DFC window opens for domestic loans

DFC window opens for domestic loans

August 19, 2020 | By Tracy Horton in Washington, DC and Kenneth Hansen in Washington, DC

The US government is making available new loans to fund domestic private-sector projects that support the domestic industrial-base capabilities necessary to respond to the COVID-19 outbreak, including by bringing relevant manufacturing back to the United States.

The loans are being offered by the US International Development Finance Corporation (DFC).

The first loan planned under the program — a $765 million loan to Eastman Kodak to allow the company to make chemicals needed for anti-coronavirus medications — was put on hold while the government investigates charges of insider trading after stock options were granted to several Kodak executives shortly before the loan was announced and the stock jumped 1,000% following the loan announcement.

Background

The DFC was launched in January 2020 under authority granted in the BUILD Act of 2018 to replace the Overseas Private Investment Corporation and to administer what was the US Agency for International Development's development credit authority. (For more information, see "DFC Replaces OPIC" in the February 2020 NewsWire.)

The DFC's statutory purpose is to "mobilize and facilitate the participation of private sector capital and skills in the economic development of less developed countries."

President Trump authorized the DFC in an executive order on May 14, 2020 to make domestic loans pursuant to section 302 of the Defense Production Act of 1950 "that create, maintain, protect, expand, or restore domestic industrial base capabilities supporting the national response and recovery to the COVID‑19 outbreak, or the resiliency of any relevant domestic supply chains."

The Defense Production Act is a Korean War-era statute that gives the US president broad powers to press US factories into service to support the war effort. The Trump directive is Executive Order 13922.

Loans made under the authority granted by the executive order will be funded through $1 billion appropriated to the Department of Defense under the CARES Act and will not count against DFC's $60 billion annual lending cap. The authority delegated under the executive order will expire on March 27, 2022, in accordance with title III of division B of the CARES Act.

On June 22, 2020, DFC and the US Department of Defense (DOD) entered into a memorandum of agreement detailing the joint administration of the first $100 million of DOD's CARES Act spending plan. DFC will originate, screen, underwrite and finance projects under the new loan program in consultation with DOD. Under the memorandum, DOD will bear all direct and indirect costs of the loan program.

Concurrently with the release of the memorandum, DFC issued a request for proposals for loans under the new program, a separate "Defense Production Act Loan Program Guide" and the form to use to apply for loans (DFC-014), all of which are available on the DFC website.

The loan program guidelines and documents are effective immediately and without advance notice or a comment period due to "the urgent and compelling circumstance" of the COVID-19 outbreak and the time-limited nature of the program.

Adam Boehler, the DFC CEO, said the program will be administered by an approximately 15-person dedicated team within DFC that is walled off from the other DFC programs.

According to the request for proposals, Boehler, as CEO, will have sole discretion to select eligible projects, meaning that loans and projects will not require approval by the DFC board of directors.

DFC will accept proposals in response to the RFP until February 28, 2022. However, given the length of time the screening and underwriting process can take and the relatively short window DFC has to fund projects until March 27, 2022, interested parties are encouraged to submit relevant proposals as soon as possible.

Eligibility and Selection

The new loan program is focused on the following sectors: pharmaceutical, personal protective equipment, medical testing supply, airway management consumables, vaccine-related items and "relevant" material or technology.

Projects eligible for loans are private-sector projects in the United States that create, maintain, protect, expand or restore (including reshoring) the domestic response to and recovery from the COVID-19 outbreak or the resiliency of any relevant domestic supply chain.

Aside from obvious areas like health-care supply chains for medicines, masks and personal protective equipment, loans could also be made to fund data science innovations and supply chains for electronics, manufacturing, machine tools, industrial controls and raw materials.

The loan program guidelines say that DFC must determine, among other things, that "the loan supports the production or supply of an industrial resource, critical technology item, or material that is essential to the national defense [and that] without the loan, the US industry cannot reasonably be expected to provide the needed capacity, technological processes, or materials in a timely manner."

Any products associated with projects involving the manufacturing of pharmaceuticals or medical equipment must be certified by the US Food and Drug Administration in order to be eligible for the program.

Eligible projects must be sponsored by the private sector and be commercially viable with a demonstrated "reasonable assurance of repayment" of the loan. DFC cannot compete with private-sector banks and other private sources of financing. Sponsors must demonstrate that private financing is unavailable on reasonable terms, that the DFC loan is the best way to fill the financing gap for the project and that any additional funding required for the project will be available within a reasonable period of time.

The RFP selection criteria and application are also heavily focused on the qualifications of the project's management team. Factors such as the management team's previous track record with similar projects, experience in the relevant sectors, depth, credibility and cohesiveness, and experience servicing debt obligations, managing institutional capital and meeting reporting requirements will be considered.

The loan application requires character- and fitness-type certifications, such as, that the borrower and owners of the borrower are not debarred by any federal department or agency, are not involved in any bankruptcy, and are not delinquent on and, in the last seven years, have not defaulted on a federal loan that caused a loss to the government.

The borrower must also certify that the borrower (if an individual) and any individual owning 20% or more of the equity of the borrower are not subject to criminal charges, currently incarcerated, or on probation or parole, and, within the last five years have not been convicted of, pleaded guilty or nolo contendere to, or been placed in a pre-trial diversion, parole or probation with respect to any felony.

Loan Terms

The loan may be structured as a project finance loan to a special-purpose vehicle or as a corporate loan.

The loan may be used for the acquisition, development, construction, ownership or operation of facilities or equipment, working capital or other costs associated with an approved project.

The loan terms will be determined on a case-by-case basis, although some general guidelines are available. According to the RFP, loan amounts may range from $10 million to $500+ million dollars. (This latter amount appears to assume that there will be an increase or extension of the memorandum of agreement between DFC and DOD.)

Loans will generally not exceed 80% of project costs.

The loan program materials do not provide an offered interest rate, but by statute the interest rate must be determined by the US Treasury to be reasonable, considering the average yield on outstanding obligations of the United States with maturities comparable to the loan. The maximum maturity date will take into account the useful economic life of the project, but in no event will exceed 25 years.

Any loan will be secured by a collateral package that may include, among other things, a pledge of shares of the borrower, liens or mortgages on assets, guarantees from creditworthy individuals or companies, irrevocable standby letters of credit or a debt service reserve account.

The loan program materials do not specify the amount of origination fees and other charges due to DFC, but the program guidelines do indicate that fees and other charges may be collected.

Other Considerations

The loan program materials indicate that applications that make it through the initial screening will be subject to environmental, credit and legal due diligence and that applicants may be asked to retain third-party consulting services, such as environmental and social consultants, an independent engineer and an insurance consultant. Costs for such consultants can be included in financed project costs. The project will be submitted for approval by the DFC CEO after the completion of due diligence.

In addition to the uncertainty around loan terms and fees noted earlier, other aspects of the program are not yet clear and may delay closing of the initial loans. For example, DFC has not indicated what environmental and social standards and review process DFC will apply to the loans. The loan terms may be documented by a commitment letter and will in any event be finalized in a finance agreement.

Despite the open issues, the program is an important opportunity for projects in the relevant sectors to fill financing gaps while working with a sophisticated and knowledgeable lending institution.