KEY FINDINGS
• All OECD ECAs charge risk premia, also known as exposure fees, but differences among ECAs with respect to risk rating as well as methods used to calculate and collect premia can have a competitive impact on transactions.
• One of the primary goals of the current OECD premia negotiations is to streamline the pricing practices for High Income markets so that there is more consistency and convergence in pricing among different ECAs.
• EXIM charges fees that cover its reserve requirements, which for medium-term transactions can at times be higher than the minimum premium rates required by the OECD Arrangement.
Given that EXIM ensures all of its transactions cover their loan loss requirements, in 2014 EXIM was considered less competitive in the medium-term space.
• However, with respect to long-term transactions and transactions in High Income OECD and Euro Area countries, EXIM risk premia was considered to be consistent with those of our foreign ECA counterparts.
BACKGROUND
ECAs charge risk premia, also known as exposure fees, to cover the risk of non-payment for a transaction. ECAs arrive at this calculation in different ways because there is no uniform risk classification system. Nevertheless, in 2011 the Participants to the OECD Arrangement reached an agreement to complete Arrangement rules on risk premia by introducing a comprehensive premia framework that covers all types of buyer risk. The agreement sets minimum premia rates for both sovereign and non-sovereign borrowers, and seeks to price risk on a transaction-specific basis.
Under the premia rules that went into effect in September 2011, OECD ECAs now operate within a detailed framework for pricing buyers receiving export credit financing under the OECD Arrangement with the goal of maintaining a level playing field. The fee system provides guidance on risk classification, and established Minimum Premium Rates (MPRs) for non-sovereign buyers in addition to sovereign buyers. The package also established pricing protocols for transactions in High Income OECD and High Income Euro Area countries (formally known as Category Zero markets).
One of the major provisions of the 2011 package attempts to achieve a level playing field by requiring extensive transparency in exchange for allowing each ECA to classify the risk of each buyer according to their own evaluation system. This means that ECAs are allowed certain flexibilities when it comes to the risk classification or pricing of buyers as long as the ECA agrees to provide detailed information on the rationale for its classification and/or pricing to other ECAs prior to authorization.10 Since the introduction of the
10 Under the premium agreement, ECAs must prior notify to the OECD if a transaction meets any of the following criteria:
• Involves an obligor or guarantor in a High Income OECD or High Income Euro Area country having a credit value of greater than USD 15 million;
• Applies MPR associated with a third party guarantor located in a country other than that of the obligor;
• Applies MPR associated with a multilateral or regional institution acting as a guarantor;
• Involves non-sovereign obligor or guarantor where the premium rate charged is below that set by Buyer Risk Category CC1 (i.e., CC0 or SOV+);
• Support of transaction involving a non-sovereign obligor or guarantor where the buyer risk rating is assessed as being better than the Accredited Credit Rating Agency (CRA) rating and having a credit value of greater than USD 10 million;
• Application of an MPR reflecting the use of country risk mitigation (i.e., offshore escrow account or local currency financing); or
• Application of an MPR reflecting the use of buyer risk credit enhancements (i.e., asset
2011 Package, there have been approximately 729 notifications of such flexibilities by OECD members that relate to the premium agreement. It is clear from the large number of notifications that many ECAs are either using the flexibilities allowed under the agreement (i.e., rating a buyer better than its credit rating), or are authorizing transactions that meet certain thresholds (e.g., approving transaction in High Income OECD or High Income Euro Area countries with credit values over USD 15 million). Such notifications provide key insight into how other ECAs rate buyers for risk and the implications of such diverse ratings on competitiveness.
With respect to ECA transactions in High Income OECD or High Income Euro Area countries, a market segment of particular interest to EXIM, OECD members have not yet concluded negotiation of detailed disciplines for this market segment. When the new rules went into effect in 2011, High Income markets had few rules and maximum flexibility because they had historically seen little ECA activity given the historic widespread availability of private sector financing in these relatively “wealthier” markets. However, in the years since the 2007–2008 global financial crisis, OECD ECA activity in High Income markets has increased dramatically, and differences in pricing have been significant in size and number, creating competitiveness concerns. In an effort to mitigate these concerns, OECD ECAs have been working to renegotiate premia rules for High Income OECD and High Income Euro Area markets with the goal being less flexibility and more consistency in pricing practices across OECD ECAs. However, these negotiations are still ongoing and as such OECD ECAs continue to operate with maximum flexibility, and as a result of such flexibilities ECAs also must comply with significant transparency requirements.
EXIM POLICY AND PRACTICE
EXIM charges the MPR for sovereign buyers as dictated by the OECD Arrangement rules. In addition, consistent with the management of a self-sustaining institution, EXIM must also ensure that the premia collected meets the U.S. Government’s minimum budgetary requirements. As a result, in certain cases (e.g., medium-term transactions), EXIM must charge fees that are higher than the minimum fees allowed under the OECD premia system. EXIM reserve requirements are dictated by internally developed and annually updated credit loss factors, which are based on EXIM’s historical loss experience and relevant qualitative and environmental factors. The new credit loss factors that went into effect on October 1, 2014 (the start of EXIM’s fiscal year), resulted in a decrease in reserve requirements, thus making EXIM less uncompetitive in the last quarter of 2014 compared to the first three quarters of the year.
Since the new premia rules went into effect in 2011, EXIM has notified a total of 55 transactions.
As shown in Figure 21, in 2014 EXIM had 13 transactions that met the OECD ex-ante notification requirements.
FIGURE 21: EXIM Premia-Related OECD Notifications
0 2 4 6 8 10
Third Country Guarantee Non-Sovereign Better than CRA Rating Non-Sovereign Better than CC1 Country Risk Mitigation High Income OECD or High Income Euro Area Buyer Risk Credit Enhancements Non-Concessional Matching of Participant or Non-Participant Notification Type
Number of Notifications
n 2011 n2012 n 2013 n2014
Source: EXIM data
As Figure 21 indicates, in 2014, consistent with previous years, the majority of EXIM notifications have been in relation to either a transaction in a High Income OECD or High Income Euro Area market, or a transaction dealing with a Better than CC1. In addition, also consistent with previous years, in 2014 Buyer Risk Credit Enhancements, Non-Sovereign Better than CRA Rating, and Third Country Guarantee flexibilities were also used, however to a lesser extent than the two flexibilities mentioned above. Also notable, 2014 was the first year that EXIM utilized the Country Risk Mitigation flexibility since the new premia rules went into effect in 2011.
FOREIGN ECA
s’ POLICIES AND PRACTICES
Currently the only way to compare ECA activity under the premia agreement is through the ex-ante notifications. Figure 22 below demonstrates the trends in notification over the years since the premia rules went into effect in 2011. Interestingly, from year to year the reasons for notifications across ECAs are remarkably consistent. Given this consistent trend, the use of flexibilities has not seemed to create a competitive advantage by any single ECA.
FIGURE 22: Total Premia-Related OECD Notifications
One premia-related element that has competitiveness implications is the willingness of ECAs to offer buyer risk credit enhancements, or discounts on the risk premia charged, in the transactions they support. In 2014, there were a total of 13 transactions that included buyer risk credit enhancements, eight of which were supported by Germany, three of which were supported by Denmark, and one each supported by Sweden and the United States. Given Germany’s willingness to offer credit enhancement discounts on their transactions it is clear that they are more competitive than other ECAs in this regard.