In the fiscal year 2008, US Exim authorised US$14.4bn in financing in support of an estimated US$19.6bn-worth of US exports of goods and services. This marked a 22% increase compared to the previous year, and the bank’s activity during the first quarter of 2009 suggests business is only going to get busier. Jeffrey Abramson, vice-president of US Ex-Im’s trade finance and insurance division, speaks to Rebecca Spong about business prospects and the future of the export finance market in the US.
GTR: Earlier this year, US Exim closed two direct loans totalling US$165mn to finance purchases of Boeing aircraft and General Electric and CFM aircraft engines.
Is there a trend towards US Exim more frequently providing direct financing?
Abramson: We have had the ability to provide direct loans for a long time. We just haven’t had as much call to be a direct lender in recent years. This is now changing to a degree.
However, it is an important issue for us to adhere to our mandate which states that we should not compete with commercial financing. Therefore, we are really not out there marketing or pushing our direct lending capacity.
The position we are taking is that if direct lending is the right solution to help exporters, we are ready and willing to do it.
We have seen increased demand for direct lending, often at the behest of the commercial lender. They often have a client they want to support but they are facing high costs of capital or have issues accessing liquidity, and they come to us and ask us to step in and act as a funder of a deal. We are pleased to work on that basis. We can keep the commercial lender in as a servicer and administrator of the transaction, and this allows us not to crowd out the private players.
GTR: Which US Exim products are you seeing greatest demand for?
Abramson: We are definitely seeing increased demand for certain products such as short-term insurance cover and working capital guarantees.
US companies are also approaching us to support longer-term project financing, such as aircraft financing and other big ticket deals. There is a greater need for us to fill the financing gap.
The host governments of large-scale projects such as power or water plants are in some cases committed to developing their power or water plant projects to help support their country’s economic and social development. But financing them is becoming far more challenging, so we are becoming a more popular source of support.
GTR: Is US Exim seeing increased activity in the developed world as well, given the extent of the economic downturn?
Abramson: To a certain extent. At the end of 2008, we launched a programme to cover risk on confirmations of letters of credit issued by Korean banks.
This is a developed market where traditionally we haven’t seen a lot of demand for cover because the commercial market had a lot of appetite for risk there.
In the current market, this picture has changed and this Korean initiative is a good example of a developed market where we are not used to operating but where US lenders and exporters are asking us to step in.
We chose to act in this region due to the huge trade volumes between US and South Korea. Commercial capacity stepped back, but we very much wanted to maintain those high volumes of trade.
We are looking at other markets where we can get ahead of the curve and put some capacity in.
GTR: Which regions in particular are you looking at?
Abramson: We have recently authorised some short-term credit lines for Indian banks, where there are lots of opportunities for US companies, and we are trying to facilitate that.
What we have noted is a change in the character of borrowers within key emerging markets.
In big corporates in Brazil and Mexico for instance, these companies previously had access to international capital markets and lots of domestic liquidity, and had no reason to pay for export credit agency (ECA) financing, and there was no reason for us to step in as the commercial market was there to facilitate commerce.
That is now changing and we are getting calls from bigger corporates in emerging markets who are now looking to access whatever sources of finance that are available.
For example, as was reported in the press, Petrobras has discussed potential financing arrangements with us and the Overseas Private Insurance Corporation (Opic). Petrobras is a company that has tremendous requirements to finance their new finds, and I suspect that they will acknowledge that their access to capital markets and the local Brazilian banking sector may not be sufficient to meet these requirements.
GTR: At the end of 2008, the US and Chinese governments signed a framework agreement to improve access to trade finance, aiming to increase the provision of short-term trade finance facilities via their country’s Exim banks. What trends have you seen with US Exim’s business with China?
Abramson: We have had some success during the past year under the framework agreements that we have in place with the Chinese government. We have completed a large transaction with a US company involving the financing of rail manufacturing equipment, and we have done several transactions for US medical equipment being imported into Chinese hospitals.
In terms of regular commercial business, we find that most of the Chinese banks are still able to finance a lot of their own business.
GTR: How do you see US Exim’s business volumes developing over the course of 2009?
Abramson: I think it is fair to say that based on experiences of the first quarter, we are operating above the business volumes we saw last year.
The bank’s aircraft group has said in public forums that it is looking at doing around US$7-9bn-worth of business this year, compared to the US$5.5bn recorded in 2008.
In terms of the short-term letters of credit business, we are already seeing greater demand compared to last year.
US Exim takes action
In November 2008, US Ex-Im decided to allow senior US Ex-Im officials to approve requests for up to US$2.9bn in insurance cover involving letters of credit issued by 11 Korean financial institutions. This decision followed surveys of relevant confirming banks and brokers that suggested market instability had led to a gap in commercial capacity to support letters of credit issued by Korean institutions.
In November last year, US Ex-Im also increased access to direct lending. In addition to its existing authority to make direct loans, the bank can work with lenders to structure transactions to adapt to their financial conditions. This is to be done on a case-by-case basis, and it is intended that the servicing of direct loans will be done by commercial banks.
US Ex-Im has also modified its working capital loan guarantee product, most frequently used by small-business exporters. Changes to the product, introduced at the end of 2008, include US Ex-Im’s new ability to guarantee working capital loans to companies that do not directly export themselves, but sell their goods or services to other US exporters.
US Ex-Im will also cover warranty letters of credit up to 20% of the loan amount or US$1.5mn, whichever is lower, for a 12-month term. The bank will also consider reducing collateral requirements for letters of credit to 10% of face value, decreasing from the 25% requirement.
In December 2008, the US and China announced a new partnership to increase trade-related finance to emerging markets. The two governments expect that their efforts will generate total trade financing for up to US$38bn in exports over 2009. US Ex-Im is set to provide US$4bn in new short-term trade finance facilities and US$8bn in new medium and long-term trade finance facilities for the export of US goods and services to the emerging markets. China Ex-Im similarly pledged US$8bn in short, medium and long-term trade finance facilities to support Chinese exports to emerging markets.