US Ex-Im Bank: When reaching a state of limbo is progress in the US' tormented political spectrum
For some, the re-authorisation of the US Ex-Im Bank in early Dec-2015 was a major victory in the years long political fight over the embattled agency. Its detractors claim Ex-Im is a poster child for corporate welfare and its proponents argue the agency supports hundreds of thousands of US jobs, some of which were jeopardised during the six month hiatus Ex-Im was forced to take when its charter expired in Jun-2015.
But the US Senate still needs to authorise two of five seats on Ex-Im’s board of directors, which means the bank cannot approve transactions of more than USD10 million until there is a quorum of directors. Although Ex-Im executives seem optimistic the Senate will move quickly on director approval, US politics is anything but predictable. In the interim, other global export credit agencies will continue to seize on opportunities created by Ex-Im’s hands essentially remaining tied.
Ex-Im’s current authorisation lasts until Sep-2019, which is after the US presidential and Congressional mid-term elections. Given the US political climate, Ex-Im’s may again be open for business, but its future is anything but secured.
Delta Air Lines has been one of Ex-Im's harshest critics, tying its dealings to the Gulf debate
The Ex-Im has been under political scrutiny for several years. Export credit agencies stepped in to help during the economic downturn late in the last decade when credit markets tightened. One of the bank’s most vocal opponents has been Delta Air Lines, which is a customer of the Ex-Im’s largest beneficiary, Boeing.
Delta’s opposition centred on financing Ex-Im has granted to airlines for widebody aircraft. The airline previously stated Ex-Im support lowers the cost of capital for foreign competitors allowing those airlines to quickly recoup their investments and lower ticket prices on competing routes.
The airline mounted an unsuccessful lawsuit against Ex-Im, claiming the bank failed to perform a meaningful economic analysis to ensure transactions it conducted would not adversely affect US industries. Financing for Emirates, Etihad, Korean and LATAM Airlines Group was cited in Delta’s complaint.
Since Delta filed its lawsuit the war between the big three US airlines American, Delta and United and Emirates, Etihad and Qatar has erupted. Led by Delta and pilots' unions, the big three claimed the Gulf airlines were unfairly subsidised and asked the US government to conduct consultations with the governments of the UAE and Qatar on open skies agreements with those countries.
A lack of support for Ex-Im reform by trade group Airlines For America (A4A) was one of the reasons Delta opted to renounce its membership from the group in 2015. Ironically, Prior to the splintering, A4A and Delta unsuccessfully tried to challenge Ex-Im’s financing of aircraft to Air India.
See related report: The Delta Air Lines Paradox: Stellar fundamentals against a bemusing antiglobalisation stance
Effects of Ex-Im's shut down were immediate – lost jobs and other ECAs seizing the day
Opposition to the Ex-Im Bank during the last couple of years has continued to grow as Tea Party Republicans gained a voice and concluded the bank was a form of corporate welfare benefitting a few large corporations.
See related report: US Ex-Im Bank: Congress fails to renew mandate before recess – equivalent to unilateral disarmament
In Jul-2015 the US Congress went into recess without renewing Ex-Im’s charter, wiping out is ability to engage in new transactions, and shutting down the bank.
Effects of Ex-Im’s six month shut down are reflected in the drop of loan guarantees, insurance and direct loans the bank awarded in FY2015 (ending 30-Sep-2015). Its FY2015 authorisations totalled USD12.4 billion, compared with authorisations in FY2014 of USD20.5 billion and USD27.3 billion in FY2013.
Ex-Im Bank lending authorisations: FY2013 to FY2015
According to news outlet MoneyWatch, Ethiopian Airlines and South African airline Comair sent letters to Boeing explaining USD3 billion in aircraft orders were at stake after Ex-Im’s reauthorisation lapsed. Those airlines told Boeing they might have to buy aircraft from Airbus, which has support from three export credit agencies.
The news outlet reported that Boeing lost two contracts in its satellite business due to Ex-Im’s shutdown, and that layoffs had begun in that business division.
The effects on Boeing are just a small snapshot of the repercussions of politicising the Ex-Im Bank. The US National Association of Manufacturers has warned that global markets have responded to Ex-Im’s inability to conduct transactions.
With the vacancies on Ex-Im’s board, its hands remain tied in engaging in the large transactions that help create and preserve thousands of American jobs. But it is not clear that the US Senate will move quickly to fill the board seats, which again leaves the bank at the hand of Congress and in limbo until the seats are filled.
One positive outcome of the re-authorisation of the bank was strong bipartisan support from each chamber of the US Congress.
Perhaps the effects of the millions Boeing and GE have spent lobbying for Ex-Im’s cause are beginning to spread among US legislators. Fortune reported that alongside an intense lobbying campaign, Boeing and GE pulled Super PAC donations and other financial contributions to lawmakers that opposed the bank.
Funding by export credit agencies drops, but they still warrant considerable clout
Air transport remains the largest beneficiary by far of Ex-Im’s support. For FY2015 the sector represented 48% of the bank’s exposure compared with 45% in FY2014.
Ex-Im exposure by sector: FY2015 vs FY2014
A new Aircraft Sector Understanding (ASU) adopted by the Organisation for Economic Co-operation (OECD) in 2011 governing export credit agency financing has also made financing from those agencies less attractive. It raises the fees borrowers pay on loans based on a risk profile. But even the most credit worthy airlines now pay higher financing fees.
According to Boeing Capital Corporation’s 2016 aircraft financing outlook, export credit agency funding has been characterised as a cautionary or major concern since 2010, and 2016 is no different.
Outlook for various forms of aircraft financing: 2009 to 2016
“With its higher exposure fees and risk requirements, the 2011 Aircraft Sector Understanding is keeping the costs of export credit higher than commercial alternatives,” Boeing Capital concluded in its forecast. The company stated that given the ample liquidity available from commercial markets, “we forecast that global export credit usage will remain at historically low levels in 2016”.
The aircraft manufacturer projects credit markets should support 38% of its deliveries in 2016, compared with 9% for export credit. Ex-Im supported 29% to 30% of Boeing’s deliveries during the global economic downturn from 2009 to 2012.
Even as Ex-Im’s support for Boeing deliveries diminishes, the USD3 billion at stake with Ethiopian and Comair shows the bank is still an important element of Boeing’s business, warranting millions of dollars of lobbying funds to ensure its existence.
Boeing operator Copa recently stated that most of its financing transactions during the last couple of years have been either sale-leasebacks of Japanese operating leases with call options. The airline noted there were alternatives to Ex-Im. However, Copa did state that Ex-Im was a "good thing" and from a political standpoint, it should be good for the US.
Ex-Im regains lost ground to celebrate being in limbo. Its future still remains uncertain
It is not often that reaching a state of limbo can be deemed progress, but that is the current scenario of the US Ex-Im Bank. Its re-opening for business is a major victory for its proponents, some of whom made heavy investments in the fight to ensure Ex-Im remains a mainstay among global export credit agencies.
But some opponents have vowed to keep up their fight against the Ex-Im’s existence, stressing the battles that have ensued during the last couple of years set the stage for dismantling the agency in 2019.
Four years in the US political spectrum is an eternity, and for now, the task at hand is for Ex-Im to become fully functional. The timeframe for when that occurs remains murky.