What it means
When an American company sells expensive equipment abroad, such as aircraft, power plants or machinery, the foreign buyer often needs several years to pay. Someone has to lend that money, and the exporter wants to be paid promptly rather than wait.
Commercial banks may be reluctant to lend for long periods at fixed rates, especially to buyers in riskier countries, and this can cost the exporter the sale. PEFCO was established in 1970 to help solve this problem.
It is owned by commercial banks, industrial companies and financial firms, and operates as a private corporation rather than a government agency. It raises money in the capital markets, for example by issuing notes to investors, and lends it on to foreign buyers.
The key feature is the guarantee. Its loans are covered against non-payment by EXIM, so the credit risk is effectively that of the US government rather than the foreign buyer.
This allows PEFCO to borrow cheaply and to offer fixed-rate loans that might not otherwise be available, with pricing that follows market conditions rather than a government budget. PEFCO can act as a direct lender, or buy loans originated by other lenders in the secondary market.
It typically focuses on medium and long-term finance, with repayment over several years. It also runs smaller-scale offerings for smaller exporters, but its core business is larger, guaranteed export transactions.
For an exporter's finance team, PEFCO is one of several export finance options. Alternatives include bank loans with EXIM guarantees, supplier credit, forfaiting (selling export receivables at a discount to a financier) and export credit agencies from other countries.
The best choice depends on the buyer's country, deal size, tenor (loan length) and the price of funds. A nuance is that PEFCO is not a source of grants or subsidies, so borrowers still pay interest and fees and the deal must meet EXIM's eligibility rules, including requirements on US content.
Exporters should talk to their bank or EXIM early, because arranging this kind of finance takes time. Fees, guarantee premiums and legal costs also need to be built into the price of the contract, since the buyer will compare the total financing cost with other offers.
In practice
Real-world examples.
Example
A US manufacturer of power turbines wins a $60,000,000 contract with a utility in Asia. The buyer wants 10 years to repay at a fixed rate, and a PEFCO loan guaranteed by EXIM makes the offer possible.
Example
A commercial bank has lent to a foreign airline to buy US aircraft, with an EXIM guarantee. It sells part of the loan to PEFCO so it can free up capital for new lending, while the airline continues to make its payments exactly as before and notices no change.
Example
A US agricultural equipment exporter finds that its customer's local banks only offer short-term variable-rate loans. By arranging guaranteed export finance, it offers a 7-year fixed-rate package, so the customer knows its repayments in advance, and wins the order.
Case study
Seen in the real world.
Redhawk Machinery is an illustrative, fictional US manufacturer of mining equipment. It bid on a $35,000,000 contract in a developing country, but a competitor from another country offered a financing package from its own government.
The Redhawk finance director approached its bank and EXIM, and arranged a guaranteed loan funded by a lender such as PEFCO. The buyer received a fixed rate for 8 years, which let its finance team budget the repayments precisely, and Redhawk received payment in full when the equipment was shipped.
Redhawk won the contract and delivered on time, and the $35,000,000 of sales supported about 150 US manufacturing jobs for two years. The loan was repaid in instalments over the agreed period. The illustrative lesson is that financing is part of the product in large export deals, and that arranging it early can decide who wins.
Watch out
Common mistakes.
- Thinking PEFCO is a government agency, when it is a privately owned corporation that works alongside EXIM.
- Assuming the loans carry the foreign buyer's credit risk, when they are protected by a guarantee from EXIM.
- Leaving export finance until after the contract is signed, when buyers often decide on the basis of the finance offered.
Questions
People also ask.
What does PEFCO do?
It lends to foreign buyers of US exports and buys export loans from other lenders, always with a government-backed guarantee, so that exporters can offer longer repayment terms.
Who owns PEFCO?
Commercial banks, industrial companies and other financial firms with an interest in US exports.
How is it different from EXIM?
EXIM is a US government agency that guarantees and insures export credit, whereas PEFCO is a private lender that provides the funds.
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