Financial Protocol

Doing business with Israeli companies within the Framework of the Second Financial Protocol 

Background

In response to the high demand for financing medium and long-term credit transactions in China and in order to facilitate the Israeli export to China, a bilateral agreement was signed in 1994 between the Israeli Ministry of Finance and the Chinese Ministry of Finance, with the cooperation of ASHRA.

This agreement establishes a mechanism for execution of export transactions to China and their financing through the Inter-Bank Credit Lines.

Since its' signature, dozens of transactions have been insured and financed under it, totalling in more than USD 250M as a result of the increasing demand for this product.

During the year 2003 the first financial protocol has been significantly expanded and in 2004, the Second Financial Protocol was signed and its terms have significantly improved the previous one.

 

The second financial protocol was signed in November 2004 between the Israeli Ministry of Finance and the Chinese Ministry of Finance in order to redefine and improve the terms of the financial protocol between the countries. The framework amount of the protocol has been increased by USD 200M to the total of 550 million dollars.

The Agreement Structure:

Framework Agreements

 

In light of the Financial Protocol, Framework Loan Agreements were signed between Chinese Banks and Israeli and International Banks, which set the terms and the process for granting specific loans to finance export transactions.

Commercial banks that signed the framework loan agreements are the following:

 

 

 

 The Process of Commercial Contract Financing

1. Commercial contract between Israeli supplier and Chinese end-user should be signed.
2. For financing a commercial contract under the Framework Agreement, an Individual Loan Agreement has to be signed.
3. The Israeli supplier delivers the goods and services to the Chinese end-user.
4. After the goods were accepted, to the end-user satisfaction, the Borrower will ask to disburse under the Individual Loan Agreement.
5. The Israeli Bank (the Lender) transfers the funds to the Israeli supplier and debits the Chinese Bank (the Borrower) for the amount of the Disbursement according to the conditions set in the Framework Loan Agreement.
6. ASHRA insures the repayment of the Loan by the Borrower.

The Financing Structure

The financing of the transaction is in the extent of 100% of the Commercial Contract value and is divided into two loans: The Down Payment Loan and the Long Term Loan.

 1. The Down Payment Loan:  15% of the Commercial Contract value. The loan will be affected by one disbursement executed according to the conditions of the Individual Loan Agreement.
Fixed interest rate 1.5% p.a
Repayment of Principal: 12 months from the entry in to force of the Individual Loan Agreement
Interest Payments: every 6 month.

2. The Long Term Loan:  85% of the Commercial Contract value. For the Long Term Loan there will be a choice out of three financing alternatives based on the following criteria:

• Projects below US$1,000,000 (inclusive) will be financed under the financing alternative "A".
• Projects between US$1,000,000 to US$5,000,000 (inclusive) will be financed under the financing alternative "A" or "B".
• Projects above US$5,000,000 will be financed under the financing alternative "A", "B" or "C".

 

 

The Financing Alternatives

The financing alternatives for the Long Term Loan are as following:
 

	Financing Alternative A	Financing Alternative B	Financing Alternative C
Maturity Period	7 years	10 years	12 years
Credit Period	12 semi annual equal instalments starting 18 months from entry into force of each individual loan agreement	70% -10 semi annual equal instalments starting 18 months from entry into force of each individual loan agreement 30% (remaining) - 10 semi annual equal instalments starting 66 months from entry into force of each individual loan agreement.	22 semi annual equal instalments starting 18 months from entry into force of each individual loan agreement
Fixed Interest Rate	3.2% per annum	2. 5% per annum	3.5% per annum
Interest payments	every 6 months	every 6 months	every 6 months

 

Coverage terms and ASHRA Insurance Premium

ASHRA provides better terms for insuring and financing transactions in China, in order to assist the Israeli supplier and the lenders to facilitate the transaction and to include the transaction within the framework of the Financial Protocol.

The company's insurance will apply to the transaction amount minus the down payment plus the contractual interest.

The cover percentage will be up to 95%. In case the foreign content and/or the agent's commission in the transaction exceed 40% and 15% respectively the cover percentage will be reduced according to the company's policy.

The insurance premium is calculated as a percentage of the covered amount and is paid as a percentage of each disbursement or up front. ASHRA's insurance premium, for transactions under the financial protocol in China, is 35% lower than the standard premium for transactions in similar countries.

How to apply and the procedure for approving transactions

Transactions will be checked and approved by the Inter-Ministerial committee on the Israeli side and the Ministry of Finance of China on the Chinese side.

How to apply for the Chinese support (the end-user)

Feasibility study and project proposal should be submitted to the following local government authorities:

1. Local Planning and Development Committee

2. Local Bureau of Finance

The feasibility study should include:

1. Company introduction: ownership structure, institutional building terms, repayment creditability.
2. Market analysis.
3. Project description: future prospected revenues, cash flow analysis, economical and social benefits of the project.

Approval of the Project proposal by the provincial/Central MOF and NDRC.

Suppliers' application for the Israeli support (described bellow).

Presentation of the project to the local Chinese commercial bank (the Borrower). The Chinese bank goes through its internal approval process both in local and provincial head office.

·         Tender Process
The projects within the framework of the financial protocol are required to undergo a bidding process as follows:

1. The end-user chooses an IE (import-export) company approved by the MOF (there are 30-40 eligible companies).
2. Tender documents are prepared by the end-user: technical requirements and other configurations.
3. The chosen IE Company conducts the bidding process, which is published for 20 days at MOFCOM website. The entire process is monitored by the MOFCOM.
4. After the IE Company determines the winner of the tender, they sign a commercial contract with the Israeli supplier.

 

The basic flow of the approval process in China:

Projects are classified by the BOF into 3 categories:

1.Public sectors (medical sector, education, environment etc.) - BOF guarantee is granted to the borrower.

2. Infrastructure (railways, roads etc) - BOF guarantee is granted to the borrower.

3. Industrial projects- There is no BOF guarantee.

 

Projects below US$5,000,000 should require an approval of the provincial level. In case the Project amount exceeds US$5,000,000- an approval for the feasibility study of the central authorities (NDRC and MOF) is needed as well.

Since the protocol is a bilateral agreement, the Chinese government has given until now an exemption of taxes and V.A.T for equipment exported under it.

How to apply for the Israeli support (the supplier):

a.Application to ASHRA should be submitted using the initial application for insurance form.

b.Upon ASHRA's approval to the transaction, a Principal Approval which is valid for 3 months will be sent to the exporter (supplier), including the terms of the coverage and the next steps required to finalize the transaction.

c.Following completion of all the terms and verification of the documents, a Specific Insurance Certificate will be sent to the bank enabling the insurance and financing the transaction.

For further information kindly contact:

ASHRA at: 03-5631700, Emails: insurance@ASHRA.co.il, marketing@ASHRA.co.il

 (Marketing or Underwriting and Insurance Divisions)
or the Commercial Section at the Israeli Embassy in Beijing: +86(10)- 85320664, E-mail: econ@israeltrade.org.cn