What is the GSM 102 Program ?
The U.S. Department of Agriculture’s (USDA) Export Credit Guarantee Program (GSM-102) provides credit guarantees to encourage financing of commercial exports of U.S. agricultural products, while providing competitive credit terms to buyers. By reducing financial risk to lenders, credit guarantees encourage exports to buyers in countries—mainly developing countries—that have sufficient financial strength to have foreign exchange available for scheduled payments.
The GSM-102 program guarantees credit extended by the private banking sector in the United States (or, less commonly, by the U.S. exporter) to approved foreign banks using dollar-denominated, irrevocable letters of credit for purchases of U.S. food and agricultural products by foreign buyers. USDA’s Foreign Agricultural Service (FAS) administers the program on behalf of the Commodity Credit Corporation (CCC), which issues the credit guarantees. GSM-102 covers credit terms of up to three years; maximum terms may vary by country.
CCC guarantees payments due from approved foreign banks to exporters or financial institutions in the United States. However, the financing must be obtained through normal commercial sources. Typically, 98 percent of principal and a portion of interest are covered by a guarantee. Because payment is guaranteed, financial institutions in the United States can offer competitive credit terms to the foreign banks, usually with interest rates based on the London Inter Bank Offered Rate (LIBOR). Any follow-on credit arrangements between the foreign bank and the importer are negotiated separately and are not covered by the CCC guarantee. Program announcements issued by FAS provide information on specific country and commodity allocations, length of credit periods, and other program information and requirements.
Eligible Countries or Regions
Interested parties, including U.S. exporters, foreign buyers, and banks, may request that CCC establish a GSM-102 program for a country or region. Prior to announcing the availability of guarantees, CCC evaluates the ability of each country and foreign bank to service CCC-guaranteed debt. New banks may be added, or levels of approval for others may be increased or decreased, as information becomes available.
CCC selects agricultural commodities and products according to market potential and eligibility based on applicable legislative and regulatory requirements.
CCC must qualify exporters for participation before accepting guarantee applications. Diverse City Enterprise LLC. is an approved exporter. An exporter must have a business office in the United States and must not be debarred or suspended from any U.S. government program. Financial institutions must meet established criteria and be approved by CCC. CCC sets limits and advises each approved foreign bank on the maximum amount CCC will guarantee for that bank.
The exporter negotiates terms of the export credit sale with the importer. The exporter usually wishes to be paid at the time of shipment; so the exporter must work closely during negotiations with the eligible U.S. financial institution to ensure that arrangements are firmly in place for the U.S. financial institution to pay the exporter and to extend credit to the foreign bank.
Once a firm sale exists, the qualified U.S. exporter must apply for a payment guarantee before the export date. The exporter pays a fee calculated on the dollar amount guaranteed, based on a rate schedule. Fee rates are currently based on the country risk that CCC is undertaking, as well as the repayment term (tenor) and repayment frequency (annual or semi-annual) under the guarantee.
The CCC-approved foreign bank issues a dollar-denominated, irrevocable letter of credit in favor of the U.S. exporter, ordinarily advised or confirmed by the financial institution in the United States agreeing to extend credit to the foreign bank. The U.S. exporter may negotiate an arrangement to be paid as exports occur by assigning to the U.S. financial institution the right to proceeds that may become
payable under the CCC’s guarantee. Under this arrangement, the exporter would also provide transaction-related documents required by the financial institution, including a copy of the export report, which must also be submitted to CCC.
If the foreign bank fails to make any payment covered by the GSM-102 guarantee, the exporter or assignee must submit a notice of default to CCC. A claim for loss also may be filed, and CCC will pay claims found to be in good order.
For CCC audit purposes, the U.S. exporter must obtain documentation to show that the commodity arrived in the eligible country, and the exporter or the exporter’s assignee must maintain all transaction documents for five years from the date of completion of all payments.