CELEX: 51985PC0242
Language: en
Date: 1985-05-22
Title: Proposal for a COUNCIL DECISION on the application of a sector understanding on export credits for wide-bodied jet aircraft (submitted to the Council by the Commission)

ARCHIVES HISTORIQUES
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DOCUMENTS "COM"
COM (85) 242
Vol. 1985/0113
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 ---pagebreak---                                                            C0MC85)   242  final.
     COMMISSION                                            Brussels, 22  May 1985
        OF THE
EUROPEAN COMMUNITIES                                        FOR OFFICIAL USE ONLY
    General Secretariat
                                         Proposal for a
                                    -   COUNCIL DECISION
                        on the application of a sector understanding on
                          export credits for wide-bodied jet aircraft
                          (submitted to the Council by the Commission)
      C0M(85) 242 final
 ---pagebreak---                    EXPLANATORY MEMORANDUM
INTRODUCTION
On 10 December 1984, the Council established negotiating directives
for the international negotiations on export credits for aircraft.
These directives are divided into two parts (A : large aircraft -
B : other airacraft) and are aimed at a global agreement covering
all categories of aircraft.
Since then, negotiations on each part have been opened. On large
aircraft ("wide bodied jet aircraft") which is produced only in
the US and the EC, the Community has negotiated bilaterally with
the US. On other aircraft produced in a number of OECD countries,
negotiations are presently carried out in the OECD .
 Concerning wide bodied jet aircraft, the negotiations with
the US have resulted in a draft understanding . The US side
 has indicated its agreement to this text. The US also agreed
 that this Understanding should be incorporated in a global
 OECD agreement on export credits for aircraft as soon as
 the ongoing negotiations in the OECD have been concluded.
 With the present communication the Council is requested to
 approve as a first step, the Understanding negotiated with the
 US.
 APPRECIATION OF THE DRAFT SECTOR UNDERSTANDING
 The Commission is of the opinion that the draft sector Understanding
 constitutes a considerable development of current financing practices
 and corresponds fully to the objectives set out in the negotiating
 di rectives.
  (a) The Sector Understanding applies to all markets, including
      the countries producing wide bodied jet aircraft.
  (b) The financial conditions take into account the needs of the
      aircraft market as well as the evolution of financial markets
      in the US and the Community . It provides for the possibility
      of offering long term finance up to 12 years to airlines.
      The interest rate provisions are based upon the long term
      government bond market and introduce a system of automatic
      interest rate adjujtments at short intervals , allowing
 ---pagebreak---      for a high degree of flexibility in the financing offers.
 (c) The necessity of ensuring that European offers are competitive
     against US offers is fully respected.
     In particular,           financing agencies in the Community
     can compete with US institutions at competitive rates of interest.
     In addition, should it become clear that commercial banks in the
     US can offer finance at more attractive conditions, the
     Understanding provides for a downward adjustment of interest
     rates. The Understanding also ensures that offers carrying
     shorter repayment periods than the maximum of 12 years (an
     alternative which European countries may prefer) remain competitive.
 (d) The Sector Understanding maintains traditional European financing
     practices, such as the possibility of holding financial offers
     over a period of three months.
 (e) The application of the Sector Understanding is preceeded by
     a transitional period of 12 months. During this period,the new
      system is phased-in in three stages, allowing producers to
     adjust stepwise to the new conditions.
(f)   The Understanding provides for financing in ECU.
3. CONCLUSION
Given that the objectives set out by the Council in December 1984
have been achieved, it is in the interest of the Community to conclude
the Sector Understanding on wide-bodied jet aircraft. The Understanding
should become effective as foreseen , on 1 July 1985. It goes without
saying that all efforts should be made in order to bring the OECD
negotiations on the other categories of aircraft to a successful
end,as soon as possible. In this respect it is worth noting that
in the attached Understanding, both the Community and the US
have confirmed their willingness to contribute to such a result.
 ---pagebreak---                         COUNCIL DECISION
           ON THE APPLICATION OF A SECTOR UNDERSTANDING ON
                        EXPORT CREDITS
                   FOR WIDE-BODIED JET AIRCRAFT
THE COUNCIL OF THE EUROPEAN COMMUNITIES,
Having regard to the Treaty establishing the European Economic
Community, and in particular Article 113 thereof,
Having regard to the proposal from the Commission,
 ---pagebreak---                                  - 2 -
Whereas it is necessary to establish international discipline in
sectors not covered by the Arrangement on Guidelines for Officially
Supported Export Credits in order to minimize self-defeating and
counterproductive credit competition between suppliers in these
areas;
Whereas in its Decision of 21 February 1983 the Council made a
complementary undertaking to proceed, inter alia, to negotiations
on an Understanding on Export Credits for Aircraft;
Whereas the Council accordingly adopted directives on the basis of
which the Commission was to express the position of the Community
in Internationa l negotiations aimed at concluding an Understanding on
Export Credits for wide-bodied jet aircraft;
Whereas the results of these negotiations meet the interests of the
Community;
Whereas , in the interests of the Community and in order to give
effect to the principle of international co-operation, it is
necessary that the Understanding on Export Credits for wide-bodied
jet aircraft be applied in the Community,
Whereas this Understanding is intended to become part of a comprehensive OECD
civil aircraft agreement to be concluded expeditiously,
 ---pagebreak---                               - 3 -
 HAS ADOPTED THIS DECISION :
                                ARTICLE 1
 From 1 July 1985, the Sector Understanding on Export Credits for
 wide-bodied jet aircraft annexed to this Decision shall be applied
 in the Community.
                               ARTICLE 2
 This Decision is addressed to the Member States.
Done at Brussels                                           For the Council
                                                             The PRESIDENT
 ---pagebreak---                                                                                              ANNEX
       U N D E R S T A N D I N G ON G U I D E L I N E S F OR O F F I C I A L S U P P O R T E D
                   E X P O R T C R E D I T S FOR L AR G E C I V I L A I R C R A F T
                     (LARGE A IR C R A F T SECTOR UND ER STA ND IN G )
A. FORM AND SCOPE
   This Sector Understanding
         complements the Arrangement on Guidelines for Officially
         Supported Export Credits;
         is concluded with a view towards forming part of a com­
        prehensive OECD civil aircraft agreement, the remaining
      • portion of which should be concluded expeditiously;
        sets out in paragraphs B through P the particular Com­
        plementary Guidelines which are applicable to officially
        supported export credits for the financing of sales or
        leases of large aircraft listed in Annex 1 and super­
        sedes the terms of the OECD "Standstill” (TC/ECG/M.75.1
         item 6 and Annex III-A) with respect to such aircraft.
B. OBJECTIVES,OF THIS SECTOR UNDERSTANDING
   The objective of the Understanding on Guidelines for Offi­
   cially Supported Export Credits for Large Civil Aircraft
   shall be to establish a balanced equilibrium which in all
   markets;’
        equalizes competitive financial conditions between Par­
        ticipants;
        neutralizes finance among Participants as a factor in
        the choice among competing aircraft; and
        avoids distortions of competition.
C. CREDIT TERMS AND CONDITIONS
   (1) Cash Payments
        The minimum cash payment is 15 percent of the aircraft
        total price (the price of the airframe and any installed
        engines plus the spare engines and spare parts described
        in paragraph I). Participants will not provide official
        support for such cash payments other than insurance and
        guarantees against the usual pre-credit risks.
 ---pagebreak---                                             s
                                               V
             \
                               -   2 -
    (2) Maximum Repayment Term
        The maximum repayment term of an officially supported
        credit shall be 12 years.
D.  MINIMUM INTEREST RATES
    (1) Notwithstanding the provisions of paragraph E below, the
        following minimum interest rates, inclusive of credit
        insurance premia and guarantees, shall apply where
        Participants are providing official financing support by
        way of direct credit, refinancing or interest rate
        subsidy:
        (a ) Financing in US Dollars
                         Number of Years in Maximum Repayment Term
Date of Application      Up to   10   Years  Over 10-12 Years
From 1 July 1985         12%                 12.55%
                                                        i.
From 1 October 1985      TB 10 — ^    + 90   TB 10    + 145
                         basis points        basis points
                         or 12%, whichever   or 12.55%, whichever
                         is more              is more
From 1 July 1986         TB 10   ^    + 120  TB 10 ^  + 175
                         basis points        basis points
        If during the period from 1 July 1985 to 30 June 1986,
        TB 10 1/ falls to 10.8 percent or below, the final
        minimum interest rates of TB 10 + 120 basis.points for
        the 10-year option and TB 10 + 175 basis points for the
        over 10-12 year option shall apply immediately and the
        minimum interest rates shall thereafter be adjusted
        automatically in accordance with paragraph D(2) below.
1/  Ten-year U.S. Treasury bond yield at constant maturity,
    averaged over the previous two calendar weeks.
 ---pagebreak---                               - 3 -
       (b) Financing in the Currencies of the Currency Cocktail
       (DM, FF, h, ECU) 2/
       A currency cocktail package based on 10-year government
       bond yields for DM, FP and fc 3/ plus a margin shall
       apply. This margin, calculated as a weighted average of
       the margins applicable to each currency, shall be equal
       to the margin applicable in the case of financing in
       U.S. dollars.
       In the case of financing in ECU, the minimum rate appli­
       cable shall be the long-term ECU bond yields 4/ less 20
       basis points plus a margin equal to the margin appli­
       cable in the case of financing in U.S. dollars.
   (2) Interest Rate Adjustments
       An adjustment will be made to the minimum rates of
       interest set out in (i) above if the two-weekly average
       of the 10-year government bond yields at constant matu­
       rity at the end of each two-week period differs'' by 10
       basis points or more from the average of the 10-year
       government bond yield at constant maturity at the end of
       ttie 'last two calendar weeks of June 1985 . When such a
       change occurs, the levels of the minimum rates of inter­
       est set out above shall be adjusted by the same number
       of basis points, the recalculated minimum rates being
       rounded off to the nearest 5 basis points.       Subse­
       quently, minimum rates of interest will be adjusted on a
       two-weekly basis according to the aforementioned method
2J At present, the "currency cocktail" financing for the A 300
   and A 310 consists of the following percentages of the
   following currencies:
       Deutsche Mark or ECU         40%
       French Franc or ECU          40%
       UK Pound Sterling, or
       US Dollar, or ECU            20%
   For the A 320, the "currency cocktail" shall consist of the
   following percentages of the following currencies:
       Deutsche Mark or ECU          33.7% (Provisional)
       French Franc or ECU           40.0% (Provisional)
       UK Pound Sterling, or
       US Dollar, or ECU             26.3% (Provisional)
3/ At constant maturity, averaged over the previous two calen­
   dar weeks.
4/ As published by the Luxembourg Stock Exchange -- long-term
   bond series, averaged over the previous two calendar weeks.
 ---pagebreak---       if there is a change of 10 basis points or more in the
      interest rate underlying the preceding change in minimum
      rates of interest.    Similar provisions shall apply to
      the ECU in the case of changes in the ECU bond yield.
(3) Special Adjustment?
      (a)  If a Participant believes that at least two signi­
           ficant sales in any six-month period, (a) for which
           Participants are direct competitors, and (b) on
           which offers have been made with official financial
           support (See paragraphs E(l) and (2)), have been
           concluded on a pure cover basis, other than PEFCO,
           at a fixed interest rate below the applicable
           minimum interest rates specified in this Sector
           Understanding, Participants shall consult each other
           immediately (1) in order to determine the interest
           rates on the basis of which the sales have been con­
           cluded and (2) if necessary, to find a permanent
           solution which ensures that the objectives of parag­
           raph B are fully met.    If during these consul­
           tations, (1) it cannot be determined that the inter­
           est rates for the sales in question were at, above,
           or equivalent to the applicable minimum interest
           rates specified in this Sector Understanding, and
           (2) if a solution cannot be found within '30 days
           from the start of the consultations, then the m i n i ­
           mum interest rates specified in paragraph D(l)(a)
           shall be reduced by 15 basis points, unless the
           participants agree that the sales concerned were not
           significant.   In no case shall the interest rate for
           the 10 year option be reduced below TB 10 plus 105
           basis points.   Such adjustments would be made with­
           out prejudice to continuing consultations to find a
           solution, including the possibility of a recoupment
            in the event that additional cases do not occur.
       (b) If in any six-month period two or more sales for
           which Participants are direct competitors are con­
           cluded on a floating-rate pure cover basis, consul­
           tations to ensure that the objectives of paragraph B
           are fully met shall be held at the request of any
           Participant.
 (4 ) Differential   Between 10- and 12-Year Financing options     5/
       (a)  If, subject to the conditions outlined below, at the
           end of the period between 1 July 1985 and 1 July
            1986, 66 percent or more of all sales of aircraft,
            financed either by means o f official support or by
         . pEPCO, have been concluded on a 10-year term, then
 ---pagebreak---                                - 5 -
             the minimum interest rate on the 10-year financing
            option shall be increased by 15 basis points.
             If during the following year, 66 percent or more of
            all sales of aircraft, financed either by means of
            official support or by PEFCO, have been concluded on
            a 10-year term, then Participants shall review the
            differential between 10- and 12-year financing
            options with a view to finding a permanent solution
            to the problem of equating the differential between
             the two options.   If, on the other hand, 66 percent
            or more of the above sales have been concluded under
             the 10-12 year financing option, then the minimum
              interest rate on the 10-year financing option shall
            be decreased by 10 basis points.
        (b) If, subject to the conditions outlined below, at the
            end of the period 1 July 1985 and 1 July 1986, 66
            percent or more of all such sales have been con­
            cluded on a 10-12 year term, then the minimum
             interest rate on the 10-year financing optipn shall
            be decreased by '15 basis points.
            If, during the following year, 66 percent or more of
            all sales of aircraft have been concluded under the
            10-12 year term then Participants shall review the
            differential between 10- and 12-year financing
            options with a view to finding a permanent solution
            to the problem of equating the differential between
            the two options.    If, on the other hand, 66 percent
            or more of the above sales have been concluded under
            the 10-year option,· then the 10-year minimum
            interest rate shall be increased by 1.0 basis points.
5/ For the operational purposes of this paragraph     it is- under­
   stood thatj
   the test sample shall include only those cases in which the
   two financing options have been offered by at least one
   Participant;
-  the activation of an interest rate adjustment can take place
   only if 66% of sales of aircraft according to one option
   have been concluded under two or more separate transactions;
   the term "sales of aircraft" signifies that each separate
   aircraft sold is included in the sample.
                                                4
          1 \
 ---pagebreak--- (5) Date of Determination of Interest Rate O ffer
    A Participant may offer the borrower a choice of one of
    the two following methods for selecting the date on
    which the minimum interest rate (as defined in paragraph
    D(l) et s e q . ) on official fixed interest rate financing
    (see p a r a g r a p h 'E (1) below) and on PEFCO financing (see
    paragraph E(2) below) shall be determined.            The
    selection by the borrower shall be irrevocable.
    -   the minimum rate shall be the minimum rate prevail­
        ing on the date of the offer by the lender or,
        the minimum rate shall be the minimum rate prevail­
        ing on whichever one of a series of dates may be
        selected by the borrower.            The date selected shall
        \in no event be later than the date of delivery of
        the a i r c r a f t .
AMOUNT OF FINANCING
(1) Official     Fixed interest Rate Financing
    (a) The percentage of the aircraft total price (as that
        term is defined in paragraph C (1 ) ) which may be,
         financed at the fixed minimum rates specified in
        paragraph D(l) by means of official financing
        support shall be a maximum of 62.5 percent, when
         repayment of the loan is spread over the entire life
        of the financing, and a maximum of 42.5 percent when
        repayment of the loan is spread over the later
        maturities.            Participants are free to use either
        repayment approach, subject to the ceiling appli­
        cable to that pattern.            A Participant offering such
        a tranche shall notify the other Participants of the
        amount, interest rate, date on which the interest
        rate is set, validity period for the interest rate
        ^nd pattern of repayment.
    (b) Participants will review the two ceilings at the
        time of each review pursuant to paragraph P to
        examine whether one ceiling proves more advantageous
        than the other with a view to adjusting the more
        advantageous ceiling so that a balance is more
        evenly struck.
 ---pagebreak---                                 - 7 -
    (2) PEFCO Financing
         Fixed-rate funds may be officially financed in a manner
         comparable to that provided by the Private Export Fund­
         ing Corporation (PEFCO).     Weekly information on PEFCO's
         borrowing costs and applicable lending rates exclusive
         of official guarantee fees on fixed-rate finance for
         immediate disbursement and for disbursements over a
         series of dates, for contract offers and for bid offers
         shall be communicated to Participants on a regular
         basis.   A Participant offering such a tranche shall
         notify the other Participants of the amount, interest
         rates, date on which interest rate is set, validity
         period for the interest rate and pattern of repayments.
         Any Participant matching such financing offered by
         another Participant shall match it in all of its terms
         and conditions other than the validity period of offers
       • of commitment (see Paragraph F ) .
         These rates as notified shall be applicable by all
         Participants as long as the 24-month disbursement
         interest rate does not exceed 225 basis points "above TB
         10 (see Paragraph D ) . In the event the 24-month rate
         exceeds 225 basis points, Participants shall be free to
         apply the rate of 225 basis points for 24 months di s ­
         bursement and all the corresponding rates and shall
         consult 'immedlately with a view toward finding a p e r m a ­
         nent solution.
   (3)   "Pure Cover"  Tranche
        Official support by means of guarantees only ("pure
         cover") shall be permitted subject to the ceiling
         specified in paragraph 4 below.     However, a Participant
         offering such a tranche shall notify the other Partici­
        pants of the amount, term, pattern of repayments, and,
        where possible, interest rates.
   (4) Total Official    Support
        The total amount of funds benefiting from official
        support pursuant to paragraphs E(l), (2), and (3) above
        shall not exceed 85 percent of the total price as
        defined in paragraph C(l) above.
F. VALIDITY PERIOD OF COMMITMENTS
   The duration of fixed-interest rate offers of commitment on
   the tranches of financing defined in paragraph E(l) and E(2)
   shall not exceed three months.
          1  \
 ---pagebreak---                                -  8 -
          '' \
G.   FEES
     Commitment and management   fees are not included  in the
     interest rate,
 H.  SECURITY
    The Participants retain the right to decide upon security
     acceptable to themselves autonomously and will communicate
     fully to other Participants on this point, as requested or
    when deemed appropriate.
 I· SPARE ENGINES AND SPARE PARTS
    The financing of these items is provided as a function of
     the size of the fleet of each specific aircraft type,
     including aircraft being acquired, aircraft already on firm
    order or aircraft already owned on the following basis:
     For the first five aircraft         15 percent of the aircraft
    of the type in the fleet:            price (airframe and
                                         installed engines.)
    For the sixth and subsequent         10 percent of the aircraft
    aircraft of that type in the         price (airframe and fleet:
                                         installed engines.)
    The Participants reserve the right to change their practice
    and match the practices of competing Participants in matters
    of detail relating to the timing of the first repayment with
    respect to spare engines and spare parts.
J.  TIED AID CREDITS
    The Participants will not provide tied aid credits, associ­
    ated financing (as defined by the Development Assistance
    Committee of the OECD), aid loans or grants or provide any
    financing at credit conditions more favorable to the bor­
    rower than those set forth in this Sector Understanding.
K.  PRIOR COMMITMENTS
    The Participants reserve the right to honor all financing
    commitments made prior to 1 July 1985 and the dates of all
    subsequent changes in interest rates.     Participants reserve
    the right to match offers made by other Participants.
 ---pagebreak---                                                                 \
                              - 9 -
L. MODEL CHANGES
   It is understood that when a loan contract has been
   concluded on one type of aircraft, the terras contained
   therein cannot be transferred to another type bearing a
   different model designation*
M. LEASES              '                                   ,
   It is also understood that a Participant may match a 12-year
   officially supported lease transaction with a 12-year repay­
   ment term and 85 percent credit financing support, subject
   to the other terms and conditions of this Sector
   Understanding.
N. COMPETITION REFERENCE POINT
   In the event of officially supported competition, aircraft
   defined in Annex 1 to this Sector Understanding competing
   with othier aircraft shall be able to benefit from the same
   export credit terms and conditions.
O. PROCEDURES
   The procedures outlined in the Arrangement on Guidelines for
   Officially Supported Export Credits shall apply to this
   Sector Understanding.   In addition should any Participant
   believe that another Participant may be offering an offi­
   cially supported export credit not in conformity with the
   Guidelines without giving advance notice, consultations ,
   shall be held within ten days upon request.
P. REVIEW
   The information procedures and conditions outlined in this
   Sector Understanding are subject in principle to an annual
   review.   However, the Participants shall review the pro­
   visions of this Sector Understanding whenever requested,
   notably in relation to the possible development of certain
   financing and interest rate trends (see paragraph D(3) and
   (4).
   A special review shall be initiated not later than October
   1985 with a view to examining!
        ECU financing provisions;
        disbursement pricing;  and,
        questions relating to credit  insurance premia and
        guarantee fees.
 ---pagebreak---                          - 10 -
At the first annual review Participants shall examine, inter
alia, questions of:
    leasing,
    sales of spare parts and engines, and
    new developments in financing systems.
 ---pagebreak---                                - 11 -
                              APPENDIX
     This list identifies large civil aircraft competing on
world markets.    All other similar aircraft, which may be
introduced in the future, shall be covered by this Sector
Understanding and shall be added to the list in due course.
(1) US AIRCRAFT
    BOEING B 737
    BOEING B 747
    BOEING B 757.                         ·  .
    BOEING B 767
    MC DONNELL DOUGLAS MD-80 series
    MC DONNELL DOUGLAS DC-10
(2) EUROPEAN COMMUNITY AIRCRAFT
    AIRBUS A 300
    AIRBUS A 310
    AIRBUS A 320