Export Import Bank – Corporate Welfare or Export Champion? David Gustin - July 7, 2014 1:48 AM | Categories: ECA Finance, Risk Management | Tags: Ex-Im Bank The question of whether the US government is likely to withdraw support from the Export-Import Bank of the United States (Ex-Im Bank) is pushing the hot buttons of many large corporates and is getting prime press in the WSJ. Ex-Im Bank was established in 1934 by an executive order, and made an independent agency in the Executive branch by Congress. Congress sets the bank’s lending cap and must reauthorize its charter, which expires Sept. 30th. First, what does Exim Bank do? The mission of the Bank is to create and sustain U.S. jobs by financing sales of U.S. exports to international buyers It performs this mission by borrowing from the Treasury to provide working capital guarantees, export-credit insurance and financing to help foreign buyers purchase U.S. goods and services. Export Credit Insurance Ex-Im provides insurance policies to U.S. companies and banks to mitigate risks of non-collection from foreign buyers and borrowers. Risks covered include default due to commercial reasons, such as buyer insolvency and cash-flow problems, as well as political risks such as war, civil unrest and currency flow restrictions. Export Credit Insurance policies can be issued to companies directly exporting, or to banks lending to foreign buyers. Working Capital Guarantee The Working Capital Guarantee program provides loan guarantees to banks willing to lend to exporting companies. The loan guarantee is secured against foreign accounts receivable, and against work in process and finished goods inventory destined for export. Ex-Im may guarantee 90% of a loan to a foreign buyer to purchase goods from a U.S. Exporter and charge a fee of 1.5% for the coverage. The guarantee covers principal and interest and has repayment terms between one year but can be up to three years. Why wouldn’t you want to renew something as good as Ex-Im? Large manufacturers like Boeing and GE have depended on these loans to sell into difficult markets. The Bank has come under criticism for allegedly favoring special interests and heavily subsidizing corporates that can use the private credit insurance market. In fact, ExIm itself notes that is supports less than two percent worth of U.S. exports. Much of the loan guarantees go to companies purchasing Boeing aircraft. Boeing alone typically accounts for more than 40 percent of the Bank’s credit activities and the top ten users are estimated to receive 75 percent of ExIm’s benefits. Of course big corporations have come to the defense of the subsidy. Why wouldn’t I play the job card in my lobbying efforts with creative ads such as – “Shutting down the U.S. Ex-Im Bank is good for business and creates thousands of jobs…in China, Russia and France,” The Heritage Foundation’s Diane Katz observed: “If the Bank were stepping in where private investors fear to tread, a larger proportion of its financing would be directed to Africa and Latin America, where risks are greatest. Instead, the Bank is busiest in Asia, Europe, and North America.” It hasn’t helped that four Ex-Im officials were suspended for bribes and kickbacks. Would shuttering Ex-Im put our big corporations at a disadvantage? Or are we being naive to think that Boeing, Caterpillar, GE, etc. don’t have excellent access to the capital markets and private insurance. As subsidies go, there are many others in the Federal Government that are more wasteful and shameful. It is not a level playing field in world commerce. Most governments provide heavy support for export businesses. The point is can we focus the efforts to help more mid sized companies that don’t have the resources of GE or Deere. GE, Boeing, and others will have their lobbying in full force, and I suspect the charter will get renewed. Source: Ex-Im web site Related Articles Corporations Boost Finance with Trade Credit Insurance Promoting Receivables Insurance – Interview with Mark Attley of Receivables… Your Largest Unprotected Asset – Accounts Receivable First Voice Tony Brown: 09.07.2014 at 11:04 am The Export-Import Bank of the U.S. faces an existential threat. This stems from the conviction of some that private markets can and should provide the credit insurance and export loans now offered by Eximbank. If all of Eximbank’s global ECA peers were to cease their support of indigenous export industries, I too would agree that it would be time for the private sector to take over from the ECAs. But that’s as likely to happen as a snowball’s chance of survival in hell! And it’s naïve to think that US employment won’t be adversely affected by withdrawal of public sector support for exports. Nevertheless, an argument can be made that Asian SMEs get plenty of support from banks for pre-export, work-in-progress/production finance without any form of ECA support. So-called Packing Credits used to be offered to exporters against L/Cs issued in their favor by overseas buyers’ banks but now these are available for open account business too. Asian banks have perfected Purchase Order Financing by understanding production risk, transactional cash-flow cycles, evaluating exporter-importer performance history and taking collateral and personal guarantees as appropriate. As someone who launched the first US PO finance company in 1989, I’m delighted to see how many practitioners of this specialized form of transactional lending exist today. None of them require public sector support. With the digitization of trade and the concomitant creation of transactional databases, IT platform developers and lenders have recognized the treasure trove that Big Data offers to create algorithmic predictors that can accelerate lending decisions. SWIFT and platform providers of Reverse Factoring/Dynamic Discounting are now focusing on ways to extend their value into the “pre-invoice” (ie production finance) period. All this innovation without a hint of ECA support! Perhaps the crutch of ECA support of pre-export finance should be reduced/eliminated to spur the development of market-driven solutions. US trade financiers can take a leaf out of the books of their Asian counterparts and use all of the tools available to them (e.g. “borrowing base”-driven asset based lending, performance scorecarding, etc) to satisfy the huge demand for production finance – for both domestic and export business. And since the US is losing its manufacturing base to low-cost developing markets, why not harness the skills of laid-off US factory production managers to help lenders evaluate independently the ability of a company to manufacture a product for which they have a strong order book? Reply Discuss this: Cancel reply Your email address will not be published. Required fields are marked *Comment Name * Email * Website Notify me of new posts by email.