Ann: Canada Provides Further Export Credit Support for Kachi, page-87

I found this explanation on what ECA loan and guarantee mean very useful.It is from the latest CCR report on LKE.

"Effectively, Government backed loans for pre-production assets are being transacted at rates similar to those received by AAA corporates like JNJ and MSFT. The net effect of this credit uplift makes LKE appear substantially more attractive/less risky to Tier-1 customers and their banks. In debt markets this is often referred to as a “credit wrap”.

Normally, ECA project support comes in the form of guarantees. Rather surprisingly, some funds will be in the form of direct loans, will also be made available.

What do ECA guarantees do? The ECA guarantees ensure that a lender, or bank, will receive payment in the event that the producer, like LKE, defaults. As Kachi is located in Argentina, the ECA guarantees would effectively cover country risk and corporate risk. This provision of insurance should reduce the risk to lending banks, as they are not taking real project risk,which should reduce the cost of funds to LKE. For this reason, we suspect that interest payable on loans will be almost half of what a corporate loan might look like at around 5-6%.

What is ECA Direct lending? – This involves the ECA directly lending funds to LKE, which are secured against the project.This is unusual, but is expected to be a source of even lower cost of funds.

What is the cost and duration of the debt? – Lithium is priced in US dollars and the debt will also be in US and benchmarked against the Commercial Interest Reference Rates (CIRRs), which are the official lending rates of Export Credit Agencies. The current CIRR rate is 1.8% with a spread of around 1.2%. The CEO stated in a recent corporate webinar that the cost of debt could approximate a blended 3%. The duration of the debt is circa 11-years or 8.5 years from first production. This timeline will cover the construction and ramp-up of Phase-2 to 51kt/year.

Equity risk declines
High levels of debt normally increase equity risk. However, ECA debt is low cost and long term. Further, the lower cost of debt lowers the company WACC and reduces the call on equity and hence dilution to shareholders and increases potential free cash flows. The combination of these two forces de-risks the project at both thePhase-1 and Phase-2 levels and in so doing; also leads to an increase in valuation."