The import of a satellite exporter’s bank
by Jeff Foust
|In the past, Ex-Im was hardly controversial, said Hartman. “Most of the members of Congress didn’t even know how to spell ‘Ex-Im.’”|
The bank in question is the Export-Import Bank of the United States, usually known simply as Ex-Im. It is the official export credit agency of the US, providing financing for American companies who want to export products but can’t get financing from the private sector, at least on favorable terms.
While the bank has been around since the Great Depression, it’s only been in the last several years that the space industry has made much use of it. It started in 2009, recalled John Schuster, the former head of Ex-Im’s structured finance division, during a panel discussion about the bank’s prospects held by the Washington Space Business Roundtable last week.
Schuster said that he met with two executives from satellite manufacturer Space Systems Loral (SSL). “They were all set to lose a transaction to Astrium of France,” he recalled, even though the customer, Asia Broadcast Satellite (ABS), preferred SSL’s satellite. “They implored upon us to take some level of support to show that we were serious in that transaction, and we did so.”
This, he noted, was in the aftermath of a financial crisis that made it difficult to line up private financing, and at a time when other country’s export credit agencies, like France’s Coface, were getting involved in satellite and launch deals. “The export credit agency gloves were off, especially in the satellite area,” he said.
Ex-Im’s backing helped SSL win that contract, and set the stage for many more, supporting companies like Boeing, Lockheed Martin, Orbital, and SpaceX. Over the course of five years, Schuster said, Ex-Im supported 19 separate deals involving 25 satellite programs, with a total value of more than $5.25 billion. He said that supported between 6,250 and 7,000 jobs directly with the manufacturers, and 10,000 jobs overall.
Those deals, though, stopped this year. Part of the reason is that it has been a down year overall for the commercial satellite industry, with fewer orders than in previous years. Another reason, though, is the uncertain future of the Ex-Im Bank. The bank requires periodic reauthorization of its charter by Congress, and on July 1, that authorization lapsed when Congress failed to pass a reauthorization.
In the past, Ex-Im was hardly controversial. Congress routinely approved reauthorizations of the bank with little discussion, said Joshua Hartman, managing partner of Renaissance Strategic Partners. “There were no speeches, there were no real issues, there were no concerns,” he said. “Most of the members of Congress didn’t even know how to spell ‘Ex-Im.’”
The bank, though, has recently attracted the scrutiny of some conservative members, particularly in the House, who believe that the government should not be involved in such lending when the private sector can take it on. Among them is Rep. Jeb Hensarling (R-TX), chairman of the House Financial Services Committee, who has argued that Ex-Im distorts the market.
|“In the case of Boeing, we’ve lost sales. We’ve lost real jobs,” said Trauberman.|
“Put another way, the Bank ostensibly makes loans backed by taxpayers that the private sector is unwilling to make,” Hensarling said at a 2013 hearing about Ex-Im. “If private creditors are unwilling to engage in these transactions, it begs the question why should the American taxpayer?”
Today, if you go to the website of the Ex-Im Bank, you’re greeted with a warning in bold all-caps: “AUTHORITY HAS LAPSED”. Because the bank was not reauthorized, it cannot engage in new business, although it can continue to handle existing deals approved before July 1.
That lapsed authorization affects anyone attempting to do business with Ex-Im. However, since the commercial space industry in the US has made such heavy use of the bank in recent years—Hartman estimated that Ex-Im was involved in about 60 percent in all the commercial satellite deals involving US companies in the last five years—the industry feels the loss of the bank particularly hard.
There is also evidence, less than three months after the bank’s authorization lapsed, that American companies have lost deals because of the lack of Ex-Im financing. “In the case of Boeing, we’ve lost sales. We’ve lost real jobs,” Jeff Trauberman, vice president of space, intelligence and missile defense systems at Boeing, said at the panel event last week.
Prior to Ex-Im’s lapse in authorization, Boeing had announced a deal with ABS to build the ABS-8 satellite. The deal would have been the third ABS satellite Boeing had built, and, like the previous two, planned to make use of Ex-Im financing. But the bank’s authority lapsed before that financing could be arranged, and that deal is now suspended.
An ABS executive at the panel confirmed that its deal with Boeing, or any other American satellite manufacturer and launch provider (the previous Ex-Im deals involving Boeing and ABS also included launches by SpaceX), depended on the more favorable financing terms that only Ex-Im could provide. “If the Export-Import Bank charter is not reinstated, unfortunately we’ll have to go elsewhere for them because we’re a small company,” said ABS chief technology officer Ken Betaharon.
ABS-8 is the first of four new satellites that Hong Kong-based ABS plans to acquire through 2017 as the company grows. “We’re growing very quickly, but we don’t have the financial resources to implement our very ambitious plan,” Betaharon said. “We have started to look at other export credit agencies because we need to grow our business.”
A second US manufacturer now says it’s been hurt by Ex-Im’s inability to do new deals. Ted McFarland, senior director for GEOComm at Orbital ATK, said it believed it was the frontrunner to land a contract for the Azerspace-2 satellite from the government of Azerbaijan. Orbital had built Azerspace-1 for the country and its bid included Ex-Im financing.
|Without Ex-Im, Schuster said, customers will instead get better deals from other nations. “It’s a level of unilateral disarmament.”|
But McFarland said that Ex-Im now closed to new business, it’s lost that deal. “We got in the door and had an indicative letter from Azerbaijan, and then we lost it,” he said. While the contract for Azerspace-2 has yet to be formally announced, he said Orbital lost to a “Canadian-backed enterprise.” That’s a reference to SSL, which is now owned by Canadian company MacDonald, Dettwiler and Associates (MDA), making it eligible for financing from Canada’s export credit agency even though the work is still done at SSL’s factory in California.
Satellite manufacturers say they need Ex-Im financing to compete for many potential satellite orders, particularly from smaller companies and nations that need the more favorable financing export credit agencies provide to make their plans viable. In some cases, they say, export credit financing is explicitly required for their bids. “It’s entry table stakes,” said Boeing’s Trauberman.
Eliminating Ex-Im financing, industry officials argue, would not mean private financing would fill the gap, as the bank’s opponents claim. “The commercial sector is much more hesitant that we even thought” to finance satellite and launch deals, said Schuster, who is now a principal at financial advisory firm 32 Advisors.
Moreover, he said that those seeking financing will turn to the more attractive rates offered by other nations’ export credit agencies. “Why would you even think about having US competitors enter a market where there’s either no financing that’s available from commercial markets, or there’s going to be better financing available from your competitor?” he asked. “It’s a level of unilateral disarmament.”
The use of Ex-Im financing for satellite deals is not without its critics, though. Some companies have gone to great lengths to secure that financing even when it would appear they’re not eligible for it. For example, ViaSat, headquartered in California, used Ex-Im to finance a satellite to be built by Boeing and launched by SpaceX. That would not appear to be an export, and thus not something Ex-Im could finance, but ViaSat handled the deal through a business unit in the UK, making it technically an export.
Then there’s the case of NewSat, an Australian company that used Ex-Im to finance the purchase of a communications satellite built by Lockheed Martin. NewSat, however, ran into financial problems and filed for bankruptcy protection in April. A US court gave Lockheed Martin, who was no longer receiving payments from NewSat, permission to cancel the contract and take possession of the mostly-built satellite. That left Ex-Im with potential losses in excess of $100 million.
Critics of Ex-Im in general have used the NewSat deal as evidence that the bank finances bad deals that wouldn’t pass muster in commercial markets, but Schuster, the former Ex-Im official, disagreed. “Even with that transaction, which was unfortunate for a lot of reasons,” he said, “the profitability of the bank remains. It sent—not returned—to the Treasury on average $600 million per year.” The bank, he noted, is self-sustaining, guaranteed but not directly funded by the government.
As for critics of Ex-Im in general, he said, “If it hadn’t been that transaction that opponents would raise, it would have been another. They’re looking for something.” Those critics, he said, “are dogmatically opposed to the bank in principle.”
But while the US commercial space industry has become increasingly reliant on Ex-Im support, it’s less clear how critical that support is to making the case to reauthorize the bank. While a large fraction of commercial satellite and launch orders in the last five years used Ex-Im financing, those deals accounted for only a small fraction of the bank’s overall business: the more than $5 billion in deals in the last five years financed through Ex-Im is dwarfed by the $27.4 billion in exports the bank supported in fiscal year 2014 alone.
At last week’s panel, industry officials offered no clear solution to how space can be used to win support for the bank. “We’re literally talking about thousands of peoples’ livelihoods, and that’s the only political answer we can leverage at this time,” said McFarland.
|Critics of Ex-Im in general have used the failed NewSat deal as evidence that the bank finances bad deals that wouldn’t pass muster in commercial markets.|
Relief, though, could come from an unexpected change in political leadership. On Friday, Speaker of the House John Boehner (R-OH) announced that he plans to resign from Congress at the end of October. While Boehner’s leadership had been facing challenges from some staunch conservatives in the House, his decision surprised many in Washington.
During his month-long “lame duck” period, Boehner is expected to push through some legislation, most notably a continuing resolution (CR) that must pass by Wednesday to keep the federal government funded when the new fiscal year begins October 1. But with nothing left to lose, he might seek passage of other bills stalled in the House—including, perhaps, a transportation bill that the Senate passed this summer that includes a provision reauthorizing the Ex-Im Bank.
“I expect that might have a little more cooperation from some around town to try to get as much finished as possible,” Boehner said Sunday in an interview on CBS’s “Face the Nation” program. “I don't want to leave my successor a dirty barn. I want to clean the barn up a little bit before the next person gets there.”
Doing that sooner rather than later might be a good idea for the industry: while the leading candidate to succeed Boehner, House Majority Leader Kevin McCarthy (R-CA), is a leading advocate for commercial spaceflight in Congress, he opposes Ex-Im.
Schuster, at last week’s panel before Boehner dropped his bombshell, said he expected either the transportation bill, or an omnibus spending bill later this year to fund the government for all of fiscal year 2016, to be the next opportunities to win reauthorization of the bank. He didn’t expect the CR this week to be used for reauthorizing Ex-Im.
“Otherwise,” he added, “there’s fairly little that this Congress is passing and doing on anything.”