NAC files, lot 60 D 137, “Documents”

The Managing Director of the Export-Import Bank (Arey) to the Secretary of the National Advisory Council on International Monetary and Financial Problems (Glendinning)1

for nac use only
Document No. 1700

Dear Mr. Glendinning: The recent shift in international trade conditions from a seller’s to a buyer’s market abroad, the increasing importance of export markets to United States manufacturers because of expansion of plant capacity, and the increasing credit competition offered by foreign manufacturers based on assistance provided by their governments, make it desirable for the Export-Import Bank to adopt procedures to expedite the extension of assistance to United States exporters of capital goods without sacrificing sound principals of finance.

Accordingly, the Bank proposes, within the field in which it could appropriately extend exporter credits on a case by case basis, also to extend lines of credit to assist exporters of certain types of capital equipment to meet competition in established United States markets abroad. This proposal rests upon the premise that certain [Page 377] types of capital goods will be required year after year in a particular country, will improve or continue to sustain the economy of that country and, based upon past experience, can be sold there for dollars in a certain volume each year without injury to our overall trade position. Such a procedure would not minimize the importance of or be inconsistent with consideration on their merits of either projects of a developmental type or exporter credits for the expansion of exports as distinct from their maintenance at appropriate levels.

Such a line of credit would not be expected to finance more than a portion of the business of a particular exporter of capital equipment. The establishment of such a line for his assistance, however, would enable the exporter to know the extent of the aid he might anticipate from the Bank in a given period and thus permit him rationally to plan the extension where necessary of credit terms to his foreign dealers or other customers. Moreover, the line of credit from the Bank could be arranged and used more effectively to supplement and complement the exporters’ own resources and his lines of credit from commercial institutions.

The contemplated procedure is not entirely new to the Bank. Somewhat similar lines of credit have been extended to assist groups of manufacturers in the machine tool industry. These revolving credits have operated successfully and without loss. The creation of such groups, however, is not practicable or appropriate for most types of equipment.

The Bank proposes, in short, to authorize a line of credit to assist an individual company in an amount of not more than one-third to approximately one-half of the average foreign business done by it during the last few years. At the outset, no line would be authorized in excess of $10 million, or would be available for more than one year, until some experience with this device has been gained.

After such authorization, application could be made to the Bank by the exporter for financial assistance under the line in making a sale in any friendly country on a case by case basis. Where the nature of the goods permits of repetitive sales to the same customer abroad during a year, provision would be made for utilization of the line without prior approval by the Bank of each such transaction. For these cases the Bank will designate from time to time the countries in which such transactions may be financed automatically, and the amount of credit which may be outstanding at any one time in each approved country. As a further prerequisite to such transactions, the Bank also will designate from time to time the amount of credit which may be outstanding at any one time to an approved importer in that country. The provisions for such automatic [Page 378] treatment, however, are not to apply to sales where the purchaser is a government or government owned entity.

In connection with each sale to be financed under an exporter credit line, a down payment of at least 20% of the invoice value must be obtained by the exporter unless otherwise approved by the Bank. The exporter will be expected generally to participate in the financing by carrying not less than 25% of the balance or financed portion of the sale. The Bank, then, will purchase or guarantee not more than 75% of the financed portion. This financing would be without recourse to the exporter and would be pari passu with the 25% or more which he would carry for his own account or with the assistance of his commercial bank or other financial institution. On this basis the amount to be financed by the Bank would not exceed 60% of the invoice value of the item sold.

The maturity of the paper to be purchased or guaranteed would vary according to the nature of the equipment to be financed and to some extent with the competitive terms offered. It is believed the terms should not exceed and usually should be shorter than those offered by competitors, but seldom should be for periods of less than 1 year. For some types of equipment terms of 2 or 3 years will be adequate. For others, terms of about 5 years may be required, and for large units of heavy equipment there will be occasions when terms of 7 years or so will be necessary. The desire to extend excessive terms will be minimized, it is believed, because the exporter will be required to participate ratably for the full period. It should generally be possible to finance through private channels products for which credit terms of less than one year are appropriate.

The paper to be purchased or guaranteed usually will bear interest at not less than 5% per annum. There may be some instances, however, in which approved sales to governments or their entities may require use of 4½% as the rate of interest. Interest will at least equal minimum requirements of the NAC formula. Interest and installments of principal are to be payable not less often than semiannually.

The Bank proposes to charge a commission on all obligations purchased or guaranteed by it. The commission, payable by the exporter when the Bank assumes responsibility for the paper, will be 1½% flat on obligations having a final maturity of 3 years or less, and will be increased by ¼% for each year or portion thereof by which the maturity of the last maturing obligation exceeds 3 years.

Some exporters have indicated that they can provide the financing required for the sales which are to be assisted if the Bank will extend its guaranty to the exporter in lieu of arranging for purchase of the paper. In the majority of cases, however, it is the intention [Page 379] that these purchases shall be made by commercial banks designated by the exporter with the guarantee of the Export-Import Bank. Accordingly, it will be necessary to enter into guaranty agreements with these commercial banks. The Export-Import Bank proposes to charge for its guaranty, whether issued to the exporter or to the commercial bank, a fee of 2% per annum on the outstanding balance guaranteed if the obligation bears interest at the rate of 5% per annum or less. The guaranty fee will be increased by one-quarter of any amount by which the interest borne by the guaranteed obligation exceeds 5% per annum. The fee would be payable to the Bank from interest collected on the guaranteed obligation.

The exporter is to be responsible for determining that all requirements incident to the right to obtain dollar exchange to meet installments on the importer’s obligations have been complied with by himself or the importer. If this has not been done, the Bank will have recourse against the exporter in connection with the particular transaction.

A few exporters are prepared to assume all commercial risks involved in their sales abroad on credit, but have indicated that if they are to do so they require protection against loss resulting from political occurrences beyond the control of the exporter or the importer. Such risks include inconvertibility, war and, possibly in some cases, expropriation. The Bank, therefore, proposes to offer limited guaranties which would vary from those for total coverage under lines of credit as discussed above in the following respects: (1) Instead of purchasing or guaranteeing the paper in the first instance, the Bank will agree to make such purchase within 180 days after occurence of a default resulting solely from a defined political risk; (2) the Bank’s undertaking would cover 75% of the financed portion of the sale after provision for a cash down payment of 20% of the invoice value; (3) the commission charged the exporter by the Bank at the time of assuming responsibility would be ¾% of the obligations covered by the Bank’s undertaking for obligations having a final maturity of 3 years or less, plus ¼% for each year or fraction thereof by which the maturity of the last maturing obligation exceeds 3 years; and (4) the Bank will receive a premium of 1¾% per annum payable at least semiannually if the obligations of the importer bear interest at the rate of 5% per annum, plus one-quarter of any amount of interest in excess of 5% borne by the obligations.

There is transmitted herewith a memorandum2 describing in greater detail the proposal to establish lines of credit in favor of [Page 380] individual exporters of capital goods. If the National Advisory Council perceives no objection to the program as described, the Bank is presently prepared to consider authorization of lines of credit as follows:

1)
A line of $4 million to assist The Oliver Corporation in the sale of agricultural equipment. This company has had a foreign business in excess of $15 million per year over the past 5 years, the average having been about $18.5 million. Provision may be made for the automatic use of this line within limits based upon the average (or minimum in some cases) of sales in a particular country during the past 5 years. Automatic use of the line, however, will not be permitted in countries presently faced with a serious dollar exchange problem. Any sales in such countries will require prior approval of the Bank.
2)
A line of $6 million to assist Combustion Engineering, Inc. in the sale of steam boilers and associated equipment. The individual transactions generally involve large amounts. Automatic use of this line is not envisaged and accordingly each transaction will require prior approval of the Bank. The average annual foreign business of the company has been $10.5 million.

The Export-Import Bank requests the National Advisory Council to advise the Bank whether the Council perceives any objection to the consideration by the Bank of applications for lines of credit to assist United States exporters to finance the sale of capital goods of a productive nature on the terms described above.

Sincerely yours,

Hawthorne Arey
  1. A covering sheet containing a draft NAC action and a transmittal memorandum by Glendinning are not printed.
  2. The reference memorandum, prepared in the Export-Import Bank, dated Aug. 12, 1954, is not printed.