Tools - Garrulus Enterprise

OECD Minimum Premium Rates

The Organisation for Economic Co-operation and Development OECD with 38 Member countries with the goal to stimulate economic progress and world trade through market economy, providing a platform to compare policy experiences, seek answers to common problems, identify good practices, and coordinate domestic and international policies of its members.

The purpose of the so-called Arrangement on Officially Supported Export Credits is to provide a framework for the orderly use of officially supported export credits. It seeks to foster a level playing field for official support in order to encourage competition among exporters based on quality and price of goods and services exported rather than on the most favorable officially supported financial terms and conditions.

Import countries are classified regularly into classes of 0 to 7 and High Income countries (see Ratings). For market rates and for other purposes special interest rates by currencies are regularly assessed (see CIRR rates). For country category 0 and high income countries the Arrangement uses also letter ratings ranging from AAA to B-.

The Arrangement rules only credits with a repayment term of 2 years and more for so-called supplier and buyer credits. The maximum duration may vary from 8.5 to 10 years, for special infrastructural goods even longer.

Country Category 1 to 7

The formula for the premium rate is as follows:

${ \mathrm{MPR}=$
$\Big\{ \big[(a_i\cdot \mathrm{HOR}+b_i)\cdot\max(\mathrm{PCC},\mathrm{PCP})/0.95) \big]\cdot (1-\mathrm{LCF})$
$+\big[c_{i,n}\cdot\mathrm{PCC}/0.95\cdot\mathrm{HOR}\cdot(1-\mathrm{CEF} \big]\Big\}\cdot \mathrm{QPF}_i\cdot \mathrm{PCF}_i\cdot \mathrm{BTSF}}$
with the meanings
$i$ Index for the 1 to 7 country categories,
$n$ Index for the seven buyer categories,
$a_i$ Country risk coefficient,
$b_i$ Constant depending on $i$ ,
$c_i$ Buyer risk coefficient depending on $i$ and $n$ ,
HOR Horizon of Risk,
PCC Percentage of commercial cover,
PCP Percentage of political cover,
LCF Local currency factor,
CEF Credit enhancement factor,
$\mathrm{QPF}_i$ Quality of product factor in country $i$ ,
$\mathrm{PCF}_i$ Percentage of cover factor in country $i$ ,
BTSF Better than sovereign factor.
The first part with $a_i$ and $b_i$ stems from the ancient times when only sovereign risk was insurable. Then $c_{i,n}$ etc. was introduced to accomodate also private buyers. Therefore the rating is two-fold, for country risk plus for commercial risks.
Sometimes a letter rating in the style of Credit Rating Agencies seems preferable. Unfortunately there is no one-to-one mapping in neither direction. We use letter rating only with market benchmarking.
The formula ist based on a semi-annual repayment schedule. For other patterns, i.e. quarterly, monthly or annual frequencies the formula must be corrected. This is done via the Horizon of Risk. The higher the frequency the lower the premium.

Market Benchmarking (Country 0 and High Income)

The rate is calculated by discounting the payments of the spread times cover and portion of credit with the CIRR rate plus credit spread. Formally:

${r=c\cdot\sum_{j=1}^N \hat{s}\cdot a_j\cdot (1+\hat{s}+i)^{-t_j}}$ with ${\hat{s}}$ the interpolated spread according to Period of Risk and rating, ${i}$ the CIRR interest rate, ${t_j}$ the payment dates and ${a_j}$ with ${\sum_{j=1}^N a_j=1}$ , the portion of the credit amount due at ${t_j}$ and finally ${c}$ the cover rate.

This procedure may be executed with different spreads, i.e. from outstanding bonds, credit default swaps or syndicated loans in addition to the standard mix of „through the cycle“ default rates from Credit Rating agencies. There is also a so-called actuarial spread-curve to indicate the absolute minimum. From these 2 or potentially 5 rates the ECA may choose the rate according to own policies.

Markets are dynamic and may change spreads daily. Here the spreads are update once a year in February. During the year the rates stay fixed.