Ex-Im Bank: Reimagine, Don’t Exit

Boris Ryvkin

Few federal agencies attract as much derision and contempt from free-market conservatives as the Export–Import Bank of the United States (the “Ex-Im Bank”), and for a raft of sensible reasons. The Ex-Im Bank is regarded as a crude tool of corporate welfare and as a barnacle-like holdover of the Rooseveltian New Deal (it was founded in 1934) that operates on the fringes of the U.S. export market. As noted by George Will in 2019:

Ex-Im has always been peripheral to U.S. exporting. In the four years since Ex-Im became largely dormant, the portion of American exports it subsidized fell from less than 2 percent to 0.3 percent — and exports have risen.

Critics point to the fact that the Ex-Im Bank was not able to reach a quorum to guarantee loans above $10 million for years prior to spring 2019 and is often only semi-functional. They also note that a disproportionate amount of the agency’s assistance ends up benefiting large, politically connected companies such as General Electric, Boeing, or Caterpillar, which capably export their products overseas without the Ex-Im Bank’s help. In any case, again referencing George Will’s article, market efficiency, not political criteria, should determine credit allocations and financing decisions. The best course of action, therefore, is to let the agency die by not renewing its charter.

Is that the end of the analysis, or is there, perhaps, another way of looking at the Ex-Im Bank that might lead us to give it another chance? Could the Ex-Im Bank be retained and restructured into a vehicle better suited to the geopolitical challenges confronting America in today’s world? To answer these questions, we should consider how the Ex-Im Bank operates on a granular, transactional level for a particular financing. Specifically, if the Ex-Im Bank provides a guarantee to a buyer of U.S. manufactured products for export, what are the mechanics of that guarantee, which entities are parties to the transaction and what are their obligations to each other?

The Ex-Im Bank features prominently in aviation-finance transactions. Let’s take a typical transaction in this sector that shows how the bank works, and the value it can provide. In transactions involving multiple jurisdictions, overlapping and sometimes conflicting regulatory regimes, as well as multiple subsidiaries and affiliates between the original buyer of the aircraft and the ultimate user, a multi-level lease and sublease structure is often used. This is especially popular with smaller acquirers of helicopters or light aircraft, which may negotiate separate financing arrangements for each purchased unit. The purchaser lessor issues a promissory note to a private lender in the amount of each aircraft and the Ex-Im Bank guarantees up to a fixed amount of the principal and interest payable on the loan. The lessor then acquires and leases the aircraft to a sublessor. The sublessor will often have its own guarantor of the sublessor’s lease obligations. The sublessor could then further sublease the aircraft until it reaches the end user.

At each stage of the process, the transaction parties rely on separate guarantees to the effect that (i) a guarantor’s obligations are cross-collateralized (through the establishment of a security trust, escrow, or other structure) and (ii) such guarantor can negotiate extensive indemnification protections, subrogation and/or reimbursement rights from the defaulting parties whose obligations it guarantees. In this complex set of arrangements, the Ex-Im Bank, in the event of the purchaser lessor’s nonpayment of its issued notes, typically demands and receives reimbursement rights upon demand for any amounts it is required to pay under its guarantee. Furthermore, the agency can step into the shoes of the private lender to pursue all remedies available under applicable law against the borrower and collect on all pledged, assigned, and/or otherwise secured collateral.

To put all this another way, the Ex-Im Bank guarantee is not provided without recourse rights or as a blank check of taxpayers’ money. The mechanics of how the guarantee is structured, the steps needed to invoke it, and the agency’s reimbursement and indemnification rights after making any payments make it a low-risk and practical tool to give the other parties, particularly a private lender uneasy about financing a multijurisdictional project, the comfort to proceed with and ultimately close the deal.

Most of the agency’s critics argue that it distorts lending rates that should be set by the market. Those who stop short of calling for the end of the Ex-Im Bank altogether seek to balance its benefits with its costs while also acknowledging the value of risk mitigation. Is the Ex-Im Bank’s guarantee valuable if it means getting a specific transaction closed that otherwise would not have been? Yes, especially when considering not just the gain to the transaction parties themselves, but also the work provided to myriad service companies assisting with the transaction and third parties (vendors, customers, suppliers, etc.) who would wish to see the deal done.

Could the same transaction have been done without the Ex-Im Bank’s involvement through, possibly, a consortium of lenders willing to finance a risky, cross-border sale and lease venture involving companies with little-to-no market share or credibility in the end user’s country? Maybe, but at what cost? And, more important, at what cost relative to the low risk of the Ex-Im Bank’s involvement? From a transactional perspective, the Ex-Im Bank guarantee almost performs the function of a low-cost bridge loan, but without an up-front payment. There’s value in that.

To take another tack, if the Ex-Im Bank’s role in supporting U.S. exports is statistically marginal, that might suggest the agency is not useless but underused. Maybe we could take its functions that do work and redirect them to something that could provide immediate gains for U.S. policy by supporting strategically useful investment. Specifically, for certain transactions where the contracting parties cannot expressly provide in their relevant documentation that the transactional purpose is the promotion of U.S. exports, the Ex-Im Bank could be used to provide guarantees to U.S. companies (particularly emerging growth companies, start-ups, smaller joint ventures, and midsize companies) to help them (i) gain footholds in high-risk and politically unstable emerging markets and (ii) successfully compete for bids and development tenders. The most pressing area where this approach could be used today is the great game that the U.S. finds itself in with China as the latter’s state-owned enterprises provide financing at a loss to developing countries as part of the Belt and Road Initiative.

There is pushback here as well. We cannot “out-China” China, some critics claim. Just because the China Development Bank, with billions of dollars in assets, does what it does, the U.S. cannot and should not follow suit. “Countering the Belt and Road Initiative is a foreign policy issue, not an Ex-Im issue,” wrote Diane Katz of the Heritage Foundation. The U.S. should, instead, “help establish and enforce new rules of the road; promote better standards, transparency, and a new vision for regional connectivity; shine a light on the risks and consequences of the [Belt and Road Initiative] where necessary; [and] aid friendly countries subject to Chinese economic coercion.” Laudable goals, but what does this mean in the context of real transactions with real investors, lenders, credit facilities and security arrangements? If the Ex-Im Bank’s low-risk participation in an auction pitch by a U.S. company to an overseas seller or lessor (private or government) makes the difference between that company or a Chinese company getting the contract, which outcome would most benefit the U.S.? Priority should be given to getting actual deals done rather than debating frameworks from the sidelines.

The Ex-Im Bank should not be viewed as a mere commercial, bureaucratic irrelevance to be discarded. It can instead be reframed and restructured as a vehicle to aid overseas strategic investment in competition with our rivals. This could make it an asset that serves an important geopolitical or national-security purpose. Effectively managed with an eye toward concrete, transactional benefits for U.S. companies that can be converted to diplomatic influence (leaving the specifics of the deals to the diligence efforts and good-faith negotiations of the private parties), one could even argue that American taxpayers would be better served if some of the annual defense budget were reallocated from the Pentagon to a reformed Ex-Im Bank.

There has never been a time when trade and investment were not inextricably linked with foreign policy. Looking ahead, the U.S. would be better served if policymakers worried as much, or more, about expanding American companies’ market shares in emerging regions of the world and winning investment bids than about where to send the Fifth Fleet. That is certainly how our main adversaries seem to be thinking about their foreign policies these days.

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