No export credit agency reflects the growing importance of such institutions better than US Exim. From its annual conference in Washington DC, Finbarr Bermingham reports record-breaking growth, but room for development.
America has never needed much of an excuse to put on a show, and at the Export-Import Bank of the United States (US Exim)’s annual conference in Washington DC, they didn’t have to look too hard to find one.
For when you peel away the Oscars-scale layers of glitz and read between the lines of the vice-presidential battle cry, you’ll find etched in black and white the small matter of US$35.8bn worth of authorisations and loans issued by US Exim in 2012. The first half of 2013 is set to be the strongest in US Exim’s 79-year history, with US$14.8bn worth of deals authorised already.
US exports are up by over 40% on 2008’s levels. The bank has stepped up its game after being given a mandate by President Barack Obama in 2010 to help double US exports within four years. At the time, the US was moulting jobs: 8.7 million had been shed in the two years from the start of the financial crisis, with unemployment languishing at 9.8%. In such circumstances, it’s normal for a leader to come out with rhetorical guns blazing, but the way in which the White House harnessed US Exim to help reach its target has been impressive.
In 2012, US Exim was involved in 60% of America’s commercial satellite exports, 35% of commercial aircraft exports and 35% of locomotive exports. Where the bank arguably differs from other agencies is its willingness to fund transactions of all shapes and sizes (from gourmet pickle-maker Miss Jenny’s Pickles, to the US$5bn loan to the Sadara project in Saudi Arabia). As chairman and president Fred Hochberg told GTR at the conference, the bank may only be involved in just 2% of total US exports, “but they’re an important 2%”.
To the rescue
US Exim’s recent history can be viewed as the story of export credit agencies (ECAs) in microcosm. The risk-averse winds that have blown across the post-2008 landscape, coupled with the regulatory measures that followed (with many still to be implemented) meant commercial banks couldn’t meet demand in economies hoping to export their way out of trouble. ECAs stepped in to plug the gap.
In 2012, ECAs supported one third of the world’s total project finance, shipping finance and agro-finance businesses, respectively. In Dealogic’s Trade Finance Review 2012, ECAs were involved in eight of the 10 largest transactions. It’s unusual now to find a big deal that one or more ECAs haven’t covered or contributed to.
Lillian Labbat is JP Morgan’s export finance head for the Americas. The bank has worked on a host of big ticket, US Exim-backed deals over the past 12 months. In December 2012, for instance, JP Morgan had a US$1.06bn loan to Reliance Industries, an Indian petrochemicals company, guaranteed by US Exim, who also contributed a direct loan of the same amount.
“Over the last couple of years,” Labbat told us in Washington, “there’s been a lot of growth in the export finance industry and this has been the result of ECAs stepping up to the table to bring liquidity to market at competitive pricing. US Exim levels the playing field by matching the credit support that’s available from other ECAs across the world, and this ensures that US exporters are competing on the quality of their products and services, rather than the terms of the ECA finance.”
Even a few years ago, the notion of an ECA providing direct loans was an uncommon one, with the agencies’ role traditionally being to provide guarantees to bank loans. Certainly, with Basel III looming, the ECA lending model will become more crucial, and how agencies deal with this challenge remains to be seen. But the uniform view among those attending the conference is that ECA lending will always exist to complement commercial lending, not to provide competition.
Citi’s global head of export and agency finance, Valentino Gallo, told GTR at the event: “Clearly, the ECAs have been a very important complement. As the market goes back to normal, we’re expecting the agencies to retreat a little bit from that.”
His sentiments were echoed by Alejandro Luna, North American head of structured trade finance at BBVA, who said: “We certainly see ECA financing as complementary, especially for small and medium-sized transactions. It’s rare that direct funding by ECAs competes directly with commercial lending.”
Four more years, four more years!
It seems strange, then, to think that this time next year, US Exim will be fighting for its life once more. Some quarters of the Republican Party are adamant that government institutions have no place in the private sector. Last year, South Carolina senator Jim DeMint described the bank’s activities as “corporate welfare” – despite the fact that one of its biggest beneficiaries, Boeing, employs many thousands of people in the state he represents. And as the US begins to feel the bite of sequestration, 2014’s reauthorisation process looks set to be more hotly debated than ever.
“From my perspective, the two issues that really crunch how much business we can do with US Exim are political,” says Derek Fried, senior vice-president and sales manager for Wells Fargo’s exim working capital programme. “It’s harder for them to increase their headcount – growing government is not really something people want to do these days. Also reauthorisation for US Exim is critical. It needs to happen and needs to happen more easily. It’s really a bi-partisan concept. There was a lot of difficulty the last time out, and if the next one can be easier, that helps all the borrowers and all the banks wanting to do business.”
One point for next year’s debate may be US Exim’s content policy. The bank’s raison d’être is to create US jobs. Therefore, it states that for transactions seeking medium to long-term US Exim support, 85% of the goods involved must be produced in America. For short-term working capital support, the minimum requirement is 50%.
“The question is whether on long and mid-term debt, the American content requirement of 85%, which was adjusted in 1987 from 100%, needs to be adjusted again to create additional growth in US jobs now,” Michael Boyle, CEO of Boyle Energy Services and Technology, a US Exim customer, told GTR in Washington. “If you lower the required content level you increase supply chain demand, which allows foreign nationals to have parts of our exports base. [The United States Department of] Labour complains that if we do that, then we won’t be able to support developing US jobs. But everybody I talk to in commerce wants to lower it to zero!”
The general view of the banking sector, on the other hand, is that the limit is unnecessary. JP Morgan’s Labbat thinks it’s a case of staying competitive with other ECAs, who have no such content requirements on their transactions. “Some ECAs, for example Export Development Canada [EDC] and Finnvera [Finland], look more at the contract being of national interest to the country of the exporter and this of course becomes very challenging when some ECAs are still requiring that a certain percentage of exports are identified as coming from a specific country.”
US Exim’s policy is the exception, rather than the rule. In Germany, the minimum national content requirement is 70%; in France, it is 60%; in Japan, it is 30% and in the UK, it is only 20%. The Export Council of Australia is one of the only ECAs that matches US Exim’s minimum content requirement.
Whichever path it chooses, US Exim should tread carefully: it finds itself at a hazardous crossroads on a bureaucratic minefield. By abandoning its content requirement, the labour lobby says that US Exim will jeopardise its political trump card (the creation of US jobs) – if only by giving its critics a stick with which to beat it.
While the “sexier” BRIC economies are often mooted as essential trading partners, there are major opportunities on America’s doorstep too.
The balance of power has shifted,” Sir Martin Sorrell, CEO of advertising agency WPP Group told the US Exim conference. It was a statement paraphrased throughout the two days, but with the added caveat that while the US may no longer be the centre of the trading world, it is still a vital component in it. And when vice-president Joe Biden took to the stage to deliver his keynote speech, he did so to encourage US exporters to embrace frontier economies, rather than fear them.
For US exporters, “frontier economies” may be closer to home than they sound. Last year, trade between the US and Latin America topped US$850bn – one of the fastest-growing bilateral routes in the world, and on the 20th anniversary of the signing of NAFTA (the North American Free Trade Agreement), Mexico is now the US’s second biggest trading partner after China.
Trade with Mexico is now running at US$1.2bn per day. It buys more US exports than the four BRICs combined, than China and Japan combined and than the UK, Germany and Italy combined. Mexico’s exports were 19 times greater in 2011 (US$350bn) than in 1980 (US$18bn). Over the same period, the economy has undergone real diversification too. Thirty years ago, oil accounted for 50% of all exports, whereas today the figure is 15%. The country has recovered spectacularly from its “tequila crisis” financial slump in 1994, prompting Mexico’s former ambassador to the US Arturo Sarukhán to tell the conference that the situation has gone from “tequila crisis, to tequila party”.
The growth of the middle class in Mexico makes it a viable opportunity for both consumer goods’ exports and project finance transactions. The ease of export, based on proximity and freedom of trade, makes it a natural destination for US goods. Last year, though, the huge Etileno XXI petrochemicals transaction attracted US$3.2bn worth of investment – but none of it came from US banks. The trade volumes are huge, but the potential is there for them to increase exponentially.
Further afield, numerous speakers cited Colombia as a country to watch. Like Mexico, Colombia has had its security issues in the past, but things have improved drastically in recent years. The country is investing heavily in infrastructural, transport and energy projects, including the development of Bogota International airport, which the US Trade and Development Agency (USTDA) is partly funding. The USTDA is also active in Chile (funding wind, telecoms and aviation projects) and Brazil (it has an aviation partnership with the Brazilian government) and can help exporters find projects and clients in Latin American countries.
A worry for US exporters, though, is that they may be too late to the South American party. “We face serious competition for projects in these countries,” said Leocadia Zak, director of the USTDA. The Chinese, in particular, have been active in South America, but the free trade agreements which the US has already established with parts of the region may offer it an advantage. Furthermore, it’s likely that China’s presence in the region has more to do with the abundance of natural resources than the availability of projects.
Perhaps the most intriguing Latin American nation, from a US perspective, is Cuba – the forbidden fruit. Julia Sweig, senior fellow for Latin America at the Council on Foreign Relations, said the post-Castro era is “already underway”. Tentative reforms have already been made, with small businesses being given private licenses for the first time. The prospect of opening the gates to large-scale private finance is a long way off, but when it comes, Cuba’s infrastructure and industry are crying out for investment.