EXIM Bank pricing policies for project finance transactions are designed to comply with the OECD Arrangement pricing rules, which came into effect April 1, 1999.1 The intent of the rules is to level the playing field with respect to fees charged for officially supported export credits. The principles set minimum premium benchmarks (MPBs) for sovereign and country credit risks, regardless of whether the buyer or borrower is a private or public entity. The MPB rules provide a price floor, which should prevent variations in total fees, charged by competing export credit agencies (ECA) for officially supported financing.
Generally, ECAs cannot charge below the MPB unless the project qualifies for a Permitted Exception2. ECAs can, however, set fees at their discretion above the minimums. Key elements of the system include:
- Classifying countries into seven categories of risk;
- Establishing minimum premium rates for each category of risk;
- Applying surcharges or discounts to the premium rates to account for differences among export credit agency products (insurance v. guarantees, quality of coverage, etc.)3; and,
- Establishing Permitted Exceptions, which allow discounts to the minimum rates in certain narrowly defined scenarios
Limited-Recourse Project Finance Pricing: An Overview
EXIM Bank charges two types of fees for project finance transactions - commitment fees and exposure fees. The MPB regime does not distinguish between commitment fees and exposure fees. Rather, the total nominal value of all fees charged as a percent of the amount EXIM Bank finances (excluding the exposure fee) must be equal to or greater than the MPB. Other types of fees associated with a project financing; such as outside legal, financial, and technical advisors to EXIM Bank; are not included in our all-in-cost fee analysis to meet the MPB.
Due to the nature of limited-recourse project finance, and its reliance on complex contractual structures for repayment rather than a creditworthy sovereign or private sector borrower, the pricing of project finance transactions may differ significantly from the fees charged for standard export credits. For example, a country may have a very low (good) OECD rating due to a strong creditworthy sovereign, but have a weak legal or regulatory environment. In this situation, the sovereign MPB may not reflect the true risk of the transaction and therefore may not be indicative of the fees that would ultimately be charged.
EXIM Bank will also consider factors such as competitor practices when setting fees. When U.S. exporters or project sponsors are faced with competitors backed by official export credit agency support, EXIM Bank can price to meet the competition as appropriate.
Commitment fees for transactions involving pre-completion coverage (direct loans and comprehensive or political risk only guarantees) are 1/2 of 1%. This fee includes one post-completion option for either a guarantee or a direct loan. There is an additional commitment fee of 1/8 of 1% for each additional option. For transactions without any pre-completion coverage, the commitment fee is 1/8 of 1%. All commitment fees are charged on the full, undisbursed portion of a loan.
For example, a borrower requesting a guaranteed loan without any additional take-out options would pay a 1/2% commitment fee on the undisbursed balance of the pre-completion commitment. If that borrower wanted a comprehensive guarantee pre-completion and have the option to keep the guarantee or convert it to a direct loan post-completion, the commitment fee would be .625%, of which 1/8 of 1% would be charged on the entire uncancelled amount of the post-completion commitment.
EXIM Bank determines exposure fees using the Exposure Fee Calculator located on the Bank's Web page at www.exim.gov. However, project finance fees may differ from fees charged in EXIM Bank's other programs for several reasons, including:
- Different all-in-cost assumptions for determining exposure fees;
- Tailored repayment profiles and grace periods under the Project Finance Framework Agreement;
- Different levels of coverage for pre- and post-completion periods; and
- Permitted Exceptions to the MPB.
For example, projects with lengthy disbursement periods, or projects that finance fees will have higher nominal fees than projects with front-ended disbursement periods or projects in which exposure fees are not financed. Also, transactions with tailored repayment profiles that reduce (or increase) the average life of the debt will have exposure fees that will be lower (or higher) than for transactions with a straight-line repayment profiles.
Because infrastructure projects, such as power plants, will not generally qualify for Permitted Exceptions to the MPB due to a lack of a hard currency earning revenue stream, they are likely to be priced at or above the MPB. On the other hand, hard currency earning projects such as oil and gas projects may qualify for Permitted Exceptions as described in Exhibit 2, and can therefore be priced lower than the MPB. Political risk only transactions are allowed a 10% discount to the MPB.
Minimum exposure fees may be estimated by following the steps below. Indicative fees are also included in Exhibit 1.
- Estimate the MPB by using the Fee Calculator at www.exim.gov (the sovereign fee is the MPB). Note that the MPB or sovereign fee includes both exposure and commitment fees.
- Deduct from the result in Step 1, the commitment fees as a percent of the amount of EXIM Bank financing (excluding the exposure fee).
- Discount the result in Step 2 by the appropriate percentage (if any) for projects which qualify for Permitted Exceptions as outlined in Exhibit 2.
1EXIM Bank is a participant in the Arrangement on Guidelines for Officially Supported Export Credits. Other participants generally include the official export credit agencies of OECD countries.
2See Exhibit 2.
3Due to the high quality of EXIM Bank's unconditional guarantee, the OECD defines the guarantee as an "Above Standard Product", which results in a surcharge to the MPB. Other ECAs may offer insurance products, which the OECD defines as either "Standard" or "Below Standard", which may result in pricing which appears lower than EXIM Bank, but when adjusted for the quality between products is equivalent.
Exhibit 1: Project Finance Exposure Fee Examples
Indicative Minimum Project Finance Exposure Fees
(as of March 8, 2005, Net of Commitment Fees)(a)
(Fees below are percentages and represent minimums - actual fees may be higher)
Local Currency Earning Projects (No Permitted Exception or Discount)
Hard Currency Earning Projects (20% Discount for Permitted Exception)
- Repayment in equal annual installments
- Fees accrue as of each disbursement and are financed.
- 36-month disbursement period with straight-line draw down profile
- Comprehensive guarantee pre- and post-completion
- Annual discount rate of 3.50% (OECD rate)
(a)Commitment fees equal 0.73% based on a drawdown period of 36 months, with drawdown commencing 3 months after Board approval and commitment fees beginning to accrue 60 days after Board approval.
(b)Maximum term allowable under OECD guidelines
Exhibit 2: Permitted Exceptions
There are ten Permitted Exceptions allowed under the MPB system, which provide for discounts to the MPB. Generally, Permitted Exceptions are maximum discounts that must be justified on a case-by-case basis. If a specific project qualifies for a Permitted Exception, it does not set a precedent for any future transactions. In order for a Permitted Exception to apply, it must meet the OECD criteria for the entire duration of the indebtedness.
Of the ten Permitted Exceptions, the one most applicable to limited recourse project finance is Offshore Future Flow Structure Combined with Offshore Escrow Account . To qualify for this Permitted Exception, all of the following criteria must be satisfied:
- Hard currency earning project revenues flow into an escrow account.
- The escrow account is funded through long-term or other appropriate contracts with creditworthy foreign customers located in better risk countries than that of the borrower.
- The escrow account is held offshore in a country with very low transfer or country risks (e.g., a High-Income OECD country).
- The escrow account must be held at a creditworthy financial institution.
- The borrower must irrevocably instruct project revenues to be paid directly into the escrow account.
- The account is secured as collateral for the benefit of the lenders.
If all the above Permitted Exception criteria are met, the following discounts may apply (note, these are maximum percentages applicable to the borrower, the actual discount may be less based on unique project characteristics):
- A 20% discount of the MPB if all the above conditions are met;
- A 30% discount of the MPB if all the above conditions are met and: either the project's Loan Life Coverage Ratio (LLCR) averages at least 1.75:1 OR there is at least 9 months of debt serve pre-funded in a debt service reserve account
- A 40% discount of the MPB if the above conditions are met and: (a) the projected LLCR averages at least 2.5:1 OR the projected LLCR averages at least 2.0:1 and the projected ADSCR is not less than 1.0:1; (b) there is at least 12 months of debt service pre-funded in a debt service reserve account; (c) the creditor has a first priority interest in the escrow account and the long-term contracts; and (d) the buyer/borrower is a private entity being more than 80 per cent private ownership.
The LLCR and ADSCR ratios have agreed upon definitions among the OECD participants.