Executive summary:
Following the recent appointment of Reta Jo Lewis as chair and president of the Export-Import Bank of the United States (“EXIM”), on February 24, 2022 EXIM announced (the “February 2022 Announcement”) that its Board of Directors (the “EXIM Board”) will vote on a new domestic financing initiative which would make EXIM funding available both for new U.S. manufacturing and infrastructure projects and existing ones looking to expand with an export nexus. EXIM announced that the initiative will also offer financing priority to environmentally beneficial, small businesses and transformational export area transactions, including semiconductors, biotech and biomedical products, renewable energy and energy storage.1
This program would make EXIM financing available to many projects previously outside the remit of EXIM’s activities, potentially also increasing such projects’ ability to raise private financing. It signals a growing trend of export credit agencies (“ECAs”) playing a bigger role in supporting their domestic markets.
Background: the U.S. Government’s call to strengthen U.S. supply chains and manufacturing capabilities
This initiative was prompted by President Biden’s executive order no. 14017 of February 24, 2021 (the “Executive Order”) that, against the trade and supply chain crisis caused by the COVID-19 pandemic, called for an all-of-government approach to strengthening and securing U.S. supply chains and manufacturing capacity. In the 100-Day Review of the Executive Order, the U.S. Government recommended that EXIM consider developing a financing program to fund the establishment and/or expansion of U.S. manufacturing facilities and infrastructure projects that support U.S. exports.
In December 2021, EXIM published its proposed domestic financing plan and solicited feedback and comments (the “December 2021 Proposal”).2 The consultation process ended on January 20, 2022 and it is reported that the proposal received widespread positive feedback and support. The EXIM Board will vote on the initiative later this spring.
Details of the proposed domestic financing program
The details of the new domestic financing program, which seeks to expand EXIM’s foreign buyer financing program to domestic transactions, will be confirmed in spring 2022. However, it is generally expected to be launched on terms not dissimilar to the hypothetical parameters published in the December 2021 Proposal which are as follows:
- Export Nexus. EXIM expects the program to be available for new manufacturing or infrastructure projects or those that are looking to expand that have a nexus to exports of between 25% to 50% based on production or capacity. That means a manufacturing project needs to export at least 25% of its goods or an infrastructure project (such as a port) needs to export at least 25% of its traffic. Importantly, this threshold looks through the supply chain to apply to “indirect exports”, extending the program to transactions that help support exports. “For example, if a company sells 50% of its output to a domestic company, which in turn uses 50% of the supplier’s inputs for exports, this transaction would meet the 25% threshold”, explains EXIM.3
- Pricing. The program would not be classified as “official export financing”, so would not be subject to the OECD Arrangement terms and conditions. Instead, EXIM indicates that an eligible transaction would need to comply with its own budget and World Trade Organization (WTO) rules, meaning that transactions would need to “break even” and the agency would be required to provide “market” pricing. EXIM indicates that it would do so by relying largely on direct market proxy, e.g. lending on identical terms and conditions as part of a syndicate.
- Jobs supported. Under the existing foreign buyer financing program, EXIM may look to the number of U.S. jobs the financing would support to determine the maximum financing available. Applying the same criterion to the new domestic program, EXIM indicated it may take into account the number of U.S. jobs per year involved in the construction and ongoing operation of the project during the term of the financing provided.
- U.S. flag shipping. Already required by EXIM in certain circumstances, U.S. flag shipping may also be a requisite on major discrete equipment imports specifically sourced for the project. However, “items that had been imported with no expectation or foreknowledge that they would end up being purchased with EXIM financing would not require U.S. flag shipping”, explains EXIM.4
While this was not covered by the December 2021 Proposal, the February 2022 announcement indicates that the program will also offer financing priority to environmentally beneficial, small business and transformational export area transactions, including semiconductors, biotech and biomedical products, renewable energy and energy storage. Details of this “financing priority” and particular sector focus are not yet known. It remains to be seen whether recent events in Ukraine affecting the European energy market will broaden the scope of transactions that are seen as a “financing priority”.
Commentary
Previously available to domestic exporters only, the proposed new program (while still expected to require an export nexus) offers a significant opportunity for U.S. manufacturers that are not exporting a majority of their production, as well as ports and other domestic infrastructure projects that would help facilitate exports, to access EXIM financing. The expectation is that EXIM’s involvement in domestic projects could also lure in greater levels of private sector capital to these projects, providing the much needed boost to the U.S. manufacturing and infrastructure sectors.
The proposal also puts EXIM on a competitive footing with other ECAs which already have domestic financing programs in place, although the 25%-50% export nexus proposed by EXIM is still a higher threshold than that of other ECAs, which generally only require a 20% export content (or as little as 5% in the case of UK Export Finance). Various commentators to EXIM’s call for feedback urged EXIM to lower the export nexus in line with the 20% export content of other ECAs. Nonetheless, the initiative would provide significant additional support towards creating a level playing field for American companies competing in overseas markets.
We continue to monitor announcements relating to this new program and look forward to keeping you updated.