THE INTERNATIONAL COMMERCE & LAW REVIEW Vol. 48 DEC. 2010 pp.

127~155

Article submitted on 2010. 11. 30.

Examination completed on 2010. 12. 07.
Publication accepted on 2010. 12. 18.

A Comparative Study on a Supplier Credit and a

Buyer Credit in International Transactions of
Capital Goods*
- Focusing on Industrial Plant Exports, Shipbuilding Exports,
and Overseas Constructions -

Kim, Sang Man**

Ⅰ. Overview
Ⅱ. A Supplier Credit and A Buyer Credit
Ⅲ. Case Analyses of A Supplier Credit and A Buyer
Credit of Capital Goods
Ⅳ. Conclusion

Ⅰ. Overview

As it was announced, Korean Consortium led by KEPCO(Korea Electric

Power Corporation) won UAE Nuclear Power Plant Project in December

* This paper has been supported by 2010 Kyungnam University Research Fund
** Full Time Instructor at Kyungnam University, Attorney at Law(New York)

－ 127－
128 THE INTERNATIONAL COMMERCE & LAW REVIEW Vol. 48 (DEC. 2010)

2009. This called on public attention into exports of capital goods such as
industrial plant exports, overseas constructions, shipbuilding exports, etc.
According to IAEA, 430 Nuclear Plants are scheduled to be constructed
worldwide.1)
Industrial plant exports, overseas constructions, and shipbuilding exports,
require high-technology, help to get access to new emerging markets, bring
less trade conflict, help to transfer technology to an importing country, and
attribute to promote economic cooperation with an importing country. Such
benefits encourage all the countries to make efforts to promote competitiveness
in industrial plant exports, the overseas constructions, and ship building
exports. These exports have so strong influence on a nation's economy that
most countries concentrate on the exports.
However, these transactions are so huge that tremendous amount of funds
are required. Therefore syndicated loan which is provided by two or more
banks is common.2) Most of these transactions are of over 100 million US
Dollars, and some of them are of over one billion US Dollars. These
transactions require longer-term financing than traditional commodities. This
is because the amount of time it takes for capital goods to pay for itself is
considerably longer than for consumer goods.3) This amount of time, known
as the capital goods cycle, extends into years. It may take considerable time
before enough products can be produced for it to pay for itself. Some of the
importing countries are developing ones that are politically and economically
unstable. Therefore the financing mechanism for these transactions is
conclusive in winning the transaction. This is the primary reason why we need
to study on the financing schemes for those transactions of capital goods.
Global financial market instability caused by US sub-prime mortgage

1) Lee, Jae Kyu, "World Nuclear Market and Entering Strategy", Overseas
Construction, 2010.2, p.8
2) Andrew Fight, Syndicated Lending, Elsevier, 2004, p.1
3) Harry M. Venedikian, Gerald A. Warfield, Export-Import Financing, 4th
Edition, John Wiley & Sons, Incl, 1996, p.20
A Comparative Study on a Supplier Credit and a Buyer Credit in International Transactions of Capital Goods 129

financial crisis expanded all over the world, and the international transactions
have been decreased due to global credit crisis. This indicates how much
influential the financing market is in international transactions.
The financing schemes are classified into a supplier credit and a buyer credit
by who provides the financing. In a supplier credit an exporter(a supplier) is
responsible for providing the financing, and in buyer credit an importer(a
buyer) is responsible for providing the financing. Large amount of funding are
made available by these two means.4)
A supplier credit is quite opposite to a buyer credit in that a borrower is the
opposite; in a supplier credit a borrower is an exporter, and in an buyer
credit a borrower is an importer. A supplier credit and a buyer credit have
their own advantages and disadvantages in the respect of the parties
respectively. These two financing methods are selectively used considering
financing conditions such as funding cost, importer's and/or exporter's
financial conditions, importing country's political risk.
There are some articles previously published on a supply credit and a buyer
credit ; 'The State and Use of Buyer Credit'5) focuses officially supported
export loan and its application rather than the comparison of these two
financing schemes. 'Understanding of Short-Term Export Insurance(Buyer
Credit) and Cases'6) gives brief explanation of a supplier credit and a buyer
credit. It focuses on export of consumer goods and/or commodities, and
export insurance for consumer goods and/or commodities. 'The Changes of
Shipbuilding Industries and Ship Financing'7) illustrates very shortly advantages
and disadvantages of a buyer credit only.

4) Richard Willsher, Export Finance, Macmillan Press 1995, p.66

5) Kang, Mal Lee, "The State and Use of buyer credit", Export Insurance,
Volume 14, 1982.10, p.105-118
6) Ahn, Yoo Shin, 'Understanding of Short-Term Export Insurance(Buyer Credit)
and Cases', Export Insurance, 2006.11, p.22-29
7) Lim, Jung Duck, The Changes of Shipbuilding Industries and Ship Financing,
KIET, 2009.9, p.50
130 THE INTERNATIONAL COMMERCE & LAW REVIEW Vol. 48 (DEC. 2010)

However this article focuses on international transaction of capital goods

such as industrial plant, shipbuilding, and overseas construction rather than
consumer goods and/or commodities. This article gives more detailed
explanation as well as deep analyses of a supplier and a buyer credit,
analysing advantages and disadvantages of all the parties(an exporter, a
financial institution, and a importer) respectively. Furthermore, this article
analyzes two export transactions of capital goods proceeded respectively in a
supplier credit and in a buyer credit with export insurance cover for the
convenience of understanding .
The article will help the parties involved in international transaction of
capital goods to choose the proper financing schemes, and to conclude a
contract in an amicable way. In addition, the detailed understanding of these
two financing methods will hopefully promote the international transactions of
capital goods worldwide.

Ⅱ. A Supplier Credit and A Buyer Credit

1. A Supplier Credit

1) Concept
A supplier credit is credit extended by an exporter(seller, supplier) to an
importer(buyer) as part of the export contract.8) Cover for this transaction
may be extended by an export credit agency('ECA')9) to an exporter.10) In a

8) Malcolm Stephens, The Changing Role of Export Credit Agencies, IMF

Washington, 1999, p.110
Richard Willsher, op. cit., p.75
9) 'ECA is an institution providing export credit insurance facilities. All credit
agencies were at stage government-owned or government controlled. or, if they
were private companies, operated on government account. This is no longer the
case, because the position is now rather complicated, and so there is today
A Comparative Study on a Supplier Credit and a Buyer Credit in International Transactions of Capital Goods 131

sales contract an exporter shall provide fund required to manufacture or

procure goods, and in a construction contract a contractor shall provide fund
required to complete a construction.11) When a supplier credit transaction
arises in a mid and long term12) transaction, an importer normally makes cash
downpayment up to 15%. Forfaiting is a form of a supplier credit finance
where the exporter receives promissory notes or bills of exchange as evidence
of the future obligations of the importer to pay for the goods.13)
In international transactions of capital goods, an exporter(seller) shall
provide finance with his own credit. An exporter borrows the amount of fund
prerequisite to manufacture and install industrial plant, to accomplish overseas
construction, and to build a ship. After performing its contractual obligation,
it receives payment from an importer on a deferred installment payment basis.
With the payment from an importer, an exporter repays the loan that it
borrowed from a financial institution. Even though an importer does not pay,
an exporter is obliged to repay the loan.
On a rare occasions an exporter will be prepared to deliver a ship to an
importer without being paid in full, in which case an exporter will normally

probably no single meaning for the term '"export credit agencies". It is probably
best to define it in terms of functions of the organization rather than its status.'
(Malcolm Stephens, op. cit., p.85)
10) Malcolm Stephens, op. cit., p.110
11) Kim, Sang Man, A Study on the Legal Aspects of the Financing Schemes in Plant
Export Transactions, Doctoral Degree Thesis at Korea University Graduate
School, 2008, p.47
12) In international finance, mid and long term means the term of over one year.
However the OECD Arrangement on Guidelines for Officially Support Export
Credits is applied to a transaction with repayment term of two years or more.
‘The Arrangement shall apply to all official support provided by or on behalf
of a government for export of goods and/or services, including financial leases,
which have a repayment term of two years or more.’
(the OECD Arrangement on Guidelines for Officially Support Export Credits
Chapter I Provision 5)
13) Richard Willsher, op. cit., p.75
132 THE INTERNATIONAL COMMERCE & LAW REVIEW Vol. 48 (DEC. 2010)

require comfort from a third party, usually a bank, unless the importer can
produce a satisfactory guarantee from its parent company.14)

(Diagram for a supplier credit15))

④ deferred payment

exporter ① export contract importer

(seller, borrower) (buyer)
③ perform contract

⑤ repay ② loan

financial institution
(lender)

The general procedure for a supplier credit is as follows;

① An exporter(a seller) enters into an export contract with an importer(a
buyer), in which an importer pays to an exporter on a deferred payment basis.
② An exporter borrows funds to perform the export contract from a bank
with its own credit. an exporter enters into a loan agreement with a bank.
③ An exporter, then, performs the export contract by using the funds.
④ After an exporter performs the export contract, an importer will pay to
an exporter on a deferred payment basis with the revenues from the
operation of the plant.
⑤ Finally, an exporter will repay the loan to the bank with the payment
that it receives from an importer.

14) Stephenson Harwood, Shipping Finance, 3d Ed, Euromoney, 2006, p.17

15) Kim, Sang Man, op. cit., p.48
A Comparative Study on a Supplier Credit and a Buyer Credit in International Transactions of Capital Goods 133

2) Parties to a Loan Agreement

As an exporter borrows money from a financial institution in a supplier
credit, an exporter becomes a borrower and a financial institution becomes a
lender. An exporter and a financial institution become the parties to a loan
agreement. A supplier credit is a back-to-back funding operation whereby an
exporter passes through, or assigns, to a lending bank the credit risk and the
funding requirements of the transaction.16) Although an importer is not a
party to a loan agreement, a financial institution shall directly claim the
payment to an importer when the payment is assigned to it.

3) Securities
A financial institution requires securities when it decides an exporter's credit
rating does not meet the criteria. The main securities required by a financial
institution are as follows.
First, a financial institution requires corporate guarantee by a parent
company, which is the simplest security. A traditional guarantee is secondary
in the sense that it requires breach or alleged breach or failure under the
transaction as a condition precedent to become payable.17) However, a
financial institution requires an independent guarantee, in which a guarantor
promises to pay as a primary obligor not a secondary obligor.18) However,
these days a parent company is reluctant to provide a corporate guarantee.
Second, an exporter may assign the payment to a financial institution for
security, In this case, an importer is supposed to make payment directly to a
financial institution.
Third, an exporter assigns an export insurance policy to a financial
institution for security. Such insurance may help for an exporter to obtain

16) Richard Willsher, op. cit., p.76

17) Matti S. Kurkela, Letters of Credit and Bank Guarantee under International
Trade Law 2nd Edition, Oxford University Press, 2008, p.12
18) Roeland Bertrams, Bank Guarantees in International Trade 3rd Edition, ICC
Publishing S.A. 2004, p.11
134 THE INTERNATIONAL COMMERCE & LAW REVIEW Vol. 48 (DEC. 2010)

bank financing easily.19) Many Countries have established export credit

agencies to promote their exports through various forms of support including
export insurance.20) Export credit agencies share one main aim that is to
promote exports from their own countries protecting exporters against
commercial risks of importers and political risks in importing countries.21) For
instance, ECGD's22) core purpose, as defined by statute, is to facilitate, directly
or indirectly, exports of goods and services and overseas investments.23) When
an importer is not creditworthy, the assignment of the payment shall not be
regarded as safe security. Therefore a financial institution requires an exporter
to purchase export insurance.
Fourth, a letter of credit is required especially in short term transactions.
Invariably an exporter would not wish to part with his goods prior to being
paid for them, and an importer would not wish pay for goods prior to having
inspected them and ensured that they were of the quality and specifications
required.24) A letter of credit can satisfy both an exporter and an importer.

4) Relevant Export Insurance

'Medium & long term export insurance(supplier credit)' is selectively used
as a security in an export transaction of capital goods, while 'short term
export insurance(general export)' is used in an export transaction of consumer
goods. Export insurance covers risks which are peculiar to export transactions

19) Harry M. Venedikian, Gerald A. Warfield, op. cit., p.2

20) John E. Ray, Managing Official Export Credits, Institute for International
Economics Washington D.C, 1995, p.1
21) Eric Bishop, Finance of International Trade, Intellexis plc, Elsevier Ltd, 2006,
p.100
22) ECGD is an English ECA.
23) Secretary of State for Trade and Industry, Review of ECGD's Mission and
Status, 2000.7, p.16
24) Howard Palmer, International Trade and Pre-export Finance, Euromoney
Institutional Investor PLC, 1999, p.21
A Comparative Study on a Supplier Credit and a Buyer Credit in International Transactions of Capital Goods 135

but are not normally covered by commercial insurance.25) Short term export
insurance covers risks of nonpayment of export proceeds in an export
transaction due to political or commercial risks, the payment term of which
does not exceed two years. Medium & long term export insurance(supplier
credit) covers risks of non-payment by an importer in an export transaction
due to political or commercial risks, the payment term of which exceeds two
years. In these two export insurances, an exporter becomes a policy holder.
Short term export insurance is the most frequently used insurance product
among various export insurances. However, medium & long term export
insurance(supplier credit) is typically considered more important than short
term export insurance for the payment term is longer and therefore the risks
are higher. Medium & long term export insurance(supplier credit) enables a
financial institution to provide loan to an exporter for it is treated as a safe
security.
The International Union of Credit and Investment Insurers('Berne Union') set
「Berne Union General Understanding」26) which regulates starting point of
credit, length of credit, minimum downpayment, and installment. One of the
main purposes of the Berne Union is to work for the international acceptance
of sound principles of export credit insurance and the establishment and
maintenance of discipline in the terms of credit for international trade.
As the Berne Union General Understanding restricts the length of credit of
consumer goods within two years, medium & long term export
insurance(supplier credit) is applicable to exports of capital goods such
industrial plants, the overseas constructions, and shipbuilding exports.

25) Clive M. Schmitthoff, Export Trade : The Law And Practice Of International
Trade, 9th ed., London Steven & Sons, 1990, p.471
26) http://www.berneunion.org.uk
136 THE INTERNATIONAL COMMERCE & LAW REVIEW Vol. 48 (DEC. 2010)

5) Advantages and Disadvantages of a Supplier Credit27)

(1) In an Exporter's Respect

It is comparatively easy for an exporter to borrow fund on a supplier
credit basis for its good credit rating. Generally an exporter which won
industrial plant export, overseas construction, or shipbuilding export has good
stable financial condition. Therefore an exporter can borrow fund required to
perform export contract easily from a financial institution. An exporter
surpasses an importer in negotiating contract price for it provides finance.
However, an exporter is paid on long term deferred payment method. After
an exporter completes its contract obligation, an importer may willfully raise
claim to deduct payment or to reject payment. Furthermore, an importer can
be insolvent or bankrupt, in which case an exporter can not receive payment.
A shipbuilding contract has lower risk than a industrial plant export, or
overseas construction, in that a builder holds mortgage on the ship and the
ship can be resold in an another country. However, as an industrial plant is
not movable, it can not be resold in an another country.
During the performance of the contract, the loan is added to an exporter's
balance sheet as liability(debt). After performance of the contract, the contract
value is added to an exporter's balance sheet as asset(account receivable). Thus
debt on balance sheet increases, and liability ratio rises, which results in the
aggravation of financial structure.
The key to success for an exporter is to obtain securities to mitigate the
risks. The securities are as follow ; mortgage on the object, export insurance,
guarantee by a bank or a parent company.

(2) In an Importer' Respect

The advantages of a supplier credit in an exporter's respect is the
disadvantages in an importer's respect, and the disadvantages of a supplier

27) Preposition : an exporter is a company with good credit rating, and an importer
is a company with poor credit rating located in a developing country.
A Comparative Study on a Supplier Credit and a Buyer Credit in International Transactions of Capital Goods 137

credit in an exporter's respect is the advantages in an importer's respect. In a

supplier credit an importer is free from non-performance risk by an exporter
for an importer makes payment only after an exporter performs the contract.
Normally an importer pays downpayment approximately 15% of the
contract price. An importer can get rid of the risk of downpayment by way of
advance payment guarantee issued by a financial institution. Furthermore an
importer requires performance guarantee. In the event an exporter fails to
perform the contract, an importer can make demand under a performance
guarantee as well as under a advance payment guarantee. As an exporter
provides finance, an exporter can surpass an importer in negotiating contract
price, which may result the increase of contract price.

(3) In a Financial Institution's Respect

A financial institution provides loan to an exporter in a supplier credit, and
to an importer in a buyer credit. Which is more beneficial to a financial
institution depends on specific credit conditions of an exporter and an
importer, and on the terms and conditions of a loan agreement.
Under the preposition aforesaid, as an exporter has sound credit rating, the
loan is considered to be more secured. As an exporter has principal place of
business in domestic area, establishing securities is easier. Therefore, a financial
institution does not require high spread.
When the repayment term of a loan is long term, a financial institution
tends to require securities for an event of default such as ; assignment of the
payment under the export contract, assignment of export insurance policy, etc.
In rare cases a financial institution purchases the payment right without
recourse and with high rate of discount, in which case an exporter is free
from payment risk at all.

2. A Buyer Credit

1) Concept
138 THE INTERNATIONAL COMMERCE & LAW REVIEW Vol. 48 (DEC. 2010)

A buyer credit is an arrangement in which an exporter enters into a

contract with an importer, which is financed by means of a loan agreement
where the borrower is the importer of the goods.28) Such arrangements are
most frequently used to finance capital goods or projects on a medium or long
term basis.29) Shortly, a buyer credit is a loan or credit extended by a
financial institution directly to an importer(buyer) in a third country. An
exporter enters into a contract with an overseas importer, which is financed
by means of a loan agreement between a lending bank and an overseas
importer. In a sales contract an importer shall provide fund required to
manufacture goods, and in a construction contract an employer shall provide
fund required to complete a construction. an buyer credit is a tied loan for the
loan is used for the export contract.30) A buyer credit has two schemes of
direct loan and relending facility. Direct loan is given directly to an importer,
and relending facility is given to a bank in an importing, and the bank gives
loan to an importer.
A buyer credit is common in project finance which is a method of raising
long-term debt financing for major projects through "financial engineering",
based on lending against the cash flow generated by the project alone.31)
An export credit agency in an exporting country typically provides insurance
cover to a lending bank, and an exporter can draw on the loan as the work
is done and accepted.32) The exporter shall be paid as he accomplishes the
export contract or be paid on a progressive payment basis. A buyer credit
benefits both of a seller and a buyer as the seller receives on delivery or

28) Malcolm Stephens, op. cit., p.73.

Richard Willsher, op. cit., p.66
29) Malcolm Stephens, op. cit., p.73.
Richard Willsher, op. cit., p.67
30) Kang, Mal Lee, op. cit., p.105
31) E.R. Yescombe, Principles of Project Finance, Academic Press, 2002, p.1
32) Malcolm Stephens, op. cit., p.73.
Richard Willsher, op. cit., p.67
A Comparative Study on a Supplier Credit and a Buyer Credit in International Transactions of Capital Goods 139

acceptance of the goods and the buyer has affordable mid/long term finance
that may not been available in its own country.33)
Interest on the loan accrues during the drawdown period and is typically
payable during the drawdown period. However these days especially in project
finance, the interest during the drawdown period is capitalized for a borrower
for an importer does not make any profit during construction.
Even though an exporter fails to accomplish the contract, a borrower
should repay the loan disbursed. Once the project is completed, an importer
makes revenue by operating the project. And an importer repays the principal
as well as the interest with the revenue. The interest can be paid either at a
floating rate such as Libor plus spread, or at a fixed rate such as
CIRR(Commercial Interest Reference Rate).34)

(Diagram for buyer credit35))

④ progressive payment

exporter ① export contract importer

(seller) (buyer, borrower)
③ perform contract

⑤ repay ② loan

financial institution
(lender)

33) Michele Donnelly, Certificate in International Trade and Finance, ifs School of
Finance, 2010, p.136.
34) CIRR(Commercial Interest Reference Rate) is figures published monthly by OECD,
which represent the lowest interest rates for each of the major currencies at which
export credit agencies may support credits of over two years' maturity. They are
generally set by reference to government borrowing rates in the appropriate currency
plus a margin. (Malcolm Stephens, op. cit., p.76.)
35) Kim, Sang Man, op. cit., p.50
140 THE INTERNATIONAL COMMERCE & LAW REVIEW Vol. 48 (DEC. 2010)

The general procedure for buyer credit transaction is as follows;

① An exporter enters into an export contract with an importer, in which an
importer shall pay to an exporter on a progressive payment36) basis.
② An importer enters into a loan agreement with a bank
③ An exporter performs the export contract.
④ A bank shall disburse the loan to an importer.
In fact, a bank transfers the funds directly to an exporter.
⑤ An importer pays an exporter on  progressive payment basis.
⑥ Once an exporter completes the plant, an importer shall repay to the
bank with the revenues from the operation of the plant on a long term
installment basis.

2) Parties to a Loan Agreement

As an importer borrows money from a financial institution in buyer credit,
an importer becomes a borrower and a financial institution becomes a lender.
An importer and a financial institution become the parties to a loan
agreement. When an importer lacks credit-worthiness, a financial institution
purchases export insurance. Typically, an export credit agency in an exporter's
country covers the loan agreement. In some cases a parent company of an
importer borrows money from a financial institution.

3) Securities
A financial institution requires securities when it decides an importer's credit
rating does not meet the criteria. The main securities required by a financial
institution in an buyer credit are as follows.
First, a financial institution requires corporate guarantee by a parent

36) In progressive payment, an exporter shall be paid to in proportion to the

performance. In plant exports, normally an exporter is paid monthly. Every month
an importer checks the performance and issues a certificate. And an exporter shall
be paid with the submission of certificate and invoice. Finally, at completion of the
plant, an exporter shall be paid in all.
A Comparative Study on a Supplier Credit and a Buyer Credit in International Transactions of Capital Goods 141

company. This is the simplest security. However these days a parent company
is reluctant to provide a corporate guarantee. Especially in project finance, a
sponsor, which is a parent company of a project company, does not provide
direct payment guarantee to a financial institution.37)
Second, a financial institution purchase export insurance which is provided
by an export credit agency in an exporter's country. Generally an importer
pays all the costs related to export insurance.
Third, in project finance, a financial institution requires completition
guarantee, concession from a host country, long term off take contract etc.
Fourth, in a ship building contract, an importer requires refund guarantee
(which is shortly called 'R/G')38) issued by a first class bank. If a builder
(exporter) fails to build a ship and to deliver, a beneficiary on the refund
guarantee makes demand to the issuing bank for the amount of the principal
of progressive payment plus interest accrued. A financial institution requires an
importer to assign the refund guarantee or requests an importer to nominate it
as a beneficiary under the refund guarantee.

4) Relevant Export Insurance

Medium & long term export insurance(buyer credit) covers non-recovery
risk of financial proceeds by a financial institution in a medium & long term
loan agreement, the repayment of which exceeds two years. Separate from the
export contract (or the supply contract), a financial institution provides export
financing to an importer(project company in project finance) and a financial
institution becomes a policyholder. Medium & long term export insurance
(buyer credit) enables a financial institution to provide loan to an importer for
it is regarded as a safe security.

37) E.R. Yescombe, op. cit.,, p.7

38) Refund guarantee is a kind of independent guarantee, which is issued to guarantee
the performance of a shipbuilding contract by a builder. In the event a builder fails
to perform a shipbuilding contract, refund guarantee shall be called.
142 THE INTERNATIONAL COMMERCE & LAW REVIEW Vol. 48 (DEC. 2010)

The basic function of medium & long term export insurance(buyer credit) is
to cover non-payment risks, and it plays more important role as a security for
a buyer credit finance. This is why financial institutions come to visit an
export credit agency to request insurance cover before they issue letter of
intent for a project. The detailed terms of an ECA export insurance or
guarantee will be different depending on the ECA and the governing law.39) A
borrower draws down loan from a lender to pay an exporter before delivery
of goods, or to pay an exporter in progressive payment method. The importer
repays the loan with the revenue that it earns by operation of the project.

5) Advantages and Disadvantages of a Buyer Credit40)

(1) In an Exporter's Respect

An exporter is normally paid on a progressive payment method In a buyer
credit, in which it receives full payment before he performs the export
contract. Therefore an exporter does not bear the non-payment risk. As an
exporter receives payment on progressive payment method or 100%
downpayment, it enjoys the same satisfaction as cash payment. An exporter
has no borrowing for it does not borrow fund to perform the export contract.
After an exporter performs an export contract, not the total transaction but
the margin only is added to balance sheet as asset, which results in the
reduction of liability ratio and the improvement of financial status. As an
exporter's finance structure improves, the borrowing cost afterwards will go
down.
As an importer provides finance , it surpasses an exporter in negotiating
contract price, which may result in the reduction of contract price.
Furthermore an exporter is obligated to provide bank guarantee such as
advance payment bond, refund guarantee, and performance guarantee. An

39) Graham Vinter, Project Finance, London Sweet & Maxwell, 1998, p.199
40) Preposition : an exporter is a company with good credit rating, and an importer is
a company with poor credit rating located in a developing country.
A Comparative Study on a Supplier Credit and a Buyer Credit in International Transactions of Capital Goods 143

importer requires that an export credit agency in an exporter's country provide

export insurance cover for a financial institution.

(2) The Advantages and Disadvantages in an Importer' Respect

As mentioned above, an importer can surpass an exporter in negotiating
contract price to reduce contract price in a buyer credit. In the event of an
export credit agency provides export insurance cover, an importer can borrow
fund with long term credit as well as with low spread.
However, an importer is exposed to the non-performance risk by an
exporter. An importer should repay the loan to a financial institution even
though an exporter fails to perform the contract. To mitigate
non-performance risk by an exporter, an importer, normally, requires
performance guarantee as well as advance payment guarantee by a financial
institution.
In the event that an exporter fails to perform the export contract, an
importer shall make demand call under performance and advance payment
guarantee. With the payment from these guarantees an importer recovers what
it paid and damages caused by the exporter's failure. A loan agreement
stipulates Isabella Clause41) in order to obligate an importer to repay
regardless of the performance of contract by an exporter. An importer's
financial structure gets worse for its liability ratio rises.

41) Malcolm Stephens, op. cit., p.91.

'Isabella Clause means a clause or provision in a contract or loan provision that
separates the obligations, rights, and responsibilities under the contract from those
under an associated loan agreement. Such a clause may be inserted when export
credit agencies issue buyer credits. buyer credit loans subject to an Isabella clause
thus involve "clean" repayment obligations on the borrower, irrespective of what may
be happening under the contract being financed. In other words, problems with the
contract or project do not give the borrower any right to default or delay payment
on the loan or to suspend repayments.'
144 THE INTERNATIONAL COMMERCE & LAW REVIEW Vol. 48 (DEC. 2010)

(3) In a Financial Institution's Respect

As an importer has poor financial condition in general in a buyer credit,42)
high spread is applied to a loan. Especially in project finance in which a
project company is newly established and has poor financial structure, a
financial institution requires extremely high spread. However, a financial
institution should bear high risk due to an importer's poor credit rating.
To mitigate risk, financial institutions cooperate to provide a loan on a
syndicated loan basis. In many instances the term and risk go beyond the
willingness of one bank to carry so that several banks act as a syndicate in
financing large projects requiring longer terms.43)
Furthermore a financial institution requires securities for an importer's
default as well as for political risk in an importing country. One of the most
preferred securities is export insurance provided by an ECA of an exporter's
country, for export insurance covers not only commercial risk but also
political risk.
In a project finance more detailed feasibility study is required. One of the
main elements is DSCR which means 'debt service coverage ratio'. In a power
plant project with long term offtake contract, DSCR at minimum 1.3 is
required, and without long term offtake contract, 2.0 is required.44) In
addition a financial institution requires performance guarantee by a sponsor. A
financial institution considers all the benefits and risks involved in a loan to
choose the best credit method.

42) This is based on assumption that an importer is in a developing country with poor
financial condition. In a ship building contract, generally an importer has good
financial condition, and is in a developed country. Thus the general explanation
above does not apply.
43) Harry M. Venedikian, Gerald A. Warfield, op. cit., p.21
44) E.R. Yescombe, op. cit., p.273
A Comparative Study on a Supplier Credit and a Buyer Credit in International Transactions of Capital Goods 145

Ⅲ. Case Analyses of A Supplier Credit

and A Buyer Credit of Capital Goods.

1. A Supplier Credit Transaction

1) Transaction Summary
D Company(Korean exporter) and N Company(Azerbaijan importer)
entered into contract for supply and installation of telecommunication
equipment and system. The contract value amounted to USD 12.5 millions.
The buyer shall pay 15% of the contract value in advance, and shall pay the
remaining 85% on deferred installment payment for four years upon issuance
of acceptance certificate. N Company shall provide payment guarantee of the
Ministry of Communication as well as its own promissory note.

(Summary of Transaction)

Export Contract
Seller D Company(Korea)
Buyer N Company(Azerbaijan)
Work Scope Supply and Installation of Telecommunication Equipment and System
Contract Value USD 12.5 million
15% : advance payment
Terms of Payment 85% : deferred installment payment for four years after acceptance
certificate
Interest Rate 4.5%(fixed interest rate)
- Promissory Note of N Company
Securities
- Payment Guarantee of Ministry of Communication of Azerbaijan
Loan Agreement
Lender K Bank
Borrower D Company(Seller)
Loan Amount USD 10.7 million
Interest Rate 5.18%(fixed interest rate)
146 THE INTERNATIONAL COMMERCE & LAW REVIEW Vol. 48 (DEC. 2010)

Repayment Terms the same as terms of payment of Export Contract

- Assignment of Promissory Note of N Company

- Assignment of Payment Guarantee of Ministry of Communication
Security for Lender
of Azerbaijan
- Assignment of KEIC export insurance policy

- Promissory Note by N Company

Security for KEIC
- Payment Guarantee of Ministry of Communication of Azerbaijan

2) Effect of Transaction
As this transaction was proceeded on a supplier credit, D Company(seller)
shall provide itself the fund necessary for the supply and installation of the
telecommunication equipment and system. It may be burdensome for D
Company(buyer) to borrow the fund from a bank. Moreover the loan that D
Company borrows is added to its debt, which increases the liability and causes
the liability ratio to rise. As a result, this transaction will worsen D Company's
financial status.
Even after D Company completes successfully the export contract, the
nonpayment risk by a buyer continues until all the remaining installment
payment is paid in full. In this transaction, the non-payment risk continues at
least for four years even after completion of the contractual obligation by D
Company.
N Company stopped payment of installment only after paying three
installments out of nine installments, claiming that the equipment did not
work according to the contract, which often happens in a supplier credit
transaction.
Therefore D Company shall repay the loan borrowed from K Bank with its
own money, which was supposed to repaid by the payment from N Company.
The non-payment risk is the biggest disadvantage in a seller's respect in a
supplier credit. If this transaction had been concluded in a buyer credit, such
a nonpayment could not have happened. This transaction shows how big the
disadvantages and the risks are in a seller's respect. These disadvantages and
A Comparative Study on a Supplier Credit and a Buyer Credit in International Transactions of Capital Goods 147

risks should be included in the contract value, which means that a seller
should require higher amount of contract value in bargain for a supplier
credit. Otherwise, a seller is recommended to require a buyer credit in bargain
for discount of the contract value.

2. A Buyer Credit Transaction

1) Transaction Summary
H Company(Korean exporter) and C Company(French importer) entered
into shipbuilding contract of two container vessels, of which contract value
amounted to USD 114 millions. C Company transferred the contract to S
Company, Italian company.
As this transaction was based on a buyer credit, C Company bears
non-delivery risk of vessel by H Company. To mitigate such risk, H
Company shall deliver to C Company an assignable refund guarantee('R/G')
by a acceptable financial institution for the refund of pre-delivery payment
and plus interest.

(Brief Summary of Transaction)

Shipbuilding Contract
Seller H Company(Korea)
Buyer C Company(France) → S Company(Italy)*
Object Two 51,000 TEU Container Vessels
Contract Value USD 114.3 million
40% : progressive payment
Terms of Payment
60% : on delivery of vessel
securities refund guarantee('R/G')
Loan Agreement
Lender S Bank
Borrower S Company(Buyer)
Loan Amount USD 114.3 million
148 THE INTERNATIONAL COMMERCE & LAW REVIEW Vol. 48 (DEC. 2010)

Interest Rate 6 month Libor + 0.45%

Repayment Terms 24 consecutive semi-annual installments
- Refund Guarantee : for predelivery
Security for Lender - KEIC export insurance policy : for both pre-delivery and
post-delivery
- Payment Guarantee of Parent Company
Security for KEIC
- Mortgage on the vessels
* C Company(France), Original buyer transferred the contract to S Company(Italy)

2) Effect of Transaction
As this transaction was proceeded on a buyer credit, C Company shall
provide H Company with funds required to build vessels. It was burdensome
for C Company to provide such a big amount of fund. Therefore C Company
required H Company to arrange export insurance cover by Korea Export
Insurance Corp45)(hereinafter 'KEIC').
KEIC's export insurance cover enabled H Company to conclude and
perform this shipbuilding contract. With export insurance cover, C Company
could borrow the fund from commercial banks with low spread. In this
project the interest rate was 6M Libor + 0.45%(spread).,Without export
insurance cover the spread would be over 1.0%.
This transaction was proceeded on a buyer credit, which enabled H
Company to receive 40% of the contract value on a progressive payment
method and 60% of the contract value upon delivery of each vessel. Once the
delivery is made, H Company is free from nonpayment risk by S Company,
which is the fundamental risk of a seller in a international transaction.
The total loan was not added to H Company's debt, but S Comany's debt.
The payment received by H Company shall be added to H Company's asset,
and the cost would be added to H Company's Liability. Finally, only the

45) According to the Revision of 'Export Insurance Act' to 'Trade Insurance Act', Korea
Export Insurance Corporation was renamed to Korea Trade Insurance Corporation
as of July 7, 2010.
A Comparative Study on a Supplier Credit and a Buyer Credit in International Transactions of Capital Goods 149

margin of this transaction would be added to H Company's net asset. While

H Company's liability stayed same, its asset increased. This resulted in the
decrease of liability ratio. This shows that a buyer credit improves a supplier's
financial status compared with a buyer credit transaction.

3. Analysis of Global Project Finance Volume in 2009

Global project finance volume reached US$ 292.5 billion in 2009, the
second highest total on record despite the fact that volume dropped 9%
compared with US$ 320.9 billion in 2008.46)
The largest deal to close in 2009 was Papua New Guinea LNG project, the
project amount of which was US$ 18.0 billion. This project financing
comprised US$ 14.0 billion debt and US$ 4.0 billion equity. Project finance
loan volume fell 6% to US$ 223.9 billion in 2009, while project finance bond
volume increased 96% to US$ 12.5 billion, compared with US$ 6.4 billion in
2008.47)
State Bank of India took the first place in mandated lead arrangers for
global project finance loans reaching US$ 27.0 billion out of 51 out of 51
deals. The following table shows the financial institutions and the loans made
by them in 2009.48)

Financial Institution Value(US$ million) No. of Deals

State Bank of India 26,987 51
Calyon 6,992 84
IDBI Bank 6,500 15
BNP Paribas 6,034 72
Santander 5,390 87

46) Project Finance, "Dealogic Global Project Finance Review - Full Year 2009", Project
Finance, 2010.2, p.85
47) Ibid.
48) Project Finance, op. cit., p.89
150 THE INTERNATIONAL COMMERCE & LAW REVIEW Vol. 48 (DEC. 2010)

Industrial & Commercial Bank of China 4,358 6

SG CIB 4,348 55
Mitsubishi UFJ Financial Group 4,258 57
China Development Bank Corp 3,954 6
Sumitomo Mitsui Banking Group 3,854 44

Ⅳ. Conclusion

The international transactions of capital goods such as industrial plant

exports, overseas constructions, and shipbuilding exports, are so huge that
tremendous amount of funds are required, and that most of the loans are
long-term credits of over five years. Korean Consortium led by KEPCO won
UAE Nuclear Power Plant Project in December 2009. In the export of huge
capital goods, financing is more crucial than technology itself. Some of the
importing countries are developing ones that are politically and economically
unstable. Therefore the financing mechanism for these transactions is
conclusive in winning these projects.
Global financial market instability caused by US sub-prime mortgage
financial crisis expanded all over the world, and the international transactions
have been decreased due to global credit crisis. This indicates how much
influential the financing market is in international transactions. The financing
schemes are classified into a supplier credit and a buyer credit by who
provides the financing.
A supplier credit is a credit extended by an exporter(seller) to an
importer(buyer) as part of an export contract. Cover for this transaction may
be extended by an export credit agency to an exporter. In a sales contract a
seller shall provide fund required to manufacture goods, and in a construction
contract a contractor shall provide fund required to complete a construction.
A buyer credit is an arrangement in which an exporter enters into a
A Comparative Study on a Supplier Credit and a Buyer Credit in International Transactions of Capital Goods 151

contract with an importer, which is financed by means of a loan agreement

where the borrower is the importer. In a sales contract an importer shall
provide fund required to manufacture and procure the goods, and in a
construction contract an owner shall provide fund required to complete a
construction. Therefore an exporter is paid on progressive payment method.
A supplier credit is quite opposite to a buyer credit in that a borrower is the
opposite; in a supplier credit a borrower is an exporter, and in an buyer
credit a borrower is an importer. A supplier credit and a buyer credit have
their own advantages and disadvantages in the respect of the parties
respectively. These two financing methods are selectively used considering
financing conditions such as funding cost, importer's and/or exporter's
financial conditions, importing country's political risk.
When a financial institution provides loan either on a supplier credit basis
or on a buyer credit basis, it generally requires securities. Export insurance is
considered one of the most valuable securities.
152 THE INTERNATIONAL COMMERCE & LAW REVIEW Vol. 48 (DEC. 2010)

REFERENCES

Ahn, Yoo Shin, 'Understanding of Short-Term Export Insurance(Buyer Credit)

and Cases', Export Insurance, 2006.11
Andrew Fight, Syndicated Lending, Elsevier, 2004
Clive M. Schmitthoff, Export Trade : The Law And Practice Of International
Trade, 9th ed., London Steven & Sons, 1990
Eric Bishop, Finance of International Trade, Intellexis plc, Elsevier Ltd, 2006
E.R. Yescombe, Principles of Project Finance, Academic Press, 2002
Graham Vinter, Project Finance, London Sweet & Maxwell, 1998
Harry M. Venedikian, Gerald A. Warfield, Export-Import Financing, 4th
Edition, John Wiley & Sons, Incl, 1996
Howard Palmer, International Trade and Pre-export Finance, Euromoney
Institutional Investor PLC, 1999
John E. Ray, Managing Official Export Credits, Institute for International
Economics Washington D.C, 1995
Kang, Mal Lee, The State and Use of buyer credit, Export Insurance, Volume
14(Oct, 1982)
Kim, Sang Man, A Study on the Legal Aspects of the Financing Schemes in
the Plant Export Transactions, Doctoral Degree Thesis at Korea
University Graduate School, 2008
Lee, Jae Kyu, "World Nuclear Market and Entering Strategy", Overseas
Construction, 2010.2
Lim, Jung Duck, The Changes of Shipbuilding Industries and Ship Financing,
KIET, 2009.9
Malcolm Stephens, The Changing Role of Export Credit Agencies, IMF
Washington, 1999
Matti S. Kurkela, Letters of Credit and Bank Guarantee under International
Trade Law 2nd Edition, Oxford University Press, 2008
Michele Donnelly, Certificate in International Trade and Finance, ifs School of
Finance, 2010
A Comparative Study on a Supplier Credit and a Buyer Credit in International Transactions of Capital Goods 153

Project Finance, "Dealogic Global Project Finance Review - Full Year 2009",
Project Finance, 2010.2,
Richard Willsher, Export Finance, Macmillan Press 1995
Roeland Bertrams, Bank Guarantees in International Trade 3rd Edition, ICC
Publishing S.A. 2004
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Status, 2000.7
Stephenson Harwood, Shipping Finance, 3d Ed, Euromoney, 2006
154 THE INTERNATIONAL COMMERCE & LAW REVIEW Vol. 48 (DEC. 2010)

ABSTRACT

A Comparative Study on a Supplier Credit and a Buyer Credit in International

Transactions of Capital Goods

- Focusing on Industrial Plant Exports, Shipbuilding Exports, and Overseas

Constructions -

Kim, Sang Man

The international transactions of capital goods such as industrial plant

exports, overseas constructions, and shipbuilding exports, are so huge that
tremendous amount of funds are required, and that most of the loans are
long-term credits of over five years. In the export of huge capital goods,
financing is more crucial than technology itself. Some of the importing
countries are developing ones that are politically and economically unstable.
Therefore the financing mechanism for these transactions is conclusive in
winning these projects.
Global financial market instability caused by US sub-prime mortgage
financial crisis expanded all over the world, and the international transactions
have been decreased due to global credit crisis. This indicates how much
influential the financing market is in international transactions. The financing
schemes are classified into supplier credit and buyer credit by who provides
the financing.
A supplier credit is a credit extended by an exporter(seller) to an
importer(buyer) as part of an export contract. Cover for this transaction may
be extended by an export credit agency('ECA') to the exporter. In a sales
contract a seller shall provide fund required to manufacture goods, and in a
construction contract a contractor shall provide fund required to complete a
construction.
A buyer credit is an arrangement in which an exporter enters into a
contract with an importer, which is financed by means of a loan agreement
A Comparative Study on a Supplier Credit and a Buyer Credit in International Transactions of Capital Goods 155

where the borrower is the importer. In a sales contract a buyer shall provide
fund required to manufacture and procure the goods, and in a construction
contract an owner shall provide fund required to complete a construction.
Therefore an exporter is paid on progressive payment method.
A supplier credit and a buyer credit have their own advantages and
disadvantages in the respect of the parties respectively. These two financing
methods are selectively used considering financing conditions such as funding
cost, importer's and/or exporter's financial conditions, importing country's
political risk.

Key Words : a supplier credit, a buyer credit, international transaction,

capital goods, ECA, export insurance, project finance