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Exposure Fee Advice
Since 1978, Ex-Im Bank has worked with the Organization for
Economic Cooperation and Development (OECD) Arrangement to minimize official
export credit subsidies to ensure that buying decisions are made on factors
other than the financing provided by official export
credit agencies (ECAs). There have been many achievements, including the
elimination of trade-distorting tied aid from a variety of sectors and the
establishment of market-related minimum interest rates. The establishment of
minimum fees that ECAs must charge for risk is another step in our efforts to
give U.S. exporters a level playing field and to minimize cost to taxpayers.
One of the last major uncovered aspects of official export finance support was
the fees charged by ECAs for the risk that a transaction would not be repaid.
We changed our exposure fee system in concert with all major ECAs to charge no
less than the OECD minimum risk fees for every market. Ex-Im Bank set its
exposure fees at the lowest levels allowed for sovereign transactions. This
means that for sovereign risk transactions, no other ECA will be able to
provide support at a more advantageous rate than Ex-Im Bank. Like every aspect
of the arrangement, the new system only affects transactions with at least a
two-year repayment term.
"Permitted Exceptions" (i.e., conditions that insulate Ex-Im Bank
from country risk) do permit lower than minimum OECD benchmark fees. Although
an agreed list of such exceptions is not yet available, examples of situations
that may qualify include off-shore escrow accounts and acceptable third
country guarantors.
What risk elements are included?
The basic sovereign risk exposure fee, i.e., the minimum fee for a country,
is determined by five variables: exposure fee level of the country, percentage
of cover, the "quality" of product provided, and the length of the
drawdown and repayment periods.
- Ex-Im Bank Exposure Fee Level
Exposure fee levels (1-7) have been established for all
markets where it is possible for Ex-Im Bank to provide cover ( i.e., not
for markets where Ex-Im Bank is prohibited by law from providing support).
Since the minimum exposure fee for a country is determined by the OECD
country classification, Ex-Im Bank exposure fee levels are consistent with
OECD country classifications. For markets which have not been classified
by the OECD process, Ex-Im Bank translates the U.S. Government's
Interagency Country RiskAssessment
System (ICRAS) classification (based on eleven categories) into an
exposure fee level.
- Percent of Cover, e.g., 90%, 95%, 100%
The OECD norm for coverage is 95%. Ex-Im Bank's normal
coverage is 100% for medium-term insurance, guarantees and loans. A
premium is applied for the additional coverage. Ex-Im Bank is in the
process of evaluating the merits of offering a long-term insurance product
which may provide less than 100% cover.
- Products Offered (from least to most expensive)
There are three quality levels of financing product:
-
Below Standard (conditional insurance
product which does not cover post-default interest) Ex-Im Bank does not
currently offer a "below standard" product.
- Standard (conditional insurance product which covers
post-default interest)
Ex-Im Bank's existing insurance product quality is
"standard."
- Above Standard/Superior (unconditional coverage)
Guarantees and direct loans are priced as "above standard."
(The Arrangement would allow Ex-Im Bank to price the direct loan as a
"standard" product, but Ex-Im Bank decided to price both
equally in order to not introduce a bias in favor of direct loans over
guarantees.)
-
Length of the Drawdown Period
Ex-Im Bank's exposure fees are sensitive to risk covered
during the drawdown period, which is defined as the number of months from
the first drawdown to the starting point of the credit under the approved
transaction. (See www.exim.gov for Calculation of Drawdown Period.)
- Length of the Repayment Period
Ex-Im Bank's exposure fees are sensitive to the length of the repayment
period, expressed in half-year increments. The repayment period is defined
as the time from the starting point of credit to the final repayment. (See
Repayment Terms Fact Sheet.)
Ex-Im Bank's exposure fees are also sensitive to two additional decision
items, whether or not the exposure fee is to be financed and when the exposure
fee is paid.
- Financing the Fee
Ex-Im Bank allows the exposure fee to be financed -- albeit at a higher
rate than if not financed. Also, it remains possible to finance 85% of the
exposure fee at the lower rate, i.e., if the exposure fee has been
subsumed in the contract value of the exports being covered.
- Timing of Exposure Fee Payment
Ex-Im Bank allows the choice of paying the entire exposure fee
"up-front" at or before the time of first drawdown, or on a
pro-rata basis as the loan is drawn down. The exposure fee will be higher
if paid as disbursed to take account of the time value of money.
There are four
options for paying the exposure fee:
-
Fee Financed - either (1) paid as drawn
down (typical for Ex-Im Bank; nominally highest fee option) or (2) paid
up front (the fee is included in the promissory note with Ex-Im
Bank's guarantee, but the lender pays the entire fee amount to Ex-Im
Bank when it requests the first drawdown).
- Fee Not Financed - either (3) paid as drawn down (the
fee is not included in the promissory note but paid, in parts, at each
drawdown), or (4) paid up front (condition precedent; OECD
"baseline fee," nominally lowest fee option).
How are non-sovereign rates determined?
Since the OECD fee arrangement stipulates minimum fees per
country, i.e., sovereign risk fees, Ex-Im Bank has established a series of
"transaction risk increments" which determine the exposure fees for
non-sovereign transactions. The non-sovereign exposure fees attached to the
risk increments are 0-50% higher than a country's sovereign fee (i.e., a
non-sovereign deal which is risk-rated in "increment 1" has an
exposure fee which is 10% higher than the sovereign fee for that market). Fees
for non-sovereign transactions cannot be less than the sovereign fee, except
for permitted exceptions, and when "political risk only" cover is
provided (these transactions are priced at transaction risk increment
"-1", which is 10% lower than the sovereign rate).
Transaction risk increments are generally determined by how risky a
transaction is relative to the sovereign. Hence, the exposure fee for a
transaction that is rated 2 risk levels higher than the sovereign under ICRAS
is that of "risk increment 2" for the country in question (or 20%
higher than the sovereign fee).
In practice, medium-term transactions have pre-determined risk increments
assigned to them, much like the previous system which assigned standard fee
levels. For example, transactions under $10 million for Mexican financial
institutions are priced at transaction risk increment "0" (the same
as sovereign) based on Ex-Im Bank's current analysis of the Mexican banking
sector. Under the previous ICRAS-based system, these transactions were priced
at "fee level 5" -- the same as the sovereign.
Generally, there are not any pre-determined risk increments assigned to
non-sovereign long-term transactions. Although the fee calculator does show
the range of possible pricing, more specific exposure fee indications for
long-term transactions can be obtained by looking at the exposure fee advice
sheet for the country in question. These sheets make use of either private
risk ratings (if available) or key financial ratios and indicators which allow
a transaction risk increment to be identified.
How is country cover policy determined?
Ex-Im Bank uses its Country Limitation Schedule (which
remains based on ICRAS classifications) to determine country cover policy.
Hence, the fact that the OECD agreement provides rates for countries where
Ex-Im Bank is closed has no bearing on Ex-Im Bank's willingness to provide
cover in a given market or for a particular transaction.
How do our current products fit in this system?
- Short-Term Insurance
These fees do not change. The arrangement applies only to
transactions with repayment terms of at least two years.
- Medium-Term Products
For medium-term insurance, we offer 100% coverage, standard
quality, and the option to have fees financed or not; fees are paid up
front. For direct loans, we offer 100% coverage, above standard quality,
and the option to have fees financed or not; fees are paid as disbursed.
We will offer an up-front payment option for fees. (Fees on canceled
authorized amounts will be refunded.) For guarantees, we offer 100%
coverage, above standard quality, and the option to have fees financed or
not; fees are paid as disbursed. We offer an up-front option.
- Long-Term Products
We offer the same on long-term loans and guarantees as we
do on medium-term products. The creation of a long-term insurance
policy is being studied. Other changes that may be considered are options
for lower-percentage coverage on all medium- and long-term transactions.
- OECD Baseline
The current OECD baseline product offers 95% coverage and standard
quality; fees are not financed and are paid up-front.
How Do I Get an Exposure Fee?
You have two options for obtaining an exposure fee once you
know all of the variables mentioned above.
1. Internet: www.exim.gov
(see Country Information section).
2. Calculator on disk: request a free disk from
Ex-Im Bank at (202) 565-3912. Country fee level
charts can be purchased.
Instructions for using exposure fee advice tables ?
Ex-Im Bank provides two Exposure Fee Advice Tables for every
market in which Ex-Im Bank is open for business. The first table pertains to
public sector credits (i.e., credits in which the obligor or guarantor is a
public sector entity) and the second to private sector credits (i.e., credits
in which the obligor or guarantor is a private sector entity). Ex-Im Bank
generally defines an entity as being"public
sector" when the government directly or indirectly owns fifty percent or
more of the entity.
The instructions are presented step-by-step. Once you reach
the step that provides the relevant exposure fee level (which is the same for
all transactions in a given market) and transaction risk increment (which is
specific to the transaction), you need not proceed to subsequent steps.
Although the exposure fee level will always be known for all
transactions in a given market, in determining the appropriate transaction
risk increment, Ex-Im Bank's assessment of the credit's strengths, weaknesses,
and uncertainties may lead to an adjustment from the transaction risk increment
indicated on the table, particularly with respect to transactions covered by
Steps 3 and 6.
Step 1. If your transaction involves a
sovereign borrower/guarantor (e.g., Ministry of Finance or equivalent which
conveys the country's full faith and credit), the transaction risk increment
is given under section A on the "Public Sector Credits" table.
Step 2. If your transaction involves political-only
cover for a private sector transaction, the transaction risk increment is
given under section B on the "Private Sector Credits" table.
Step 3. If credit ratings and/or market spreads for
the borrower/guarantor of the transactions are available, Ex-Im Bank will
assign a transaction risk increment based largely on this information, using
sections C1 and C2 of the Fee Level Chart. Ex-Im Bank will consult S&P
(212-208-1527) and Moody's (212-553-0300).For financial institutions, Ex-Im
Bank will also consult IBCA (212-687-1507) and subscription services
such as Thompson Bankwatch Capital Intelligence and BREE. In a small number
of cases, Duff & Phelps (312-263-2610)and Fitch (212-905-0582) will
provide ratings. Ex-Im Bank may accept ratings from local rating agencies,
if these agencies benchmark to S&P or Moody's ratings. Ex-Im Bank will
also examine recent credit spreads on internationally traded debt.
Sometimes, multiple ratings/spreads will yield a range of possible
transaction risk increments. If so, Ex-Im Bank will
evaluate which transaction risk increment is most appropriate, as part of
its assessment of a credit's strengths, weaknesses,
and uncertainties. In the majority of cases, the final transaction risk
increment will fall within the range of transaction risk increments
indicated by the available rating and spread information.
Step 4. If your transaction's financed/insured
amount is $10 million or less (excluding the exposure fee), the transaction
risk increment generally will be that given under section D1 or D2 of the
Exposure Fee Advice Tables. The transaction risk increment may be lower or
higher if Ex-Im Bank has pre-approved a transaction risk increment for the
borrower/guarantor.
Step 5. If the borrower/guarantor for the credit is
one of the country's largest profitable financial institutions, but is not
rated by a credit rating agency, the transaction risk increment is given
under section E on the appropriate (public/private) Exposure Fee Advice
Table. To qualify, a financial institution must meet two tests: (1) total
assets must comprise at least 1/10th of the country's domestic credit, as
reported on line 32 of the IMF's "International Financial
Statistics"; and (2) net income/assets must exceed 1.00 percent on
average over the last two years.
Step 6. If the transaction's borrower/guarantor is not rated by a
credit rating agency and does not qualify under Step 5, Ex-Im Bank will
assign a transaction risk increment using sections F1 or F2 on the Exposure
Fee Advice Tables as a guidepost for a possible transaction risk increment.
Sections F1 and F2 give guide post transaction risk increments for
combinations of key ratios, using year-end data from independently audited
financial statements. For definitions of the terms used in these ratios, see
Explanation of Terms Used in
Section F of the Fee Advice Tables.
Section F1 covers credits with borrowers/guarantors other than financial
institutions; the guidepost transaction risk increment is based on
combinations of two key ratios. Section F2 covers financial institutions; the
guidepost transaction risk increment is the simple average of the transaction
risk increments for five key ratios, rounded to the nearest whole number. In
assigning the transaction risk increment, Ex-Im Bank will evaluate potential
adjustments to the guidepost transaction risk increment as part of its
comprehensive assessment of a credit's strengths, weaknesses, and
uncertainties.
Small Transactions
A "small transaction" is a medium-term transaction
with a financed or insured amount of $10 million or less, excluding exposure
fee or premium.
Ex-Im Bank has developed specialized procedures for
evaluating financial risk in small transactions. They are designed to promote
efficiency and maintain credit quality by limiting and standardizing the
scope of financial evaluations. Using these procedures, Ex-Im
Bank is able to prudently accept more small transactions without repayment
guarantees. Questions may be directed to Business Development, 202.565.3946.
Risk Assessment
Small transactions need to comply with all Ex-Im Bank policies related to
the extension of credit. Assuming the small transaction qualifies for support,
Ex-Im Bank will then perform its risk assessment to determine (1) whether or
not reasonable assurance of repayment exists, and (2) the appropriate
transaction risk increment.
Ex-Im Bank will use the following sources of information in determining
reasonable assurance of repayment on small transactions:
- Credit ratings and market
spreads
- Credit agency and bank
references
- Historical financial
statements
- Ex-Im Bank's credit experience
with the borrower/guarantor and its industry
Ex-Im Bank will generally review only the information
listed above, and not such information as market studies or cash flow
forecasts. While the risk assessment process for large and small transactions
is the same, the difference is in the narrower scope of information reviewed
for small transactions.
Determination of the Transaction Risk Increment
The determination of the transaction risk increment for
small transactions will vary depending on the type of risk under
consideration. For sovereign and political only risk transactions, Ex-Im Bank
will generally review only the status of the borrower's/guarantor's
payments on its Ex-Im Bank obligations. For all other small transactions,
Ex-Im Bank will review available credit ratings and market spreads provided by
the applicant to determine the appropriate transaction risk increment, using
Step 3. If reliable ratings or spreads are not provided, Ex-Im Bank generally
will assign the transaction risk increment shown in section D of the Exposure
Fee Advice Tables. If Ex-Im Bank has pre-approved a transaction risk increment
for the credit, the pre-approved transaction risk increment applies. Contact
the Business Development Division to determine if a transaction risk increment
has been pre-approved.
Ex-Im Bank does not require independently audited financial
statements for transactions when the financed/insured amount is $1 million or
less, excluding the exposure fee or premium, provided the
unaudited statements are accompanied by an acceptable explanation of
accounting principlesused in their preparation. In such
cases, if Ex-Im Bank determines that reasonable assurance of repayment exists,
the applicable transaction risk increment is shown in section D of the
Exposure Fee Advice Tables.
Special Notes
If Ex-Im Bank or other creditors have had negative payment experience with the
borrower/guarantor, a significantly higher transaction risk increment may be
applied. Transactions in the smallest developing-country economies, as
designated on their Fee Level Chart, may incur a fee level penalty if the
transaction could create a significant net foreign exchange burden on the
local economy.
Explanation of Terms Used in Section F of the Exposure Fee Advice
Tables
For Unrated Borrowers/Guarantors
Other Than Financial Institutions:
- Debt is current maturities of long-term debt and leases +
non-current maturities of long-term debt + capital leases + short-term
debt (including notes payable and supplier credit contractual
obligations). Note: If the proposed Ex-Im Bank financed transaction will
increase the company's outstanding debt by at least 25 percent, Ex-Im Bank
will re-estimate the two ratios on a pro forma basis, taking into account
the increase in debt.
- Tangible Net Worth is paid-in capital stock + preferred stock +
retained earnings - treasury stock - minority interest - intangible
assets, e.g., goodwill, patents, licenses. Note: Tangible net worth should
also include reserves for revaluation or monetary correction as well as
for foreign exchange gains/losses, if these are reported as net worth
items.
- Operating Cash Flow (for each of the last two years) is net
income - extraordinary items - net non-operating income + non-cash
charges, e.g., depreciation - the increase (or + the decrease) in net
non-cash working capital. Note: In calculating operating cash flow Ex-Im
Bank may make adjustments for any non-recurring or unusual developments
affecting the operating cash flow.
For Unrated Financial Institution Borrowers/Guarantors:
- Assets are as reported + off-balance sheet acceptances and
rediscounts.
- Shareholders' Equity is paid-in capital stock + preferred stock +
capital surplus + retained earnings + capital reserves - minority interest
+ adjustment for cumulative effect of foreign currency translation -
treasury stock.
- Net Income is as reported.
- Borrowed Funds are interbank borrowings + notes/bills/bonds.
- Net Loans are loans and advances - general and specific loan loss
reserves.
- Liquid Assets are cash + short-term marketable and trading
securities + government securities + due from banks.
- Reserves are general and specific reserves available to absorb
loan and other credit losses.
- Non-Performing Assets are assets which are not producing current
income + assets involving a high probability of restructuring or loss of
principal. Note: If non-performing assets are not reported, or if they are
under reported, Ex-Im Bank will make its own estimate.
EBD-M-41 December 2001
Export-Import Bank of the United States
Revised: January 4, 2002
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