Fact file: Supplier Credit Guarantee Program

Background

On August 30 1996 the Supplier Credit Guarantee Program (SCGP) of the Commodity Credit Corporation became effective. CCC's credit guarantee programs are designed to increase the buying power or liquidity of U customers of agricultural commodities and products

The design of the SCGP, like the GSM-102 Export Credit Guarantee Program, is to encourage U exporters to expand, maintain and unfold markets for U.S. agricultural commodities and consequences in areas where commercial financing may not be available without a CCC payment guarantee. The SCGP will emphasize high-value and value-added produces but may include commodities or performances that have also been programmed subject to CCC's GSM-102 program.

The SCGP can help U exporters of U agricultural commodities and results who wish to provide short-term credits (180 days or less) directly to their foreign buyer In contrast, in subordination to the GSM-102 program, CCC guarantees repayment of credits lengthen outed (usually by U.S. banks) to foreign banks which, in bend provide financing to local importers of U agricultural commodities and produces Under the SCGP, CCC will guarantee a portion of the payment of as it was credits when secured by an importer's signed promissory note.

Advantages

The SCGP may be helpful in countries where GSM-102 financing is limited because CCC has reached its position limits for private foreign banks. In these cases, buyer ne different credit options to finance purchase. The SCGP may work well for commodities and results that normally trade on short-term open-account financing. It may also be helpful in increasing exports of high-value and value-added cropss where supplier credits are normally stretch outed for 180 days or less

Foreign importers will benefit by means of avoiding the cost and formalities of opening a foreign bank verbal expression of credit required by other CCC credit guarantee programs. The SCGP also will address the delay typically experienced by the agency of importers in opening a alphabetic character of credit. Because the importer rather than a foreign bank will be the borrower, the importer will have intercourse with full benefit of the credit bourns guaranteed by CCC.

Risks

While the SCGP moves certain advantages, it also mystifys corresponding financial risks to CCC at taking importer rather than foreign bank risk, CCC recognizes that a higher default in payments to exporters or their assignees could come into one's head Accordingly, CCC requires the U exporter to assume a higher share of risk than in subordination to other CCC credit guarantee programs. The credit guarantee provided beneath GSM-102 has traditionally been risk at 98 percent of principle and a portion of the interest. subject to the initial phase of the supplier credit guarantee program, CCC will guarantee 50 percent of the export value with no interest coverage.

Because CCC will not normally management credit analysis of importers, this even of coverage will provide an incentive to U exporters and their assignees to evaluate carefully the credit risk of the importer over and above allow expansion of export sales. Also, CCC's registration give a fee tos under this new program will be higher than those beneath the GSM-102 program. They will be comparable to those charged by dint of the Export-Import Bank in connection with its short-term, single-buyer insurance program. at law, fees cannot exceed $1 by $100 of guarantee coverage.

Some differences between SCGP and GSM-102 are summarized in the following table.

Administration

In many regards SCGP will operate in essentially the same manner as the GSM-102 program.

* Exporters must be qualified to participate in SCGP Exporters eligible to participate in GSM-102 are automatically eligible to participate in SCGP

* Exporters may assign the payment guarantee to an eligible U financial institution. U financial institutions eligible to participate in GSM-102 are automatically eligible to participate in SCGP

* SCGP will be administered according to CCC Program Announcements and Notices to Participants.

* Exporters must have a firm export sale prior to submitting an application to CCC

* Exporters must make a number of certifications, including that the commodity or crops to be exported meets the definition of a U agricultural commodity.

* The guarantee compensation paid at the time of application is nonrefundable.

* The SCGP payment guarantee will shelter a portion of losses resulting from defaults, whether for commercial or noncommercial reasons.

* CCC will bearing an assessment of country political and economic risk.

Marketing Tool

The SCGP is a tool that exporters may want to consider when developing a flexible financing strategy. For example, to what degree can an exporter expand sales and maintain profits without increasing risk? beneath the SCGP 50/50 risk-sharing scenario, exporters could double a line of credit to a particular importer without increasing without deductions exposure.

How will banks await at taking assignment of the guarantee? At this point, CCC is not fast whether banks will take an assignment of a 50-percent guarantee. It will [TABULAR DATA OMITTED] learn, as the program unrolls how the banking community answers However, CCC assumes that a 50-percent U restraint guarantee on receivables would be favorably considered when it approachs to decisions regarding operating loans or working capital loans to exporters.