For several years, until May 2019, the Export-Import Bank of the United States (Ex-Im Bank) lacked sufficient directors to field a quorum for approval of any new commitments for transactions other than to approve short-term to medium-term transactions (i.e., those with terms of seven years or less) up to $10 million, which in turn effectively rendered long-term financings of high value equipment impossible. (For additional context, see Holland & Knight's previous alert, "President Trump, the Ex-Im Bank and Aircraft Finance," Jan. 20, 2017, for an assessment of the Ex-Im Bank at the start of the Trump Administration.)
However, on May 8, 2019, the U.S. Senate finally confirmed the necessary three additional directors required to achieve board quorum, at which point full capacity was restored. Subsequently, in December 2019, the Ex-Im Bank's authorization was extended through December 2026, with a statutory limit on lending at any one time set at $135 billion. It is worth noting that the reauthorization was bipartisan and, at seven years, the longest in the agency's history.
Reauthorization's Strategic Goals
Key strategic goals of the reauthorization included providing export finance support to U.S. small and medium-sized enterprises, as well as protecting U.S. competitiveness and enhancing U.S. national security by leveling the playing field for U.S. exporters. These goals are particularly apparent in two congressional mandates, namely 1) the "Small Business Mandate" and 2) the "Program on China and Transformational Exports Mandate."
It is not clear whether the new Biden Administration will want to adjust these priorities or their features. That said, given the effects of the COVID-19 pandemic, expect a continued emphasis on supporting small businesses, many of which will be in the transportation sector. (For example, in 2020 the Ex-Im Bank authorized guarantees for a number of facilities under the agency's Supply Chain Finance Guarantee Program benefiting exporters in the aviation sector.) Note that small businesses represented 38.6 percent of total authorizations in 2020, well above the current target of 30 percent.
Regarding the China program, the broader political consensus around the need to both neutralize export subsidies for competing goods and services (financed not only by official Chinese export credit but also, for example, with the coordinated participation of state-owned banks as well as linked aid) and advance U.S. comparative leadership in so-called "transformative" industries – such as artificial intelligence, wireless technology (e.g., 5G), renewable energy (and associated storage), biotechnology and quantum computing – suggests that this program will also continue as a focal point for the Ex-Im Bank. It remains to be seen as to what extent this will impact transportation. For example, transportation does not directly feature in this list as a "transformative" industry, but there are clearly related technology related subsets of the transportation industry that are included. It is of note that this relatively new program is, prior to any incoming administration input, expected to absorb a significant amount – not less than 20 percent – of the agency's total financing authority.
It will also be interesting to see to what extent another set of congressional mandates – the "Environmentally Beneficial Goods and Services Mandate" and "Sub-Saharan African Mandate" – will bring about greater Ex-Im Bank authorizations given the Biden Administration's increased emphasis on the environment and in light of China's influence in the Sub-Saharan region (the so-called "debt trap diplomacy") alongside the wider China/U.S. issues described above.
The Ex-Im Bank has introduced various COVID-19-related measures focused on a) providing liquidity relief under existing product lines (including pre-delivery/export financing, supply chain financing guarantees and working capital guarantees) – essentially by way of waivers, (automatic) extensions and generally introducing much greater levels of flexibility in terms of claims and documentation), and b) introducing a new bridge financing with several hard-wired "options to extend" decision points during the repayment term, intended to provide foreign purchasers with short-term funds required to fund the continued purchase of U.S. goods and services. Borrowers are incentivized to refinance as soon as possible by the potential to recoup a portion of the exposure fee relating to any unextended period. In addition, where existing transactions have sufficient accumulated collateral (for example, aircraft), it is understood that more bespoke forbearance solutions have also been structured. Expect this to continue as wider global economic conditions caused by COVID-19 remain uncertain and volatile.
Aircraft represent the single-largest exposure in the Ex-Im Bank's portfolio, currently at 37.6 percent for Fiscal Year (FY) 2020, down slightly from 41 percent for FY 2019. Given the retrenchment of many commercial banks that were traditionally active in the aircraft space, expect demand for Ex-Im Bank support for new aircraft (as well as spare parts and engines, maintenance and service contracts, and aircraft conversions – less well known goods and services that are also eligible to receive Ex-Im Bank support) to be very pronounced over the short to medium term. Somewhat ironically, the effects of COVID-19 may also make it incrementally easier for all applicants to satisfy the "economic impact" and "additionality" analysis introduced in 2020. (See Holland & Knight's previous blog, "Export Credit Agency Financing and the Aviation Industry: What Does the Future Hold?", July 16, 2020.) Other factors that are likely to support demand in the aviation space include not only the inherent competition that flows from the very active role of the European Export Credit Agencies (who have also come out of a recent more dormant period, albeit for very different reasons) in supporting Airbus deliveries, as well as the unique challenge that the U.S. industry faces concerning the backlog of more than 400 Boeing 737 MAX aircraft for which deliveries only recommenced in late December 2020.
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