The Insurance of Buyer/Buyer’s Bank Credit enables the commercial bank to insure the collection of receivables against commercial and political risks arising from the loan contract concluded with the foreign buyer/foreign bank. Loan is extended for the purpose of financing of export of goods and services in the manner that disbursement out of the loan funds is made directly to the exporter’s account, and the loan is repaid by the buyer or its bank abroad.
The usual cover ranges between 80% and 95% of the loan amount, depending primarly on the buyer’s country exposure.
- Conclusion of the insurance contract and payment of premium.
- Advance payment based on the export contract.
- Delivery of goods or rendering of services.
- Disbursement of loan proceeds.
- Loan repayment.
- Payment of indemnity if the buyer/buyer’s bank fails to meet its obligations.
Insurance of Losses Incurred in the Course of Production
Within the framework of insurance of supplier credit and buyer/buyer’s bank credit, it is possible to insure losses incurred in the course of production, which represents additional security for the exporter in the case when goods are manufactured by special order and it is not possible to sell them to another buyer. Inability to fulfil a commercial contract is insured for the purpose of enabling the buyer to terminate the contract, as well as the occurrence of a political risk, such as introduction of export ban to the buyer’s country. The indemnity to the exporter is paid in the amount of actual costs arisen in the process of manufacturing certain goods, reduced by the percentage of self-retention, i.e. agreed participation of the exporter in loss.
- Non-payment or non-fulfilment of the foreign debtor’s obligations. The submission of security for payment under the Buyer Export Credit Facilities Contract shall have the same effect,
- Insolvency, bankruptcy or execution on the property of the foreign debtor.
- Inability to honour the buyer export credit facilities contract on the part of the insured party or its agents due to facts for which the insured party is not responsible, and which occur abroad.
- War or similar events,
- Rebellion or revolution,
- Government measures limiting and impeding the transfer or free disposal of payments owed to the Insured party for a period longer than 3 months.
- Inability to fulfil an obligation due to other political events, particularly in a country through which it is possible to effect payment. This definition includes damage incurred in the course of production, as well as the inability of fulfilment by the insured party or its agent due to reasons for which the insured party is not responsible, and which occur abroad, whereby the insured party is a public law entity.
Amount on which the insurance is concluded, and as such stated in the Insurance policy may not be higher than the value of the Buyer Export Credit Facilities.
Premium rate is the price of the risk taken and is generally paid in advance and exceptionally it can be included in the loan amount. It depends on the risk of the buyer’s country, creditworthiness and status of the buyer, past experience with the buyer, duration of the risk, additional insurance and percentage of the cover.
Indemnity claim could be submitted after the period determined in the insurance policy (usually 6 months after the payment default).
International rules on export credit insurance and export finance
In the case of transactions with repayment periods exceeding 2 years, we follow the OECD regulations (Arrangement on Officially Supported Export Credits), among which the following are the most significant ones:
- Down payment (advance + interim payments) of at least 15% (in the case of vessels, at least 20%).
- Local costs financed out of the Buyer/Bank Credit must not exceed 30% of the export contract.
- Maximum Repayment Terms are determined in accordance with the classification of the buyer’s country in the following manner: for Category I countries*: the maximum repayment term is 5 years; for Category II countries**: the maximum repayment term is 10 years; in case of financing construction of renewable energy resources, as an exception, the maximum repayment term can be up to 15 years.
- Repayment of principal is normally effected in equal semi-annual instalments, with the first instalment falling due six months after the beginning of the loan repayment.
- Beginning of the loan repayment – varies in accordance with the nature of goods and services.
* Category I countries – GNP per capita in excess of USD 6.275** Category II countries – GNP per capita USD 6.275 or less
Insurance Contracting Procedure
- After receiving information about an international tender or already initiated export transaction negotiation, HBOR is notified about the project and its readiness in principle for the provision of export transaction insurance coverage or the issuing of a Letter of Intent is requested.
- After the loan agreement has been concluded, which must conform to the international regulations on export credit insurance and export finance (The Berne Union General Understanding, OECD Consensus), an insurance policy application is submitted (the application is submitted by the commercial bank that finances the export transaction).
- If the exporter produces goods upon a special order, cover may be provided for the loss during the production process by means of an additional insurance contract.
- Conclusion of the insurance contract and payment of the premium.
- The exporter starts to deliver its goods and services under the export contract and to draw down the loan proceeds.
- HBOR is informed regularly by the bank that the loan is duly serviced.
- If one of the insured risks occurs, and if the insured party has fulfilled its obligations under the Export Contract, HBOR shall, upon the receipt of a claim submitted by the insured party and upon the review of the documentation, pay the indemnity.