Supplier Credit Guarantee Program, 3790-3791 [06-610]

Agencies

• DEPARTMENT OF AGRICULTURE
• Commodity Credit Corporation

[Federal Register Volume 71, Number 15 (Tuesday, January 24, 2006)]
[Proposed Rules]
[Pages 3790-3791]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 06-610]


========================================================================
Proposed Rules
                                                Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of 
the proposed issuance of rules and regulations. The purpose of these 
notices is to give interested persons an opportunity to participate in 
the rule making prior to the adoption of the final rules.

========================================================================


Federal Register / Vol. 71, No. 15 / Tuesday, January 24, 2006 / 
Proposed Rules

[[Page 3790]]



DEPARTMENT OF AGRICULTURE

Commodity Credit Corporation

7 CFR Part 1493

RIN 0551-ZA00


Supplier Credit Guarantee Program

AGENCY: Commodity Credit Corporation (CCC), USDA.

ACTION: Advance Notice of Proposed Rulemaking (ANPR).

-----------------------------------------------------------------------

SUMMARY: This ANPR solicits comments on options to reform the USDA, 
CCC, Supplier Credit Guarantee Program (SCGP). The purpose of this ANPR 
is to invite suggestions on changes to reform the program to reduce the 
risk of default, improve the ability to effect a collection on 
defaulted obligations, and consider alternative program mechanisms and 
forms of payment obligations that are consistent with commercial export 
practices. The intent of this request is to seek comments on program 
reforms that would improve the SCGP's effectiveness and efficiency and 
lower costs.

DATES: Comments must be submitted on or before February 23, 2006.

ADDRESSES: You may submit comments, by any of the following methods: E-
mail: SCGP.ANPR@fas.usda.gov.
    Fax: (202) 690-1595 Attention: ``SCGP/ANPR Comments.''
    Mail: William S. Hawkins, Director, Program Administration 
Division, Export Credits, Foreign Agricultural Service, U.S. Department 
of Agriculture, 1400 Independence Ave., SW., Stop 1031, Washington, DC 
20250-1031.
    Hand Delivery/Courier: 1400 Independence Ave., SW., Room 4083, 
Washington, DC 20250-1031.
    All comments received will be available for public inspection at 
the above address during regular business hours.

FOR FURTHER INFORMATION CONTACT: William S. Hawkins, Director, 
Administration Division, at the address stated above. Telephone: (202) 
720-3241.

SUPPLEMENTARY INFORMATION:

Background

    The regulations for the SCGP became effective on August 30, 1996. 
The program became operational with an announcement for Mexico on that 
same day, providing coverage for high-value agricultural products such 
as fruits, vegetables, tree nuts, potatoes, wine, brandy, dairy 
products, and ice cream. The products made eligible were those that 
typically traded in smaller transactions and not commonly financed 
under the existing CCC Export Credit Guarantee Program (GSM-102). CCC 
viewed the SCGP as a means of supplementing the GSM-102 program and 
providing more flexibility and options in leveraging private sector 
credit.
    Since 1981, the GSM-102 program has served as a means of 
guaranteeing the payment by foreign banks of credit extended by U.S. 
exporters or banks for agricultural commodity sales. The SCGP provides 
a similar guarantee for payment by importers when U.S. exporters' 
extend short-term credit, up to 180-days, in export sales. CCC 
developed the SCGP as an export credit alternative that did not require 
a letter of credit as a payment mechanism, would better accommodate 
smaller transaction sizes associated with containerized shipping, and 
would react to importers' general desire to obtain open-account terms 
of payment from U.S. exporters.
    At inception, the SCGP offered a 50 percent guarantee in the event 
that an importer of U.S. agricultural commodities or products defaulted 
on an obligation to pay the exporter for the value of the goods sold. 
On December 3, 1997, CCC amended the commodity eligibility for the SCGP 
to include bulk commodities such as cotton, feed grains, oilseeds, 
protein meals, and wheat. On October 1, 1999, guaranteed coverage under 
the SCGP increased from 50 to 65 percent.
    The SCGP relies upon the principle of risk-sharing between exporter 
and CCC to work. Exporters are often in a unique position to assess the 
ability of an importer to pay for an export transaction because of past 
contractual experience, access to importer's credit references, or 
specialized knowledge of the agricultural business sector in the 
importing country. Since inception, the instrument establishing the 
importer's obligation to pay the export value has been a promissory 
note form, prescribed by CCC and issued by the importer to the 
exporter. The U.S. exporter can hold the SCGP payment guarantee or 
assign the guarantee to a U.S. financial institution. In many cases, 
where the exporter has assigned SCGP payment guarantees to a U.S. 
financial institution, the exporter is paid the percentage guaranteed 
by CCC by that financial institution and retains the risk of payment by 
the importer. In other cases, the U.S. financial institution, in taking 
an assignment of the SCGP payment guarantee, may be willing to pay the 
exporter for the entire export value if that financial institution is 
able to make a credit assessment of the importer and is willing to 
accept the risk of default for the uncovered portion of the sale.
    Overall, since 1997, CCC issued approximately $2.78 billion in 
credit guarantees under the SCGP supporting more than $4.3 billion in 
U.S. export sales of agricultural commodities and products. Mexico has 
dominated the SCGP as an import destination with more than 60 percent 
of the volume of activity, but other regions such as Central America, 
South East Asia, and the Caribbean have benefited and further growth in 
these regions is expected. The SCGP has supported the U.S. export of a 
variety of agricultural commodities and products ranging from bulk 
commodities such as feed grains, oilseeds, protein meals, rice, and 
cotton, but also including significant volumes of red meat, poultry, 
fruits, grocery store items, and other high value agricultural 
products.
    From 1997 to 2004, the defaults experienced in the SCGP were 
manageable given the limited size of the SCGP at that time and the 
sporadic nature of the defaults incurred. However, in 2004 and 2005 CCC 
experienced significant defaults under the SCGP. In reaction to these 
increased defaults, CCC made improvements to its claims recovery 
process, but CCC continues to seek other means to reduce defaults and 
better recoveries.
    CCC's interest in SCGP improvements also arises from the outcome of 
the recent World Trade Organization (WTO) dispute brought by Brazil 
against the

[[Page 3791]]

United States with respect to the CCC export credit guarantee programs, 
including SCGP. The WTO dispute panel's ruling requires CCC to charge 
premia that are adequate to cover the long-term operating costs and 
losses of the programs as a whole. In response, on July 1, 2005, CCC 
revised the premia for the export credit guarantee programs to reflect 
program default risk and operating costs. CCC is interested in 
exploring potential revisions to the structure, design, or operation of 
SCGP that can contribute to meeting this ``break-even'' goal, 
particularly by incurring fewer program losses.
    We request interested parties to comment on the following specific 
questions under consideration for the SCGP. Interested parties may 
choose to address any or all of the questions listed or provide other 
comment. CCC's aim is to improve upon the SCGP's integrity, 
effectiveness, flexibility, and continued viability.
    1. Transaction Size Considerations: What limit, if any, should be 
imposed on the value of transactions or the amount of exposure that CCC 
should take on the importer that would be consistent with commercial 
practices?
    2. Level of Guarantee Coverage:
     Is the current level of guarantee coverage at 65 percent 
appropriate?
     If a higher level of guarantee coverage is desired, what 
measures should CCC adopt to better ensure that importers are capable 
of meeting their credit obligations?
     If CCC offered a lower level of guarantee coverage, at 
what point would one the SCGP no longer be a viable program for U.S. 
exporters?
    3. Assignments of Payment Guarantees:
     Should CCC require assignment of the SCGP payment 
guarantee and risk?
     Should CCC permit, but not require the exporter to assign 
the SCGP payment guarantee risk?
     Should CCC not permit the exporter to assign the SCGP 
payment guarantee and risk?
    4. Alternative Payment Obligations:
     Should CCC permit alternative forms of payment obligations 
that would change the obligor risk from the importer to a foreign bank? 
(Examples of such alternative payment obligation are: A banker's 
acceptance from an eligible foreign bank, a guarantee of an eligible 
foreign bank of the importer's obligation to pay, or a bank aval 
(obligation to pay) added to the importer's promissory note.)
     What are the estimated costs of requiring a foreign bank 
guarantee mechanism on the importer's obligation as stated in the 
question above?
     5. Collection Experiences on Foreign Bank Obligations: What are 
U.S. exporters' or U.S. financial institutions' collection experiences 
in using banker's acceptances or avalized promissory notes?
    6. Risk Mitigation Techniques:
     Should CCC permit the U.S. exporter or financial 
institution to mitigate their risk on the portion of the transaction 
value not covered by the SCGP payment guarantee?
     If CCC permits risk mitigation, what should CCC do to 
ensure that the risk-sharing principal is maintained and that all 
monies are shared, on a pro-rata basis, between CCC and the exporter/
assignee?
    7. Standby Letters of Credit:
     Should CCC require that the importer open a standby letter 
of credit to the exporter for a portion of the export value that could 
be drawn upon by the exporter and shared with CCC on a pro-rate basis 
in the event of the default?
     What costs might be expected if the importer were required 
to maintain a standby letter of credit associated with the SCGP 
transaction?
    8. Creditworthiness Assessment of Importers:
     What are exporters' and U.S. financial institutions' 
experiences in their attempts to assess the creditworthiness of the 
importer using commercial credit reference services?
     Are there countries and regions where credit assessments 
on agricultural importers cannot be performed readily and reliably?
    9. Collections and Recoveries:
     How can CCC best partner with the exporter and/or the 
financial institution that has accepted assignment of a SCGP payment 
guarantee in order to effect a collection?
     What other means should CCC employ in its recovery efforts 
on SCGP defaults?
    10. Other Concerns: What other concerns, comments, or interests 
relating to the program regulations, mechanisms, and operations of the 
SCGP are important?

Consideration of Comments

    Additional comments on other program modifications to the SCGP that 
are responsive to the principles outlined herein are encouraged. CCC 
will carefully consider all comments submitted by interested parties. 
After consideration of the comments received, CCC will consider what 
changes, if any, should be made to the SCGP. Some of the above-
described changes would require additional notice and consideration of 
comments from interested parties via the rulemaking process. Other 
changes might be adopted by changing internal policies and procedures. 
Comments received will help the Department determine that extent and 
scope of any future rulemaking.

    Authority: 7 U.S.C. 5602, 5622, 5661, 5662, 5663, 5664, 5676; 15 
U.S.C. 714b(d), 714c(f).

    Signed at Washington, DC, on December 16, 2005.
W. Kirk Miller,
General Sales Manager and Vice President, Commodity Credit Corporation.
[FR Doc. 06-610 Filed 1-23-06; 8:45 am]
BILLING CODE 3410-05-M