Projects & Policies | Loan Guarantee

FOREIGN CURRENCY GUARANTEE

The Ex-Im Bank Foreign Currency Guarantee policy (FCG) was established to meet the competitive threat of other currencies. It is designed to help these buyers control certain risks associated with export credits by effectively spreading fluctuation risk amongst a number of parties. Cover for transactions denominated in foreign currencies is also available under Ex-Im Bank's Export Credit Insurance. The policies governing cover under the insurance program are the same as for the guarantee product and are affected by endorsement to an insurance policy

GUARANTEE

As the name suggests, the FCG only contemplates the issuance of guarantees by Ex-Im Bank. Ex-Im Bank does not issue direct credits in foreign currencies.

Under this and other Ex-Im Bank guarantees, a commercial bank extends an export credit to a buyer of US goods and/or services and Ex-Im Bank extends to a commercial bank a 100% guarantee of all principal and regular interest. In other words, Ex-Im Bank takes the full political and commercial risk of a credit. All lenders are eligible to use the program, provided that they enter into a standard Master Guarantee Agreement with Ex-Im Bank.

The interest rate applicable to a guaranteed credit is negotiated between the borrower and the commercial bank. Ex-Im Bank neither determines guaranteed interest rates, nor regulates unguaranteed commercial bank fees or other charges.

As with any credit guaranteed by Ex-Im Bank, a FCG credit must comply with the requirements of the OECD Arrangement on Guidelines for Officially Supported Export Credits. In addition, such credits are subject to Ex-Im Bank standard polices and procedures, including:

1. A risk based exposure fee (which may be financed under the guaranteed credit).
2. A commitment fee of 1/8th of 1% on the undisbursed amount of the credit.

Commitment and exposure fees are paid to Ex-Im Bank in U.S. Dollars on established dates.

DISBURSEMENT

• funds the loan with Dollars and pays the US suppliers - calculating the amount of foreign currency, or
  
• funds the loan with the foreign currency and purchases Dollars with that currency in order to pay the suppliers, which would mean that the amount of the foreign currency loan ultimately owed by the borrower would be determined by the amount of the foreign currency that was required to fund the Dollar disbursements, at the exchange rate applicable to each disbursement on each disbursement date.

A significant devaluation of the foreign currency could therefore have a material effect on the amount of the foreign currency ultimately owed by the borrower. To cover this risk, Ex-Im Bank estimates the average exchange rate over the disbursement period and authorizes the foreign currency transaction on that basis.

DEFAULT CONVERSION MECHANICS

Under the FCG, in the event of a payment default, Ex-Im Bank will pay the commercial bank the amount owing under the guarantee, normally on an accelerated basis. This payment would be in the foreign currency of the guarantee. Ex-Im Bank may be subject to "appreciation risk" under its guarantee, in the event that increasing amount of Dollars are needed to cover the underlying foreign currency obligation.

If the borrower does not default, then Ex-Im Bank makes no payments. In this case, the credit stays as a foreign-currency based credit and the borrower faces no mismatch or other devaluation risk.

In the event of a default and claim payment, the currency of the credit converts to US Dollars based on the spot rate in effect on the claim payment date. Ex-Im Bank will then proceed to collect Dollars from the borrower in satisfaction of outstanding obligations. In this case, the borrower thereafter faces devaluation risk until payment is made in full.

CURRENCIES

To date, Ex-Im Bank has announced a willingness to issue guarantees in a number of hard and soft currencies. This includes the following:

Ex-Im Bank is willing to consider any currency. If an exporter or a Bank is interested in Ex-Im support in a currency that is not on the above list, they should contact Ex-Im's trade finance group.

Last Updated: May 5, 2006