Capitalization of interest refers to the practice of allowing the borrower to accrue interest due on principal disbursements made during the construction of a project and then adding the accrued but unpaid interest to the principal loan/guarantee amount. Interest that accrues after the start of credit (SPOC) will not be capitalized.
- Project Finance: EXIM Bank generally offers IDC support for limited recourse project finance transactions because, before project completion, the project does not generate any revenue\ to pay accrued interest. Hence, IDC support is often a critical factor in a limited-recourse financing structure.
- Special Programs: IDC is automatically available for projects that meet EXIM Bank’s criteria for having a beneficial impact on the environment (Environmentally Beneficial Exports {EXIM.GOV) and for medical equipment exports (Medical Technologies EXIM.GOV) when there is an extended installation and/or construction period.
Hence, IDC support is an incentive to both exporters and buyers, pursuant to EXIM Bank’s Environment Export Program and Medical Equipment Initiative.
Possible Exceptions: IDC for corporate finance transactions has also been allowed in the past on an exceptional basis. The factors taken into consideration when deliberating on whether an exception for IDC is appropriate include:
The availability of such support from competing ECAs.
- If a U.S. exporter is bidding as part of a consortium, and all members of the consortium is offering capitalization of interest support.
- The significance of the U.S. exporter’s share of the project; and whether the U.S. exporter is competitive in terms of price, quality, technical ability, and other market-determined factors, thereby making IDC a critical competitive factor.
To facilitate financing with other export credit agencies (ECAs), EXIM Bank is actively establishing “One-Stop-Shop” co-financing facilities. “One-Stop-Shop” arrangements allow products and services from two (or more) countries to benefit from a single ECA financing package. Without co-financing, the parties would have to make separate financing arrangements with two (or more) ECAs to ensure support for exports from various countries. The country with the largest share of the sourcing and/or the location
of the main contractor will generally determine which ECA leads the transaction. EXIM Bank’s co-financing option allows U.S. exporters to compete with exporters from other countries that offer similar arrangements.
The lead ECA will provide export credit support for the entire transaction and will arrange for support from the follower ECA behind the scenes. As a result, the lead ECA is able to provide one set of documents, one set of terms and conditions, and one set of disbursement and claims procedures for the entire transaction. The buyer will benefit
from the ease of a streamlined financing package, as the involvement of the follow-up ECA should be invisible to the buyer.
EXIM Bank as the Lead ECA
As the lead ECA, EXIM Bank will provide its standard cover for the entire transaction under its guarantee or insurance program. EXIM Bank will seek a separate financial commitment (e.g., reinsurance) from the following ECA for the value of the exports to be covered by it. EXIM Bank will require the use of its standard insurance or guarantee documentation, appropriately modified. Certain EXIM Bank policies, such as U.S. vessel shipping requirements (MARAD), would not apply to the follower ECA supported
portion. In the case of economic impact and environmental reviews, however, EXIM Bank will continue to evaluate the entire project to ensure compliance with statutory and policy requirements.
EXIM Bank as the Follower ECA
As the follower ECA, EXIM Bank will provide a commitment to the lead ECA for the U.S. portion. Before EXIM Bank approval of the transaction, the U.S. exporter will be required to complete and submit a Co-financing Certificate to EXIM Bank, which will provide U.S. content information and confirm compliance with statutory and policy requirements. The lead ECA will be responsible for documenting the transaction and administering disbursements using its standard procedures. EXIM Bank will require, however, compliance with U.S. vessel shipping requirements with respect to the U.S. exports. The U.S. exporter will be required to submit a revised Co-financing Certificate to EXIM Bank if there are material changes to U.S. content or to the other certifications.