Capitalization of interest refers to the practice of allowing the borrower to accrue interest due on principal disbursem*nts made during the construction of a project, and then add the accrued but unpaid interest into the principal loan/guarantee amount. The interest that accrues after the starting point of credit (SPOC) will not be capitalized[1].
Project Finance: EXIM Bank generally offers IDC support for limited recourse project finance[2] transactions because, prior to project completion, the project does not generate any revenue\ to pay accrued interest. Hence, IDC support is often a critical factor in a limited-recourse financing structure.
Special Programs: IDC is automatically available for projects that meet EXIM Bank’s criteria for having a beneficial impact on the environment (Environmentally Beneficial Exports | EXIM.GOV) and for medical equipment exports (Medical Technologies | EXIM.GOV) when there is an extended installation and/or construction period. Hence, IDC support is an incentive to both exporters and buyers, pursuant to EXIM Bank’s Environment Export Program and Medical Equipment Initiative.
Possible Exceptions: IDC for corporate finance[3] transactions has also been allowed in the past on an exceptional basis. The factors taken into consideration when deliberating on whether an exception for IDC is appropriate include:
- The availability of such support from competing ECAs;
- If a U.S. exporter is bidding as part of a consortium, and all members of the consortium are offering capitalization of interest support;
- The significance of the U.S. exporter’s share of the project; and
- Whether the U.S. exporter is competitive with regard to price, quality, technical ability, and other market determined factors, thereby making IDC a critical competitive factor.
November 2023
[1] As per the OECD Arrangement on Officially Supported Credits dated July 2023, Article 13 d). This generally refers to the starting point of commercial operation of a project in limited recourse project financings.
[2] Limited recourse project finance is debt financing based upon future revenue or cashflow supported by the project’s contractual structure.
[3] Corporate finance is based upon the financial strength of a borrower as reflected by their financial statements.
