How one can attract foreign debt financing with an advantage and establish an international credit history of one's business
Or how one can attract foreign debt financing with an advantage and establish an
international credit history of one's business.
By Kateryna S. Barabash,
Trade Finance Specialist,
Managing Director, IBcontacts
Today, operations of practically each Ukrainian company, one way
or another, concern international trade. First, Ukrainian
manufacturers are forced to import higher quality raw materials,
equipment or machinery that have no analogs in Ukraine. Second,
any equipment is subject to depreciation and obsolescence and,
therefore, needs regular updates. It would be also reasonable to
mention the expansion of production resulting in the need to
acquire new property and equipment and to increase the raw
materials purchase volumes.
Rather frequently, all the above processes are unpredictable for
Ukrainian businesses and, what's more, they tend to arise
simultaneously, forcing businesses to take out good round sums
from cash in turnover which they often just are unable to afford.
What is the way out? Where can one borrow significant amount for
a long period of time?
Following lengthy discussions and analyses, management often
makes decision to go along the simple path of applying for bank
loan or conclusion of leasing agreement. However, both options are rather costly, and the periods
of financing, as a rule, are unacceptable for Ukrainian companies. In addition, the procedure for
obtaining a loan is quite intricate and includes approval of the credit committee, verification of
honesty of the business owner, availability of relevant collateral, audit?
If you intend to engage in a foreign economic transaction, how about taking a more high-profile
glance at the options of debt financing and find out what else do they do abroad??! In the first
place, go beyond Ukrainian information framework. You are right, we will discuss foreign trade
To begin with, let's define the terms. Foreign trade financing or export financing is the attraction of
foreign capital against guarantees provided by a foreign export credit agency (ECA). In addition,
they use the term "structural financing" describing this process from the perspective of its structure,
that is the sequence of its stages. Nevertheless, in all cases, we deal with the financing of
deliveries to Ukraine.
The chairs this morning ?
As of today, this financial instrument appears to be the most advantageous for Ukrainian
businesses both in terms of cost (which is by an order of magnitude smaller than domestic rates),
and in light of maturities (which are distinguished by significant duration). In addition, successfully
realized projects on attraction of foreign trade financing develop a positive international credit
history for Ukrainian company, opening further perspectives of cooperation with foreign banks and
export credit agencies.
?In our opinion, trade financing arrangements facilitate the increase of companies' purchasing
power and ensure their access to finance required to purchase goods or services from Thailand,
raise competitive ability of our producers in other countries, decrease risk of default, and increase
the borrowers' working capital?, - told us our source in Export-Import Bank of Thailand.
There is no doubt that, to be able to properly present its merits to a foreign partner, domestic
business will have to attract specialists in the area of credit analysis according to the international
standards, who will prepare relevant project documents. However, acting knowingly, the borrower
will carry out such procedure quickly and painlessly, and the resulting credit conclusion will also be
instrumental for further presentation of the business with the objective of expansion of international
?When determining the amount of insurance coverage, we focus primarily on analysis of the risks
and carry out research of the foreign borrower's creditability and its ability to repay the loan on
time?, - said our source in OeKB, Austrian ECA.
Naturally, to be able to apply for trade financing, potential borrower must meet certain criteria. And
you should not think it's beyond your control, you should just have a clear understanding of your
capabilities and the requirements of the foreign banks and insurers to the Ukrainian corporate
borrowers. One should not underestimate own merits and surrender under the storm of allegations
about insolvency of Ukraine as a country and Ukrainian business as a whole.
Thus, if you are prepared to the victories on the international scale, it is high time to take a
detached view of your business and assess the degree of its transparency. Well, let it be at least
semi-transparency. ?When rating international creditability of a company or a group of companies,
we concentrate on positive movements in revenues, volumes of assets, existence of related legal
entities, history and structure of ownership, and on payment discipline. In addition, we pay attention
to many other legal and marketing factors characterizing operations of the target in specific
industry?, - points out Mrs. Antonina Mavrodii, Manager of Ibcontacts Analytical Department and
an ACCA member.
As such, if, after applying the above criteria, you come up with at least firm "4" according to the old
good 5-point scale, your should undoubtedly ponder over entry on the foreign financing market
which will automatically raise your company to a new level of business.
?Our company can insure so called "supplier's credit", providing the buyer direct credit limit, which
depends on country risks, level of creditability, and payment discipline of the buyer. Obviously, the
decision is made on the basis of the available information about the borrower?, - told us Baigozin
Erbol, Director of Marketing and Sales Department of ECA KazExportGarant, Kazakhstan.
The money tomorrow evening ?
When attracting short-term financing (for a period of up to one year) for the purpose of, say,
procurement of raw materials, foreign supplier may give commodity credit and deferral of payment
against guarantees of ECA. However, if the payment deferral period required is longer (five years
and more), foreign exporter is unable to wait so long for its luck penny. At this point steps in foreign
lending bank which in most cases is operating in the country of the producer's incorporation.
The funds are disbursed to Ukrainian borrower (it may be either a Ukrainian bank, or the Ukrainian
importer itself) against guarantees of ECA. In this case, the cost of financing is significantly lower
which has its logical explanations. First, the funds are granted by foreign banks whose interest
rates are lower apriori. Second, export credit agency insures the risks of the lenders, which also
enables them to reduce annual interest rates.
The question is, what are the motives that drive ECAs to take part in such projects and take the
risks? As we have already told in the previous issue of IBobserver, ECAs are established by foreign
states to support their domestic producers, therefore the risks are, in effect, taken by the foreign
governments. And this is the main advantage of trade financing arrangements.
On the other hand, if your supplier is a customer of a private insurance company which does not
have the noble goal of development of national economy, obtaining insurance cover becomes
much more difficult, because in this case the insurer puts at stake its own money. In addition, the
insurers have been incurring huge losses during the past two year of total defaults. This is why
these are state-owned ECAs that are dominating in the post-crisis era and expanding their shares
on the market.
Normally, when realizing such projects, ECA charges premium representing lump sum interest rate.
The amount of the premium directly depends on the risks prevailing in the country of the borrower.
In addition, OECD has developed a special rating scale, according to which Ukraine was rated the
lowest 7th grade. This is the key factor affecting the amount of insurance premiums charged by
ECAs from the Ukrainian importers ? the higher the risks, the higher the fees... However, our
practice of cooperation with ECAs and banks shows that there are certain factors that may reduce
Therefore, the following key question remains: in which cases the importer applying for foreign
long-term financing can act as the borrower itself and when it should attract Ukrainian bank.
?In our practical work, we often find ourselves in the situations when creditability analysis and
business plan developed by us for Ukrainian business appear to be quite safe for ECA, enabling
Ukrainian company to obtain funds directly from the lender which rules out bank from the project.
This, of course, makes it possible to reduce the borrowing rates making the trade project cheaper.
It is a case of so called "mini IPO". Having obtained financing of such type, you win international
recognition as a reliable borrower with minimal financial risks which is a total success, as the risks
of our country on the whole continue to be at the top level for the international community?, ? said
Anna Pobedimskaia, IBcontacts Trade Projects Coordinator.
However, when rendering services to the Ukrainian businesses that, due to a number of reasons,
are still unable to borrow directly from foreign banks, we attract to the projects Ukrainian banks
which are essentially acting as guarantors. In this case these are the banks who obtain loans to
finance Ukrainian companies' projects.
Full version of the article featuring comments of such ECAs as K-sure and EKF is available
in the third issue of IBobserver