Many of Britain’s best firms produce quality capital or semi-capital goods that require significant investment. In the current environment, putting finance in place for a transaction of this kind is vital – and poses a challenge for some buyers. As a result, Direct Lending Facilities (DLFs) have become an increasingly important part of export promotion in recent years.

Essentially, a DLF offers finance to an international buyer of capital goods or services, conditional on the lender buying from businesses in the organising country. A DLF offers a significant competitive advantage when bidding internationally: all things being equal, an organisation choosing between two potential suppliers for a major purchase will lean towards one where an affordable finance solution is in place.

Introducing Direct Lending
With this in mind, the Direct Lending Scheme has been developed by UK Export Finance (UKEF), the Government’s export credit agency. UKEF works closely with UKTI to support British export competitiveness and growth. Initially announced by the Chancellor of the Exchequer in the Autumn Statement of 2012, the demand-led Direct Lending Scheme is designed to ensure that British companies can compete with their counterparts in offering credit as well as quality goods and services.

Under the terms of the scheme, UKEF has been mandated to provide an export credit loan directly to an overseas buyer or borrower. The agency can directly negotiate the terms and conditions of the loan, disburse funds against the manufacture and supply of the goods and services under the contract and manage the repayment of the loan.

The initial response to the scheme from the business community has been positive although, as a temporary lender-of-last-resort facility, it had potential to expand its application.

Building on the scheme
Improvements to the DLF were announced under Budget 2014 in March. The total DLF funding available has been doubled, from £1.5bn to £3bn, while the scheme has also been placed on a permanent basis.

Perhaps more significantly, having been originally introduced as a ‘back stop’ option where no other affordable finance was available, the DLF has now been re-envisioned to complement private finance rather than functioning as a lender of last resort. Previously, UKEF required evidence that two banks had refused export finance before an application could be considered. Now, the agency can assess all direct loan requests to confirm that any market displacement is minimised. To do this, an exporter should confirm to UKEF’s satisfaction that its existing bank is either not prepared to provide export finance for the transaction, or will only do so at an interest rate that would jeopardise the firm’s chances of winning the contract.

The loan limits of the original scheme have also been revised. Previously, the minimum loan value offered under the scheme was £5m unless specially agreed by UKEF, with a maximum available loan value of £50m. Now, depending on the facility’s total £3bn headroom, there will be no fixed upper or lower limits for loans. UKEF may offer alternative export finance options for loans below £5m in value, while it is envisioned that funding for loans of over £50m will come through a combination of the DLF and private commercial finance.

THE EXPORT REFINANCING FACILITY
Announced in April 2014, the £5bn Export Refinancing Facility offers long-term financing where buyers require loans of over £50m to purchase UK goods and services. The scheme is designed for large-scale construction or infrastructure development projects, and allows borrowers to avail of highly competitive funding from debt capital markets to refinance export finance loans after their initial funding by the banks. Under the terms of the new facility, UKEF will guarantee repayment of bonds issued by buyers to refinance initial loans. As a result, the bonds can be competitively priced, utilising the UK’s strong credit rating to further British trade. If a borrower is unable to refinance the loan, UKEF will become the lender until alternative funding is found.

Irene Graham, Executive Director of Business Finance at the British Bankers’ Association, explained some of the benefits offered by the scheme when it was announced. “Competitive pricing of UKEF-backed loans is key to UK exporters winning long-term export contracts, and we are supportive of a flexible ERF scheme that can further support long-term projects and finance options at competitive rates,” she said. “The BBA’s export finance banking specialists have worked closely with UKEF and HM Treasury on the development of this facility and are pleased it is now launched.”

Improving terms
The terms of the finance available under the scheme have also been improved to make as competitive an offering as possible while still following international rules. Under the original terms of the scheme, finance was offered at an established Commercial Interest Reference Rate (CIRR) + 1.5% – or the cost of Government borrowing if higher. This has been revised downwards to a flat CIRR or the cost of Government borrowing, whichever is higher. CIRRs will continue to be set in line with OECD guidelines.

The date of fixing the CIRR has also been made more flexible. The rules announced in 2012 stipulated that the CIRR will be fixed at the date of draw-down. Now, however, the borrower or exporter can fix the CIRR rate up to 120 days before contracts are signed with an additional cost, or fix CIRR at financial close or first drawdown without paying anything extra.

Private sector partnership
UKEF is also seeking to enhance the scope of the DLF by incorporating private sector finance. Previously, UKEF acted as the sole agent and lender under the scheme. However, the agency is now willing to deliver direct lending in and also operate in partnership with private sector providers.

Banks will negotiate fees from the borrower in the normal way, while a 0.15% contribution from the CIRR margin will be provided to partner banks on outstanding loan amounts below £20m for their role in the scheme.

DLF – OTHER KEY CONDITIONS
Several conditions of the DLF scheme are worth keeping in mind for exporter companies.

FOREIGN CONTENT
UKEF can consider supporting foreign content – the cost for exporters of purchasing goods or services from non-UK contractors – worth up to 80% of the contract value. The agency may vary this proportion depending on the countries involved and loan values of over £50m.

AVAILABILITY
DLF is currently available in nations where UKEF’s Country Cover insurance is on offer. A list of these countries, from Abu Dhabi to Zambia, is available on the UKEF section of www.gov.uk.

DOCUMENTATION
Standard UKEF loan documentation requirements apply, including pre-payment breakage cost provisions.

CURRENCIES
Loans can be issued in Sterling, US Dollars, Euro and Japanese Yen.

Increasing attraction
These key changes have improved the availability and attractiveness of the scheme, according to Andrew Barton, Manager of the Export Refinance Facility at UKEF. “No companies have made any drawing under the facility, as of yet. This is mainly a result of the original facility being designed as a backstop (lender of last resort) facility, and an expected lag between the Chancellor’s announcement on 19 March and live deals coming to fruition,” he notes. “Export finance projects typically involve lengthy contract negotiations. We are currently dealing with a large number of potential DLF deals, ranging from £4m to £500m plus, with the first deals likely to be concluded over the summer months,” Barton reveals.

As more UK exporters tap into the potential of export finance to improve their competitiveness, the DLF and the related Export Refinancing Facility will be increasingly valuable tools for winning business overseas.

HOW TO APPLY
Applications for the DLF scheme should be submitted by the proposed exporting company. You can download the application form from www.gov.uk/government/organisations/uk-export-finance.