The US Export Import Bank (Ex-Im) is preparing to surpass its 2011 lending performance on the back of an unstable banking market that is grappling with increased regulation and Europe's struggling economies.
"Unfortunately it is going to be another busy year at Ex-Im Bank generally and in the aircraft division specifically," says Bob Morin, vice president, transportation at Ex-Im Bank in an interview with Flightglobal Pro.
"I say unfortunately because it means the commercial bank market is not there now, whether it be due to Basel III, the eurozone crisis or other reasons, the bank market is not stepping up to provide as much aircraft financing as it did in the past."
In light of the significant increase in the number and value of aircraft that are scheduled to be delivered by the aircraft manufacturing industry this year (from approximately $75 billion during 2011 to $100 billion in 2012), Morin says the bank is "on track" to exceed last year's total of $11.5 billion in aircraft financings.
"However, on a percentage basis of delivery financing, I hope the percentage of delivery financing provided by Ex-Im Bank does not increase," he admits.
Morin describes the recent lending behaviour of Ex-Im and the European export credit agencies as "very similar" with respect to their respective support for Boeing and Airbus aircraft. "During the past several years, the amount of funding provided by each of Ex-Im and the European ECAs has been almost the same, plus or minus ten aircraft."
Fewer used deals
While Morin expects another record financing year at Ex-Im Bank with respect to new aircraft, he does not anticipate an uptick in demand for Ex-Im supported financing of pre-owned, or used aircraft.
"Only a small portion of Ex-Im Bank's existing aircraft portfolio is for used aircraft and I don't see an increase in demand this year because the payment terms for pre-owned aircraft are quite limited under the Aircraft Sector Understanding," he says.
Morin points to an Ex-Im used aircraft deal completed in 2009 as evidence that financing pre-owned aircraft is "consistent with Ex-Im Bank's mission of supporting US jobs."
In 2009, Continental Airlines sold some of its existing Boeing 737-500 aircraft to Russian carrier UTair to make room for some new Boeing 737-900ER aircraft.
Then, last year at the Paris Air Show, UTair announced an order for 40 new Boeing aircraft.
"That is just what we want to see happen. When Ex-Im Bank finances the purchase by a foreign airline of used US-manufactured aircraft being sold by a US airline, Ex-Im Bank is supporting US jobs. This is because financing the foreign airline's purchase contributes to the US airline being able to acquire new US-manufactured aircraft, which supports US jobs.
"In addition, the foreign airline is able to try out the used US-manufactured aircraft and later the foreign airline ends up ordering new Boeing aircraft, which also supports US jobs."
One feature no longer available to Ex-Im Bank guaranteed lenders is the take-out option, which allowed commercial banks to purchase the right to sell Ex-Im guaranteed loans back to the export credit agency, at par, if there were significant changes in the commercial banks' funding costs.
The take-out option allowed lending banks to clear the loan off their books for a small fee, at no increased credit risk to Ex-Im with respect to the foreign borrower.
The take-out option was made available from the summer of 2010 to the autumn of 2011, when Ex-Im Bank decided to pull the option.
"The take-out option was offered to encourage banks to fund Ex-Im Bank guaranteed loans. But times have changed, and the circumstances are different now and there seems to be enough funding for Ex-Im Bank guaranteed loans from commercial banks and other financial institutions, so the take-out is no longer needed."
Morin admits some banks were affected and the banking market has "reacted a bit", but he doesn't believe either offering or discontinuing the take-out option "had a big overall impact one way or another, because for every bank that reduced its activity in funding Ex-Im Bank guaranteed loans, there was another bank that increased its activity."