The US has introduced a new foreign military sales (FMS) policy that enables some of Washington's allies and partners buying US-made defence products and services to obtain commercial financing on standby letter of credit (L/C) terms.

The introduction of commercial financing heralds a new era in the US$45 billion per year market for US military exports while the option for foreign countries to use standby L/Cs to finance their purchases offers an alternative to the 'cash with acceptance' standard term of sale for certain FMS partners.

CAPS programme

A new term of sale titled 'credit assured payment schedules' (CAPS) is now available for eligible FMS partners.

CAPS authorises the use of payment schedules on an FMS partner's purchases where a standby L/C is established at the dollar value equivalent to the total uncollected value of all applicable FMS programme purchases, including any modifications and amendments.

The new term of sale may also offer a lower initial deposit for certain partners that seek to make an initial payment of 25 per cent rather than 50 per cent.

Bank eligibility criteria

Standby L/Cs under CAPS may be provided by a US bank with a minimum 'A' credit rating, or a foreign bank located in the US with a minimum 'A' credit rating and a license from the office of the comptroller of the currency.

Final determinations of bank eligibility are at the discretion of the defence security cooperation agency (DSCA) financial policy.

The standby L/C must name DSCA as a beneficiary, thus providing access to funds via a demand letter if the FMS partner fails to make payment.

Standby benefits

The standby L/C demonstrates a willingness and requisite ability of the purchasing country to make payments to the US government for its FMS programme, thereby ensuring that FMS partners will pay the full amount for its purchases.

At the same time, the standby L/C sufficiently mitigates the US government's financial risk against any losses in accordance with US law.

A detailed DSCA memo, New Term of Sale, Credit Assured Payment Schedules, can be found here.

This article represents the views of the author and not necessarily those of the ICC or Coastline Solutions.