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CHAPTER 2

CAPITAL LOAN PROGRAM

Eximbank provides long-term financial assistance for U.S. exports, typically supporting transactions which require longer than 5 years to repay. Briefly, the purposes of the capital loan program are to

--supplement private sources of financing when such

sources are unwilling or unable to assume the political and commercial risks involved,

--extend credit for terms longer than those of private

lenders, and

--enable U.S. suppliers to offer terms competitive

with those of government-sponsored export-financing institutions in other countries.

Eximbank follows a policy of participation financing, under which commercial bank funds are combined with Eximbank funds. Eximbank's 6-percent interest rate is combined with private funds at prevailing market rates to establish an overall interest rate acceptable to the borrower. Private sources are repaid from the early installments and Eximbank is repaid from later installments, Repayment is generally made semiannually beginning 6 months after delivery or after completion of the project financed.

DISTRIBUTION OF RESOURCES

Eximbank's capital loan resources are concentrated in three product categories: commercial jet aircraft, nuclear and thermal power plants, and defense materials, These categories consumed about $2.8 billion, or about 70 percent, of the $4 billion authorized for fiscal years 1969-71. Eximbank's resources are devoted to jet aircraft and nuclear power plants because of the high unit cost and the long amortization period of the items--7 to 10 years for widebodied jets and up to 20 years for nuclear power plants; terms which U.S. commercial banks generally do not finance.

Eximbank stresses the need for the United States to support the sale of jet aircraft and nuclear power plants to keep its dominant position in world markets. The National Advisory Council on International Monetary and Financial Policies (NAC) has approved Eximbank's loan policies, with the proviso that maximum private financing be used with repayment in the shortest possible time. (See pp. 45 and 53 for guidelines on jet aircraft and nuclear power plants.)

The following schedule shows that Eximbank greatly increased its capital loan activity in recent years.

The number of loan authorizations has more than doubled and has increased in value by about $717 million between fiscal years 1969-71--a 77 percent increase over 1969.

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Source:

Eximbank annual reports (includes only capital equipment type items), "Schedules of

Credits Authorized."

LOAN APPLICATION PROCEDURES

Eximbank assesses applications on a case-by-case basis. General guidance on information to submit in applying for capital loans is made available to prospective borrowers and enables Eximbank to evaluate the merits of the financial assistance requested. Applications for credit are not made on a standard form because each loan is considered separately. Information requested by Eximbank (see app. III.) includes a description of efforts to obtain financing from sources other than Eximbank, but this information is not always provided.

Applications are assigned for processing to case officers from either the Project Development Division or the Product Financing Division. The case officer is assisted by a staff, including a lawyer, a finance officer, an economics officer, and, when appropriate, an engineer. The case officer is responsible for presenting a loan memorandum, containing the conclusions and recommendations of the group, to Eximbank's Board of Directors.

In testimony before the Congress, Eximbank stated that it examined each case on its merits, with four tests involved: (1) is it an economically viable purchase or contract, (2) does it refer entirely to U.s. products or services, (3) is there assurance the export will not adversely impact on the U.S. economy, and (4) is there reasonable assurance of repay

ment.

The loan memorandum demonstrates the stress placed on the economic viability of the proposal. It usually contains information on the

--capitalization and financial condition of the borrower,

--reliability of the guarantor,

--country's economic condition and

and foreign debtservicing ability,

--economic feasibility of the purchase and,

--previous credits extended to the borrower.

Comments are requested from the U.S. Embassy in the purchasing country on political or other considerations of the loan proposal.

The Board of Directors then decides whether to approve the proposed credit or preliminary commitment. Approvals by the Board involving $10 million or more of Eximbank exposure (loans plus guarantees) are sent to NAC for its approval before Eximbank authorizes the credit or makes the commitment. Minutes of the Board of Directors' meetings contain only brief statements of the decisions reached.

No detail is recorded of the Board's considerations in authorizing loans.

ROLE OF NAC

NAC operates under Executive order to coordinate the policies and operations of international financial organizations, including Eximbank. It is composed of representatives of the Departments of State, Treasury, and Commerce; the Federal Reserve Board (FRB); and Eximbank. Operating policies approved by NAC for Eximbank are contained in NAC action documents.

There are three levels of NAC deliberation: principals, comprising representatives at the Secretary and Chairman level; alternates, comprising representatives at the assistant secretary level; and staff committee, comprising representatives at a lower working level. The importance of the matters under consideration dictate the level of deliberation. The principal level meets infrequently, whereas the staff committee meets weekly. Most deliberations on Eximbank loans are carried out at the staff level.

When there is no major disagreement, the staff committee recommends NAC approval. Disagreements are reported by the staff committee to its respective principals, who evaluate and vote on the matters.

Nature of NAC review

The following statements extracted from loan memorandums submitted by Eximbank to NAC staff members in consideration of loan transactions illustrate the type of

justifications provided regarding the essentiality of its financing

1. A $5.2 million loan in February 1971 to buy two

used aircraft.

"Eximbank participation is required to complete
the required financing package on reasonable
terms and the Bank should accept the later
maturities for the same reason. The financing
pattern, terms and conditions are comparable
to those recently supported by Eximbank for
similar aircraft transactions involving compar-
able airlines."

2. An $82.3 million preliminary commitment in

January 1971 for equipment and services to
construct nuclear power systems.

"The Preliminary Commitment requested *** will
contribute to the maintenance of a market in
Japan for U.S. manufactured nuclear steam sup-
ply systems and nuclear fuel in competition
with non-U.S. manufacturers who are in a po-
sition to offer similar equipment manufactured
under licensing agreements with U.S. manufac-
turers.

3. An $800,000 loan in January 1970 for equipment

and services to construct an ammonia plant.

"The financing requested from Eximbank *** will
further the sale of advanced U.S. technical
services and assist in maintaining an estab-
lished market for these services in Japan.

In considering loan requests Eximbank solicits the views of NAC member agencies. However, it considers exceptions to operational judgments of its Board of Directors to be outside NAC's monitoring role. Eximbank also believes that requiring loan proposals to clearly demonstrate that financing is essential to a sale is unduly restrictive since it considers not only the immediate sale but also long-term

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