In June 2015 Congress will have the chance to decide the fate of the Export-Import Bank. If it survives, business will go on as usual, but if it's eliminated it may have an effect on certain industries and stocks in the financial services, energy, and air transportation industries, but there are ways to hedge your risk.
There are many sides to the growing debate over the necessity, and even the legality, of the Export-Import Bank. While the bulk of loans made by the Bank are to "big business" like Boeing (NYSE: BA), in FY 2013, nearly 90% of Ex-Im Bank's transactions were for small businesses. This has the business community split over the Ex-Im Bank's role in the market.
Some, including conservative Republican groups, argue that the U.S. Government shouldn't be in the business of "making money" because it hurts the private sector and job creation. Others, including the U.S. Chamber of Commerce and National Association of Manufacturers, argue the Bank is self-sustaining (it gave back $1.2 billion to the U.S. Treasury last year) and is better able to service the small business community with the profit made from lending to big business - in this way big business is subsidizing small business and the Export-Import Bank facilitates that process.
Both arguments have considerable support and Congress must make a decision about which one prevails by June 2015.
The Obama Administration requested a 5-year extension to the current charter which expired on September 30, but instead, due to a political challenge, the charter was only temporarily extended to June 30, 2015. With longtime supporter Eric Cantor replaced by a House Majority Leader that wants the Bank dead, Republican rule in the Senate, and the decoupling of funding from the Bank's authorization (funding ends at the end of 2014), the existence of the Bank may be in real jeopardy for the first time in 80 years.
The Export-Import Bank was originally established by President Franklin D. Roosevelt on February 2, 1934. Specifically, it was created to help facilitate trade after a period of economic distress. The Treasury holds no control over the Bank, but it does hold the capital stock creating a "related-party" relationship between Ex-Im Bank and the U.S. Treasury. Primarily focused on providing commercial credit facilities for importers of manufactured goods in the U.S, the Ex-Im Bank currently offers four financial products: direct loans, loan guarantees, working capital guarantees and export credit insurance. Prior to this year, the Bank was renewed by Congress 16 times.
A Typical Deal
To better understand how this will affect the business community let's review a typical Ex-Im Bank deal. Company USA is located in the USA and wants Company Asia, located in Asia, to buy its cars. As a sweetener, Company USA gets the Export-Import Bank of the United States to provide a loan to Company Asia so that it can purchase the cars. The Export-Import Bank makes money on the spread over the cost of funds and what they charge Company Asia. Company USA benefits by increasing sales for its products, which helps sustain the jobs behind those sales, and Company Asia benefits by receiving attractive financing in order to pay for the cars.
Ex-Im Banking Customers
These are the types of deals being carried out every day by the Ex-Im Bank and its customers. The Ex-Im Bank is a banker of choice to many across the world, but who exactly are the "many"? To gain a better understanding of the geographies, industries and companies most affected by the elimination of the Bank, let's look at a breakdown of the actual loan portfolio by geography as of Sept. 30.
Source: Export-Import Bank Annual Report
Asia is the clear leader with 41% of the loan volume, followed by Latin America & Carribbean and Europe. If the Bank is eliminated the sales made with these loans will decline as buyers search for the same product in other countries with better credit options. The seller in the U.S. will have to lower their bid to make up for the lack of inexpensive, government-backed financing.
Let's look at the breakdown of the loan portfolio by industry.
Source: Export-Import Bank Annual Report
Air Transportation leads the pack, even more so than Manufacturing, with Energy bringing up the rear. The top 5 aircraft manufacturing companies are United Technologies (NYSE: UTX), Boeing Co, Lockheed Martin (NYSE: LMT), General Dynamics Corporation (NYSE: GD), and Raytheon Company (NYSE: RTN).
The lack of funding will make bids on foreign soil less competitive and therefore less attractive. Larger companies, like the ones listed above, would be able to secure guarantees for their bids from other banks, but not at the same low rates.
Finally, let's look at the top borrowers of the Bank's funds.
Source: Export-Import Bank Annual Report
Pemex is a public entity of the Mexican Government. Mexican officials hold 15 seats on the Board of Directors and the Chairperson is the Secretary of Energy. The elimination of the Ex-Im Bank may result in more than lost profits, but a loss of leverage with the Mexican Government.
Sadara Chemical Company was formed in 2011 as a joint venture between Dow Chemical (NYSE: DOW) and Saudi Arabian Oil Company. The elimination of the Ex-Im Bank may increase Dow Chemical's cost of capital and/or decrease the rate of growth.
Papaua New Guinea LNG (PNG LNG) is operated by Exxon Mobil (NYSE: XOM) affiliate Exxon Mobil PNG Limited. The elimination of the Ex-Im Bank may increase the cost of capital and/or decrease the rate of growth at Exxon Mobil.
Australia Pacific LNG is a joint venture partnership between ConocoPhillips (NYSE: COP) and Sinopec (NYSE: SNP). The elimination of the Bank would likely result in a decrease in growth for both and/or an increase in the cost of capital.
Ryanair (NASDAQ: RYAAY) is an airline in Europe operating more than 1,600 daily flights. According to the company website Ryanair operates a fleet of more than 300 Boeing 737-800 aircraft. It goes on to say that:
Ryanair has recently announced firm orders for a further 280 new Boeing 737 aircraft, as well as options for 100 more Boeing 737 MAX 200s...
This deal with Boeing was likely financed with funding from the Ex-Im Bank. The elimination of the Bank may make it harder for Ryanair to secure low financing and/or cut into Boeing's sales.
In summary, the majority of the loan products are used by Asian based companies. The two dominant industries benefiting from the services of the Bank today, both at home and abroad, are Air Transportation and Energy. Your portfolio may be affected if it's heavily invested in the companies or industries receiving the most funding.
How To Hedge Your Risk
One way to hedge your risk is by investing in those companies that stand to benefit from the elimination of the Bank.
The Private Export Funding Corportion (PEFCO) is owned by 26 commercial banks, one financial services company and 6 industrial companies. The function of the group is to perform the same services as The Export-Import Bank in the private sector. Indeed, PEFCO is supervised and funded by the Ex-Im Bank.
The Ex-Im Bank provides PEFCO with a credit guarantee until Dec. 31, 2020. In exchange for this guarantee the Ex-Im Bank has supervision over PEFCO's major financial management decisions, including the approval of individual loan commitments and terms.
Without the Ex-Im Bank, PEFCO may lose the Ex-Im Bank's guarantee, but it may also gain autonomy and the additional loan volume as Ex-Im Bank customers search for alternative forms of financing.
The following is a list of shareholders as of September 30, 2013.
Source: Ex-Im Bank Website
The elimination of the Ex-Im Bank may lead to the growth of PEFCO shareholders due to a growth in volume. In other words, the profit the Ex-Im Bank brings to the Treasury would find its way to the private sector represented by the names listed above. The largest shareholder is JPMorgan Chase & Co (NYSE: JPM), followed by Bank of America (NYSE: BAC). Boeing is not only one of the primary beneficiaries of loans through the Export-Import Bank, as evidenced by its relationship with Ryanair, but it's also the fifth largest majority shareholder in PEFCO. At least we know Boeing is well informed.
Conservative Republicans argue the Bank subsidizes big business and supports "crony capitalism", while liberal Democrats say the Bank helps keep jobs in the US. Both statements are true to some extent, relationships do seem a bit incestuous, and job creation follows sales, but what about the impact of the Ex-Im Bank on your portfolio?
If the Bank is eliminated it could stunt growth for:
- small and big business that rely heavily on sales from China,
- small and big business in the energy sector including Exxon Mobil, ConocoPhillips, Sinopec, and Dow Chemical; and,
- small and big business in the air transportation sector including Boeing and Ryanair.
If the Bank is eliminated it could improve growth for:
- PEFCO shareholders due to additional deal flow for corporate banking and fund raising products; and,
- private sector companies that offer the same products and/or already have strong banking relationships in Asia, Energy, and Air Transportation such as J.P. Morgan Chase and Bank of America.
As June 2015 grows closer, the risk of Ex-Im Bank elimination grows stronger, but there are ways to hedge your risk by increasing exposure to those companies and organizations like PEFCO that stand to benefit.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.