By Ted Howard
The crisis highlighted the importance of Ex-Im financing. Here’s how treasury can use it.
When world trade was booming and credit spreads anorexic, calls in the major industrial countries to wind down their export credit agencies were commonplace. They operated in the black for the most part, but nonetheless looked like relics of industrial policy initiatives from years past. The financial crisis changed all that.
The nadir of the crisis saw monthly plunges in trading volumes of 40 percent or more for countries like Japan. The lack of private-sector export finance was a significant factor, although inventory management and lack of demand were significant drivers. Nonetheless, with 80 to 90 percent of trade involving some form of credit, insurance or guarantee, according to the World Trade Organization, the ECAs were soon back on center stage, playing a bigger role. In fact, many have expanded their programs significantly (see ECA Revival, below) as part of economic stimulus packages and other measures. This gave treasurers of MNCs a number of additional arrows in their export-finance quivers, most of which are still available.
BOEING’S BANK TO BANKS’ PARTNER
For example, the Export-Import Bank of the United States—once derided as “Boeing’s Bank”—pulled out the stops. In 2009 it authorized a record $21 billion of financing and guarantees. In the first quarter of 2010 it authorized a record $9.9 billion in loans, guarantees and insurance, more than three times the amount in the year-earlier period. Its total outstanding loans and credits totaled over $70 billion for the first time in early December.
Typically ECAs offer or insure chunks of debt for overseas purchasers of domestic goods. But in 2009, with banks reeling, they became more important partners to financial institutions, working with them to deal with issues of liquidity and capital constraints. Banks were having a difficult time lending on a long-term basis. The ECAs helped by providing that crucial part of the financing package at a competitive price, which was unavailable in other markets. ECAs increased the percentage of loans they would guarantee, made larger direct loans to banks and corporations, and offered hedging solutions to enable banks to bring low-cost funding to borrowers. For example, Ex-Im introduced a number of new products. One was its Take-out Option, which allows commercial banks to reduce their liquidity risks by selling their Ex-Im-guaranteed medium- and long-term loans back to the ECA.
The ECA’s advantages have dimmed somewhat with the partial revival of the commercial lending markets. ECAs still lend, but their loans are typically pegged at what’s known as commercial interest reference rates or CIRRs, which are based on domestic government bonds. In the US, it is currently 2.49 percent for facilities up to five years.ECAs also got more involved in the bond guarantee business. This was done repeatedly in the aircraft industry, according to the head of export finance at a European bank. Boeing used Ex-Im for loan guarantees, and it allowed customers to issue Ex-Im guaranteed debt. Also, Dubai-based airline Emirates successfully priced a US bond offering guaranteed by Ex-Im for three Boeing 777s. Japan’s ECA, Japan Bank of International Cooperation (JBIC) has reportedly done similar transactions.
THINK (AND FINANCE) GLOBALLY
Despite the efforts of the ECAs and the revival of private markets, there remain many gaps in trade finance. Some related programs can help treasurers bridge them. For example, a G-20 financial package agreed on last April offers further public guarantees in support of $250 billion of trade transactions.
While ECAs were key to stabilizing global trade, transaction levels are still down dramatically from before the crisis. The International Monetary Fund estimates that the “clean-up process” for the financial crisis is only at the half-way mark. And it notes that many private balance sheets—bank and corporate—remain vulnerable to secondary effects of the downturn, namely bad loans. In this context, the ECAs can still play an important part for treasurers seeking to assemble financial packages for their overseas customers.