Publication for professional investors
In-depth insights from NN Investment Partners
January 2017
FocusPoint
Investing in Export Credit Agency Loans
Efficient Investment in Government Debt
• Enhance
returns on highly rated sovereign debt in the current low rates environment
• Access diversified global government assets without costly FX hedging
• Partner with NN Investment Partners, an experienced ECA lender and innovator
www.nnip.com
Publication for professional investors
January 2017
Optimising your government allocation
Combining enhanced returns with low levels of risk, government
guaranteed ECA loans are attracting the attention of investors
looking to optimise and diversify their government bond portfolios
in the current low interest rate environment.
To illustrate the role of export credit agencies and the opportunity
that the changing role of bank arrangers offers to institutional
investors, a representative example of a transaction in the aviation
sector is given below.
The loans offer a compelling risk-return proposition for investors
who can accept an amount of illiquidity and complexity versus
benchmark government debt.
Figure 2: How an ECA loan works*
Lending via ECAs (Export Credit Agencies) has become an essential
element of the multi-trillion dollar global trade marketplace.
As such, it offers a scalable opportunity for institutional investors
to improve allocations to highly rated assets.
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NN Investment Partners (NN IP) was one of the first non-bank
investors active in the ECA market and plays a leading role in the
continued development of export finance.
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Role of Export Credit Agencies
An ECA is a government-sponsored agency set up to promote its
country’s industries by helping buyers of exported products and
services to finance their deliveries at competitive rates. Typically
this support takes the form of direct loans, payment guarantees or
export insurance, and is extended to a range of sectors, including
aviation, shipping, renewable energy, infrastructure and SME.
ECA lending has traditionally been dominated by bank arrangers,
however the impact of recent regulation has reduced the ability of
banks to lend in the volumes and tenors that the market requires.
This structural change in the dynamics of global lending now gives
institutional investors a unique opportunity to participate in this
essential component of global trade.
Features of ECA loans
An export loan is a lending facility provided to an importer of goods
or services in order to fund a specific purchase. Loan characteristics
will vary with the type of goods and services being financed.
Below we describe the key features of the asset class:
Figure 1: Features of ECA Loans
Characteristic
Description
Guarantee
Commitment
Repayment
WAL
Interest
Commitment Fee
Illiquidity Spread
Solvency II Charge
100% principal and interest
Fully committed, scheduled draw-downs
Amortising
5-15 years
Floating, paid on drawn amounts
Paid on undrawn amounts
80-100 bp over relevant government bond
0% SCR (Standard Formula)
Guarantee
4
5
3
Loan
6
Bank
7
Investor
1. Boeing is an American aircraft manufacturer.
2. Passenger planes are expensive (EUR 100m+).
3. Airlines may struggle to raise funds to purchase aircraft given
their frequently non-IG ratings.
4. To support Boeing’s sales, the US government’s ECA “US EXIM”
extends a guarantee to the loans financing the aircraft.
5. The ECA guaranteed loans bear a higher interest rate than US
government debt, but are significantly cheaper than KLM’s senior
unsecured borrowing.
6. Trade finance banks arrange the loans, and have traditionally
also been the sole lenders.
7. Non-bank investors can now also provide financing.
Portfolio Context
Institutional investors with significant government bond portfolios
are finding re-investment challenging given the minimal or
negative yields attainable in the current interest rate environment.
By allocating a portion of this to ECA loans it is possible to materially
increase returns for the same underlying sovereign risk (and
associated minimal capital charge), without functionally impairing
the overall liquidity position of the portfolio. It is therefore possible
to optimise the portfolio by increasing the returns on government
exposure by foregoing surplus liquidity.
* For illustrational purposes only
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Publication for professional investors
January 2017
Figure 3: Access a diverse global market, no hedging required
UKEF - UK
Atradius - Netherlands
Hermes - Germany
EKF - Denmark
EKN - Sweden
ONDD - Belgium
KEXIM - South Korea
EDC- Canada
EXIM - USA
OEKB - Austria
SINOSURE - China
COFACE/BPI - France
SERV - Switzerland
SACE - Italy
Source: NN Investment Partners
Guarantee mechanics and timelines – clear and simple
In the rare event of a borrower default, claiming payment under
ECA guarantees is simple and transparent.
• After a payment default, the investor usually has 10 business days
to present the guarantor with a demand notice. NN IP will perform
this role on behalf of the investor.
• The guarantor usually has 60-90 days in which to make payment.
ECAs may accelerate and make the investor whole (par + accrued
+ default interest), or more likely will take over the regular scheduled payments and keep the transaction alive. This approach is
most advantageous to both parties as it allows the borrower time
to return to financial stability and thereby in turn protects the
ECA’s domestic exporter.
Figure 4: Timeline claiming payments under ECA guarantees
One day following
non-payment
Guarantor to receive
Demand Notice
Payment by Guarantor shall
be made no later than 60-90
calendar days afterwards
Default
Final demand notice
Guarantor payment date
10 business days
60-90 calendar days
Large and diverse marketplace
Global ECA-backed trade continues to grow, with total loan value for
each of the last 3 years exceeding $80bn, increasing steadily from
$20bn in 2005 (source: TXU). The market for ECA loans is large and
diverse, with agencies from a variety of countries globally providing
guarantees to exporters in a wide range of sectors.
ECA loans are denominated in the major global trade currencies
(USD/EUR/GBP/JPY), and are independent of the local currency
of the guaranteeing government e.g. the US government often
guarantees loans directly in Euros. This means that investors are
able to diversify their exposure to global governments without
expensive currency hedging.
NN IP has investment experience with the majority of highly-rated
national agencies including Atradius (NL), US EXIM (US), UKEF (UK),
Euler Hermes (DE), Coface/Bpifrance (FR), EKF (DK), Finnvera (FI),
ONDD (BE), EKN (SE), EDC (CA).
NN Investment Partners: a proven partner in ECA loans
NN IP is an experienced and active participant in the ECA loan
market. The Private Debt team comprises 29 dedicated professionals
with an average experience of 15 years. We support investors
throughout the life-cycle of their investment, from identifying
suitable loans and securing terms, to servicing and reporting.
• 6 year ECA loan investment track record, including development
of some of the first ECA transactions completed by non-banking
investors.
• Well recognised and trusted partner, with strong relationships
across Europe, the US and Asia, ensuring first-ranking access to
attractive deals.
• Experienced Structuring and Legal teams to manage documentation
and ensure compliance with economic, legal, accounting and
regulatory requirements.
• Loans made to multiple sectors ranging from EUR 30m to
EUR 300m+.
• Dedicated operational infrastructure with over 20 years track
record in private loan servicing.
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Publication for professional investors
January 2017
Figure 5: Example of ECA loans
Aviation
Simpler structure
Lower spreads
• Very active global market
• Involvement mainly from ECAs in
US/UK/FR/DE
• Simple cash flow schedules
• Some standardisation
• 7-10 year amortising loans
• Relatively liquid with emerging
secondary market
Shipping
Complex structure
Medium spreads
• Developed market
• Significant NL presence
• Medium ticket sizes
• Complex cash flows
• 10-15 year amortising loans
• Illiquid with very limited
secondary market
Supporting your investment
Investing in ECA loans involves two stages: 1) Sourcing and
Structuring, and 2) Servicing following investment. NN IP offers
extensive support in both of these complex areas, which can
otherwise be challenging for many investors.
Sourcing and Structuring
NN IP works closely with investors to identify suitable loans for
investment, secure optimal terms and coordinate documentation.
These activities include:
• Screening markets for appropriate deal opportunities.
• Conducting detailed analysis to assess creditworthiness.
• Negotiation and structuring of deal terms.
• Managing and monitoring the bidding process between lenders,
Project
Complex structure
Medium spreads
• Rapidly growing market
• Large ticket sizes
• Complex cash flows
• 10-30 year amortising loans
• Illiquid with very limited
secondary market
SME
Complex structure
Higher spreads
• Bank dominated, slowly opening
up to investors
• Guarantees mainly from
Supranational Agencies
• Complex guarantee formats
• Variable cash flow schedules
• 10-30 year bullet loans
• Highly Illiquid
borrowers and provides comprehensive reporting on a loan-by-loan
and portfolio basis.
The Legal Department implements any agreed amendments to the
documentation and supervises activation of the guarantee in the
event of a borrower default.
Investing in ECA loans
NN IP provides investors access to ECA loans in two ways; via a
Managed Account, or through a Fund. In each case investors
benefit from NN IP’s established investment processes, alignment
of interest, and by pooling investment resources, gain access to
larger scale transactions and pipeline.
Issues to consider
banks, borrower and ECA.
• Drafting and executing documentation in cooperation with legal
counsel.
ECA loans should be considered buy-and-hold investments.
Investors should be aware of the complexity of these instruments
compared to other fixed income and loan assets.
Loan Management
The Investment Team monitors the economic risk factors of the loan
and project manages interaction with the ECAs, lenders, banks and
borrowers.
Risk factors include:
• Credit risk - of the government guarantor (sovereign).
• Prepayment risk - early repayment often permitted, although
rare. Loans may draw and amortise in irregular ways.
• Legal and structural risk - legal and structural risk factors exist.
Transactions and guarantees may differ in subtle ways.
• Liquidity risk - liquidity is limited.
The Private Placements Management Team monitors cash flows
to ensure they reconcile with drawing and payment schedules,
processes fiscal events including prepayments, communicates with
For more information about NN IP’s ECA Loan strategy, please
contact Colin van Rossen (Senior Portfolio Specialist),
your local sales representative or visit our website www.nnip.com
Once a loan commitment is in place, NN IP provides comprehensive
servicing for the full life of the investment.
Disclaimer
The elements contained in this document have been prepared solely for promotional purposes and do not constitute an offer, in particular a prospectus or any invitation to treat,
buy or sell any security or to participate in any trading strategy. This document is intended only for MiFID professional investors. While particular attention has been paid to the
contents of this document, no guarantee, warranty or representation, express or implied, is given to the accuracy, correctness or completeness thereof. Company names,
explanation and arguments are given as an example and do not represent any recommendation to buy, hold or sell the stock. Any information given in this document may be subject
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