EXIMBANK FIVE YEAR BUYER FINANCING
Provident Traders is a political risk and foreign credit insurance brokerage specializing in transactions involving Latin America. Provident is one of the US Export-Import Bank’s (Eximbank) “most active” brokers. We also provide consulting services to exporters with difficult trade finance needs. Please see Corporate Profile of the company.
In addressing the financing issues of overseas buyers, it became clear that many of them would benefit from qualifying for credit support, on a direct basis, with Eximbank for their large U.S. equipment purchases. By accessing Eximbank directly, the overseas buyer could eliminate local bank guarantee fees, pay an attractive interest rate reflecting the Eximbank support and gain a new line of credit.
In 1996, Provident put together Bank of America’s first Eximbank-insured Medium Term insured transaction. Since then Provident has been increasingly involved in qualifying Latin American buyers for Eximbank five-year financing and securing bank funding for the sales.
Below are brief descriptions of the Eximbank Five-Year program and general policies, the competitive advantages of Provident’s approach and Provident’s compensation.
Eximbank Medium Term Insurance Policy description
Eximbank’s Medium Term Insurance policy provides 100% non-payment cover on the lessor of 85% of the contract or the US content portion of the contract for exports of U.S. capital equipment and U.S. services qualifying for medium-term financing (a 15% downpayment must be made prior to shipment). Repayment terms are up to 5 years (exceptionally 7 years) depending on the size of the sale.
The policy makes it particularly easy to arrange without recourse bank financing of an exporter’s sale because it protects a funding bank from fraud, disputes and other defects in the underlying transaction (otherwise known as policy exclusions).
Furthermore, provided the overseas buyer is deemed creditworthy by Eximbank, a host country bank guarantee will not be necessary.
Eximbank’s current five-year premium rate for a Mexican private sector buyer is approx. 5.4% flat of 85% of the invoice. This premium is a one time charge and can be 100% financed by Eximbank and varies by country. Divide by five for an approximate annual interest rate.
The entire Eximbank Medium term process takes about 3.5 months: one month to collect the information for the application; 1 – 1.5 months for Eximbank to approve; one month (sometimes more) to get bank quotes, choose the bank and finalize documentation.
Some of Eximbank’s “basic” credit criteria for private sector buyers seeking $1 – 5 million in cover include: positive operating and net income, been in the same general line of business at least 3 years, and Total Liabilities must not exceed 1.75 times Tangible Net Worth. Also, Eximbank’s exposure cannot exceed 40% of the buyer’s Tangible Net Worth.
General Eximbank policies
To qualify as US content, the product must be produced or manufactured in the US. That is, if it is not “made” in the US, it is foreign.
Services (such as consulting advice) can be financed if the personnel that provide these services are US – based and employed by the US exporter.
Financing locally-sourced installation costs is possible to the extent that they qualify as “local costs”. Local costs are limited to 30% of the Net Contract value (which is the US content plus any “eligible” foreign content). Local costs must be an integral part of the sale and can include installation and supervision of the subject equipment.
Provident Traders’ Role and Competitive Advantages
Unfortunately, most overseas buyers are not known to Eximbank. This is usually because the Medium Term application process involves a considerable amount of careful, “hands on”, work which most banks and exporters are not able or willing to do (unless paid to do so).
Provident’s services include:
a) complete preparation of the application with the exporter as applicant, including: collection of required documents, credit analysis and spreadsheet on the buyer, presentation to Eximbank and follow-up.
b) working directly with the buyer and exporter to anticipate and resolve any special needs.
c) Securing bank financing including: circulation of the Eximbank approval among 2 – 4 banks interested in this type of business and asking them to bid. All quotes are forwarded directly to the buyer (with no additions or changes). The buyer chooses the bank they want to work with and the exporter is paid by the bank as shipments go out, much like a letter of credit.
Competitive Advantages of Provident Traders’ Approach
This approach (with the exporter as the applicant) is more competitive than allowing a bank to be the applicant for several reasons:
a) Speed. The exporter and the buyer have the greatest incentive to “move, fast, now”. On the other hand, a bank, after it has been mandated to submit the application, is in control of the application process which usually gets delegated to someone junior. Certainly, the bank does not have as the exporter’s or buyer’s incentive to move quickly.
b) Cheaper rates for the buyer. When a buyer or exporter applies through a bank, the selection of the applicant bank is made after competing bank offers are made. In our experience, when banks are competing for a mandate, they frequently quote high (interest rate spread and/or front end fee) because (1) they don’t know if the deal will be “real”, (2) they don’t know what unanticipated problems they may come across in getting the Eximbank approval, (3) they know that they will have to do all the work of qualifying the buyer and exporter with Eximbank (credit write up, spreadsheet, dealing with underwriter questions, etc.) and/or (4) they want to take advantage of the buyer.
However, after an Eximbank approval is circulated among several banks for funding quotes, the banks are more competitive in their pricing because (1) they know the deal is “real”, (2) someone has already done the hard work of qualifying the buyer and (3) they know they are in a competitive bidding situation.
For example, Provident recently qualified a Mexican buyer for a $950,000 sale and found a bank willing to fund the deal at 6-month LIBOR plus 1.375% p.a. (per annum) and a $10,000 front end fee (85% financed by the bank).
On another recent transaction ($2,300,000), the funding bank charged 6-month LIBOR plus 0.80% p.a. and a $20,000 front end fee (85% financed by the bank).
Fixed interest rates are also available.
c) Better exporter control. If a bank were the applicant and the buyer found another supplier, it is fairly easy to replace the old supplier with the new supplier. When the exporter is the applicant, this process is more difficult because the new applicant must start all over again.
d) Transparency. Provident receives only the compensation outlined below. We neither ask the funding bank for part of their interest rate spread nor part of their fees (all quotes are sent directly to the buyer). Nor do we seek sales commissions from exporters.
First, and for no charge, we will review the buyer’s financials and generate a memo covering how the buyer fits Eximbank’s “basic” credit criteria. Our services and compensation will be included in that memo. After that, the buyer can decide if they want to take the next step.
Provident’s Spanish website
Please feel free to refer your prospects to Provident’s web site (www.providenttraders.com) where we have a page in Spanish that describes Eximbank’s Medium Term insurance program, how we work and includes the “basic” buyer credit criteria Eximbank uses to determine buyer creditworthiness.
Call us and/or send us your buyer’s last three audited fiscal year-end financial statements including their most recent interim financial statement for the current year. We will respond with a memo regarding how your buyer fits Eximbank’s “basic” credit criteria.
John Keevan-Lynch, President