[Federal Register Volume 61, Number 218 (Friday, November 8, 1996)]
[Notices]
[Pages 57853-57856]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-28755]
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DEPARTMENT OF DEFENSE
Defense Export Loan Guarantee Program
AGENCY: Department of Defense.
ACTION: Notice of program announcement.
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SUMMARY: The National Defense Authorization Act for FY96, directs the
Secretary of Defense to implement an export loan guarantee program for
private sector loans made to eligible sovereign nations for the sale or
long-term lease of U.S. defense articles, services or design and
construction services. The program is limited to $15 billion in
contingent liability and is available for NATO allies, major non-NATO
allies, emerging democracies of Central Europe and non-communist
members of APEC. The law requires that the program be implemented at no
cost to the Department and operated through the collection of user fees
and exposure fees to cover the cost of program implementation and the
risk of loan default. This notice announces the Department of Defense's
implementation of this law and describes the basic parameters of the
program.
EFFECTIVE DATE: November 8, 1996.
[[Page 57854]]
FOR FURTHER INFORMATION CONTACT: The Office of the Deputy Under
Secretary of Defense (International and Commercial Programs)--Defense
Export Loan Guarantee Program, telephone 703-697-2685.
Introduction
Section 1321, the National Defense Authorization Act for Fiscal
year 1996 (Pub. L. 104-106), codified at 10 U.S.C. 2540, directs the
Secretary of Defense to establish a loan guarantee program. This notice
describes the Defense Export Loan Guarantee (DELG) program established
in accordance with the guidelines in the legislation.
Program Purpose
The purpose of the Department of Defense (DoD) Export Loan
Guarantee program is to meet national security objectives by
encouraging standardization and interoperability of defense systems
with our allies, lowering purchase costs of defense items to DoD,
preserving critical defense skills, and maintaining the stability of
the industrial base by facilitating the export of American-made
products.
Overview
The Deputy Under Secretary of Defense (International and Commercial
Programs) will have oversight of the DELG program. The DELG program
issues comprehensive guarantees to lenders against losses of principal
or interest, or both, for loans extended to eligible countries.
Guarantees are available for loans to certain sovereign nations for the
sale or long-term lease of U.S. defense articles, services or design
and construction services, as defined in the Arms Export Control Act,
((AECA)(22 U.S.C. 2751, et seq.)). Guarantees will only be issued if
the products and services are approved for export under AECA
procedures. The DELG Program will also provide loan guarantees for
eligible sales under DoD's Foreign Military Sales program.
The DELG program will function much the same way as the Export
Import Bank (Ex-Im Bank) functions. Under 10 U.S.C. 2540, the DELG
program may not offer guarantees with terms and conditions more
favorable than those offered by Ex-Im Bank. However, the DELG program
procedures differ from the Ex-Im Bank procedures in several ways.
First, the DELG program must charge fees to cover all expected
current and future program costs. Second, the DELG legislation requires
the borrowing country (borrower) to pay an exposure fee to cover the
risk associated with a potential default. That exposure fee cannot be
included in the amount guaranteed. Lastly, the definition of export for
the DELG program is as defined in the AECA and its implementing
regulations.
Like the Ex-Im Bank's program, the DELG comprehensive guarantee
commits the full faith and credit of the U.S. Government and covers 100
percent of the risk of nonpayment of principal and interest. Likewise,
the borrower must accept the loan as sovereign debt and make a cash
payment to the supplier of at least 15 percent of the contract price.
Notes guaranteed by DoD are fully and freely transferable but all
claims must be submitted by the original lender or its paying agent, as
discussed below.
All loans guaranteed by DoD must be denominated and payable in U.S.
currency. Current authority limits the U.S. Government's contingent
liability to $15 billion under the DELG program. DoD reserves the right
to limit the loan amount guaranteed for any one country.
Eligible Countries
10 U.S.C. 2540 (b) limits participation in the DELG program to
countries meeting any of the following criteria.
(1) A member of the North Atlantic Treaty Organization (NATO).
(2) A country designated, as of March 31, 1995, as a major non-NATO
ally pursuant to 10 U.S.C. 2350a(i)(3).
(3) A country in Central Europe that the Secretary of State has
determined: (a) Has changed its form of national government from a non-
democratic form to a democratic form since October 1, 1989, or (b) is
in the process of changing its form of national government from a non-
democratic form to a democratic form.
(4) A noncommunist country that was a member nation of the Asia
Pacific Economic Cooperation (APEC) as of October 31, 1993.
Notwithstanding the above, DoD will not guarantee a loan to a
country that is ineligible for guarantees from the Ex-Im Bank.
Eligible Exports
DoD will issue guarantees only for loans related to the sale or
long-term lease of U.S. defense articles, services, or design and
construction services as defined under the AECA. If the item to be
exported contains foreign-made components, only the U.S. content as
determined by DoD will be supported by a DELG guarantee. In order to
qualify for a DELG guarantee, the U.S. portion of the production cost
of the items exported must be greater than 50%.
Application Process
The DELG program offers both a letter of interest and a final
commitment. The lender, borrower or suppliers/exporters may apply for a
letter of interest. Only the lender or the borrower may apply for a
final commitment. Applicants for a letter of interest will be charged a
processing fee of $1,250 and applicants for a final commitment will be
charged a processing fee of $25,000. Applications will not be processed
without the appropriate processing fee. A letter of interest is not a
prerequisite for application for a final commitment.
Applicants for a DELG guarantee must comply with all applicable
U.S. laws and regulations, including those related to the export of
defense articles and services.
Letter of Interest
DoD issues a letter of interest to indicate that a proposed loan
may be eligible for a DELG guarantee. The letter of interest is based
upon a limited review of the proposed transaction for which a loan
guarantee is sought, and provides an estimate of the guarantee terms
and DELG program fees. Terms and fees stated in the letter of interest
are subject to change. The letter of interest is valid for six months
and may be renewed. The letter of interest does not obligate DoD to
provide a guarantee.
A letter of interest may be sought before the details of the
transaction are fully defined. Accordingly, it is acceptable for the
applicant to provide estimates on its application. However, the
accuracy of the DELG program fee estimates depends on the accuracy of
the information provided by the applicant.
Final Commitment
The final commitment is a firm indication that DoD will guarantee
the loan for a particular sale or lease, subject to satisfaction of all
conditions specified in the commitment letter. A final commitment is
issued upon extensive review of the application and the documentation
that must accompany it. Prior to issuance of a final commitment, DoD
must receive a copy of a valid export license or other evidence of
compliance with the AECA. Additionally, DoD must receive written notice
from the appropriate authority of the borrower that it will accept the
loan as sovereign debt.
Eligible Lenders
Lenders qualified for loan guarantees under the procedures of the
Ex-Im Bank will become eligible to participate in the DELG program upon
execution of the DELG Master Guarantee Agreement
[[Page 57855]]
(MGA). (See discussion of the Master Guarantee Agreement below.)
Lenders not currently qualified must first seek qualification from Ex-
Im Bank. DoD reserves the right to disallow a lender for a particular
transaction, even if that lender is otherwise qualified and has signed
a DELG MGA.
Master Guarantee Agreement
The MGA is an agreement between DoD and a lender. The MGA provides
the general terms and conditions applicable to DELG guarantees. The MGA
facilitates the guarantee process.
For each specific loan transaction, a credit agreement must be
executed by the lender, the borrower and DoD. A standard credit
agreement has been developed for use in these transactions. A
promissory note must also be executed by the borrower for the benefit
of the lender to further evidence the credit.
Fees
DoD is required to fund all program costs through the assessment of
fees. As described below, several types of fees are assessed at various
stages of the process to cover these costs. Fees are subject to change
without notice.
Processing Fees
The processing fee for a letter of interest is $1,250. A fee of
$500 will be charged to renew or update a letter of interest. The
processing fee for a final commitment is $25,000.
Exposure Fee
The exposure fee covers the expected future cost to the U.S.
government of a potential default by the borrower. The exposure fee is
paid proportionately as the guaranteed loan is disbursed. The exposure
fee must be paid by the borrower and shall not be included in the
guaranteed loan amount.
DoD will calculate the exposure fee based upon the loan's repayment
term (up to 12 years), its disbursement schedule (up to 5 years), the
country's risk ratings (1 to 8, with 1 representing the least risk),
and the guaranteed loan's interest rate. The country risk ratings are
determined by schedules and agreements set by the Interagency Country
Risk Assessment System (ICRAS). The Office of Management and Budget
(OMB) requires that all U.S. credit agencies use the same country risk
factors and methodology to calculate the subsidy (in this case, the
exposure fee) inherent in a sovereign credit transaction.
These fees change periodically based upon changes in the ICRAS
ratings and other factors. The exposure fee schedule for different risk
ratings is available from the DELG program or the DELG internet site at
www.acq.osd.mil\icp\.
Administrative Fee
The administrative fee covers the cost of servicing the guarantee
during the disbursement and repayment period. The administrative fee
shall be paid at loan closing and shall be three-eights of one percent
(\3/8\%) of the guaranteed amount. The parties to the transaction must
decide who will pay the administrative fee and notify DELG at the time
of application.
Commitment Fee
The lender or borrower shall pay a commitment fee of one-eighth of
one percent (\1/8\%) per annum on the undisbursed balance of a
guaranteed loan. Commitment fees begin to accrue 60 days after DoD
issues the final commitment letter, and will be computed on a 360-day
year basis.
Other Reimbursable Costs
Parties to the transaction will reimburse DoD for any legal fees
and for any other transaction costs required for loan closing and
issuance of the guarantee. These fees must be paid at loan closing.
Financing Terms
Cash Payment
The borrower must make a cash payment to the supplier/exporter
equal to at least 15 percent of the contract price. The payment may be
paid in a lump sum prior to disbursement of the guaranteed loan, or it
may be paid in installments equal to at least 15 percent of the value
of each payment under the contract or lease for which the loan is being
disbursed.
Coverage
Principal. DoD's maximum guarantee will be the lesser of 85 percent
of the contract price or 100 percent of the U.S. content.
Interest. A DELG guarantee is available for fixed or floating-rate
loans and covers 100 percent of the interest on the guaranteed amount.
Disbursement Methods
The loan disbursement period shall not extend beyond the receipt of
operational capability or completion of services, and in no case shall
it extend beyond five years. The DELG program recognizes two
disbursement methods: the reimbursement method and the letter of credit
(L/C) method. Under either method of disbursement, interest will accrue
on the outstanding balance of the loan during the disbursement period.
Reimbursement method. The borrower pays the supplier in accordance
with the terms of the contract and then requests that the lender
disburse the loan to reimburse the borrower.
L/C method. The borrower arranges for a letter of credit to be
issued by the lender, or a bank acceptable to the lender and to DoD, in
favor of the supplier. The supplier then draws on the letter of credit
in accordance with the contract or lease.
Repayment Term
The repayment term on a transaction supported by a loan guaranteed
by DoD can be no more than 12 years. The DoD will determine the
repayment period based on the contract value, the useful life of the
item, and the purchasing country. Major defense equipment generally
will be allowed a maximum repayment term of 12 years and all other
defense end items generally will be allowed a maximum repayment term of
10 years. The term of the loan shall never exceed the expected useful
life of the item, as determined by DoD.
Repayment of principal must commence within six months of the end
of the disbursement period as defined above.
Conditions of the Guarantee
Supplier's Certificate
DoD requires a certification from the supplier/exporter stating
that the goods and services meet the foreign content criteria and
disclosing any commissions or fees other than those paid in the
ordinary course of business.
Transportation
When the supplier is responsible for shipping, exports financed
under a DELG guaranteed loan that are transported by ocean vessel must
be shipped in vessels of U.S. registry, unless the foreign buyer
obtains a waiver of this requirement from the U.S. Maritime
Administration. Borrowers should address waiver requests to: Director,
Officer of Market Development, Maritime Administration, U.S. Department
of Transportation, 400 7th Street SW., Washington, DC 20590.
Insurance
The borrower shall obtain insurance against marine and transit
hazards on all shipments guaranteed under the DELG program, or shall
accept, in writing, the risk of loss of the items due to such hazards.
U.S. insurers should be given a nondiscriminatory opportunity to bid
for such insurance business. Premiums
[[Page 57856]]
for hazard insurance payable to U.S. insurance companies are eligible
for DELG financing.
Conditions Precedent to Disbursement
Before any disbursements can be made under a guaranteed loan,
parties to the transaction will be required to satisfy all conditions
precedent set out in the underlying loan documents, including payment
of all fees due and any other applicable transaction closing costs and
expenses.
When the conditions precedent to disbursement have been met to the
satisfaction of DoD, and upon the written request of the lender, the
DoD will affix a guarantee legend to the appropriate instrument in
accordance with the term of the MGA.
Transferability
The DELG guarantee is freely transferable (by endorsing the note
over to the new holder) without prior approval of DoD. This facilitates
loan participation and loan syndication as well as straight sale of
obligations.
To provide for the transfer of notes covered by a DELG guarantee,
DoD requires the use of a paying agent/registrar if the lender intends
to transfer the notes. The lender may be the paying agent/registrar.
Although the obligation may be transferred, the responsibilities of
the lender/paying agent are not transferred with the obligation. The
original lender/paying agent is required to keep records of the
transfer and the new holder of the note must work through the original
lender/paying agent to make a claim against DoD.
Claims
Procedure
Only the original lender/paying agent may make a claim. Under DELG
guarantees, a claim may be filed when a borrower fails to pay for any
reason, including a failure to pay resulting from official debt relief
accorded by the U.S. Government.
The lender/paying agent, on behalf of the note holder if other than
the original lender/paying agent, may demand payment from DoD if a note
is in default for an installment of either principal and/or interest
for at least 30 calendar days, and if at least 15 days have elapsed
since a written demand for payment was made on the borrower. The
written demand to DoD must be made not later than 150 calendar days
from the due date of the installment in default. If a claim is not made
within 150 days of default, the DELG guarantee terminates for that
installment.
The guaranteed amount includes the unpaid principal amount of the
installment and any accrued unpaid interest. Before payment by DoD, any
payments made by or on behalf of the borrower shall be applied to
amounts due in accordance with the priorities set forth in the credit
agreement or note(s).
Payment by DoD
DoD will pay the lender/paying agent the guaranteed amount of the
installment after timely receipt of the lender/paying agent's fully
documented claim including a written demand for payment to DoD and the
note(s) endorsed to DoD. The lender/paying agent is responsible for
paying the note holders.
DoD shall not accelerate any guaranteed loan or increment, or make
any payments other than in accordance with the original terms of the
loan.
After DoD makes the first payment under its guarantee for either
principal and/or interest, DoD acquires all right, title, and interest
in and to the note(s), the credit agreement, and any security. DoD, in
its sole discretion, will pursue collection of all amounts due or to
become due for its own account. The lender/paying agent shall be
entitled only to payments from DoD under the original terms of the
loan.
Additional Information
For additional information on any of the topics covered in the
program description, please contact: DELG Program, Office of the Deputy
Under Secretary of Defense (International and Commercial Programs),
3070 Defense Pentagon, Room 3E1082, Washington, D.C. 20301-3070.
Telephone: 703-697-2685. Fax: 703-695-5343.
Dated: November 4, 1996.
L.M. Bynum,
Alternate OSD Federal Register Liaison Officer, Department of Defense.
[FR Doc. 96-28755 Filed 11-7-96; 8:45 am]
BILLING CODE 5000-04-M
