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Input from the Public Will Help Improve the Export Credit Guarantee Programs
By Linda Habenstreit
What would you do if you
thought your company’s products were not being used to their
fullest extent? Would you form a focus group to determine your
customers’ attitudes and ideas for alternative uses for your
products? That’s what USDA’s Foreign Agricultural
Service (FAS) did last October when it invited the private sector
to a forum in Washington, DC, to discuss the overall
effectiveness of export credit guarantee programs.
Participants in GSM programs, U.S. exporters, financial institutions, non-bank lenders and trade associations from as far away as California and as nearby as New York came to discuss changes in existing programs and new ideas. Programs up for discussion included the well-established GSM-102 and GSM-103 programs, which nearly 200 companies use each year, and the newer Supplier Credit Guarantee Program.
In recent years, FAS has found that the combined value of registrations in the GSM-102/103 program was substantially below the $5.7-billion annual level authorized by Congress. This raised questions about whether structural changes in agricultural trade have made the current program funding levels unnecessary or whether the programs are an underutilized resource.
Raising a Variety of Issues
Suggestions ran the gamut. The following
are some of the participants’ suggestions and ideas.
• Offer alternative ways to finance purchases under the GSM-102/103 program. Some want to avoid the costs of letter-of-credit (see glossary for definitions of words in italics) transactions, while others are looking for a total package from the exporter that bypasses the bank. Avaled drafts and other foreign bank guarantees might fit the bill.
• Offer risk-based guarantee fees and different insurance or guarantees for various situations under the GSM-102/103 program. For example, offer alternatives for country risk, political risk, foreign exchange risk or currency devaluation risk coverage based on the degree of risk in each country. If the Commodity Credit Corporation (CCC) offered political-risk-only coverage, it could change its regulations to permit the U.S. bank and the foreign bank to be owned by the same financial institution.
• Reconsider the GSM-102/103 program requirement that foreign banks provide audited bank statements and, in certain circumstances, provide bank limits based on a clear indication that a government has assumed a bank’s foreign debt obligation. Also, rely more on prior-year financial statements of predecessor institutions in order to evaluate the strength of merged banks more quickly.
• Alleviate Mexican pedimento problems under the GSM-102/103 program by accepting as proof of product entry a railroad bill of lading that provides railcar history or a notification of export letter from a licensed U.S. Customs Service broker.
• Allow U.S. exporters to submit documents, such as assignment notifications and evidence of export, to the CCC electronically in order to speed up payments to exporters.
• Address various concerns about the Supplier Credit Guarantee Program (SCGP), such as the level of fees and a time-consuming application process.
• Include bulk commodities and extend coverage to all eligible countries to increase SCGP usage.
• Use SCGP in Russia, where banks are not passing on to importers the benefits of export credit guarantee financing. The program might provide leverage in dealing with Russian banks and could help mitigate the risk associated with dealing with new Russian customers.
• Share risk between the
CCC, the exporter and the exporter’s bank to reduce risk
exposure to exporters under the SCGP. A sliding guarantee fee
scale could be offered with higher fee rates for riskier sales.
Also, political-risk-only coverage could be offered that would
cover currency transfer and convertibility risk, but not currency
devaluation risk.
• Offer post-transaction coverage under the SCGP, allowing exporters to respond quickly to customers, especially on a revolving basis for repeat sales.
• Form a working group or task force of exporters and bankers to explore ideas and issues raised during the forum.
• Conduct a study of the amount of agricultural exports sold on open account, by letter of credit and by other mechanisms.
Program Changes Will Be Forthcoming
Armed with these suggestions, FAS is moving forward with plans for improving the export credit guarantee programs. One suggestion that is receiving serious attention: establishing a group of exporters, bankers and other private sector organizations to provide informal advice on program changes, in accordance with current laws and policies governing private sector advisory groups.
While the forum was the first
opportunity for the private sector to express its opinions about
modifying the export credit guarantee programs in a public
setting, FAS has been seeking the public’s input on program
operations since long before the forum took place.
A prime example of public input in action occurred in August 1997 after an FAS news release announced a notice in the Federal Register seeking public comment. Two proposed changes to the GSM-102/103 program were on the table. One proposal was for the CCC to guarantee sight letters of credit issued by eligible foreign banks where no deferred payment terms are provided. The other proposal was for the CCC to guarantee payment of obligations of eligible foreign banks arising out of transactions not involving an export letter of credit.
FAS is following up on the many comments received and is considering issuing a proposed rule.
Also before the forum, several U.S. banks and exporters had proposed that the CCC issue payment guarantees under GSM-102 for debt obligations that bear no interest. In such transactions, the CCC would cover 95 percent of the principal for repayment periods up to 12 months. The CCC’s guarantee fees for the 95-percent coverage would be the same as announced fees for 98-percent coverage for comparable credit periods.
The CCC adopted this suggestion, which should should increase flexibility in the GSM-102 program and meet the specific financing needs of foreign buyers.
Overall, the forum has proven to be a highly successful means to include the business community in the program-shaping process -- a procedure that will help move the export credit guarantee programs into the 21st century.
__________________________________
Linda Habenstreit is a public affairs specialist in FAS’
Information Division in Washington, DC. Tel.: (202) 720-9442;
Fax: (202) 720-3229; E-mail: habenstreit@fas.usda.gov
Questions Asked About the Export Credit Guarantee Programs
Question: To enable U.S. banks to offer export credit guarantee financing at lower rates, can the Commodity Credit Corporation (CCC) make the guarantees unconditional?
Answer: The CCC issues some 4,000 guarantees annually. Therefore, it is not feasible for the CCC to approve the documents required to make a claim before the claim is filed. Accordingly, the CCC’s guarantees are not unconditional in relation to documentation.
Question: Does the CCC’s process for analyzing foreign banks take into account the recent rapid changes in bank ownership, mergers and spin-offs?
Answer: Yes, the CCC does take this information into account, although it sometimes takes longer than we would like to re-evaluate such new circumstances.
Question: Why does the CCC use tranching?
Answer: Tranching is sometimes used to prevent using up a country’s entire allocation of GSM export credit guarantees before the marketing season for certain commodities.
Question: Why aren’t all agricultural commodities available for coverage when the program is announced for a particular country?
Answer: To avoid wasting the time of U.S. exporters, the CCC tries not to announce commodities that another country’s government does not want, that would be uncompetitive or that would face insurmountable trade barriers.
Question: Why hasn’t the CCC introduced the GSM-102 export credit guarantee program in Vietnam?
Answer: Up until recently, Vietnam was subject to the Jackson-Vanik amendment, which did not allow the use of GSM-102 and other programs unless the country allowed free emigration. On March 10, 1998, President Clinton waived the Jackson-Vanik amendment for Vietnam. Before GSM-102 and other programs can be implemented, however, FAS must finish analyzing the findings of a team that recently traveled to Vietnam to evaluate country and bank risk and market opportunities. The President must also issue an executive order and provide a report to Congress.
Question: In fiscal year 1997, the private sector used the GSM-103 export credit guarantee program very little? Why?
Answer: Part of the disincentive to private buyers and financing banks may be the foreign exchange risk they face when paying back credits over relatively long periods of time (up to 10 years under the GSM-103 program). The program is normally used for breeder livestock or other commodities, which are purchased by foreign governments. These authorities find the GSM-103 program more attractive than do private sector buyers.
Question: Does the CCC publish a list of approved buyers under the Supplier Credit Guarantee Program (SCGP)?
Answer: No. The CCC does not approve foreign buyers, although it may refuse to issue payment guarantees for any reason and will not issue supplier credit guarantees covering sales to buyers who have defaulted on payments.
Question: How will the CCC evaluate applications for payment guarantees under the Facility Guarantee Program?
Answer: The CCC will evaluate applications based on the information furnished to USDA and determine whether the informaiton shows that the project will promote exports of U.S. agricultural commodities. USDA will also use its resources and expertise, including review by the U.S. agricultural attaché responsible for the country in which the project is proposed. Before U.S. exporters submit their applications, they may want to contact USDA for data or other information that may be helpful in developing their analyses.
Question: Does the CCC produce bilingual information and material describing the export credit guarantee programs?
Answer: Yes. This information is available in English, Spanish, French, Portuguese, Chinese and Arabic in the publication U.S. Export Credit Guarantee Programs: What Every Importer Should Know About the GSM-102 and GSM-103 Programs. The Chinese and Arabic versions can be obtained in hard copy from FAS, while the others are available on the FAS Home Page (http://www.fas.usda.gov). U.S. embassies may have additional information about the program translated into other languages.
A Primer on How the GSM-102/103 and Supplier Credit Guarantee Programs Work
Both the GSM-102/103 and Supplier Credit Guarantee programs support commercial financing of U.S. agricultural exports.
The GSM-102/103 program guarantees payments from foreign banks to exporters or financial institutions in the United States that extend credit to finance imports of U.S. agricultural commodities. GSM-102 covers credit terms up to three years, while GSM-103 covers longer credit terms up to 10 years. For these programs, any agricultural commodity produced in the United States is eligible for coverage under the GSM-102/103 program.
The Supplier Credit Guarantee Program (SCGP) guarantees payment by foreign buyers to U.S. exporters under the terms of a standard promissory note required by the CCC. Under SCGP, coverage is for a maximum of 180 days. The SCGP emphasizes high-value and value-added products, although it may include commodities or products programmed under the GSM-102/103 program.
The following lists provide an overview of how these programs operate.
GSM-102/103 Program
1 Before a guarantee application can be accepted, exporters must be qualified for participation in the program by the USDA’s Commodity Credit Corporation (CCC). For information on qualification procedures write to the Deputy Administrator, Export Credits, Foreign Agricultural Service, U.S. Department of Agriculture, AgStop 1031, Washington, DC 20250-1031, fax (202) 720-2949.
2 Once qualified, the exporter determines if the CCC has announced credit guarantee coverage for the importing country or region and product to be imported.
3 If coverage is available, the exporter and importer negotiate the terms of the export credit sale.
4 The exporter and importer work closely together to ensure that the exporter’s bank and the importer’s bank are eligible to participate in the program and that the exporter’s bank will extend credit to the importer’s bank.
5 Once a firm sale exists and before the date of export, exporters apply for a payment guarantee from the CCC.
6 Exporters pay the CCC a guarantee fee calculated on the dollar amount guaranteed, which is based on a rate schedule applicable to different lengths of credit periods.
7 Typically the CCC guarantees 98 percent of the principal owed by the importer’s bank to the exporter’s bank. The CCC also covers a portion of the interest owed by the importer’s bank at an adjustable rate.
8 Because payment is guaranteed by the CCC, exporters’ banks can offer competitive credit terms to importers’ banks, usually with interest rates based on the London Inter-Bank Offered Rate (LIBOR).
9 Importers ask their bank to open a dollar-denominated, irrevocable letter of credit in favor of the exporter to pay for the product(s) being bought.
10 The importer’s bank issues the letter of credit, which may be advised and/or confirmed by a U.S. bank.
11 After receiving advice/confirmation of the letter of credit, the exporter ships the product(s) as agreed.
12 If exporters want to be paid as export occurs, they assign to the U.S. bank that is extending credit the right to proceeds that may become payable under the guarantee should the importer’s bank default on payments.
13 Exporters present to the U.S. bank documents showing that the products were exported in accordance with the letter of credit. The bank pays the exporter.
14 Importers receive the products and pay their bank as agreed. The importer’s payment(s) may include principal and interest, plus fees for the letter of credit, documentation, foreign exchange, guarantee and any other fees charged by the importer’s bank. The CCC’s guarantee does not cover any credit arrangement between the importer and his or her local bank. The CCC covers only the credit arrangement between the U.S. bank and the foreign bank.
15 If the importer’s bank fails to make payment for any reason, the exporter or the assignee bank may file a claim with the CCC for amounts due and covered.
16 The CCC will pay the claim and seek the full overdue amount from the importer’s bank.
Supplier Credit Guarantee Program
1 Before a
guarantee application can be accepted, exporters must be
qualified for participation in the program by the USDA’s
Commodity Credit Corporation (CCC). For information on
qualification procedures, write to the Deputy Administrator,
Export Credits, Foreign Agricultural Service, U.S. Department of
Agriculture, AgStop 1031, Washington, DC 20250-1031, fax (202)
720-2949.
2 Once qualified, find out if the CCC has announced credit guarantee coverage for the importing country or region and product to be imported.
3 If coverage is available, the exporter and importer negotiate the terms of the export credit sale, including the arrangements for the execution by the importer of the CCC-mandated, dollar-denominated promissory note.
4 Once a firm sale exists and before the date of export, exporters apply for a payment guarantee from the CCC.
5 Exporters pay the CCC one guarantee fee for all periods of coverage.
6 The CCC guarantees 50 percent of the principal and none of the interest due under the foreign buyer’s promissory note.
7 Importers execute a promissory note at the time, and in the amount, agreed to by the U.S. exporter.
8 The exporter ships the product(s) as agreed.
9 If exporters want to receive some payment as export occurs, they may assign a U.S. financial institution the right to proceeds that may become payable under the guarantee should the importer default on the promissory note that may also be assigned to the same U.S. financial institution.
10 Importers receive the products and make payment as stipulated in the promissory note.
11 If the exporter or his or her assignee do not receive payment as required by the promissory note, a claim may be filed with the CCC.
12 The CCC will pay claims that are in good order and will seek the full overdue amount from the foreign buyer.
Unfamiliar with banking or USDA program terminology related to export credit sales of U.S. agricultural products? The following simplified descriptions or definitions may help.
Avaled drafts -- A type of bank guarantee used in a number of countries that employs commonly understood laws, customs and practices, but which has not been tested widely in U.S. courts.
Commodity Credit Corporation (CCC) -- A U.S. government owned and operated corporation responsible for financing major USDA programs, including domestic and foreign food assistance and export credit guarantee programs.
Letter of credit (L/C) -- A financial document issued by a bank at the request of an importer guaranteeing payment to an exporter for goods or services if certain terms and conditions are fulfilled. In CCC programs, letters of credit must be subject to the International Chamber of Commerce’s Publication No. 500©, Uniform Customs and Practices for Documentary Credits.
London interbank offered rate (LIBOR) -- The interest rate at which London banks lend funds to other prime banks in London.
Notice to Participants -- A notice issued by the CCC through public press release to remind, clarify or instruct participants about program requirements.
Pedimento -- An official certificate issued by the Mexican government that accompanies all goods imported into Mexico. It serves as proof of the date of export by rail or truck to Mexico from the United States.
Post-transaction coverage -- Registering a sale after exporting the goods.
Sight letter of credit -- A documentary letter of credit where payment is authorized by the issuing bank when certain documents meet conditions stated in the letter of credit. The documents assure the importer that the merchandise has been shipped and that title to the goods has been transferred to the importer.
Tenor -- Credit period, e.g., one-year tenor.
Tranching -- The FAS practice of announcing only a portion of potential country guarantee allocations at one time.
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