Environmental Technologies Industries

Environmental Technologies Industries

Finance

Financing Environmental Exports - A Guide to the Fundamentals and Sources

Chapter 1 - Overview

Introduction
Your U.S. environmental company is eyeing the global demand for your goods or services. Your products are ready to make the leap into the export markets. You are ready - is your banker?

How to finance international sales of U.S. environmental goods and services is a question frequently asked of the Commerce Department's office of Environmental Technologies Exports. Money is available for good deals, if you know where to look.

This document provides a roadmap for accessing export finance in the environmental sector. Organized around questions most frequently asked by potential exporters, it provides summary answers and directs the reader to sources of more detailed information.

How do I finance establishing an overseas presence, exporting products, exporting services, and infrastructure projects?

Matrix A provides a quick summary of how different sources of finance are applied to typical export deals. Chapter 2 includes more extensive descriptions of the traditional financing techniques used.

What are the advantages and disadvantages of the major sources of export finance (grants and subsidies, equity capital, debt financing, credit enhancement, and secondary markets)?

Matrix B includes a summary description of different sources' core features, types, and limitations. Chapter 3 serves as both a glossary and a directory of published information on these various sources of financing.

How do financing techniques vary by type of country - in the United States, other industrialized countries, emerging market countries, and less developed countries?

Matrix C sets out some of the major differences in access to capital, access to grants and subsidies, political risk, and currency risk in these different types of countries. Chapter 4 includes more detailed information.

How do financing techniques vary by type of customer (multilateral development banks, multinational companies, local companies, project finance developments, local governments, and donor governments)?

Matrix D describes the bidding requirements and credit needs likely to govern export transactions with a wide range of customers. Chapter 5 provides greater depth.

Why the Unusual Structure?
The structure of this document is fundamentally different from any of the other reports issued by the office of Environmental Technologies Exports within the U.S. Department of Commerce's International Trade Administration. This report is not limited to a country or even a sector within the environmental industry. It is not designed to be read straight through.

Rather, it is built like an Internet home page and will be distributed on the World Wide Web at http://infoserv2.ita.doc.gov/ete. Using the summary, the four matrices, and the detailed table of contents, readers can "click" their way down to the level of detail they need. For example, for a company interested in credit enhancement mechanisms for environmental goods being sold into an "emerging" market,

The Summary provides an overview of the major questions to be answered about any export financing and directs the user to Matrix C for financing information on emerging markets;
Matrix C describes the major financing issues to be considered in emerging markets and directs the user to Section 4.3 for information on currency issues and commercial and political risks in emerging markets; and

Section 4.3 points the user to Section 3.3, which discusses loan guarantees and identifies multiple sources of even more detailed information about political and commercial risk insurance.

Case studies are included to provide a real-world context for the information. They contain examples of the traditional issues facing exporters of environmental goods and services, as well as developers of environmental infrastructure projects. They also link to the more fundamental information provided
on types and sources of export financing.

The substance of the information provided in this roadmap is aimed at beginners and intermediates in the world of export financing. Experts are given suggestions for sources of further information.

Although this structure promotes ease of use as a roadmap for the financing of environmental exports, it does not make for a great work of literature. No roadmap is intended to be used in its entirety at any one time. It is intended to help a reader go from point A to point B, as is this report. As a result, text is
duplicated in various parts of the report, and other devices are used to guide travelers through its many sections.

The ultimate goal is to place this document on the Web in a truly "clickable" format. Until then, it should be viewed and used in the same manner.

Matrix A: How to Finance Major Types of Export Deals

	Establishing an Overseas Presence	Selling Products	Selling Services	Developing Infrastructure Projects
Debt	Most of the costs of establishing an overseas presence are financed out of working capital. Major international expansion may be financed by long-term debt.	Long-term, short-term, or revolving credit may be provided by banks to enable exporters to increase their working capital or offer credit to international customers. Banks may require guarantees or insurance before accepting foreign accounts receivables as collateral.	Debt financing is harder to obtain for service exporters.	Senior and subordinated debt are generally provided by a syndicate of investors for large projects. Investors may include funds, banks, or nonbank financial institutions.
Equity	Most of the costs of establishing an overseas presence are financed out of working capital. Major international expansion may be financed by an additional equity infusion.	NA	NA	Project developers are generally expected to hold some equity stake in the project. Other equity investors may include infrastructure funds, banks, pension funds, and venture capital.
Guarantees	NA	Bank providing debt may require letters of credit from a customer's bank as well as political risk and commercial risk insurance. Guarantees are available from both public and private sources.	Guarantees can be used by exporters to support the services portion of their contract or services can be financed on their own.	Political risk, construction risk, and project risk insurance are usually required by debt holders.
Grants	Small grants may be available for participation in international trade missions. Trade development programs may provide grants for feasibility studies likely to result in large export sales.	Grants may be available for customers purchasing goods that achieve certain environmental goals. Such grants may be available from both public and private sources.	Grants may be available for feasibility studies, training programs, environmental audits, and environmental impact assessments. Such grants may be available from both public and private sources.	Grants may be available for projects that achieve certain environmental goals. Some infrastructure projects may be financed by donor countries as international aid.
Secondary Markets	NA	Foreign accounts receivables and banker's acceptances can be sold at a discount, thus providing the exporter with cash upon delivery of the goods.		Equity investors will often seek to ensure their exit opportunities through "put" options and asset transfer arrangements. If equities markets are not well developed, public offering may not be a viable exit.

Matrix B: Sources of Financing

	Core Features	Types	Limitations
Debt	The traditional form of debt financing is taking out a loan, creating an obligation to pay back the borrowed amount plus interest.	Trade finance, commercial lending, and project finance from commercial banks. Bonds, usually underwritten by investment banks. All of these are also available from governments and multilateral development banks.	For early-stage businesses, borrowing is expensive. Repaying loans is a paramount obligation. Small firms and startups may have trouble meeting repayment obligations and debt coverage requirements established by the lenders.
Equity	Entails ceding exclusive control by selling ownership interests, usually as shares, to outside investors. Equity is the most creative and flexible approach to supporting business endeavors. It is often the most expensive form of financing.	Share sales (public offerings, venture capital, private placements, "angels", and depository receipts), foreign direct investment, and strategic alliances, from the private sector and U.S. capital markets. Limited amounts from government and multilateral development banks.	Terms vary widely, as do the rates of return equity contributors demand. This variability increases costs and challenges of arranging for equity support. Equity holders may seek controlling positions in a company.
Guarantees	To protect against the risks (currency exchange or social unrest) associated with cross-border transactions (overseas sales or foreign projects).	Export credit insurance for commercial risks of exporting, usually from banks. Political risk insurance (covering unrest in a foreign buyer's country), usually from government.	Fees and premiums reduce retainable revenues. Coverage is usually for partial values. Expensive if customer or project is in a country considered unstable.
Grants	For early-stage activities. Competitive applications. Must fit donors' mission(s). Does not have to be repaid. Usually supplements other support.	For product/project development (feasibility studies, market evaluation, technical assistance) from government and private foundations.	Competition often keen; reporting requirements are high (especially for government grants).
Secondary Markets	The conversion and discounted sale of a firm's predictable existing and future cash flows (export receivables, loan payments, project revenues). Firms receive immediate cash from third parties for goods/services sold on credit.	Securitizations (e.g., bundles of future export receivables), asset transfers (e.g., "put" options ensuring equity investors' quick exits), and factoring and forfeiting (the sale of export receivables to financial intermediaries).	Cash flows bought at a discount, possibly secured with collateral.

Matrix C: Variation in Financing by Type of Country

	United States	Industrialized Countries	Emerging Markets	Less Developed Countries
Overall Cost of Providing Credit to Customers	Lowest	Medium	High	Highest
Customer -Importer Access to Capital	Generally easy. Firms tend to rely on equity financing more than other countries do. Capital markets are well developed. Producers often do not need to extend credit to U.S. customers, although customer credit can be a commercial advantage.	Generally easy. Firms tend to rely more heavily on debt than U.S. firms do. Capital markets are well developed. Exporters often do not need to extend credit to customers in industrialized countries.	Limited. Firms tend to rely heavily on foreign capital. Exporters will often need to extend credit to customers in emerging markets.	Very limited. Firms tend to rely heavily on foreign capital. Exporters will often need to extend credit to customers in less developed countries.
Producer-Exporter Access to Capital	Generally easy. Firms tend to rely on equity financing more than other countries do. Capital markets are well developed.	Less easy. Lenders are sometimes unwilling to accept non-U.S. accounts receivable as collateral.	Limited. Lenders are frequently unwilling to accept accounts receivable from emerging markets as collateral without certain guarantees.	More limited. Lenders are usually unwilling to accept accounts receivable as collateral without certain guarantees.
Access to Grants or Subsidies	Some grants and subsidies are available at the federal and local levels for specific environmental projects. Tax-free municipal finance is a form of subsidy at the local level.	Grants and subsidies may be available at the federal and local levels for specific environmental projects.	Grants and subsidies for environmental projects are available from donor governments and multilateral organizations.	Grants and subsidies for environmental projects are available from donor governments and multi-lateral organizations.
Currency Risk	Stable currency. Predictable interest rates.	Relatively stable currency. Relatively predictable interest rates. Hedges and swaps are available to reduce currency risk.	Currency can be volatile. Interest rates tend to be high. Hedges and swaps are less available.	Currency can be volatile. Interest rates tend to be high. Hedges and swaps are not available.
Political Risk	Negligible	Relatively small. Foreign ownership and repatriation of profits are generally not a problem. Political risk insurance is available at a relatively low cost.	Relatively large. Foreign ownership and repatriation of profits may be limited. Political risk insurance is available at a relatively high cost.	Relatively large. Foreign ownership and repatriation of profits are often limited. Political risk insurance is available at a very high cost.

Matrix D: Variation in Financing by Type of Customer

		Private Customers			Public Customers
	Multinational Company	Local Company	Project	Local Government	Donor Government	Multilateral Development Bank
Need for Credit from Exporters Suppliers	Minimal	Extensive	Usually Minimal	Minimal to extensive	Minimal	Minimal
	Financing is readily available from retained earnings, bank loans, and stock or bond offerings.	Access to debt and equity financing is often limited, particularly in emerging and less developed countries.	Construction loans, equity investments, and project cash flows are usually sufficient to cover capital expenditures.	Local governments can borrow from commercial banks and multilateral development banks. In well developed markets, local governments can also issue bonds (some of which may be tax free).	National and provincial governments. Donors tend to be industrialized countries with available funds already appropriated by the government.	Multilateral development banks (MDBs) provide sufficient capital for projects and do not default on payments to MDB contractors. MDBs can raise capital by issuing bonds at low interest rates.
	Multinational companies will not usually require that exporters extend credit	Local companies will often look to exporters to extend credit.	Exporters bidding on large projects are not usually expected to provide credit. Exporters may be expected to assume risk when their products account for a large portion of the project.	National and provincial governments will not usually require that exporters extend credit. Municipal governments may require credit.	Donor governments will not usually require that exporters extend credit.	MDBs will not usually require that exporters extend credit.
Credit Risk	Low	High	Low to medium	Low to medium	Low	Very low
Public Bidding Requirements	No public bidding requirements unless dictated by the company's lenders and investors.	No public bidding requirements unless dictated by the company's lenders and investors.	Lenders and investors often require that the project follow International Competitive Bidding or Open Tendering procedures for contracts over a certain value	May follow International Competitive Bidding or Open Tendering procedures. When financing is not in the form of bank loans or "tied aid", local governments may attempt to procure as much as possible from local sources.	International competitive bidding in some cases. Sometimes, non-U.S. donors will provide "tied aid" which limits procurement of goods from U.S. firms.	Borrowers are required to follow International Competitive Bidding or Open Tendering procedures for contracts over a certain value.