As one of the leading industrialised nations, the Federal Republic of Germany is among the largest consumers of raw materials worldwide and therefore a stable and reliable supply of raw materials is of crucial significance for the German industry. However, due to the limited resources of domestic raw materials, Germany is dependent on the supply of raw materials from abroad. The issue of a sufficient raw material supply lies first and foremost with the companies themselves. However, supply constraints, distortions in trade, drastic price increases as well as political influences aggravate the supply situation and impede the access to certain raw materials for German companies. Here, the Untied Loan Guarantees of the Federal Republic of Germany come into play, which, since 1961, have facilitated the access to raw materials abroad.
What are Untied Loan Guarantees?
The Untied Loan Guarantees (UFK Guarantees) are an integral element of the Federal Government’s raw materials strategy. They provide lenders to raw material projects abroad with cover against commercial and political credit default risks. In principle, the financed project needs to be eligible for cover in the light of raw material supply considerations and has to be in the national and macroeconomic interest of Germany. Additionally, the conclusion of a long-term supply contract for the financed project's raw material to a German offtaker is a prerequisite for cover.
What can Untied Loan Guarantees used for?
Untied Loan Guarantees be used for various raw material projects. In addition, Untied Loan Guarantees are also issued within the scope of development bank projects to support the promotion and development of market-economy structures abroad.
Worth knowing: As part of the raw materials strategy, the possibility was introduced to use Untied Loan Guarantees also for corporate finance related to the raw materials extraction but not to a specific project.
Advantages of an Untied Loan Guarantee at a glance
Raw material projects are connected with economic risks and may be situated in countries with a challenging political environment. An Untied Loan Guarantee covers the corresponding credit repayment risks. Hence, Untied Loan Guarantees often facilitate the financing of a project in the first place.
German raw material offtaker
The prospect of including an Untied Loan Guarantee in the financing scheme of a raw material project often enables German raw material offtakers to conclude long-term offtake contracts. On this basis the offtaker obtains access to a reliable source of raw material needed for many years.
Sponsor of raw material project
Including an Untied Loan Guarantee in the financing of a raw material project provides lenders with cover against credit default risks and can improve financing conditions. The necessary conclusion of a long-term offtake contract for delivery of raw materials with a German offtaker furthermore has a financial benefit for the project due to continuous revenues.
Main features of Untied Loan Guarantees
- Specific projects: Untied loans are granted to specific projects abroad. In contrast to the other foreign trade and investment promotion instruments of the Federal Republic of Germany, the Untied Loan Guarantees are not tied to the supply of German goods and services and therefore do not constitute a financing instrument for German exports.
- Subject matter of the contract: The covered obligation under an Untied Loan Guarantee is the policyholder’s repayment claim against the foreign debtor as agreed in the loan contract. The loan may be denominated in either Euro or a foreign currency. Any interest agreed on in the loan agreement is covered by the Untied Loan Guarantee insofar as it accrues up to the agreed maturities of the respective loan instalments. The guarantees can only be issued following an application by a German bank or branch of a foreign bank established in Germany as well as, subject to certain conditions, a foreign bank.
- German investment not required: German investment (e.g. equity capital) in the raw material project is not a prerequisite for cover. In a raw material project, an Untied Loan Guarantee may be included on the basis of a project or structured financing scheme. In theory the credit term is not limited, in practice, however, it is aligned with the term of the raw material offtake agreement.
Untied Loan Guarantees: preconditions for the issuing of a guarantee
1. Eligibility for cover in the light of raw material supply considerations
- Projects are considered to be eligible for cover if they increase the security of raw materials supplies to the Federal Republic of Germany. The prerequisite is that German offtakers receive raw materials on the basis of a long-term offtake agreement and that the provision of these raw materials is of a macroeconomic interest.
2. Justifiability of the risk
- The granting of an Untied Loan Guarantee must be justifiable in view of the risk involved for the Federal Government, i.e. considering the borrower’s creditworthiness and the political risks relating to the loan granted, it should be reasonable to expect a loss-free loan repayment.
3. Project structure
- A guarantee can only be granted if the commercial and technical feasibility of the raw material project to be financed as well as the total financing of the project are ensured. The loan period must correspond to the project’s commercial nature. In addition, the compliance with internationally accepted environmental, social and human rights standards of the project must be guaranteed. Finally, the financing must not serve to discharge existing obligations in respect of national or foreign supply and service transactions (no debt refinancing).
UFK Guarantee in combination with a Securitisation Guarantee
An Untied Loan Guarantee may be combined with a Securitisation Guarantee. The Securitisation Guarantee facilitates external refinancing for banks on the basis of export finance covered under an finance credit guarantee as it provides certain improvements to the cover in favour of the refinancing institution.