[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.


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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

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(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