Supply Chain

Inaction on Ex-Im Bank’s Fate Threatens Overseas Sales

If Congress fails to raise the lending cap for the U.S.’s export credit agency, financing for billions of dollars in pending sales could dry up.
Vincent RyanMarch 22, 2012

Even if Congress votes to renew the United States’ national credit export bank, U.S. exporters could lose sales this year if Congress doesn’t raise the bank’s $100 billion lending cap in the next two months. Senate Republicans passed the JOBS Act Thursday but left undecided the fate of the Export-Import Bank, which provides loan guarantees to financial institutions so they can finance sales for U.S. companies in foreign countries.

While the bank’s charter is expected to be renewed, a delay in doing so may disrupt billions of dollars worth of signed contracts that the bank is set to finance between now and October, says Julie Martin, a senior vice president in the political risk and structured credit practice at Marsh. Export credit agencies from other countries could fill the financing breach, enabling their own exporters to win the sales.

“European and Asian export credit agencies (ECAs) are contacting project sponsors to try to convince them to move production abroad or buy from a suppler in their own country rather than wait on U.S. congressional action,” says Martin. “Significant amounts of sales by U.S. companies could be lost if the Ex-Im Bank isn’t reauthorized at all or isn’t reauthorized at the appropriate [dollar] level.”

The bank’s charter expires on May 31. Congress appropriates a subsidy based on the Ex-Im Bank’s loss history, and then the agency leverages that money to back exporters’ sales to foreign customers. The Senate wants to renew the Ex-Im’s charter for four years and increase the lending cap to $140 billion from $100 billion. A bill proposed by the House would only renew the Ex-Im for one year and increase the subsidy by $13 billion.

If the Ex-Im Bank renewal is delayed, commercial banks are not likely to step in to provide credit guarantees and loans for many of the overseas deals. If they did, it would be on much less attractive terms, says a Citi banker.

“If an emerging-market airline has the choice of buying Boeing or Airbus planes at the exact same price, but the Boeing equipment has to be financed in the bank market based on the credit quality of the emerging-market airline, the Boeing deal will be much more expensive,” says John Ahearn, global head of trade for Citi.

“The pricing on the [Boeing] transaction may be LIBOR plus 500 or 600 [basis points] for a 12-year deal, but the Airbus purchase, because COFACE [France’s ECA] is providing the credit wrap, gets done at LIBOR plus 80,” says Ahearn.

In addition, points out Martin, “banks might be willing to lend for two years in country X, whereas [the buyer] could get seven years of financing from Ex-Im, and sometimes that longer term makes the deal possible for the buyer.” Bank financing is also fairly volatile, Martin says. “When the banking system is very robust, and every bank is competing heavily to win transactions, some banks will take these kind of terms, but a lot of times they won’t without  some sort of cover.”

Aircraft manufacturers like Boeing are one of the big users of Ex-Im Bank financing, because of the difficulty of financing large equipment purchases. But last February, an industry lobby group sued the Ex-Im Bank over the financing of aircraft to Air India, a move that Delta Air Lines said caused it to lose some routes.

That has helped stir debate in Congress that the Ex-Im Bank actually hurts some U.S. companies and amounts to corporate welfare. But the existence of the Ex-Im Bank can’t be considered in isolation, says Ahearn. ‘‘You have COFACE and SINOSURE [China], and the Russians are now building an export-import bank,” he says. “We as a country need to have the capability to offer the same type of structure, pricing, and tenor that competitors from other countries could get based on their use of ECAs.”

In Delta’s case, the purported disadvantage in the Air India situation will become moot by 2013, says Ahearn. New rules from the Organization for Economic Co-operation and Development take effect then that will even out the playing field for aircraft financing. The rules create a maximum 12-year term for state financing of commercial aircraft exports, and they also standardize risk-rating systems and unify underwriting standards. “The cost will get closer to what bank financing should be,” says Ahearn. “The OECD airlines won’t get the subsidies they are getting.”

Under a new program for commercial banks approved last year, the Ex-Im Bank is helping some large companies finance domestic suppliers. In February, Citi announced a $740 million program in conjunction with the agency. Ex-Im provides a 90% guarantee of the eligible invoices of a U.S.-based supplier.

Supply-chain financing helped some small businesses withstand the credit crisis. While the credit crunch has subsided, such lending may become more important again as global regulations on bank capital are enforced. In particular, Basel III may make credit for small-business suppliers scarce again, says Ahearn. Under Basel III, a bank’s cost of capital for loans to highly rated companies will be much lower than for loans to small or unrated companies.

The Export-Import Bank says the financing it provided last year supported about 290,000 U.S. jobs. “By supporting exports they are helping save and create new jobs,” says Marsh’s Martin. Because the fees the agency earns exceed its annual losses, it actually made $700 million for the U.S. Treasury in 2011.