3 ways to cure an ECA funding shortfall
Ensuring contractor compliance with tied content requirements.
Export credit agencies ("ECAs") are key players in the financing of major projects. Healthy competition among ECAs can present borrowers with attractive financing options, while a well-considered ECA financing proposal submitted alongside a contract bid will usually enhance the bidder's prospects of success.
However, many ECA facilities are conditional on the sourcing of a stipulated value of works and services ("eligible content") from the ECA's home country.
A failure to adhere to that eligible content requirement may create a lethal gap in the owner's financing structure.
Owners therefore seek to impose on their contractors obligations to comply with defined eligible content requirements, together with express remedies for failing to do so.
However, contractors are typically wary of such exposure to "consequential loss" and of the loss of sourcing flexibility.
Thoughtful and timely drafting of such obligations is therefore required to deliver a solution that both parties can live with.
Key issues to consider
In some cases the ECA facilities are arranged at the time of execution of the construction contract, in others at a later date. In the second case, the contractor's obligations will need to extend to ongoing assistance with finalisation of the ECA facilities, the contract will need to provide a mechanism for incorporating the ECA eligibility requirements when finalised and the owner will face a more complex burden of proof in relation to the causal link between non-compliance by the contractor and any shortfall in the initially committed value of any ECA facilities.
In addition to delivering the required eligible content, contractors are often expressly required to comply with the detailed sourcing substantiation procedures as a condition to drawdown.
A single ECA facility may be linked to sourcing under multiple construction contracts relating to the same project. The ECA facility may also involve multiple ECAs. Apportioning the eligibility obligations between such contracts and facilities presents a complex challenge.
Remedies for non-compliance
It makes sense to explore less drastic alternatives before resorting to the ultimate remedies described below. These include the contractor seeking a waiver or cure of any non-compliance and attempts by either the contractor or owner to arrange acceptable alternative financing, with the contractor bearing any excess financing costs incurred by the owner. The contractor is normally required to suspend its entitlement to payment of any amounts which were intended to be financed by the drawstopped ECA facility until these options are exhausted.
If no easier solution can be found, the contract will typically impose one of a range of possible ultimate remedies. These might include:
The indemnity A-bomb
This involves a simple indemnity from the contractor against all consequences of the contractor's non-compliance. While this approach has the benefit of drafting simplicity, its lack of precision may make it challenging for a contractor to accept and price.
The LD rapier
A more nuanced approach involves applying LDs equal to a percentage of the ECA shortfall. The LD amount is calibrated so that it can be sensibly priced by the contractor while providing a meaningful deterrent to changes in the contractor's sourcing plan.
The main drawback of the rapier approach is that it does not fully compensate the owner for an uncured funding shortfall.
The substitute funding smart weapon
A workable compromise between the first two remedies may be to make the contractor the funder of last resort in respect of the shortfall. This involves replacing the lump sum payments envisaged under the original contract with staged payments which mimic the payment profile of the unavailable ECA facilities. The contractor should be able to refinance (or at least price) this long-term payment stream, while the owner's funding gap is effectively plugged.