While both Short-Term and Medium-Term Credit Insurance are used to protect against foreign buyer nonpayment, Medium-Term Credit Insurance is a form of risk mitigation that can be applied towards the foreign buyer financing of capital equipment. Both U.S. exporters and financial institutions could benefit from this type of insurance under certain circumstances.
For example, an agricultural equipment manufacturer based in the U.S. is interested in selling its products with a sales price of $9 million to a buyer in a foreign country with a five-year loan repayment term at current U.S. interest rates. The U.S. manufacturer would like to offer competitive credit terms to its foreign buyer and is considering EXIM’s trade finance products as a solution.
Assuming certain terms, conditions, and requirements are met, the manufacturer could pursue a Medium-Term Credit Insurance policy because the financed loan amount is less than $25 million and the foreign buyer’s loan repayment tenure is greater than one year. Short-Term Credit Insurance coverage parameters, in contrast, are typically up to 180 days, but can go up to 360 days.
Either the U.S. exporter or its bank may apply for Medium-Term Credit Insurance, but the steps from initial discussions with the foreign buyer through loan closing and loan servicing differ based on whether a Supplier Credit (the exporter is the applicant) or a Buyer Credit (the bank is the applicant) structure is used. Continuing with the agricultural equipment exporter example, the Supplier Credit structure is outlined below. The second part of this blog post series will detail the steps of a Buyer Credit utilizing Medium-Term Credit Insurance or a Medium-Term Loan Guarantee.
For the Supplier Credit structure:
1. The U.S. agricultural equipment exporter and foreign buyer agree on terms and conditions of potential financing.
2. The exporter submits a Medium-Term Insurance application to EXIM along with other required credit information. An exporter may choose to use an EXIM-registered broker to assist with the application process.
3. The application and associated credit information is reviewed by EXIM and a credit decision is rendered.
4. If the application is approved, an insurance policy is issued. The exporter requires the foreign buyer/borrower to execute an EXIM-formatted Promissory Note. A perfected security interest in the agricultural equipment to be financed may be required. Other common structures include requiring personal guarantees from the owners of the foreign company/borrower purchasing the equipment. Each transaction is underwritten based upon the creditworthiness of the borrower and accounts for the specific market conditions of the deal.
5. The exporter requires receipt of a minimum down payment of 15% of the $9 million contract value from the foreign buyer, and then ships the agricultural equipment upon payment receipt.
6. The exporter can either retain financing on its books (85% of $9 million plus the insurance premium if U.S. content is 85% or more) and collect loan payments from the foreign buyer, or seek to sell the loan to a commercial bank.
7. If the exporter seeks to sell the loan to a commercial bank, the exporter will execute a Note Purchase Agreement and assign EXIM’s Medium-Term Insurance policy to the commercial bank before selling the loan. As part of this arrangement, the exporter assigns the policy to the lender and the lender becomes the EXIM-insured. The exporter is expected to assist the lender in the policy compliance process and provide exporter certificates and other documents as needed by the lender to fulfill EXIM policy requirements. After buying the loan, the commercial bank will collect loan payments and service the loan.
The Medium-Term Credit Insurance Policy will provide 100% coverage of the insured amount for commercial and political risks.
Many EXIM small business authorizations are for short-term insurance products because export transactions with open account terms usually have a duration of less than one year. For exporters seeking longer repayment terms in excess of one year for the sale of goods and services, Medium-Term Credit Insurance could be a useful product to consider. For more information, contact an EXIM trade specialist.
