AGA-Report No. 337
Forfaiting Guarantee coming in 2023 to support German SMEs
The Federal Government is broadening its range of export credit guarantees with the introduction of a new instrument. The German Federal Ministry for Economic Affairs and Climate Action and the Federal Ministry of Finance have agreed to introduce a Forfaiting Guarantee.
In this way, the Federal Government is acting on the commitment made in the coalition agreement to “...support credit protection for exports in the form of Hermes Cover [...] in small ticket financing for SMEs [...]”.
In particular, the Forfaiting Guarantee improves the financing options available for small-ticket transactions. At the same time, it preserves the exporter’s liquidity. Until now, banks have been reluctant to purchase receivables backed by the Federal Government’s Export Credit Guarantees due to concerns over the legal enforceability of the receivables purchased. The Forfaiting Guarantee issued by the Federal Government covers a large part of these legal enforceability risks. It therefore marks an important step towards supporting small and medium-sized enterprises (SMEs).
The Forfaiting Guarantee should be available by the end of the 2nd quarter and will be subject to review after three years. Work is currently under way on the specific structure of the product.
Further information on the Forfaiting Guarantee can be found in the press release issued by the German Federal Ministry for Economic Affairs and Climate Action and the German Federal Ministry of Finance.
A general overview and tips on the best practices for selling receivables can be found in the Forfaiting Guide for Exporters.
New: Price escalation clause for Hermes Cover click&cover
Contracts with price escalation clauses can now be covered with Hermes Cover click&cover. This permits the contract value to be subsequently increased on this basis. The Interministerial Committee (IMC) for Export Credit Guarantees has decided to make this adjustment.
With this improvement, the Federal Government is responding to the challenges currently being faced by exporters, who are increasingly being forced to include price escalation clauses in their contracts to allow for inflation effects and supply chain constraints. Accordingly, they have sought cover for this also in the digital products, as various customer interviews have indicated.
With a price escalation clause, exporters can reserve the contractual right to adjust the agreed price in the event of any cost increases. The resulting additional receivable can be included in the Export Credit Guarantee provided that the payment terms for the additional receivables are no less favourable than those for the principal receivable. In addition, the receivable must have actually arisen, be specified in the guarantee and be legally enforceable.
In the interests of lean processing, Hermes Cover click&cover only uses the percentage procedure. This means that in the future the policyholder can request an increase of up to ten percent of the contract value on the basis of a price escalation clause. The upper limit of five million euros for Hermes Cover click&cover remains in place. As a result, the maximum actual contract value is correspondingly lower and reduced by the desired value arising from the effect of the price escalation clause.
Otherwise, there are no changes to the procedure. The exporter must report the actual increase resulting from the price escalation clause without delay, however no later than 6 months after the last delivery or service. The increase caused by the price escalation clause is documented in an addendum to the cover policy (guarantee document), while the additional premium is simultaneously invoiced.
The technical basis for applying for such additional cover has been set up in the customer portal myAGA and is available with immediate effect. With just a few clicks, it is possible to submit a request for standardised supplier credit cover and also to include a price escalation clause.
Further practical information on:
Implementation of the Supply Chain Due Diligence Act for Export Credit Guarantees
The Supply Chain Due Diligence Act (Lieferkettensorgfaltspflichtengesetz (LkSG)) came into effect on 1 January 2023. It initially applies to companies with at least 3,000 employees; from 1 January 2024, companies with at least 1,000 employees will also be covered. The Act governs German companies’ corporate responsibility for compliance with human rights and environmental due diligence obligations in their supply chains. These obligations apply to the company’s own business, the activities of its direct suppliers and, under certain conditions, also to their subcontractors. The Federal Office for Economic Affairs and Export Control (BAFA) is responsible for monitoring companies’ compliance with the due diligence requirements specified in the Supply Chain Act.
Implications for the Federal Goverment's Export Credit Guarantees
The protection of human rights and compliance with national and international environmental and social standards have played an important role in the promotion of foreign trade by the Federal Republic of Germany for a long time. Looking forward, no new cover will be granted by the Federal Government to exporters who have committed serious violations of the Supply Chain Due Diligence Act such that a BAFA notice under which they are excluded from the award of public contracts has been issued against them (Section 22 of the Supply Chain Due Diligence Act). Since the beginning of the year, exporters have therefore had to provide confirmation in the application procedure to the effect that they are not subject to any such exclusion before single transaction cover is granted or spread policies (Wholeturnover Policy, Wholeturnover Policy Light, revolving supplier credit cover) are initiated or extended. Any false statements will release the Federal Government from liability for cover. In the case of isolated buyer credit cover, the bank is required to obtain the corresponding confirmation from the exporter in the application procedure. Should the exporter make any false statements in this regard and the Federal Government is subsequently required to indemnify the bank under the buyer credit cover, the exporter is liable towards the Federal Government for compensation. The Letter of Undertaking has been supplemented accordingly.
Since 1 January 2023, all spread policies have additionally provided for an extraordinary right of termination by the Federal Government in the event that the exporter is excluded from public procurement during the term of the policy due to a violation of the Supply Chain Due Diligence Act. The exporter is required to make the necessary disclosures.
The Supply Chain Due Diligence Act has been implemented for businesses and export-oriented banks in a practical manner so that very little additional effort is required on the part of the policyholders. These changes do not apply to existing cover or cover applied for before 1 January 2023.
Further information can be found in BAFA - Overview.
Iran: Availability of cover suspended
In view of the very serious situation in Iran, the Interministerial Committee (IMC) for Export Credit Guarantees formally decided at its January meeting to suspend cover facilities for that country until further notice. Political and economic risks in Iran increased significantly in 2022. In view of this, there is currently no prospect of avoiding claims under new cover for Iran. Cover under Investment Guarantees had been suspended in December.
Exceptions apply only to transactions involving humanitarian goods on the basis of a decision made by the Federal Government on the merits of the individual case.
Untied Loan Guarantees as an element of the German raw materials strategy
The Russian war of aggression on Ukraine has underscored the importance of securing raw materials and energy supplies as well as of diversifying markets and supply chains. This applies equally with regard to foreign trade promotion. In this context, the importance of Untied Loan Guarantees as an instrument for supporting raw materials and transformation projects has grown.
Since 1961, Untied Loan Guarantees have been used as financial credit cover to support German industry in procuring commodities for its own processes.
Untied Loan Guarantees protect lenders in foreign raw material projects from the risk of commercial and political default and are a central component of the Federal Government’s raw materials strategy.
Raw material purchases secured by a long-term supply contract between a foreign producer or trader and a German buyer are eligible for cover. This guarantee is “untied” in the sense that – unlike Export Credit Guarantees – it is not tied to the provision of German goods and services in return.
Demand for Untied Loan Guarantees rose significantly last year. Various projects were successfully executed, including the provision of finance for a battery cell factory in Hungary and the purchase of liquefied gas. In addition, eligibility for cover was confirmed for a large number of projects that are still in the development phase. These include projects involving imports of copper, nickel, cobalt, lithium, battery cells and green hydrogen, thus demonstrating the wide scope of the Untied Loan Guarantee.