce leasing payments of the consistently same Capital repayments (repayment profile) must be made in identical and regular instalments. The interval between two instalments must not exceed six months; in this case, the first instalment must not be due for payment any later than six months after the starting point of the credit interest on loans must be calculated and paid degressively, i.e. no later than six months in arrears on the outstanding credit amount. In addition, the determination of the maximum per - missible credit period must also take account of the OECD country classification, which is based on the per-capita income in the buyer s country. If this percapita income, which is calculated by the World Bank, exceeds a certain threshold and if the country is an OECD member, the maximum permissible credit period is eight-and-a-half years (Category I). A maximum permissible credit period of ten years applies to all other countries (Category II). Export Credit Guarantees of the Federal Republic of Germany 5

6 practical information hermes cover special Permissible payment terms in connection with the granting of export credit cover Reference can be made to international practice to determine which specific credit period over five years is permissible for a given order value. On the basis of historical data collected over many years from the international reporting procedures it is possible to determine which credit period corresponds to standard inter - national practice. The ranking shown in the chart below is derived from an analysis of the reporting procedures and thus provides a guide. Under these rules, further aspects, such as the relation - ship between a small machine for which separate cover is applied for and a large project or syndicated business, may permit the granting of longer credit periods in in - dividual cases despite smaller order values. iv. in what cases do special oecd rules apply? The OECD Consensus includes special sector under - standings going beyond the aforementioned rules for particularly durable capital goods providing for modified payment terms especially in the form of longer credit periods of more than ten years. These sector under - standings are designed to take account of the specific requirements arising in connection with financing and providing cover for such investments.. Thus, the maximum permissible credit period for ships, conventional power stations (e.g. coal-fired power stations) and civil aircraft stands at twelve years. The repayment profile for project finance may be structured in accordance with flexible conditions. How - ever, the entire credit period must not exceed 14 years from the starting point. A longer credit period of up to 18 years is possible for renewable energies (e.g. wind, solar and bioenergy) and water projects. v. what rules apply to used goods? permissible credit periods by value in eur millions If used, rather than new goods are exported, the maximum credit period eligible for cover is generally shorter. In addition, more stringent requirements may apply with respect to downpayment and collateral than is the case with transactions for new goods. Credit periods in years >15 The payment terms are particularly based on the price of the goods when new, the condition and age of the goods, their residual value and expected remaining useful lives. This is based on the individual circumstances of the specific case to a greater extent than usual. The basic rule of thumb is this: the credit period which the German Federal Government covers for used goods is shorter than the corresponding period for new goods and is no longer than the residual useful life. 6 Export Credit Guarantees of the Federal Republic of Germany

7 permissible credit periods Categories of goods Sector of goods Sector understandings Raw materials, semi-finished goods, consumer goods, spare parts and components Fertilizers, insecticides, livestock for breeding, agricultural produce and seed Consumer durables Trucks/buses/containers, quasi-capital goods, capital goods, full-scale plants OECD country category II Ships, aircraft, conventional power stations Project finance Renewable energies and water projects Value of contract in million EUR > 15 Permissible credit period (in years, in the absence of any indication to the contrary) 180 days 360 days Payment terms are subject to ongoing change in the various organizations and also in connection with international practice. The information set out above is summarized in the above table as a guide. Uwe Stumpenhusen Export Credit Guarantees of the Federal Republic of Germany 7

8 Euler Hermes Deutschland AG Export Credit Guarantees of the Federal Republic of Germany e 0213 Postal address Hamburg Visitors should call at Gasstraße 27 Hamburg - Bahrenfeld Phone: +49 (0)40/ Fax: +49 (0)40/ info@exportkreditgarantien.de Branch offices: Berlin, Frankfurt, Hamburg, Cologne, Munich, Stuttgart