The DFC (Development Finance Corporation) represents an important new financing source for companies investing in emerging markets overseas, as well as in projects in the U.S. that enhance the domestic response to COVID-19.
- The recently launched DFC has up to $60 billion to invest in development projects in low and lower-middle income countries, including supporting U.S. and foreign project sponsors, the sale of U.S. goods and services, and U.S. co-investors.
- The DFC recently partnered with DOD to support projects inside the U.S. that create, expand or restore U.S. industrial base capabilities in response to COVID-19.
- The DFC can be an important new source of financing for companies with a demonstrated record of success that are seeking to develop projects in emerging markets, or in the U.S. if the project supports our domestic COVID-19 response.
At the start of 2020, the U.S. International Development Finance Corporation (DFC) finally became operational after more than a year of organizational and budgetary delays. Signed into law as a part of the 2018 BUILD Act, the DFC is a $60 billion investment agency that merged the Overseas Private Investment Corporation (OPIC) with other foreign investment programs and added new objectives. DFC has a broader development objective than OPIC’s mission and offers increased services to lower- and middle-income economies, with nearly 100 countries identified as priority areas.
In May 2020, an executive order further expanded DFC’s remit to funding projects related to the domestic U.S. response to COVID-19, including creating, expanding and strengthening the domestic supply chain and its resiliency. This is a key development as it makes certain domestic projects eligible for significant financial support from the DFC.
In determining if a project is eligible for this domestic financing, the DFC will consider the competence of the management team and its track record of success in the same or a closely related business; whether investors have been unable to obtain sufficient support from the private sector sources; and whether investors have “sufficient exposure” to support the project’s long-term viability. Those seeking funding from the DFC also must commit to respecting the environment, worker rights, and human rights of each host country.
Designed, in part, as a competitor to China’s Belt and Road Initiative, the creation of the DFC represents a significant increase in U.S. funds available to support U.S. investment in projects overseas, and in some cases, foreign projects with limited to no U.S. involvement. This major influx of government capital is also intended to encourage banks and other private investors to fund these projects by spreading the risk and providing a U.S. government vote of confidence.
Through the DFC, U.S. businesses and investors looking to invest overseas have access to a powerful new asset. Officially opening its doors on January 2, 2020, the DFC now offers an array of services for U.S. businesses’ overseas development projects, including:
- Equity Financing.Providing direct equity of up to $1 billion per project for initiatives in the developing world with key developmental impacts or those that advance U.S. foreign policy objectives. This DFC product also offers support for investment funds to address shortfalls in private equity capital in developing countries.
- Debt financing.Providing loans and guaranties of up to $1 billion for terms up to 25 years, with specific programs to benefit small and medium-sized U.S. businesses. Loans typically range from three to 15 years.
- Political risk insurance.Offering coverage of up to $1 billion against losses due to currency inconvertibility, expropriation, government interference, breach of contract that supports U.S. capital markets financing structures, and political violence, including terrorism and acts of war. The DFC also offers reinsurance to increase underwriting capacities and guaranties on behalf of U.S. exporters and contractors to cover against the risk of wrongful calling.
- Technical Development.Offering grants for feasibility studies and technical assistance for project identification and preparation and to increase the developmental impact and sustainability of projects.
Through these offerings, the DFC has begun investing into its primary regions: Africa and the Middle East, Latin America and the Caribbean, the Indo-Pacific region, and Eastern Europe and Eurasia. The DFC is also committed to supporting specific agency initiatives, including the 2X Women’s Initiative focusing on economic empowerment of women, the Connect Africa Initiative dedicated to telecommunications and internet development in Africa, and the environmentally sustainable, infrastructure-focused Blue Dot Network initiative. The most recently published statistics by the DFC show that in its first three months of operations through March 31, 2020, the program has already committed approximately $200 million across 10 projects in Africa, Asia and Latin America.
U.S. Domestic Response to COVID-19
In addition to its existing development projects and investment areas, the DFC has also begun offering COVID-19-specific relief options. As part of President Trump’s Executive Order 13922, issued in May 2020 in response to the COVID-19 pandemic, the DFC has been authorized beyond its traditional role to provide loans under the Defense Production Act (DPA), working with the U.S. Department of Defense (DOD).
Under the order, the DFC is authorized to support projects that create, maintain, protect, expand or support the national response and recovery to the COVID-19 outbreak, or the resiliency of any relevant domestic supply chains. These DFC-DPA loans may only be offered if financial assistance is not otherwise available from private sources on commercially viable terms, and are subject to certain threshold determinations for eligibility in regard to the necessity and conditions of the loan. Once approved for financing, the DFC will make a project-by-project determination of loan amount, usually not more than 80% of the total cost of the project. Interest rates and maturity will also be determined on a project-specific basis. No DFC-DPA loan may have a maturity greater than 25 years.
While many aspects of the program are still in development, on July 28, 2020, the Eastman Kodak Company (Kodak) obtained a letter of interest from the DFC for a $765 million DFC-DPA loan to launch Kodak Pharmaceuticals. The new entity will produce up to 25% of the critical ingredients needed for generic pharmaceuticals produced in the United States.
The expansion of the DFC and growing investments that the U.S. is making in international development projects, including through the EXIM Bank, seem to be an effort to counter China’s success with its Belt and Road Initiative. Through that effort, China has made significant investments in developing countries in Africa and Latin America, including in infrastructure projects, construction, new railways and highways, real estate development, power grid modernization, and iron and steel manufacturing. China has overtaken the U.S. in the past few years as the largest trading partner for many countries in these regions and has seen a corresponding increase in regional soft power. DFC co-investment could be a key tool for unlocking large amounts of private U.S. capital to support U.S. interests. One early test for the agency will be how quickly the DFC can deploy capital and avoid political obstacles to success—two significant areas in which China has a competitive advantage.
The DFC is a promising new source of U.S. investment for projects in emerging markets overseas and/or projects in the U.S. that support our domestic response to the COVID-19 pandemic. Working with our contacts throughout the U.S. government, Pillsbury’s attorneys will continue to advise on the DFC’s products, project eligibility requirements, and our recommendations for “best practices” for achieving maximum success with the DFC and other government partners.