The premium is quoted once and paid on day one, so its annual cost depends on how fast the loan amortises, and it is larger than it looks.
Add the coupon to the upfront costs spread over the loan's weighted average life, or better, solve for the rate that equates the cash the buyer actually receives with what it repays. On an illustrative ECA-covered buyer credit of 3,570,000 over five years at a 5.50 per cent coupon, a 4.5 per cent premium and a 0.75 per cent arrangement fee raise the cost to 7.71 per cent a year all-in, 3.41 points over the base rate. Spreading the premium over the five-year tenor, as many quotes do, makes it look half as expensive as it is.
Worked in full in Trade Finance by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
An export credit agency (ECA) buyer credit is a bank loan to the foreign buyer, guaranteed or insured by the exporter's ECA, that pays the exporter in cash on delivery. The exporter sells on cash terms; the buyer gets years to pay. The buyer's finance team then compares it with whatever local or commercial bank finance it has, and the comparison is only fair on an all-in rate.
| Input | Value |
|---|---|
| Export contract value | 4,200,000 |
| Buyer's down payment, the OECD Arrangement minimum | 15%, 630,000 |
| Covered loan, 85% of the contract | 3,570,000 |
| Repayment: ten equal semi-annual instalments of principal | 5 years |
| Base rate; bank margin under ECA cover; coupon | 4.30%; 1.20%; 5.50% |
| ECA premium, paid upfront in cash | 4.5% of the loan |
| Arrangement fee, upfront | 0.75% |
| Alternative: uncovered bank loan, margin and fee | 3.50%; 1.00% |
Upfront costs = premium 3,570,000 × 4.5% = 160,650, plus arrangement fee 3,570,000 × 0.75% = 26,775: 187,425
Repayments: 357,000 of principal every six months, plus interest at 5.50% ÷ 2 on the balance, 98,175 in the first period; total interest 539,962
Weighted average life = Σ(principal × time) ÷ loan = 2.75 years
All-in rate: solve 3,570,000 − 187,425 = Σ repaymentk ÷ (1 + r)k; r = 3.856% a half-year, 7.71% a year nominal, 7.86% effective
In Excel: =IRR(B1:B11)*2 with the net proceeds in B1 and the ten instalments, as negatives, in B2:B11.
The quick check is upfront cost ÷ average life. The premium is 4.5% ÷ 2.75 = 1.64 points a year and the fee 0.27, which on top of 5.50 gives 7.41 per cent. The IRR is higher, at 7.71, because the upfront costs are paid on day one: interest and principal are serviced on the full 3,570,000 while the buyer has only 3,382,575 net in hand, and the shortcut ignores the time value of that gap.
| Route | Upfront costs | All-in rate | Spread over base |
|---|---|---|---|
| ECA-covered, premium paid in cash | 187,425 | 7.71% | 3.41 |
| ECA-covered, premium added to the loan | 27,980 | 7.63% | 3.33 |
| Uncovered bank loan | 35,700 | 8.23% | 3.93 |
Of the 3.41 points over base, only 1.20 is the bank's margin. The other 2.21 points are the price of the cover, mostly the premium. The covered route still wins by 0.51 points, because the uncovered bank prices the buyer's own risk into a 3.50 per cent margin. Adding the premium to the loan, which is common, shaves a little more off because the premium is then borrowed at the covered coupon rather than out of the buyer's own resources.
| Premium | Premium amount | All-in rate | vs uncovered, points |
|---|---|---|---|
| 2.0% | 71,400 | 6.64% | −1.59 |
| 4.5% | 160,650 | 7.71% | −0.51 |
| 8.0% | 285,600 | 9.29% | 1.07 |
| 11.0% | 392,700 | 10.72% | 2.50 |
| Tenor, years | Illustrative premium | Average life | Premium a year | All-in rate |
|---|---|---|---|---|
| 3 | 3.0% | 1.75 | 1.71 | 7.87% |
| 5 | 4.5% | 2.75 | 1.64 | 7.71% |
| 7 | 6.0% | 3.75 | 1.60 | 7.68% |
A longer tenor is not automatically dearer. The premium rises with the risk period, but the annual cost depends on the premium divided by the average life, and both grow together. For the buyer, a higher upfront figure over seven years is the cheaper money per year in this example.
Dividing the premium by the tenor. 4.5% ÷ 5 = 0.90 points a year, which is what a premium quoted as "under 1 per cent a year" usually means. But an amortising loan has only 2.75 years of average life; half the principal is gone by the middle of the term, and the premium was paid on all of it on day one. The true charge is 1.64 points a year, and once the cost of carrying it is included the all-in rate is 7.71, not the 6.40 a tenor-based quote implies.
For the exporter, the same arithmetic decides whether to offer ECA finance at all or to grant the term itself, as in how much to charge for extended payment terms; the short-term version of the order, financed by the exporter, is in how to calculate the financing cost of an export order.
Price an ECA buyer credit on the IRR of the net proceeds against the repayments, not on the coupon. Upfront costs divided by the average life give a fair first estimate; dividing them by the tenor halves them. In the illustrative case the cover turns a 5.50 coupon into 7.71 per cent all-in and still beats an uncovered loan by 0.51 points, up to a premium of about 5.7 per cent. The book's export order, its calendar and its six routes to payment are in the free workbook for this case.
The export credit agency charges a premium for its guarantee or insurance, usually as a percentage of the covered loan, set by the buyer's country and credit risk and by the length of the repayment period. It is quoted once and paid upfront or added to the loan. In the illustrative case 4.5 per cent on 3,570,000 is 160,650, equal to about 1.64 per cent a year over the loan's 2.75-year average life.
Under the OECD Arrangement on officially supported export credits, official support is limited to 85 per cent of the export contract value, so the buyer pays at least 15 per cent itself, typically by delivery. On the illustrative 4,200,000 contract that is 630,000 in cash, leaving 3,570,000 for the covered loan.
Often, because the bank lends against a sovereign-backed guarantee and charges a much lower margin. In the illustrative case the covered loan at 1.20 per cent margin costs 7.71 per cent all-in against 8.23 per cent for an uncovered loan at 3.50 per cent margin and a 1.00 per cent fee. The advantage disappears if the premium exceeds about 5.7 per cent, as it can for weaker buyer countries.
This article is one calculation from Trade Finance. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
Get the book on Amazon →Free companion files
Also on Amazon UK · Amazon Germany · Amazon France · Amazon Canada
Reading guide: business operations: cost, contracts, pricing and supply chain → · All 1682 articles →
If this book helped, or didn’t, a few lines on Amazon are worth more than they look: they are what the next reader goes on. Write a review. The workbook stays free either way.