Medium-Term transactions are a rapidly growing category of export finance. By definition, "Medium-Term" refers to transactions with a repayment period over one year.
Until a few years ago, the most common Medium-Term vehicle was forfaiting, typically meaning the payment risk was guaranteed by a foreign government or overseas bank. These transactions were expensive, often cumbersome, and rare for all but the most creditworthy entities. The Latin American and Asian crises in 1998-99 reduced the number of forfaiters sharply. Forfaiting remains an option under some circumstances, but this field is shrinking. ERM can place forfaiting transactions on our clients' behalf with a handful of sources.
In 1998, the Export-Import Bank made significant improvements to its Medium-Term program. While underwriting criteria and other refinements continue, the program is now very viable for transactions that fit the requirements.
These include: 85% or more U.S. content, sale of non-military capital or quasi-capital goods, export from the U.S.A., and a minimum downpayment of 15% (which can sometimes be financed outside the program).
Coverage provided is 100% of the financed balance, typically 85% of the sale price after the downpayment, and financial institutions are readily available to take the repayment risk.
This means payment upon shipment for the seller, and (typically) equal semi-annual installments of principal and interest for the buyer at highly favorable interest rates (generally LIBOR plus 1%, even less for larger transactions).
ERM's role in Ex-Im Bank Medium-Term policies includes not only arranging the insurance coverage and assisting in the selection of coverage options, but can also include helping exporters find competitive financing for their customers. We work with a number of banks across the country that are willing and able to handle these programs quickly and cost-effectively.
For transactions that do not meet Ex-Im Bank's requirements, Medium-Term coverage is available from a handful of commercial underwriters. Policies typically cover non-payment for both commercial and political reasons, and do not require a downpayment. However, underwriters expect someone to share the risk with them, either the seller or the lender, and generally cover only 90-95% of the exposure.
These programs are not able to compete as a rule on pricing with Ex-Im Bank or other government credit agencies, and are most commonly used to finance the downpayment portion of an Ex-Im deal, or to cover transactions that are not eligible for Ex-Im programs.
For more information about Medium-Term transactions, or for indicative pricing, contact ERM at (860) 435-0430.
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