US Export-Import Bank resurfaces
The US Export-Import Bank has an updated mandate and a new lease on life.
Ex-Im is the United States’ export credit agency. Its objective is to promote American exports by providing loans, guarantees and credit insurance to companies that export goods produced in the United States.
For the past five years, it had been hamstrung — initially by a loss of operating authority and then by the lack of a board quorum, which prevented it from approving financings exceeding $10 million. On December 20 last year, President Trump signed a bill reauthorizing the bank. The board regained a quorum earlier in 2019.
The bill reauthorizing Ex-Im grants it additional authority in several areas — notably, in supporting exports to compete with China and to support renewable energy. It provides for seven years of operating authority and includes a new mechanism for remaining operational in the event of a quorum lapse.
Just a few months into ramping its operations back up after its reauthorization, Ex-Im has been called upon to respond to the COVID-19 crisis by increasing its financing flexibility with the aim of injecting liquidity into the market and supporting US exporters in need of capital.
In late March, Ex-Im’s board of directors adopted emergency response measures to provide for a temporary bridge financing program and expansions of its pre-export financing program, supply-chain financing guarantee program and its working capital guarantee program.
Competing with China
Perhaps the most material change to Ex-Im’s mandate resulting from its reauthorizing legislation comes in the form of the establishment of a “Program on China and Transformational Exports” that will be targeted to be at least $27 billion, or 20% of Ex-Im’s total financing authority.
Under this program, Ex-Im is mandated to extend credit at rates and on other terms that are, to the extent practicable, competitive with the rates and terms offered by China’s state-owned banks. The aim is to neutralize export subsidies for competing goods and services financed by official export credit, tied aid or blended finance provided by China. It is also to support exports in certain strategic categories, including artificial intelligence, biotechnology, biomedical sciences, quantum computing, renewable energy, semiconductors, wireless technology, fintech, water treatment and sanitation, and high-performance computing.
This program was motivated by a concern that China’s concessional export financing has placed Chinese exports at an unfair advantage by providing export support outside the terms of the OECD’s “Arrangement on Officially Supported Export Credits,” which aims to foster a level playing field in order to encourage competition among exporters based on quality and prices of goods and services exported rather than on the most favorable officially supported financing terms.
By establishing the Program on China and Transformational Exports, the reauthorization legislation permits Ex-Im to undertake financings outside the OECD terms for projects falling into the categories described above — for example, by allowing for longer tenors or lower interest rates than would otherwise be permitted.
Focus on Renewables
In addition to the support for renewables-related exports in the strategic contexts described above, the reauthorizing legislation mandates Ex-Im to support exports related to renewable energy, energy efficiency, electric vehicles, electric vehicle batteries and electric vehicle charging infrastructure, and energy storage. In contrast to the previous version of Ex-Im’s governing statute, which simply instructed Ex-Im to promote exports related to renewables, the reauthorization legislation sets a goal of committing at least 5% of its annual financing authority (or $6.75 billion) to this purpose.
Although Ex-Im’s statutory financing authority remains the same as it was for the four years preceding its reauthorization, a big increase is expected in the funds it makes available.
Between July 2015 through May 2019, Ex-Im’s board of directors lacked a quorum, which meant it was unable to approve large-scale financings, so its activity was insignificant in the international project finance market.
In financial year 2019, when it finally regained a quorum, it authorized $5.3 billion in medium- and long-term financings. That amount is expected to more than double this year. The table summarizes Ex-Im’s actual and target financing amounts during the period from 2017 through 2022:
Even before Ex-Im lost full lending authority, and even at a time when Ex-Im’s lending activity had increased in the wake of the 2008 recession, Ex-Im’s support per unit of GDP was among the lowest in the world for government export credit agencies. One of Ex-Im’s stated goals for financial year 2021 is to increase its market share vis a vis other export credit agencies.
Ex-Im’s reauthorizing legislation provides the bank additional stability and a longer authorization period than ever before.
In recent years, Ex-Im was not a player in large-scale project finance transactions. During four years, it lacked the board quorum necessary to approve large transactions, and for several months in both 2015 and 2019, it lacked legislative authorization to operate at all.
As a result, project developers and financiers might be excused for viewing its revival with skepticism. However, by making it easier to maintain or re-establish a quorum even in the absence of appointment of new board members, and by granting the bank an unprecedented authorized term of seven years, Congress gave the international project finance community reason to consider Ex-Im a reliable option for supporting eligible financings.
If Ex-Im lacks sufficient directors to reach a quorum, its board cannot authorize financing transactions of more than $10 million. For several years, Republicans opposed to what they saw as “crony capitalism” practiced by the bank declined to confirm any nominees to Ex-Im’s board, hobbling the institution. In May of last year, the Senate confirmed three nominees, including the current president and chairman.
The Ex-Im reauthorization legislation provides that if there are not enough directors to constitute a quorum for a period of 120 days during any presidential term, then a temporary board will be constituted with the US Trade Representative, the Treasury secretary, the Commerce secretary and the existing Ex-Im directors as members.
As a result, approvals of financings will not face as great a risk of being delayed indefinitely. Still, the risk of having a financing determination put on hold for 120 days represents a potential material downside of pursuing Ex-Im financing, so developers and co-financiers should keep an eye on the status of Ex-Im’s board composition to evaluate whether this risk is present. The board has five director seats and a requires three directors for a quorum. The board is currently composed of three Ex-Im directors, together with the US Trade Representative and the Commerce secretary, who serve as ex-officio, non-voting members. Additional Ex-Im directors have been nominated and decisions on their nominations are pending on the Senate’s executive calendar. The Senate is in recess until April 20.
Ex-Im is authorized to operate through 2026. The length of this term in and of itself is a victory for supporters of Ex-Im and a boon for those who seek to take advantage of American export credit agency financing. Also critical is the fact that this term removes debate over authorization from the presidential election cycle; previous reauthorizations were often on cycles of four or five years.
Financing for US Projects
A senior Ex-Im official said recently that Ex-Im’s legal shop has signed off on the view that Ex-Im is authorized to provide financing for the construction of projects located in the US that are dedicated to facilitating US exports.
This approach represents an important shift in Ex-Im’s approach to financing and opens the door to a number of borrowers that may not have considered pursuing export credit agency financing before.
Ex-Im has not yet received any applications for such a financing, but it has indicated its openness to providing such support.
In response to the COVID-19 crisis, Ex-Im has indicated its resolve to meet the moment by increasing its flexibility and has approved several temporary measures to provide relief and liquidity for its clients.
One is bridge financing. In response to the lack of liquidity in the market, Ex-Im has established a temporary program to provide bridge financing to foreign customers of US exporters.
Unlike typical Ex-Im Bank loans, for which a non-refundable exposure fee must be paid up front, that fee will be refundable for the unused portion of the original term of the loan if the borrower can refinance the loan from other sources. Bridge financings will have one-year terms, which will be subject to extension at the borrower’s option, absent a default.
Another COVID-19 measure is pre-delivery and pre-export financing. Ex-Im will provide a temporary expansion to its pre-delivery and pre-export financing program to allow short-term loans or loan guarantees for exports still in the manufacturing stage, regardless of whether Ex-Im is providing long-term financing to the buyer of such exports. Previously, Ex-Im only provided financing to exporters still in the manufacturing stage as a component of its medium- or long-term financing for those clients.
Another temporary measure is supply-chain financing. In a supply-chain financing — also called “reverse factoring” — a lender purchases a receivable held by a supplier at a discount, providing immediate liquidity to that supplier, and a buyer pays the lender at a later date.
Ex-Im’s supply-chain financing guarantee program covers 90% of an exporter’s liability to a bank lender. It has not been very popular to date because of several restrictive terms, including a requirement that 50% of suppliers must be small businesses, a requirement that US exports be sold directly to a foreign buyer (rather than to foreign affiliates of US exporters as an interim step, as is common), and a 50% US content minimum. Ex-Im will temporarily eliminate the 50% small business target and be willing to provide financing for sales to foreign affiliates of US companies. Ex-Im is also evaluating lender requests that it increase its guarantee from 90% to 100%.
The final temporary COVID-19 measure is working capital financing. Ex-Im provides guarantees of 90% of the principal of certain working capital loans from commercial lenders to US exporters. This program is mostly targeted at small and medium-sized businesses and largely carried out through commercial banks with delegated authority to close loan facilities of up to $10 million (depending on the lender) without prior Ex-Im consent. Lending commitments are determined by a borrowing base of export-related inventory.
Ex-Im will temporarily expand the definition of eligible inventory to include all inventory that could potentially be exported, rather than just that inventory actually earmarked for export. Ex-Im is also working to expedite implementation of a revised working capital fee structure. As with its supply-chain guarantee program, Ex-Im is considering temporarily increasing the guarantee it offers from 90% to 100%.
Each of these temporary programs will be available for one year, beginning on May 1.
Ex-Im has also stressed its intention to work on customized solutions with borrowers to meet the challenges arising from the present crisis.
During the meeting in which the Ex-Im’s board authorized these changes, US Trade Representative Robert Lighthizer, an ex-officio member of the Ex-Im board, made it clear that “our mission is to get deals done,” stating that Ex-Im has arguably “never been more important than it is now.”
Although it is loosening a number of restrictions in the face of the COVID-19 crisis, Ex-Im remains more burdened by restrictive policies than most other government export credit agencies. Unlike other export credit agencies, Ex-Im limits its loans to the amount of US content and requires financed goods to be shipped on US-flag vessels.
Under the US content requirement, to qualify for Ex-Im support, goods and services must be have US content or be shipped from the United States. Items not produced in or shipped from the United States may be part of a project supported by Ex-Im, but will not be eligible for Ex-Im financing.
Ex-Im can support the lesser of 85% of the net costs for a transaction (i.e., total costs minus the cost of ineligible foreign content and local costs of a project) and 100% of US content.
In addition, it can also finance local project costs in the receiving country in an amount up to 30% of the financed US content.
Other countries’ export credit agencies have materially relaxed their content policies in recent years. Ex-Im’s 2012 reauthorization legislation called on Ex-Im to conduct a review of its domestic content policy, but no changes have been made in recent years. There have been calls on Ex-Im to reevaluate its US content policies.
These policies may make Ex-Im financing less attractive for a number of project developers. In the case of renewable energy projects, for example, the vast majority of components are not produced in the United States. As a result, this policy risks undermining Ex-Im’s new objective of designating at least 5% of its budget to supporting renewables.
Ex-Im has its work cut out for it as it rebuilds after a long hiatus from the project finance market.
It will need to rebuild connections and trust. The relative stability and relatively long time horizon provided by its reauthorizing legislation should help borrowers and financiers to get comfortable involving Ex-Im in transactions. During its years wandering in the wilderness, Ex-Im lost senior staff and expertise. The promise of working for an institution assured to remain authorized to approve transactions and to operate for more than a few months or years should attract talent, but it will take time to rebuild capacity.
However, as financing from private sources dries up for some in the midst of the COVID-19 crisis, Ex-Im may become a relatively more important player than Congress could have imagined when it reauthorized the bank last year. As it works to fulfill its mission in the face of the crisis, it may reveal itself, in its new incarnation, to be an institution that is not only more stable and reliable but also more flexible.