Credit Confirmation Risk Cover

Especially where short-term trade finance is required in foreign business, documentary export credit is frequently used (letter of credit = L/C). Under this specific type of credit agreement a bank undertakes, in accordance with the instructions of its client (i.e. the importer abroad), to make payment to a third party (i.e. the German exporter) or to commission another bank to do so if certain conditions are met (among other things the presentation of specific documents).

For instance, the exporter (beneficiary) agrees with his buyer abroad (importer) that he (as applicant) requests his bank (issuing bank abroad) to open a letter of credit. This bank issues the letter of credit and sends it the exporter’s bank. Thus the exporter knows for sure that he will receive payment from the issuing bank and the importer has always the guarantee that payment will not be made until the documents evidencing the goods/services have been duly presented in compliance with the terms and conditions of the letter of credit. In order to increase the security for the exporter further, his bank can confirm the letter of credit, i.e. assume a bare acknowledgement of debt on request of the issuing bank. If there is no order or authorization from the issuing bank abroad, the exporter’s bank may, however, give an independent, irrevocable undertaking to pay in the form of a silent confirmation.

The letter of credit which is to be covered must be based on an export transaction that meets the usual standards applicable to Federal export credit guarantees. Credit confirmation risk cover is granted in favour of the bank, separate supplier credit cover in favour of the exporter is not required. The bank has to give an exhaustive description of the underlying export transaction in the application form and submit a specific Letter of Undertaking and Declaration on Combating Bribery signed by the exporter.

Cover takes effected when the letter of credit is confirmed and ends with the full payment of the covered amount owing, i.e. the reimbursement of the credit amount through the issuing bank abroad after the documents stipulated in the letter of credit have been taken up or the lending period has expired. In order to effectively protect the confirming bank, the Federal Government waives its right to interfere in the cover in case of a deterioration of the risk - contrary to standard buyer credit cover - already with effect from the confirmation of the L/C. As a rule, the period of time that can be covered is limited to 360 days for the credit confirmation period plus five years for the lending period.

Where medium credit terms (two years or more) are agreed, the requirements of the OECD Consensus (a.o. down payment requirement) have to be met.