United States Department of Agriculture Foreign Agricultural Service
U.S. Export Credit Guarantee Programs: What Every Importer Should Know About the GSM-102 and GSM-103 Programs
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 and GSM-103 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; the GSM-103 Intermediate Export Credit Guarantee Program covers periods of more than 3 years, but not more than 10 years. Sales under these programs are commercially financed; they are not food aid or subsidy programs.
Under both 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.(1) 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.(2) 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. The GSM-103 program is focused on a more limited number of products, such as wheat and breeder livestock.
Q. Are any products excluded from coverage?
A. All products must meet the U.S. origin requirements of applicable law as stated in GSM-102/103 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 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. For assistance in seeking the names of approved banks, contact the U.S. agricultural counselor or attaché 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 attaché.
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 the U.S. exporter, 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 a U.S. exporter 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 the U.S. exporter covering 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 the U.S. exporter, 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. Why is a letter of credit necessary?
A. A letter of credit is a well-established commercial instrument used to effect payment for all sorts of transactions. It remains an effective means to ensure that documentation of the transaction is available should it be needed by the CCC. Issuing an irrevocable letter of credit also causes the foreign bank to assess the importer's financial capabilities.
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. The U.S. exporter pays a fee 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. Fees are higher for the longer credit periods of GSM-103. 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 fee for guarantee coverage would have been calculated and prepaid based on the original credit period, and would not ordinarily be refundable to the exporter.
Q. Does the importer need to report the arrival of the product?
A. Possibly. The U.S. exporter will need documentation showing that the product entered the country or region of destination. The U.S. exporter 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.
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. Contact the U.S. agricultural counselor or attaché at the U.S. Embassy. In countries where USDA does not have a resident agricultural counselor or attaché, contact the commercial or economic counselor, or write to USDA at the address provided on the back cover of this pamphlet.
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.
The United States Department of Agriculture (USDA) prohibits discrimination in its programs on the basis of race, color, national origin, sex, religion, age, disability, political beliefs and marital or familial status. (Not all prohibited bases apply to all programs.) Persons with disabilities who require alternative means for communication of program information (Braille, large print, audiotape, etc.) should contact the USDA Office of Communications at (202) 720-2791.
To file a complaint, write the Secretary of Agriculture, U.S. Department of Agriculture, Washington DC 20250, or call 1-800-245-6340 (voice) or (202) 720-1127 (TDD). USDA is an equal employment opportunity employer.
Steps to Participating in the GSM-102/103 U.S. Export Credit Guarantee Programs
The following is a list of steps for importers to make use of CCC export credit guarantee programs. These steps should not be considered as occurring in a specific chronological order; some steps may come earlier or later than indicated below.
1. Find out if USDA's Commodity Credit Corporation (CCC) has announced credit guarantee coverage for the importing country and product to be imported. In addition to the contacts listed in this pamphlet, U.S. exporters or an importer's local bank may be able to provide this information.
2. If coverage is available, contact a U.S. exporter who is eligible to obtain a CCC guarantee and willing to sell the product on satisfactory terms.
3. Determine which local banks have been approved by CCC and have credit arrangements with one or more financial institutions in the United States to support transactions under the GSM-102/103 export credit guarantee programs. Obtain a preliminary commitment from one of these banks to handle the planned transaction.
4. Enter into a sales contract, consistent with CCC country and commodity allocations, with the eligible U.S. exporter. The U.S. exporter will then be able to apply to CCC for a payment guarantee.
5. Arrange for the CCC-approved local bank to send the financial institution in the United States an irrevocable, dollar-denominated letter of credit in favor of the U.S. exporter.
6. When the U.S. financial institution confirms or advises the letter of credit to the U.S. exporter, the exporter proceeds to ship the product as agreed.
7. The exporter assigns the CCC guarantee to the financial institution in the United States and presents documents generated by the export transaction for payment. The assignee financial institution pays the exporter and forwards required documents as instructed under the importer's letter of credit.
8. The importer's bank settles the transaction and releases any documents to the importer as agreed.
9. The importer receives the product and pays the local bank according to prior agreement. 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.
10. The importer provides entry documentation to the U.S. exporter as appropriate.
11. The importer's bank pays the principal and interest as scheduled under its financing agreement with the financial institution in the United States.
For further information, contact the U.S. agricultural counselor or attaché at the U.S. Embassy in the importer's country or write to the Deputy Administrator, Export Credits, Foreign Agricultural Service, U.S. Department of Agriculture, AG Box 1031, Washington DC 20250-1031, facsimile (202) 720-2949.
1. The CCC guarantee is issued to the U.S. exporter, who normally assigns the right to proceeds that may become payable under the guarantee to the financial institution in the United States, which will extend credit terms to the foreign bank. In this manner, the U.S. exporter can be paid immediately by the assignee financial institution upon presentation of documents under the terms of the letter of credit. The U.S. exporter is not, however, required to assign the guarantee. Instead, the U.S. exporter may collect deferred payments directly from the foreign bank according to the terms of the letter of credit or related obligation. Since this latter situation is rather rare, it will not be discussed further in this brochure.
2. The CCC guarantee covers only the credit extended to the foreign bank. The foreign bank is not obligated to pass on to the importer all or part of the U.S. credit terms.