A comeback for Ex-Im bank?
In mid-September, Catoctin Creek Distilling Co. in Purcellville prepared to send 112 cases of its rye whiskey, brandy, gin and moonshine to an Australian importer.
But because of the expiration of the U.S. Export-Import Bank last summer, the company took on the full risk of sending its spirits abroad. “Unfortunately, we’ll bear the full risk of this order, so another $20,000 on the block,” says Scott Harris, founder and general manager of Catoctin Creek. “If they don’t pay us, then we’ll just have to eat it, and that’s a really terrible place to be.”
Typically on foreign orders, Harris would buy an insurance policy so that he could offer net-30 terms, allowing the importer to pay for the shipment within 30 days. The policies protected the distillery from the possibility of non-payment from a company located oceans away. “The policy ensures that if my buyer goes AWOL for whatever reason — a death in the family, or he’s just a crook — then the Ex-Im policy would pay back that invoice,” says Harris.
Under pressure from conservative Republicans, who view the Ex-Im Bank as government’s unfair interference into the free market, Congress allowed the 81-year-old Ex-Im Bank’s charter to expire June 30. That means that the export credit agency has been unable to issue any new insurance policies or financing deals since then, and its future has continued to be a hot-button political issue.
But political maneuvering this month has improved the outlook on Ex-Im’s future. While House Republican leadership remained in turmoil over selecting a future speaker, a 218-member group of congressmen used a rare parliamentary procedure to force a vote on reauthorizing the agency at the end of October.
In the Senate, Sen. Mark Kirk launched this week a fast-track procedure to skip the committee process and send a vote on the agency’s reauthoritzaiton directly to the Senate floor. However, the procedure, known as Senate Rule 14, would not ensure that a vote is scheduled. The agency is opposed by Senate Majority Leader Mitch McConnell, R-Ky.
Ex-Im Bank and Virginia
Ex-Im Bank expiration came at the same time Virginia government and business leaders were trying to expand the state’s exports to help make up for the federal cuts under sequestration, which are hampering the commonwealth’s economic growth. “The timing of its expiration couldn’t be worse in Virginia because we are just now gearing up for a major push to expand manufacturing exports over the next 10 years,” says Brett Vassey, president and CEO of the Virginia Manufacturers Association.
The Export-Import Bank is the U.S. government’s export credit agency, which finances or insures foreign purchases of U.S. goods. Its programs include insurance policies, like those Harris uses at Catoctin Creek, that exporting companies employ to mitigate risk that comes with selling to foreign companies. The bank also backs loans made to exporting companies through its Capital Loan Guarantee program, and it also provides financing to companies that want to purchase U.S. goods.
With the Ex-Im Bank’s expiration, businesses around the country say they are at a competitive disadvantage. General Electric Co. announced it would move several hundred jobs to Canada to take advantage of that country’s export financing.
In Virginia, supporters of Ex-Im Bank say companies already are starting to see the effects of the agency’s demise. According to the Ex-Im Bank, it insured or financed $2 billion worth of Virginia exports between 2007 and June 2015. That money backed exports from 125 companies.
Paul Grossman, vice president of international trade for the Virginia Economic Development Partnership, says statements from the Ex-Im Bank showed that the agency supported exports in a range of $3 million to $8 million monthly in 2014. “So that’s $3 million to $8 million per month obviously that Virginia companies were using that they no longer have access to,” says Grossman.
Dulles-based Orbital ATK, a space technologies company with annual revenues of more than $3 billion, says it has lost $100 million in its commercial satellite business so far because of its inability to offer export financing to foreign customers. The company estimates it could lose up to $500 million in business by the end of the year if the agency’s charter isn’t renewed.
An increasing number of emerging countries are in the market for new satellites, and they are requiring financing as part of their deals, says Amer Khouri, vice president of business development at Orbital ATK’s Commercial Satellite Division. “About 30 percent of our customers require financing as part of the overall project,” Khouri says. “So the expiration of the Ex-Im Bank has definitely and will continue to negatively impact our ability to offer a competitive financing package. Ex-Im Bank is a priority in our primary funding solution for those customers who require Ex-Im Bank financing.”
Harris at Catoctin Creek says the expiration of the Export-Import Bank likely will tamper his ability to grow his export business. Currently, exports make up around 10 percent of the distillery’s sales, while he’d like to increase that to 30 percent, particularly since export sales aren’t as heavily taxed as U.S. sales. “It would affect our ability to export to new partners, to new companies and new countries,” Harris says if the Ex-Im Bank is not reauthorized. “It puts us in the square of doing exhaustive background checks on our own time, and time is something that we have very little of to spare.”
The effect on lenders
Traditional financing is either unavailable or too costly an alternative without the support of Ex-Im Bank, supporters say, because of the risk and complexity involved in international financing. So since June 30, lenders who specialized in this financing have been unable to extend financing to some of their clients, many of whom would not be able to afford alternative financing.
Interlink Capital Strategies in Arlington County is a 20-year-old financial firm that specializes in emerging markets. Two years ago, the company established a specialty lending company called ExWorks Capital to focus on Ex-Im Bank-backed transactions and hired a former head of the Ex-Im Bank to lead the group. The group is a delegated authority lender of the Ex-Im Bank.
To compensate for Ex-Im’s expiration, the company has helped some of its small- and medium-sized clients find export financing through the U.S. Small Business Administration’s Export Working Capital Program, which is similar to Ex-Im Bank’s working capital program but has a tighter spending limit. The SBA, however, does not offer insurance policies or financing offerings for foreign importers.
So the expiration of Ex-Im bank is forcing small- and medium-sized businesses to curtail their export activities, says Alan Beard, managing director of Interlink Capital’s Washington office. “Exporters now are having to look at much more costly sources of financing, or candidly, they’re not able to replace it, and it tends to discourage their export activities.”
There also aren’t a lot of lenders clamoring to jump into export financing, says Beard. “Just like many other government programs, the goal of Ex-Im Bank is to induce banks into this marketplace for the public policy benefit of trying to increase exports…It’s not like there’s a huge amount of capital that’s dying to finance transactions in Brazil or South Africa or China, because these are very difficult markets for lenders to have exposure to, and indeed the regulators are beating banks up for having this kind of exposure.”
Lenders face difficulties from both a capital allocation and working capital perspective, says Matthew L. Ekberg, vice president of international policy for Bankers Association for Finance and Trade, or BAFT. The international subsidiary of the American Bankers Association represents more than 200 financial institutions engaged in trade finance.
It can be difficult for banks to offer international financing without a guarantee from an export credit agency, says Ekberg. That includes external constraints such as meeting capital requirements from Basel III, a global regulatory framework governing bank capital. It also can be difficult on internal risk constraints. “There are a lot of different restrictions in the mix that limit a lender’s ability to do an export financing transaction without the support of an export credit financing agency’s guarantee,” says Ekberg.
And that support is provided to most major economies around the world.
The Export-Import Bank is one of about 60 export credit financing agencies in the world. Supporters of the bank say U.S. companies will continue to lose business to foreign competitors who can offer financing through their home country’s export credit agency. “From a competitive perspective if the U.S. weren’t to have an export credit agency, it would essentially … be unilateral disarmament in the perspective from international financing,” says Ekberg.
The debate and an uncertain future
For most of its history, reauthorization of the Ex-Im Bank has passed easily in Congress. But the agency became a target of tea party-leaning Republicans, a large block of whom were voted into office in 2010, who called the bank’s support crony capitalism and corporate welfare, by using taxpayer-backed financing to boost private profits.
Opponents say the bank gives an unfair advantage to large corporations and plays a role in picking winners and losers in the U.S. economy. In addition, the Ex-Im Bank only supports about 2 percent of the U.S. exports. Opponents of the bank also believe that the private sector could take over this type of export financing.
“I understand people’s arguments that in a perfect marketplace you wouldn’t have export subsidies,” says U.S. Sen. Mark Warner, D-Va., who along with Sen. Tim Kaine are major supporters of the bank, “but why wouldn’t America do this when all our competitors are? The Europeans, the Canadians, the Brazilians, the Chinese do it on steroids…and now over ideological purity we’re going to go ahead and sacrifice American business?”
Virginia Business reached out to several congressmen and organizations on record against the Ex-Im Bank who declined to comment for this story.
Ex-Im supporters point out that while most of the Ex-Im’s money supports big businesses, a greater number of smaller companies have used Ex-Im’s products. In Virginia, according to Ex-Im Bank, 74 of the 125 exporters supported by the bank over the past eight years were small businesses.
Supporters are working closely with Congress in hopes the bank will be reauthorized soon.
Khouri of Orbital ATK says the company is continuing to work with its customers and plans to add financing to current bids if the bank is reauthorized.
The company hasn’t laid off any employees yet, but he points out it takes about 200 to 300 engineers and technicians to design and build a satellite. “When you talk about revenues, it’s one thing to recognize that it’s $150 or $200 million lost,” says Khouri, “but when we talk about potentially 300 workers with every satellite lost, that’s a lot of people being employed in Virginia and elsewhere in the U.S.”
Vassey, president of the Virginia Manufacturers Association, says that even if the Ex-Im Bank is reauthorized, even the lapse could take a toll for business. “Fall is the time where a lot of national and international trade shows are going on so companies are going to these trade shows and they’re looking for whatever tools are in their toolbox.”