U.S. Export Credit Guarantee Programs: What Every Importer Should Know About the GSM-102 Programs.
We are attempting to provide answers to commonly asked questions about how to participate in the GSM-102 export credit guarantee programs. We hope this Q&A (Question & answer) section will provide you with everything you need to know about the programs. However, we are always available for further clarifications.
In many countries, U.S. Department of Agriculture (USDA) export credit guarantee programs can help make commercial financing available for imports of U.S. food and agricultural products on deferred payment terms. The GSM-102 programs guarantee payment from approved foreign banks, normally to financial institutions in the United States that extend credit to them to finance imports of U.S. agricultural commodities. The reduction of risk to financial institutions in the United States may be reflected in lower interest rates and lower financing fees than would be the case without a USDA guarantee, or may make possible financing that would otherwise be unavailable.
Q. What are these programs?
A. USDA operates two export credit guarantee programs that guarantee payments from foreign banks. The GSM-102 Export Credit Guarantee Program provides coverage for credit periods not to exceed 3 years. Sales under these programs are commercially financed; they are not food aid or subsidy programs.
Under these programs, USDA's Commodity Credit Corporation (CCC) underwrites credit extended by eligible financial institutions in the United States to approved foreign banks that issue dollar-denominated irrevocable letters of credit in favor of U.S. exporters as a means of payment for imported U.S. agricultural commodities. These letters of credit are opened on the instructions of the importer. Importers negotiate their own credit terms, if any, from their local banks to permit them to make deferred payments for the imported commodities and products. If the importer's bank fails to make payment for any reason, the financial institution in the United States may file a claim with the CCC for amounts due and covered by the guarantee. The CCC will pay the claim and seek to collect the full overdue amount from the foreign bank.
Q. What products are covered?
A. USDA will consider announcing, for a specific country or region, the availability of guarantees for any U.S. agricultural commodity, if the market for U.S. exports will be expanded or maintained as a result. In general, agricultural commodities must be food, feed, fiber, or products thereof. Forest products, such as lumber and pulp, and also fish, which the U.S. Congress has defined as an agricultural commodity for the purposes of these programs, can be covered. Coverage has encompassed such diverse products as cotton, vegetable oil, breeding chicks, and telephone poles.
Q. Are any products excluded from coverage?
A. All products must meet the U.S. origin requirements of applicable law as stated in GSM-102 regulations, notices, and program announcements. Manufactured agricultural inputs, such as pesticides, fertilizers, and equipment, are not eligible.
Q. Are there any other program restrictions?
A. All guarantee applications are subject to review by the CCC to determine that coverage is based on a price within a prevailing market range.
Normally, eligible transactions are restricted to those where a bank in the same country as the importer issues the letter of credit. However, USDA may announce guarantee allocations for sales to a number of countries in a specific region where not all of those countries have banks approved for participation by the CCC. Exports to such countries may be covered if the importer is able to arrange letters of credit through approved banks in other countries in the region. Participants should read program announcements carefully to ensure they are aware of specific provisions or restrictions for specific countries.
Q. How does an importer become eligible to participate in these programs?
A. The CCC does not decide on importer eligibility. Any buyer located in a GSM program country may enter into a sales contract with an eligible U.S. exporter (such as Ralinkcorp) and work with a CCC-approved foreign bank to arrange for the letter of credit required for CCC coverage. Importers in some countries may be constrained by their own government's rules and regulations concerning the importation of certain products or the ability to set up the letter of credit as required by the CCC.
Q. What is covered by a guarantee?
A. The CCC guarantee typically covers 98 percent of the port value of the export item, determined at the U.S. point of export, plus a portion of interest on the financing. Guarantee coverage is usually limited to credit extended for the value of the commodity only, even though the sale may have been made on a cost and freight or cost, insurance, and freight basis. Under unusual circumstances, however, the CCC may offer coverage on credit extended for freight costs.
Q. How does an importer find out which banks can participate?
A. CCC announcements of new coverage may include the names of approved banks. This is typically the case when there are only one or two. If numerous banks are approved, announcements usually do not name specific banks, but simply refer to "any bank in (the country or region) approved by the CCC." Banks that have been approved are notified of the maximum outstanding amount the CCC is willing to guarantee for that bank. We have provided a list of approved banks in some of the African and Latin American Countries on our website. You may also contact the U.S. agricultural counselor or attache in the importing country, or the commercial or economic counselor at U.S. Embassies in countries where USDA does not have a resident agricultural counselor or attache.
Q. How is financing arranged?
A. An eligible bank for the importer's country or region establishes a credit line with an eligible financial institution in the United States, the terms of which can be made consistent with terms of coverage announced by the CCC for the importing country. The importer negotiates an agreement with the eligible bank to issue a letter of credit and finance the import transaction on credit terms to be guaranteed by the CCC. The U.S. exporter, informed of these arrangements, can then apply for the guarantee.
Importers should keep in mind that the CCC guarantee covers only the financing arrangements extended to the foreign bank. Extension of credit by the financial institution in the United States to the foreign bank does not mean that the importer will receive credit benefits from the foreign bank. Credit (perhaps in local currency) extended to the importer by the foreign bank is strictly a matter for negotiation between the importer and that bank.
Q. What paperwork is required?
A. Most of the technical details concerning the guarantee will be handled by Ralinkcorp, the financial institution in the United States, and the foreign bank. For the importer, the transaction is similar to other commercial purchases involving letters of credit.
For Ralinkcorp to arrange for a transaction to be backed by a CCC guarantee, a CCC-approved foreign bank chosen by the importer must issue an irrevocable letter of credit in favor of Ralinkcorpcovering payment for the commodity in U.S. dollars. The letter of credit, the related sales contract, and the deferred payment (credit) arrangements between the issuing bank and the financial institution in the United States will specify documentary requirements agreed to by each of the parties. Fulfilling certain CCC documentary requirements is the responsibility of Ralinkcorp, who will advise which documents, if any, may be necessary for the importer to provide. If the guarantee is assigned to a financial institution in the United States, that institution may have documentary requirements as well, but these should not affect the importer.
Q. If private financial institutions in the United States are financing shipments under letters of credit, why is a CCC guarantee necessary?
A. If financial institutions in the United States are financing exports under letters of credit, then a guarantee is not necessary. However, a CCC guarantee can encourage extension of credit in cases where financial institutions might otherwise be unwilling to finance exports on credit terms. The guarantee may also facilitate credit to foreign banks in larger amounts and on more favorable commercial terms than would otherwise be available.
Q. What are the costs of using these programs?
A. Costs to the importer can vary depending on the country in which the transaction is conducted and the particular arrangements negotiated between the parties. Normally, at a minimum, the importer can expect to pay fees for opening the letter of credit and other local bank charges related to the transaction, as well as principal plus interest, and other costs related to any credit extended by the local bank. A processing fee is paid to the CCC, in advance, to obtain each guarantee. For GSM-102 guarantees, fee rates are less than 1 percent of the value of the sale. Exact fees are based on announced CCC fee rate schedules.
Q. How is the interest rate determined?
A. The financial institutions in the United States and the approved banks opening the letters of credit negotiate their own terms. Usually, the interest rate is linked to the U.S. prime rate or the London Interbank Offered Rate (LIBOR) on a floating (periodically adjusted) basis. Interest rates on any credit extended to the importer by the local bank are a matter for the importer's negotiation with that bank.
Q. How is the interest paid?
A. Interest and principal are usually paid by routine bank transfers to the financial institution in the United States that finances the transaction. Payments are made at rates and intervals defined in the letter of credit or the related financing agreement between the financial institution in the United States and the issuing bank. The CCC requires that total accrued interest be paid no later than each principal due date, with principal payable at least annually. Agreed terms may call for interest payments at more frequent intervals than principal.
Q. Can the importer make early payments?
A. Possibly. This will depend on the importer's credit arrangements with the local bank; these arrangements are not governed by CCC rules.
Q. If the importer repays early, can some of the charges be eliminated?
A. That depends on whatever credit arrangements the importer may have with the local bank. In any event, early repayment would probably not eliminate a number of costs, such as fees already paid for the letter of credit, documentation, and foreign exchange conversion. Also, the CCC processing fee for guarantee coverage would have been calculated and prepaid based on the original credit period, and is non-refundable.
Q. Does the importer need to report the arrival of the product?
A. Possibly. Ralinkcorp will need documentation showing that the product entered the country or region of destination. Ralinkcorp is responsible for obtaining this documentation. Importing country rules governing imports may determine whether the information comes from the importer, the importer's bank, the importing country's government, or some other source. This process is required by USDA under the GSM-102 programs.
Q. How can an importer find out if credit guarantees are available or request coverage for a commodity not already included in these programs?
A. Ralinkcorp will provide this information to interested importers. You may also Contact the U.S. agricultural counselor or attache at the U.S. Embassy. In countries where USDA does not have a resident agricultural counselor or attache, contact the commercial or economic counselor.
Program requests should specify importing country, commodity, quantity, estimated value, shipping period, credit period desired, and, if available, the name of the foreign bank willing to issue the letter of credit.
Requests should be submitted as soon as possible, keeping in mind that these programs operate on a U.S. fiscal year (October 1 - September 30) basis. Sales against coverage for a given fiscal year usually must be registered by exporters no later than September 30, although the contractual arrangements between buyer and seller may permit export as late as November 30. The CCC's approval of a guarantee allocation is based on review of the economic and financial situation in the importer's country or region, the market potential for U.S. agricultural products, the existence of creditworthy foreign banks approved by the CCC to open letters of credit, and the availability of coverage within overall program levels.