March 2, 2009
Growth Through Exports: Taking the Risk Out of Selling Abroad
By DAN RENBERG, Partner, Arent Fox LLP, Washington, DC
In the challenging economic climate of today, companies need to explore new options to expand sales and reduce risks. Whether you sell products, services, or technologies, domestic demand in 2009 may not be sufficient to meet your revenue targets, which is why international sales may provide additional opportunities for revenue growth by increasing your sales volume or offering the chance to sell the same product at higher margins because of higher demand.
Export Finance Strategies for the Transit Sector
Foreign purchasers of U.S. goods, services, and technology might be attractive sources of new sales, but there is often a perceived disconnect between their willingness to buy and their ability to pay.
During a panel discussion at the 2008 APTA Annual Meeting in San Diego, experts from the transportation and finance sectors joined federal representatives to discuss export finance strategies that APTA members can use to increase their foreign sales.
They stressed that emerging markets in particular are trying to create and expand public transit fleets and embark on new passenger rail projects, and emphasized the critical role of export finance solutions in satisfying the needs of foreign buyers around the globe.
At a time of credit squeezes, fluctuating markets, currency volatility, and declining demand in many sectors, transit industry companies must consider using such export finance tools as those offered by the Export-Import Bank of the United States (Ex-Im Bank) and some private-sector solutions. These financing products will protect against payment defaults by foreign buyers; reduce the need for substantial up-front cash payments, making U.S. products, services, or technologies more affordable; and provide critical working capital and liquidity to exporting companies.
Ex-Im Bank, which began financing exports in 1934 during the Great Depression, has operated as an independent federal agency since 1945. It has financed more than $450 billion in U.S. exports, including such infrastructure projects such as highways, airports, and public transportation (buses, subways, and rail).
Filling the Credit Gap
Ex-Im Bank and private export financing solutions can help you fill the credit gap that has emerged in recent months. Foreign buyers may be interested in your clean fuel buses, engineering services, farecard collection machines, or brake pads, but they may seek help to finance their purchases or you may need additional working capital to fulfill a contract.
Gary Mendell, founder of Meridian Finance Group in Los Angeles, said: “Companies in less developed markets face scarce capital, limited access to hard currency, and high interest rates, making it difficult or impossible to import without payment terms, but exporters/lenders face greater risk of defaults.” He cited typical export credit risks including customer bankruptcy or insolvency; slow payments and other cash flow problems for the buyer; general economic conditions, expropriation, and other political risks; currency fluctuations; and changes in foreign governments, policies, and regulations.
Possible solutions from Ex-Im Bank include working capital loan guarantees (pre-export financing) where you need help in fulfilling an export contract, and buyer financing options that include direct loans to foreign buyers, loan guarantees, and export credit insurance. The private sector also offers export credit insurance options.
Generating Working Capital for an Export Transaction
The U.S. Small Business Administration and Ex-Im Bank offer working capital financing that involves a guarantee of a bank loan to a creditworthy U.S. company that needs help fulfilling its export sales orders and to generate immediate cash.
Under this program, exporters can use the loan proceeds to pay for raw materials, equipment, supplies, labor, and overhead to produce goods and/or provide services for export and to purchase finished products for export as well. This process requires no minimum and maximum transaction amounts, and Ex-Im Bank will typically guarantee 90 percent of the bank loan—including principal and interest—making the loan far more attractive to U.S. commercial bankers.
Cash or Credit: Helping a Buyer Afford Your Price
You can help your foreign buyer afford its purchases by using Ex-Im Bank loans, loan guarantees, or credit insurance. Ex-Im Bank prefers to guarantee loans made by banks located in the U.S. in support of exports of goods, services, and technologies, with the commercial bank applying for the guarantee of its loan to a foreign borrower.
Usually, the loan guarantee will cover 100 percent of the principal and interest remaining after the buyer makes a 15 percent cash down payment. The repayment terms vary based on the borrower’s financial, industry, and country conditions, and certain international agreements among governments. The lender sets the interest rate and Ex-Im Bank adds an up-front fee to cover some of its exposure. Essentially, the exporter receives payment from the commercial lender as soon at it has shipped its product(s), provided its services, or transmitted its technology (in the case of software).
This federal agency demonstrated its global reach a few years ago when it helped Tanzania’s East African Line Ltd. purchase three buses for intercity transportation from Blue Bird of Macon, GA, for $327,000, guaranteeing a Riggs National Bank loan that had a five-year repayment period.
The Role of Insurance
You can buy insurance if you don’t have total confidence that your buyer will pay. Ex-Im Bank insurance has allowed U.S. bus manufacturers to sell in markets such as Ghana and Cameroon and exporters of used buses to sell into markets like Mexico without fear of nonpayment by the foreign buyer.
Both Ex-Im Bank and private-sector credit insurance options are available, with many qualified insurance brokers who specialize in this kind of insurance: Ex-Im Bank’s web site maintains a list of current active brokers by state. Short-term insurance, usually less than 180 days, permits you to extend competitive credit terms (open account, net 90 days, for example) while minimizing risks. Effectively, it is like health insurance, homeowner’s insurance, or car insurance, since you purchase a policy to cover the risk of loss. In this case, it would be the failure of the buyer to pay for what you have sold it.
Ex-Im Bank requires that products must have at least 51 percent U.S. content and eligible services must be performed by U.S.-based personnel, whereas the private sector does not mandate those requirements.
Export credit insurance insures shipments (including where letters of credit are used) and usually covers 95 percent of commercial losses based on insolvency, bankruptcy, and default; political losses because of war or revolution; cancellation of an import or export license; and currency inconvertibility. The insurance premium an applicant/exporter pays will vary by the risk of the foreign buyer and the amount of the export.
Reducing Risk in Africa, Mexico, and China
Allan Silver of North American Bus Industries Inc. noted ways to mitigate export finance risk, including requiring a larger down payment; offering a shorter term; providing greater frequency of payments, front-loaded payment schedules, or letters of credit; and using “cross-border experts” such as Ex-Im Bank and multilateral agencies (International Finance Corporation/World Bank, Inter-American Development Bank, Multilateral Investment Guarantee Agency).
Silver described a transaction in which the sovereign government of a sub-Saharan nation committed to purchasing 1,000 transit buses for $159 million, including freight and spares, with repayment expected to take five to 10 years from the delivery of the last 100 buses. NABI weighed three options, including Ex-Im Bank, which offered to guarantee payment fully and offered seven-year terms, with 85 percent covered at a rate of 8 percent, and a private insurer that offered competitive terms.
Another example: Ex-Im Bank financing helped Cubic Corporation sell $5 million of entry/exit gates and ticket vending machines to Sistema de Transporte Collectivo Metrorrey in Monterrey, Mexico, for three light rail lines and more than 50 stations. In this transaction, the buyer financed 85 percent of the contract price at five-to-seven-year terms, with a commercial bank also financing the 15 percent cash down payment.
Similarly, Cubic has used Ex-Im Bank loans to extend credit terms to the transit systems in Shanghai and Guangzhou, China, which purchased high-tech fare collection gates and ticket vending machines. The agencies purchased the fare equipment on 10-year terms with pricing designed to match export finance offered by competitors in other nations whose own Ex-Im Bank-like agencies made concessionary terms available.
More Tools for Your Toolbox
Ex-Im Bank’s leadership and staff have been modifying the agency’s policies to help exporters weather the challenging economic conditions. Late last year, then-Treasury Secretary Hank Paulson announced an agreement with his Chinese counterpart to increase the availability of trade finance between the two nations by $38 billion, relying in part on the U.S. Ex-Im Bank to make available an additional $12 billion in short, medium, and long-term trade finance for U.S. exporters trying to sell into China.
Earlier in 2008, Ex-Im Bank created new internal authority to approve requests for up to $2.9 billion in insurance cover involving letters of credit issued by 11 Korean financial institutions, after learning from banks and brokers that instability in the Korean market had led to a significant gap in commercial capacity to support letters of credit issued by those institutions.
The agency also modified its Working Capital loan guarantee product, which is of particular use to small business exporters, including making such loans available for the first time to companies that produce goods or services that are sold to U.S. companies and are subsequently exported. Previously, a working capital loan guarantee could only help a company that was directly exporting.
The Bottom Line
While the market continues to sort itself out in the first half of 2009, consider exploring international sales opportunities and familiarizing yourself with the export finance opportunities available from private sector institutions and U.S. government institutions like Ex-Im Bank and the SBA. Others in the transit sector have done so for years and it is at times like this, when there is a heightened risk of nonpayment, that the financial products offered by these entities can help solve the trade finance gap, stimulate critically needed exports, and help your company preserve and create new jobs.
Editor’s Note: For more information, contact the Export-Import Bank or the author.