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RESPONSE ON REMAND FROM THE UNITED STATES COURT OF APPEALS FOR THE DISTRICT OF COLUMBIA CIRCUIT
DELTA AIR LINES INC V EXPORT‐IMPORT BANK OF THE UNITED STATES (JUNE 18 2013)
Response One1
I Introduction and Summary Conclusion ndash Ex‐Im Bankrsquos Economic Impact Procedures Comply with Statutory Requirements2
In Delta Airlines Inc v Export‐Import Bank of the United States the United States Court of Appeals for the District of Columbia Circuit considered whether the Export‐Import Bank of the United States (ldquoEx‐Im Bankrdquo or the ldquoBankrdquo) complied with its statutory obligation to assess the potential adverse economic effects of a transaction approved by the Bank referenced in this paper as the ldquoAir India Transactionsrdquo3 The Court did not vacate the Bankrsquos approval of the Air India Transactions and instead directed the District Court to remand the case to the Bank with several options One of these options was that
the Bank should (i) attempt to provide a reasonable explanation for how the Economic Impact Procedures which screen out loans and loan guarantees to service providers square with the statutersquos requirements 4
Since 1934 the mission of the Bank as directed by Congress has been to promote the creation and maintenance of jobs in the United States by supporting the export of goods and services Before approving any transaction the Bank is required to take into account any substantial adverse effect that the transaction might have on US industries or US jobs
In short the manner in which the Bank screens transactions of goods and services is in full compliance with its Congressional mandate The Bank adopted its Economic Impact Procedures after substantial internal review and extensive consultation with its core stakeholders including the Bankrsquos Advisory Committee industry labor and exporters The Economic Impact Procedures specifically take into account the factors described in and required by Ex‐Im Bankrsquos Charter5 and are applied in the context of experience and expertise gained over more than 75 years As further explained below use of the Economic Impact Procedures in aircraft finance transactions in general and the ldquoexportable goods screenrdquo in particular are fully in accord with statutory requirements
1 The Bank has also prepared a separate response entitled ldquoResponse Twordquo to the remand from the Court of Appeals 2 Please see the attached Glossary for definitions of all defined terms and other technical terminology 3 718 F3d 974 (DC Cir 2013) 4 Id at 978 5 12 USC sectsect 635(b)(1) 635a‐2 635(e)
II History of the Bankrsquos Economic Impact Procedures Congressional Requirements Ex‐Im Bank Responses Development of Analytical Screens
A Ex‐Im Bankrsquos Charter and Mission Balancing Support for Exports Competition and Economic Impact
The Bank was established in 1934 to facilitate exports of goods and services and in so doing to contribute to the employment of United States workers Congress has directed the Bank in carrying out its mission to provide export financing that is ldquofully competitiverdquo with export financing provided by other governments6 At the same time Congress has required the Bank to take into account the potential ldquoadverse economic impactrdquo of its financing decisions
The cumulative intent of Congress is clear
a) the Bankrsquos fundamental mission is to promote US jobs by supporting exports b) the Bank should evaluate its transactions efficiently so as not to impede the
transactions which often need to proceed expeditiously to capture the export opportunity and
c) the Bank should focus its adverse impact analysis only on those instances where the potential adverse effect is substantial
In response to these statutory mandates the Bank developed formal ldquoeconomic impact proceduresrdquo designed to identify transactions likely to produce a substantial adverse effect on US industry and to subject those transactions to thorough analysis Between the Bankrsquos inception in 1934 and 1968 when Congress first required the Bank to ldquotake into accountrdquo possible adverse effects of its transactions the Bank had completed many thousands of transactions Through this experience the Bank accumulated a significant wealth of knowledge about the industries with which it worked and the effects of its financing on domestic and foreign industries Based on this accumulated knowledge the Bank early on determined that the best way to identify those transactions that were likely to have a substantial adverse effect was by categorizing transactions that had certain characteristics so as to identify and remove from detailed economic impact review those transactions that were not likely to result in a substantial adverse effect on US industry or employment Transactions that were filtered out in this way could proceed without delay Eventually the different categorizations came to be called ldquoscreensrdquo
B ldquoAdverse Economic Impactrdquo ndash Chronology of Congressional Actions and Ex‐Im Bank Responses7
This section of the response to the Court provides a chronology of Congressional requirements and Ex‐Im Bank responses with a focus on the development of procedures to ascertain the existence of ldquoadverse economic impactrdquo The ldquoexportable goods screenrdquo first adopted in 2001 is examined briefly here and discussed more extensively in Part II below While all Bank transactions are subjected to the Bankrsquos economic impact procedures this screen categorically
6 Delta Air Lines Inc v Exp‐Imp Bank of the US 718 F3d 974 978 (DC Cir 2013) 7 Congressional actions and Ex‐Im Bank responses are summarized in tabular form on Table A
2
excluded from further economic impact analysis those transactions that did not support the financing of US exports which the foreign buyer could use to produce an exportable good Put another way this screen categorically excluded from further economic impact analysis those transactions in which the foreign buyer could only use the US exports to provide a service As explained more fully below the exportable goods screen reflected the Bankrsquos judgment that such transactions were unlikely to cause substantial adverse economic effects on US industry This judgment was and continues to be based on the Bankrsquos accumulated expertise in assessing economic impact pursuant to its Charter on its knowledge of financing markets and on input from trade groups industry stakeholders and other government agencies
1 1968 ndash The First ldquoEconomic Impactrdquo Requirements Are Added to the Bankrsquos Charter
The first of the Bankrsquos ldquoeconomic impactrdquo requirements was added to its Charter in 1968 requiring the Bank to ldquotake into account the possible adverse effects [of its loans and guarantees] upon the United States economyrdquo8 The Bank has historically interpreted this provision as an additional factor to consider in analyzing transactions for the purpose of supporting US jobs and exports
2 1975 ndash Congress Directs the Bank to Be Competitive with Other Countries and to Consider ldquoSerious Adverse Effectsrdquo on US Industry and Employment
In 1975 Congress enacted several amendments to the Bankrsquos Charter First the Bank is to consider only serious adverse economic effects of its loans and guarantees Congress required the Bank to
take into account any serious adverse effect of such loan[s] or guarantee[s] on the competitive position of United States industry the availability of materials which are in short supply in the United States and employment in the United Statesrdquo9
Congress also directed the Bank to be ldquocompetitive with the government‐supported rates and terms and other conditions available for the financing of exports from the principal countries whose exporters compete with United States exportersrdquo10 The Bank was further required to submit a semi‐annual competitiveness report a practice continued to date albeit on an annual basis Finally the Bank was ordered to ldquosurvey a representative number of US exporters and US commercial lending institutions which provide export credit to determine their experience in meeting financing competition from other countries whose exporters compete with United States exportersrdquo11
These requirements formed the foundation for Ex‐Im Bankrsquos regular practice of seeking input from stakeholders industry representatives and government agencies This is undertaken with a view to determine whether the Bankrsquos actions comport with its overall mission to support US jobs and exports without causing serious adverse effects on the United States economy
8 12 USC sect 635(b)(1)(B)(ii) PL 90‐267 82 Stat 47 (1968) 9 12 USC sect 635(b)(1)(B) PL 93‐646 88 Stat 2333 (1975) 10 12 USC sect 635(b)(1)(A) PL 93‐646 88 Stat 2333 (1975) 11 Id
3
3 1978 ndash Congress Directs the Bank to Strengthen the Competitive Position of United States Exporters and Expand US Exports
In 1978 Congress enacted three important changes relative to economic impact First Congress added language emphasizing the need to strengthen US exportersrsquo competitive position12
Second Congress prohibited Bank financing from being used to support exports that produce commodities that are in surplus or which would cause substantial injury to US producers of the same or similar commodity unless the Bankrsquos Board of Directors determines that benefits to US industry and employment outweigh injury to US producers13 This balancing test acknowledged the judgment that the Bank had to bring to bear in making such determinations
Third the Bank was directed to implement procedures to ensure consideration of the extent to which financing would have an adverse effect on US industries and employment either by reducing demand for US produced goods or increasing imports to the US14
4 1979 ndash The Bank Develops Comprehensive Economic Impact Procedures with the First Use of Analytical ldquoScreensrdquo in Response to Congressional Requirements
The following year the Bank developed a set of written economic impact procedures in order to address the various statutory requirements enacted by Congress in 1978 The general objective was to devise a framework to identify both those transactions that were relatively unlikely to result in a substantial adverse economic impact as well as those that were
As an operating premise for these procedures the Bank determined that exports involving certain kinds of capital equipment (eg locomotives) and certain projects (eg power plants) were not likely to have any serious adverse impact on US industries or jobs These types of transactions which amounted at the time to 80 to 90 of the value of all transactions supported by the Bank had little to no potential for a substantial adverse impact on the US
12 The Bank is directed to take into account any serious adverse effect of such loan[s] or guarantee[s] on the competitive position of United States industry the availability of materials which are in short supply in the United States and shall give particular emphasis to the objective of strengthening the competitive position of United States exporters and thereby of expanding total United States exportsrdquo PL 95‐630 92 Stat 3641 (1978) 13 ldquo[N]one of the funds otherwise made available pursuant to the act to the Export‐Import Bank and the Overseas Private Investment Corporation shall be obligated or expended to finance any loan any assistance or any other financial commitments for establishing or expanding production of any commodity for export by any country other than the United States if the commodity is likely to be in surplus on world markets at the time the resulting productive capacity is expected to become operative and if the assistance will cause substantial injury to United States producers of the same similar or competing commodity Provided that such prohibition shall not apply to the Export‐Import Bank if in the judgment of its Board of Directors the benefits to industry and employment in the United States are likely to outweigh the injury to United States producers of the same similar or competing commodityrdquo PL 95‐481 92 Stat 1591 (1978) This section of the Appropriations Act is the predecessor to what would become section 2(e) of the Charter in 198614 The Bank shall ldquoimplement such regulations and procedures as may be appropriate to insure that full consideration is given to the extent to which any loan or financial guarantee is likely to have an adverse effect on industries including agriculture and employment in the United States either by reducing demand for goods produced in the United States or by increasing imports to the United Statesrdquo PL 95‐630 92 Stat 3641 codified at 12 USC sect 635a‐2 (1978)
4
economy because the economic effects of the transactions were local in nature While not identified as such at the time this operating premise became the Bankrsquos first ldquoscreenrdquo in its economic impact procedures The screen eliminated from further economic impact analysis those transactions that resulted in foreign localized goods or services because they were unlikely to have a substantial adverse economic impact on US industry and jobs
For those transactions that cleared this first ldquoforeign localized goods and services screenrdquo the 1979 procedures then set forth factors for the Bank to consider in further analyzing economic impact
Categorization of transactions by ldquothe intent behind and stimulus for the projectrdquo was important in identifying transactions that were more likely to create a substantial adverse economic impact For example transactions involving ldquorunawayrdquo industries ndash ie industries that were leaving the US to seek cheaper labor in foreign countries ndash were generally suspect because they would tend to simply increase net imports into the United States
Similarly transactions involving ldquobuy‐backrdquo arrangements ndash where capital equipment is exported but there is an agreement that the resulting production will be ldquobought‐backrdquo by a party in the United States ndash were suspect because they also would tend to result in a net increase in imports
The Bank used these categorizations as tools at this stage of the analysis although additional factors were considered before the Bank approved or rejected a transaction Specifically the Bank considered (a) whether the net impact on the US economy and jobs was positive or negative by comparing the benefits from the export with the adverse impact of the transaction and (b) the seriousness of the impact or effect on the US economy if any15
5 1986 ndash Congress Directs the Bank to Balance the Benefits to US Industry and Employment Against Potential Injury
In 1986 Congress added to the Bankrsquos Charter the balancing test provisions previously contained in sect608 of the Foreign Operations Appropriations Act of 197816
The Senate Report accompanying this 1986 amendment emphasized that the Bank was to implement its provisions in a way that did not undermine the Bankrsquos primary function of financing transactions to support the export of United States goods and services
ldquothe Committee recognized the need for [the Bank] to respond to exportersrsquo requests for support in a timely and confidential fashion and intends that the Bank implement its adverse economic impact analysis procedures in a practical and workable fashionrdquo17
15 In connection with the presentation for approval of the 1979 economic impact procedures to the Ex‐Im Bank Board of Directors the Bankrsquos staff analyzed the three economic impact provisions in the Memorandum to the Board of Directors Pertinent provisions of this Memorandum are attached as Appendix A The Memorandum sets forth the Bankrsquos reasoning for interpreting the three applicable economic impact provisions in a holistic manner16 See text accompanying note 13 supra 17 See S Rep No 99‐274 at 8 (1986)
5
Explicitly recognizing the Bankrsquos expertise the Report also noted that the revised Charter ldquodoes not require the Bank to conduct further analysis if it views its existing body of knowledge as sufficientrdquo18 The Committee stressed that the ldquoprovision should be implemented in a way that does not reduce the Bankrsquos competitiveness and flexibility in assisting US exporters nor ignore the positive aspects of the export salerdquo19
This recognition of the need of the Bank to use its expertise to ensure competitiveness and flexibility in assisting US exporters was and has been incorporated as a guiding principle for the Bankrsquos analytical frameworks in assessing whether substantial adverse economic impact exists for each transaction considered
Following enactment of the 1986 provisions the Bank revised its economic impact procedures to categorize transactions These categories acted as filters posing two ldquoyes or nordquo questions summarized as follows
‐ Is the commodity to be produced likely to be in surplus on world markets at the time of production or is it likely to compete with US production of a competing commodity
‐ Will the Bankrsquos extension of a loan or guarantee cause substantial injury to US producers of a competing commodity
A ldquonordquo answer to either of these two questions in sequence would mean that no further analysis was necessary If answers to both questions were affirmative then the Bank would conduct a detailed economic impact analysis and would determine whether the short and long‐term benefits of the transaction to US industry and employment outweighed any injury to US producers of a competing commodity
6 1988 ndash Congress Defines ldquoSubstantial Injuryrdquo and Adds a 1 Test which the Bank Uses to Refine Its Economic Impact Procedures
In 1988 Congress amended sect2(e) of the Bankrsquos Charter by defining ldquosubstantial injuryrdquo for purposes of analyzing adverse economic impact Specifically Congress defined ldquosubstantial injuryrdquo to mean ldquoif the amount of capacity for production established or the amount of the increase in such capacity expanded by [the Bankrsquos] credit or guarantee equals or exceeds 1 percent of United States productionrdquo20
In November 1988 the Board of Directors approved a new set of economic impact procedures As noted in the staffrsquos Memorandum to the Board of Directors dated November 14 1988
ldquo[t]he Congressional debates on the various adverse economic impact provisions have made it clear that the focus of concern is the possibility of substantial harm to US
18 Id 19 Id 20 PL 100‐418 102 Stat 1107 (1988)
6
production and employment there was no desire to make [the Bank] less responsive or competitive by slowing down the processing of cases not likely to cause injuryrdquo21
In an effort to achieve this required balance the new economic impact procedures posed the following three questions
- Will the project be in direct competition with US production - Is [the Bankrsquos] support significantly associated with this project - Will the output of the project likely cause substantial injury to US producers of the
same similar or competing commodity
As before a negative answer to any of the three questions would mean that the Bank would not conduct a detailed economic impact analysis to determine whether the short‐ and long‐term benefits of the transaction to US industry and employment outweighed any injury to US producers of a competing commodity
7 1998 ndash The Bank Modifies Its Economic Impact Procedures to Include Consideration of Trade Sanctions
The Bank was reauthorized in 1997 and no changes were made to any of the economic impact provisions in the Bankrsquos Charter Nevertheless the Bank revised its existing procedures to include additional focus that Congress had required on transactions involving countries or industries against which certain trade sanctions were pending or imposed
8 2001 ndash After Public Notice and a Request for Comments the Bank Further Refines Its Economic Impact Procedures to Reflect Congressional Requirements and the Need to Timely Process Applications
In 2001 the Bank further updated its economic impact procedures During the preceding 20 years the nature of the Bankrsquos transactions had changed to include many more involving private sector borrowers rather than state‐owned entities The new procedures attempted to balance a thorough timely examination of economic impact issues with the need to process transactions within a short timeframe that would satisfy the speed required by commercial realities The Bank determined that it could best comply with its statutory mandate to provide competitive financing for US exports by focusing any detailed economic impact analysis only on those transactions likely to result in substantial adverse economic impact
The first stage or screen of the economic impact evaluation was to determine if the exports involved in a transaction would result in the production of an exportable good from the buyerrsquos country Hence the name ldquoexportable goodsrdquo screen As with its prior screens if the answer to this question was ldquonordquo then no further economic impact analysis was conducted
The Bank had determined that transactions that would result in the provision of exportable services from foreign countries would not cause substantial adverse economic impact on US
21 Memorandum to Board of Directors Country Risk Analysis Div ldquoProcedures for Economic Impact Analysisrdquo P 3 Nov 14 1988
7
industries The focus on exportable goods rather than exportable services was a result of several factors These included the Bankrsquos accumulated expertise with the relevant industries involved in transactions the Bank supported such as the airline sector and the financing available to such industries which indicated that US airlines generally had access to financing that was more favorable than the financing provided by Ex‐Im Bank to foreign airlines In addition the Bank took into account feedback and other input from trade groups industry stakeholders and other government agencies which would be expected to voice concerns if the Bankrsquos procedures were working to the detriment of any domestic industry
Notably the US airline sector had not raised any concerns about adverse economic impact since 1984 This lack of articulated concern by the US airline industry was consistent with the Bankrsquos own expertise and understanding of the airline sector and aircraft financing As noted above the Bank understood from its considerable involvement in aircraft finance that US airlines generally had access to financing that was more favorable than the financing provided by Ex‐Im Bank to foreign airlines Thus US airlines had no reason to complain
In anticipation of the 2001 revisions to its economic impact procedures although not required to do so the Bank published a notice in the Federal Register Its proposed new economic impact procedures were posted on its website and public comment was invited As before the US airline industry made no comments in response to the Bankrsquos proposed 2001 procedures which included among other things the adoption of the ldquoexportable goodsrdquo screen
The Bank adopted these procedures after repeated and extensive consultation with its core stakeholders including US industry labor its Advisory Committee and exporters22 In addition the Bank reached out to relevant experts in both the academic and consulting worlds who provided comments on the Bankrsquos proposed changes23 Finally the Bank requested and obtained input from other US Government agencies such as the Departments of Commerce Treasury and State as well as the Office of the US Trade Representative and the Office of Management amp Budget
The Bank considered and analyzed all the input it received and revised the procedures accordingly For example other US Government agencies had specific concerns with respect to how the Bank treated applications implicated by trade measures and the Bank modified its approach to these applications Given the lack of any articulated concerns about the airline sector and the Bankrsquos own knowledge and expertise regarding aircraft financing the Bank had no reason to believe that the proposed ldquoexportable goodsrdquo screen would not be an appropriate way to take account of adverse economic impact on the airline industry
22 The Bankrsquos Advisory Committee is created pursuant to its Charter and is ldquobroadly representative of environment production commerce finance agriculture labor services State government and the textile industryrdquo 12 USCsect635a(d)23 A partial list of those consulted includes former Congressman Bill Frenzel of the Brookings Institute Dr Robert Hahn of the American Enterprise Institute Dr Jerry Hausman of the Massachusetts Institute of Technology Dr J David Richardson of Syracuse University Dr Marina Whitman of the University of Michigan the National Foreign Trade Council the Coalition for Employment through Exports the American Iron and Steel Institute the AFL‐CIO the International Association of Machinists and Aerospace Workers NUCOR Bechtel Corporation Caterpillar Inc Delta Brands Inc and Air Tractor Inc
8
9 2006 ndash Congress Further Amends the Charter
In 2006 Congress made several substantive changes to the Bankrsquos Charter Among these were
‐ A requirement to determine whether the extension of a credit or guarantee is likely to result in the production of the same or similar commodities and whether such production may cause substantial injury to US producers
‐ A prohibition against providing a loan or guarantee that will facilitate the circumvention of any trade law order or determination
‐ A requirement for the Bank to designate sensitive commercial sectors and products for which the Bank is not likely to provide financing due to strong potential for adverse economic impact on US industry and
‐ A requirement to aggregate financial thresholds for purposes of assessing economic impact or otherwise on a rolling 24‐month basis24
In addition Congress added certain notice‐and‐comment requirements that apply ldquoif the Bank intends to conduct a detailed economic impact analysis or similar studyrdquo25
10 2007 ndash The Bank Responds to New Congressional Requirements with the 2007 Economic Impact Procedures
In response to the 2006 changes to the Charter the Bank modified its economic impact procedures The ldquoexportable goodsrdquo screen was amended to read
ldquoThe first stage of the economic impact analysis is to determine if the exports involved in a transaction will result in the production of an exportable good Therefore only exports of capital goods and services (eg manufacturing equipment licensing agreements) that will result in the foreign production of an exportable good are subject to further economic impact analysis in Stage II of these procedures The capital goods and services exports may be associated with new foreign production capacity or existing production capacity (eg applicable exports include replacement equipment in an existing production facility to maintain existing production capacity)rdquo26
Thus beginning with its first set of Economic Impact Procedures in 1968 and continuing through to 2007 the Bank has consistently made use of various kinds of filters or screens to remove those categories of transactions that are unlikely to produce a substantial adverse impact on domestic industry from detailed economic impact analysis This approach has allowed unaffected transactions to proceed without delay so that the Bank may capture the export opportunity Finally use of the screens has enabled the Bank to concentrate its resources on transactions that are more likely to cause substantial adverse economic impact
24 PL 109‐438 120 Stat 3268 (2006) 25 Id 26 Memorandum to Board of Directors Policy Analysis Div ldquoRevisions to Economic Impact Proceduresrdquo P 9 April 4 2007
9
III Discussion How the Bankrsquos Economic Impact Procedures and Exportable Goods Screen Satisfy the Requirements of the Bankrsquos Charter
In remanding the matter to the Bank the Court of Appeals required the Bank to provide a reasonable explanation to justify its use of the ldquoexportable goods screenrdquo The use of the ldquoexportable goods screenrdquo properly satisfies the various requirements of the Bankrsquos Charter When the screen was adopted the Bank knew that US airlines the industry most likely to be affected generally had access to financing at costs that were significantly more favorable than the cost of aircraft financing provided by the Bank For this very reason the Bank had not heard any economic impact concerns from any US airlines in the 17 years prior to the adoption of the screen Indeed the screen was in place for almost a decade before any US airline raised any questions about it When a single US airline did raise questions about the Bankrsquos financing to foreign airlines the analysis it submitted to the Bank did not support its claim that the Bankrsquos financing provided a financing cost advantage to foreign airlines Moreover the complaint was raised at a time and in the context of negotiations by export credit agencies (ldquoECAsrdquo) regarding the Aircraft Sector Understanding discussed below The Bank understood that the negotiations regarding the Aircraft Sector Understanding would address any concerns by US airlines which were also involved in the negotiations Finally the Bank was also aware throughout the first decade of the 2000s that the major US airlines involved in international flights were not in a mode of purchasing new aircraft and thus that any financing advantage was theoretical only In short the Bankrsquos adoption and continued use of the ldquoexportable goods screenrdquo was eminently reasonable and based on the Bankrsquos considerable expertise with the financial dynamics of aircraft financing
Section III outlines the Bankrsquos responses to evolving Congressional requirements for the Bank to consider whether its actions would have a serious or significant adverse effect on US industry or employment The Bankrsquos responses were formulated with a view to also ensure that it remains competitive with other export credit agencies as requires by its Charter and fulfills its mission to support US jobs through exports
A The US Airline Industry Financing Dynamics 1985 to Early 2001
The Bankrsquos experience over the past 45 years since the first legislated economic impact provisions were enacted has shown that most transactions for which the Bank receives applications are not likely to result in substantial adverse economic impact on the US economy or US jobs For example most of the Bankrsquos transactions are simply too small or too localized to have any significant likelihood of having an adverse impact on US industries or jobs Other examples are transactions supporting sales of consumable goods such as pickle exports to China and transactions supporting exports to be used in a power plant in a foreign country where the power generated will never be sent to the United States to compete with domestic power producers Therefore consistent with the Bankrsquos Charter not every application is subjected to a full‐blown ldquodetailed economic impact analysisrdquo
A detailed economic impact analysis can substantially delay the processing of a transaction and jeopardize the ability of the US exporter to capture the export opportunity Given the number of transactions the Bank finances each year ndash approximately 3800 in Fiscal Year 2012 ndash the
10
Bank would not be able to accomplish its mission of promoting US exports if it were to perform a ldquodetailed economic impact analysisrdquo on every transaction or even for a significant percentage of the transactions
Recognizing the dilatory effects of conducting unnecessary detailed economic impact analyses the Bankrsquos categorical approach to the economic impact provisions of the Bankrsquos Charter has always been to screen out transactions that were not likely to have a substantial adverse effect on US industries or US jobs Ex‐Im Bankrsquos experience in this area over the decades indicates three critical determinants of whether a contemplated transaction has potential to cause substantial adverse impact
1) whether the transaction is too small to have a significant impact
2) whether the transaction involves exports that are to be used for the production of goods or provision of services which are only likely to be used locally in the foreign buyerrsquos country and
3) whether the transaction relates to an industry (eg aircraft) in which the available financing for US domestic sales indicates that Ex‐Im Bank financing for foreign sales generally would not disadvantage the US industry
In 2001 when the Bankrsquos ldquoexportable goodsrdquo screen was first adopted the Bank had substantial reason to believe that transactions resulting in services being exported by foreign countries would be unlikely to have a substantial adverse economic impact on the US services sector
The Bank had for several decades received input from trade groups industry stakeholders and other government agencies regarding the domestic adverse impact of Ex‐Im Bank financing In the Bankrsquos experience such representatives could be relied upon to notify the Bank if they were concerned that the Bankrsquos policies procedures or actions threatened to cause any harm or disruption to a specific industry or sector Concerns raised by industry representatives or the absence of any voiced concerns were a significant tool for the Bank to check the soundness of its categorical judgments as reflected in the screens
As of 2001 when the ldquoexportable goodsrdquo screen was put in place the Bank had heard no concerns about Ex‐Im Bank transactions from the US airline industry in 17 years In 1984 Pan American World Airways (Pan Am) had argued that Ex‐Im Bank support resulted in lower financing costs for foreign airlines than the US airlines could themselves obtain To assess these concerns the Bank analyzed the overall costs of financing for US domestic airlines as compared to the costs of financing to a foreign airline in an Ex‐Im Bank‐guaranteed transaction The analysis compared not just the interest rates charged by lenders in the two different scenarios but also incorporated other factors so as to produce a true ldquoapples‐to‐applesrdquo comparison of the relative financing costs
These other factors included the cost of the Ex‐Im Bank guarantee fee (which the Bank now calls the ldquoexposure feerdquo) as well as the costs of financing the portion of the purchase price that
11
was not supported by the Ex‐Im Bank guarantee The Bank analyzed all of these factors and concluded that in fact Ex‐Im Bank support did not generally result in financing terms for foreign airlines that were more favorable than the financing available to US airlines Pan Am did not contest the Bankrsquos analysis at that time or at any subsequent time Nor did any other US airline or trade group raise any concerns in the intervening 17 years leading up to the adoption of the ldquoexportable goods screenrdquo in 2001 or indeed thereafter until 2010
Between 1990 and 1999 the Bank financed 440 aircraft involving the export of US‐manufactured aircraft representing a total value of approximately $22 billion dollars Given this significant expertise in the aircraft financing sector Ex‐Im Bank had ample and consistent evidence that major US airlines flying international routes had access to more favorable financing relative to the financing available to foreign airlines through ECAs such as Ex‐Im Bank Annexed as Appendix B is a detailed history and explanation of the types of financing that were available to US airlines which in turn had led the Bank to conclude that Bank financing to foreign airlines did not pose any financial competitive harm to US airlines
In contrast to the commercial bank financing available through Ex‐Im Bank in the 1980s and 1990s the principal method used by US airlines to acquire aircraft was through a ldquoleveraged leaserdquo A leveraged lease provides significant tax benefits to an entity that wants to shelter income through additional tax deductions The entity purchases the aircraft and then leases it to the airline The purchaser continues to own the aircraft and thus can take the depreciation deductions and investment tax credits on its tax returns during the term of the lease Once the lease term is over title to the aircraft may be transferred to the airline through various mechanisms The leveraged lease was very beneficial to US airlines in several respects
a) The effective cost of a leveraged lease structure was very attractive as compared to aloan to purchase the aircraft The purchaserlessor passed a portion of the tax benefitsback to the airline by way of lower lease payments
b) In most instances the airline could finance up to 100 of the appraised or ldquomarketrdquovalue of the individual aircraft In contrast under ECA financing from Ex‐Im Bank aforeign airline could only finance up to 85 of the ldquonetrdquo or actual price In short theUS airline could finance a larger percentage of a larger amount as compared to aforeign airline purchasing the same aircraft This translated into a significant financialadvantage for the US airlines
c) Under the leveraged lease structure the repayment terms offered to US airlines wereoften 18 to 22 years In contrast Ex‐Im Bank offered much shorter 10 to 12 yearrepayment terms Longer repayment terms mean lower payments which are of coursea significant benefit
As of 2001 Ex‐Im Bank was also aware that US airlines could avail themselves of commercial market financing known originally as equipment trust certificates and later as enhanced equipment trust certificates (ldquoEETCsrdquo) An EETC is a structure whereby investors can provide financing directly through the capital markets as opposed to loan financing provided by banks The EETCs provided significant cost advantages to US airlines and were generally not available
12
to foreign airlines Even for the rare foreign EETC the terms were not as favorable as the terms available to US airlines
The EETC was premised on sect 1110 of the US Bankruptcy Code which only applied to US airlines27 Section 1110 protects a secured creditor of an airline in bankruptcy by either a)requiring the debtor airline within 60 days of the bankruptcy petition date to cure any payment defaults and stay current with loan payments or b) permitting the secured creditor to obtain possession of the creditorrsquos collateral (ie the aircraft) 60 days after the bankruptcy petition date notwithstanding the automatic stay provision that applies to creditors of other types of debtors This certainty of access to collateral ndash and thus to payment ndash provided and continues to provide decreased risk to creditors of US airlines This certainty in turn allows these creditors to provide more favorable financing terms than creditors of foreign airlines In the boom years of 2000 to 2001 US airlines raised $19 billion in the EETC market primarily to purchase new aircraft
Throughout the years leading up to the adoption of the exportable goods screen in 2001 Ex‐Im Bank aircraft financing was provided in accordance with the guidelines set forth in the Large Aircraft Sector Understanding (ldquoLASUrdquo) under the auspices of the Organization for Economic Cooperation and Development (ldquoOECDrdquo) The LASU was followed later by evolving versions of the Aircraft Sector Understanding (ldquoASUrdquo) The LASU and the ASU wereare agreements that set forth guidelines to be followed by ECAs in supporting exports of aircraft manufactured in the home country of the relevant ECA The LASUASU guidelines set forth the maximum repayment term for the financing the maximum advance rate of the financing as a percentage of the net price of the aircraft and the minimum fee that the ECA was required to charge to the airline for the ECA support These terms and conditions resulted in financing that was significantly more expensive than that which could be obtained by US airlines in the private market
In light of the foregoing the Bank reasonably believed that US airlines would not suffer any adverse economic impact from the Bankrsquos financing of foreign airlinesrsquo acquisition of US‐manufactured aircraft In other words when Ex‐Im Bank first adopted the ldquoexportable goodsrdquo screen in 2001 the Bank was confident that its use of the screen would provide efficiencies in transaction‐processing time by focusing the Bankrsquos resources on transactions that could reasonably be expected to raise substantial adverse economic impact concerns
B The US Airline Industry Financing Dynamics Late 2001 to Early 2007
The decade of the 2000s presented the global airline industry with new challenges and new
opportunities ndash both of which created problems for US airlines
27 11 USC sect1110 (2001)
13
The terrorist attacks of September 11 2001 resulted in a sudden and protracted reduction in
demand for airline passenger services This was particularly prolonged in the United States and
Europe As a result of that drop in demand as well as other financial pressures the major US
airlines began a decade‐long process of mergers28 During the 2000s the major US airlines also
were able to shed costs and debtmdasheg pensionsmdashin a way not available to foreign airlines
under the US Bankruptcy Code29
As a result of this downsizing and restructuring US airlines focused on consolidation and
survival not expansion of their fleets by purchasing new aircraft US airline purchases of new
passenger aircraft almost disappeared after 2001 reappeared briefly in 2007 and then
disappeared again until sometime in 2010 Instead of ordering new aircraft US airlines
primarily relied upon the aircraft that they had purchased with EETC financing in the 2001‐2002
period
Nonetheless the data that are available indicate that through 2007 the US airlines generally
had access to aircraft financing that was no less favorable than financing provided by ECAs such
as Ex‐Im Bank In the midst of these developments starting in 2005 the various countries and
constituencies that were involved with ECA aircraft financing began negotiating a new ASU
During negotiations of the new ASU European airlines alleged that ECA financing was more
favorable than the financing to which they had access In June 2007 a new ASU agreement was
reached The European airlines explicitly approved thus signaling that the new agreement
eliminated any ECA financing advantage At the same time none of the US airlines raised any
economic impact concerns about the new ASU As Ex‐Im Bank reviewed and revised its
Economic Impact Procedures in 2007 there were no complaints raised by US airlines or any
other parties regarding aircraft transactions Likewise the new 2007 ASU had explicitly quelled
similar concerns in Europe All of the other relevant factors that led to adoption of the
ldquoexportable goodsrdquo screen in 2001 remained true in 2007 As a result in slightly varied form
the ldquoexportable goodsrdquo screen was carried through the 2002 and 2007 economic impact
procedures
C The US Airline Industry Financing Dynamics Late 2007 to 2012
After the 2007 ASU took effect the worldwide financial crisis emerged in 2008 and had a major
impact on global financial markets including those for large aircraft purchases From mid‐2008
to the beginning of 2010 the financial markets experienced significant volatility and distress
28 These included TWA and American Airlines in 2001 America West and US Airways in 2005 Northwest Airlines and Delta Air Lines in 2008 Continental Airlines and United Airlines in 2010 and Air Tran and Southwest Airlines in 2010 American Airlines and US Air announced merger plans in 201229 Bankruptcies of the major US Airlines from 2001‐2010 included US Airways in 2002 and 2004 United Airlines in 2002 Northwest Airlines in 2005 Delta Air Lines in 2005 Frontier Airlines in 2008 Mesa Airlines in 2010 American Airlines later filed for bankruptcy protection in 2012
14
Then after a short calm in 2010 the European sovereign debt and related European banking
crises rattled financial markets from mid‐2011 to mid‐2012 The result was another period of
extreme interest rate volatility
During this period the global financial market for commercial jet aircraft had been
characterized by (a) extreme volatility in both interest rates and availability of financing and
(b) major growth in demand for aircraft by airlines in the emerging markets and resource‐rich
OECD countries At the same time (and until only recently) there was very little demand for
aircraft by US airlines
There was also a fundamental shift in the key financial tools used for aircraft purchasesmdashwith
commercial banks playing a much diminished role EETC financing from the capital markets
emerged and matured into the most favorable source of financing
As noted before in early 2010 one US airline raised concerns that the financing provided by
the Bank to Ryanair an up‐and‐coming and successful discount airline in Europe was more
favorable than the financing available to US airlines The complaining airline asserted that Ex‐
Im Bank financing to Ryanair was significantly more favorable than financing that the
complaining airline itself had received in a recent EETC offering
Ex‐Im Bank reviewed and analyzed the assertions and determined that they were flawed in that
the purported difference in financial costs ignored pertinent factors and thus did not indicate
that ECA financing would be more favorable in a true ldquoapples to applesrdquo comparison Some key
factors ignored in the analysis provided by the one US airline were
a The credit‐worthiness of the US airline in question was publically rated at B‐ which in
common investment terms puts it in the ldquojunkrdquo group of ratings Ryanair by comparison is rated as investment grade a significantly higher rating Naturally a difference in credit ratings is going to result in a difference in the cost of financing
b The US airline was re‐financing a group of 10 to 12 year old aircraft while Ryanair was
financing brand‐new aircraft In both cases the aircraft being financed formed the
collateral pool for the loan Older aircraft represent a higher risk due to the poorer
quality of collateral therefore resulting in higher costs of financing
At the same time that this US airline was raising its concerns with the Bank it was also raising
similar concerns in the context of new ASU negotiations By the end of 2010 the ECAs reached
agreement on a new ASU (the 2011 ASU) which went into effect on February 1 2011 This
agreement included a built‐in adjustment mechanism to reflect changes in the financial
markets as they occurred This was designed to ensure that ECA financing and commercial bank
financing were generally equivalent The Bank continues to monitor the 2011 ASU to ensure
that the adjustment mechanism built into that agreement does in fact generally work to
15
enforce an equilibrium between the cost of ECA aircraft financings and the financing available
to US airlines in the private market In addition this very issue continues to be a regular topic
of discussion among the ASU participant countries as well Based on the data that have been
developed and presented to date the Bank believes that the 2011 ASU properly serves its
intended function of ensuring that airlines using private market financing do not suffer a
competitive disadvantage when compared to ECA financing of aircraft under the ASU
IV Conclusion
Ex‐Im Bankrsquos exportable goods screen complied with the Bankrsquos statutory requirements to
assess the potential adverse effects of all transactions and to focus on those transactions that
were likely to result in a substantial adverse economic impact on US industry Historically
financing available to US airlines for the purchase of new wide‐body aircraft has been either
more favorable than or equally favorable as Ex‐Im Bank financing to foreign airlines for the
purchase of equivalent aircraft The exportable goods screen was an appropriate reasonable
and efficient response to the realities of aircraft financing It properly balanced the
Congressional directives to assess the likelihood of substantial economic impact on US
industry and US jobs with the need to finance transactions in an efficient manner so as to
support US exports and US jobs
November 22 2013
Export‐Import Bank of the United States 811 Vermont Ave NW Washington DC 20571
16
Appendix A
Excerpt from Staff Memorandum to Ex‐Im Bank Board of Directors Accompanying 1979
Economic Impact Procedures30
Thus Section 2(b)(1)(B) of the Act requires the Board of Directors to take into account ldquoany
serious adverse effectrdquo which loans or guarantees may have on US industry materials in short
supply and employment Section 1911 of the 1978 Amendments requires consideration by the
Bank of the extent to which a loan or financial guarantee ldquois likely to have an adverse
effecthellipeither by reducing demand for goods produced in the United States or by increasing
imports to the United Statesrdquo and Section 608 of the Appropriations Act requires a finding that
the commodity ultimately produced as a result of [Bank] financing will be in surplus when the
production comes on‐stream and that US producers of the same similar or competing
commodity will be substantially injured It is apparent that the latter two statutory provisions
are explications of the basic mandate of the Act and do not expand the Bankrsquos mandate to
examine domestic impact but rather suggest factors to be considered in that examination To
a great extent the 1978 Amendments language and the Appropriations Act provisions set forth
the same concept in different ways Thus the reference in Section 1911 of the 1978
Amendments to ldquoreducing demand for goods in the United Statesrdquo and ldquoincreasing imports to
the United Statesrdquo is no more than the inevitable consequence of a commodity being ldquoin
surplusrdquo as stated in Section 608 of the Appropriations Act
Section 2(b)(1)(B) is the broadest formulation of the basic concept since it contains the most
general language ie ldquoany serious impactrdquo and encompasses all types of exports Section
1911 is primarily procedural in nature directing the Bank not only to implement appropriate
regulations and procedures to ensure full consideration of adverse impact but also to request a
report from the International Trade Commission Section 1911 includes a more detailed
description of events which would constitute adverse impactmdashie a reduction in demand for
US produced goods or an increase in imports to the US Finally this section contains an
explicit reference to agriculture which was only implicitly covered by Section 2(b)(1)(B) It
should be noted that this is one of several references to agriculture which were added to the
Act by the 1978 Amendments
The Appropriations Act provision explicitly refers to a balancing by the Board of Directors of the
benefits of the [Bank]‐supported export against the injury to US [producers] of the commodity
in question At the same time the Act has always necessitated such a balancing by requiring
the Bank to take into account ldquoserious adverse effects upon the US economyrdquo at the same
time it carries out the Bankrsquos basic mandate to ldquofacilitate exportsrdquo and to ldquofoster expansion of
exportsrdquo Under either provision therefore the Board of Directors will be taking into
30 Memorandum ldquoProcedures Regarding Adverse Domestic Impact of Eximbank Financingrdquo Pp 7‐12 Jan 5 1979 17
consideration the results of the balancing as one of the many factors involved in making a
decision to provide financing It should be noted that Section 1911 of the 1978 Amendments is
consistent with both of these provisions since it only seeks to ensure that ldquofull considerationrdquo is
given to adverse effects upon the US economy
Section 2(b)(1)(B) of the Act refers to ldquoserious adverse effectrdquo upon the US economy as a
whole whereas Section 608 of the Appropriations Act imposes a more stringent test by
focusing on a single industry ndash the domestic producers of the commodity to be produced by the
project supported by [the Bank] ndash and requiring a determination of substantial injury for that
industry alone However a reading of the entire Section shows that such a determination
would have to be made only if the net effect upon the US economy of the project for which
support was requested from [the Bank] is negative and if the commodity is likely to be in
surplus on world markets at the time the project becomes operative In any event under
Section 2(b)(1)(B) the Board would have to take into account any serious adverse effects of the
transaction upon the US economy Only if the Board decides to proceed with the transaction
regardless of such effects would it be necessary to determine if there will be substantial injury
to US producers of the commodity and thus trigger the prohibition contained in Section 608
It should also be noted that Section 1911 of the 1978 Amendments speaks in terms only of ldquoany
adverse effectrdquo However the language of that provision clearly shows that it was not intended
to set up a substantive test but rather as was mentioned above to insure that formal
procedures to take into account impacts upon the US economy are established by [Ex‐Im
Bank] as well as to enable the Bank to obtain a report from the International Trade
Commissionrdquo PL 95‐630 92 Stat 3641 (1978)
18
Appendix B
Financial Tools Available to US Airlines
Generally over the past several decades US airlines have had access to a broad range of
aircraft financing options
Accordingly at different times during the past several decades US airlines took advantage of
whichever financing option provided the most attractive overall financing terms from such
airlinesrsquo perspective For instance a US airline would be able to maximize the amount of the
financing thereby minimizing the amount of its own money it had to invest in the aircraft (ie
the ldquodown paymentrdquo) It might also maximize the amount of money in excess of the actual cost
of the aircraft it could raise against the aircraft obtain the longest possible repayment term and
the slowest possible amortization schedule (ie the longest ldquoweighted average liferdquo) obtain
the lowest interest rate and risk premium obtain the least restrictive operational and financial
covenants provide the least amount of collateral or other security or obtain other benefits
Due to the fact that the United States is seen as not presenting any ldquocountry riskrdquo and has well‐
developed and well‐regarded legal and judicial systems that are seen as being protective of
creditorsrsquo rights US airlines have usually had access to secured aircraft financings from
commercial banks from around the world During the past several decades commercial banks
from different regions have been at the forefront of the aircraft finance industry and have
provided financing to US airlines on attractive financing terms Initially US‐based banks
provided most of the aircraft financing to US airlines but during the 1980s Japanese banks
became very significant lenders to the US airlines During the 1990s and 2000s the European
banks (German French British and Swiss banks) were the most significant source of
commercial bank funding for US airlines
In addition to commercial bank financing during the 1970s and 1980s US airlines obtained
long‐term financing from US‐based institutional investors (eg insurance companies and
pension funds) through the use of the Equipment Trust Certificate (ldquoETCrdquo) financing structure or
the Pass Through Certificate (ldquoPTCrdquo) financing structure The ETC is a financing provided by
institutional investors that is secured by one or more items of equipment (eg aircraft) The
PTC is a group of ETCs combined into a public debt security that is sold into the capital markets
to institutional investors
However during the 1980s the simplest and most prevalent form of aircraft financing for US
airlines was the US leveraged lease
The US leveraged lease allowed US airlines to take advantage of the US tax code which
generally provides for all types of capital assets to be depreciated and thereby reduces or
defers taxes due to the deductibility of tax depreciation Because US airlines generally did not 19
have sufficient income to fully take advantage of the benefit of the tax depreciation deductions
associated with acquiring aircraft the US airlines entered into US leveraged leases Under a
leveraged lease the benefits of the tax depreciation deductions related to the aircraft were
transferred to profitable companies that had income they wanted to shelter from tax In
return the company was willing to provide the equity in a US leverage lease (approximately
20 of the appraised value of the aircraft) and to ldquoleaserdquo the aircraft back to the airline for the
airlinersquos use A number of different entities entered into such leases including banks insurance
companies and other financial institutions such as Ford Motor Credit as well as finance
subsidiaries of other corporate entities including consumer product companies such as Phillip
Morris or entertainment companies such as Disney The fact that these were ldquoleveragedrdquo
leases (as opposed to ldquosingle investor leasesrdquo) also enabled the equity providers to deduct the
interest expense associated with the US leveraged lease
Through the use of a combination of lease equity and debt a US leveraged lease allowed US
airlines to arrange financing for up to 100 of the appraised value of an aircraft This was
particularly attractive to major US airlines because due to their size and relative importance
to the aircraft manufacturers every major US airline generally was able to negotiate aircraft
purchases with the aircraft manufacturers that enabled the airline to buy the aircraft for
amounts significantly less than the appraised value The result was that by using a US
leveraged lease to finance its aircraft a US airline was able to ldquoover‐financerdquo the aircraft (ie
finance the aircraft for more than the airline was paying for the aircraft) resulting in the airline
effectively having the ability each time the airline financed an aircraft to arrange 100
financing for its aircraft and at the same time arrange a long‐term working capital loan This is
the equivalent of a home buyer being able to buy a house with no money down (no down
payment) and also receiving a long‐term loan for non‐home expenses
In contrast Ex‐Im Bank‐supported aircraft financing is for only 85 (and sometimes less) of the
actual ldquonet pricerdquo that the airline is paying the US aircraft manufacturer (after deducting all
discounts and other concessions the airline has negotiated with the US aircraft manufacturer
which results in a net price that is almost always less than the appraised value) This requires
the foreign airline that is using Ex‐Im Bank support to come up with a down payment of at least
15 of the net price of the aircraft As a result US airlines were able to obtain more financing
under a US leveraged lease (without putting any money down) than foreign airlines could
under an Ex‐Im Bank supported aircraft financing (which required a down payment)
In addition US leveraged leases used by US airlines always had very long repayment terms
Generally speaking the longer the repayment the longer the tax deferral and the more
advantageous the terms of the US leveraged lease As a result it was not unusual for the US
leveraged leases used by US airlines to have a repayment term of between 18 and 22 years
and sometimes as long as 25 years The only constraint was that the lease term of the
20
leveraged lease should not exceed 80 of the economic useful life of the aircraft which in
some instances was more than 30 years
In contrast the repayment term in an Ex‐Im Bank‐supported aircraft financing is never longer
than 12 years which is the maximum repayment term Ex‐Im Bank is permitted to offer for an
aircraft financing under the guidelines for export credits promulgated by the Organization for
Economic Cooperation and Development (the ldquoOECDrdquo) with which guidelines the US
Government (including Ex‐Im Bank) has agreed to abide This difference in repayment terms is
significant it is similar to the difference in monthly payments under a 15 year home mortgage
versus a 30 year home mortgage As a result US airlines were able to obtain significantly
longer financing under a US leveraged lease (which generally resulted in a smaller periodic
principal repayment burden due to the longer repayment term) than foreign airlines could
under an Ex‐Im Bank‐supported financing
US leveraged leases used by US airlines also had a slower amortization profile with a very
long weighted average life (ie small amounts of debt amortization in the early years of the
financing) of at least 10 years In the same manner that a longer repayment term increased the
tax deferral a longer weighted average life also increased the tax deferral
In contrast the amortization profile in an Ex‐Im Bank supported aircraft financing for a foreign
airline is usually between 6 years and 65 years (at least 4 years shorter than the weighted
average life of the US leveraged leases historically used by US airlines) which imposes a
much greater cash flow burden on the foreign airline in comparison with the cash flows
required of a US airline under a US leveraged lease
Although the absolute interest rate on the debt in a US leveraged lease fluctuated over time
with the overall level of interest rates the providers of the debt into these US leveraged leases
(primarily insurance companies and other institutional investors) were generally willing to
accept an interest rate margin of less than 100 basis points31 over LIBOR32 on a fixed rate
equivalent basis (and sometimes significantly less than 100 basis points)
In contrast the interest rate margin on the debt on an Ex‐Im Bank‐supported aircraft financing
was generally between a few basis points over LIBOR to 50 basis points over LIBOR because the
interest on the Ex‐Im Bank‐guaranteed aircraft financing is guaranteed by Ex‐Im Bank and
reflects the low risk associated with a US Government guaranteed loan However the interest
rate margin on an Ex‐Im Bank‐guaranteed aircraft financing does not reflect the Ex‐Im Bank
exposure fee (or risk premium) that is paid to Ex‐Im Bank in view of the underlying risk of the
foreign airline The minimum exposure fee charged by Ex‐Im Bank was 2 during the 1980s
31 100 basis points equals 1 percent 32 LIBOR is the London Inter‐Bank Offering Rate and is a common reference rate such as ldquoPrimerdquo or ldquoTreasury Raterdquo used in adjustable interest rate transactions
21
and early 1990s and 3 until 2007 when the OECD promulgated a new set of guidelines for
export credits for aircraft (known as the ldquo2007 Aircraft Sector Understandingrdquo or the ldquo2007
ASUrdquo) This exposure fee was required to be paid ldquoup frontrdquo ndash ie at the inception of the loan
On a per annum basis this equates to between 30 basis points and 50 basis points which
should be added to the interest rate margin received by the guaranteed lender to obtain the
equivalent interest rate paid by a foreign airline under Ex‐Im Bank‐supported financing (for
purposes of comparing the overall financing cost to those incurred by US airlines) The Ex‐Im
Bank exposure fee is similar to a homeowner having to pay ldquopointsrdquo up front at the time he
obtains his mortgage The effect of paying points up front and paying an Ex‐Im Bank exposure
fee effectively increases the cost of the financing In comparing the overall cost of financing
through ECA support including the exposure fee to the overall cost of a leveraged lease for
borrowers with comparable credit profiles the overall cost of the US leveraged lease was
considerably more favorable than what could be achieved through an Ex‐Im Bank‐supported
aircraft financing
Although the US leveraged lease was itself a very attractive financing structure for US
airlines at different times the basic US leveraged lease was made even more attractive due to
other provisions of the US and foreign tax codes
For instance from the 1960s (during the Kennedy Administration) until its repeal under the Tax
Reform Act of 1986 the US tax code provided for an investment tax credit which was intended
to encourage investment in capital goods and therefore allowed airlines or the equity investor
in a US leveraged lease to get a credit against the taxes it would otherwise be required to pay
This credit was a permanent reduction in taxes paid as opposed to only the deferral of taxes
(postponement of when taxes had to be paid) that could be achieved through the use of the
US leveraged lease
Similarly from the 1980s to the mid‐1990s it was common for a US airline to combine a US
leveraged lease with a lease into a foreign jurisdiction that had a ldquoform over substancerdquo
approach to its tax code (as opposed to the United States which has a ldquosubstance over formrdquo
approach to its tax code) Taking advantage of the disparity a US airline could ldquosellrdquo the
aircraft to both (i) an equity investor in the United States and (ii) an equity investor in a foreign
country such as Japan Germany or Hong Kong and each equity investor could depreciate the
same aircraft and therefore shelter its respective income Over time due to changes in the
respective tax codes these more aggressive tax advantaged cross‐border leasing structures
(ldquoDouble Dipsrdquo and even on occasion ldquoTriple Dipsrdquo) were disallowed but not before US airlines
financed billions of dollars of aircraft using such tax advantaged leasing structures
During the 1990s the basic US leveraged lease was made even more attractive by taking
advantage of another provision of the US tax code that allowed additional US taxes to be
22
deferred if the equity investor in the transaction used an offshore subsidiary that qualified as a
Foreign Sales Corporation (ldquoFSCrdquo) under the US tax code and structured the deal as a
Commission FSC
In addition during the 1980s and 1990s US airlines had access to other sources of financing
with overall financing terms that were much more attractive than what was available to foreign
airlines via Ex‐Im Bank‐supported export credits For example during the late 1980s and 1990s
Airbus made its first significant sales to US airlines In order to do so Airbus arranged and
provided very attractive and flexible financing terms to US airlines to encourage them to
purchase European‐manufactured Airbus aircraft instead of US‐manufactured Boeing or
McDonnell Douglas aircraft The US airlines were more than willing to accept these incentives
During this period some US airlines entered into ldquowalk awayrdquo leases of Airbus aircraft
pursuant to which Airbus North America (backed by the joint and several guarantees of each of
the four countries that are members of Airbus SAS) entered into a US leveraged lease of the
Airbus aircraft and then subleased the aircraft to a US airline on terms that (i) passed along
most of the tax benefits to the US airline through lower lease rentals and (ii) permitted the
US airline to terminate the sublease and simply ldquowalk awayrdquo from the lease upon a relatively
short notice period
Under the ldquoHome Market Rulerdquo the European export credit agencies (including those of
France Germany and the United Kingdom) that usually support the financing of Airbus aircraft
could not provide such support to US airlines Therefore Airbus arranged for Kreditanstalt fur
Wiederaufbau the development bank of Germany to provide very attractive financing for the
Airbus aircraft being acquired by US airlines These financings occurred on terms much more
favorable (with 18‐ to 22‐year repayment terms) than what export credit agencies could
provide (with a maximum repayment term of 12‐years)
Similarly during the 1990s US airlines began to acquire a large number of 35 to 50 seat
regional jet aircraft manufactured by Bombardier of Canada and Embraer of Brazil Many of
these aircraft were acquired by the US airlines by using export credit support from Canada and
Brazil Some of the financing terms (ie the repayment terms) of these Brazilian and Canadian
government‐supported export credit financings were even more attractive (15‐ to 18‐year
repayment terms) than what was available from the export credit agencies of France Germany
and the United Kingdom with respect to Airbus aircraft or from Ex‐Im Bank with respect to
Boeing aircraft (10‐ to 12‐year repayment terms)
To make the financing of Canadian‐manufactured Bombardier regional jets even more
attractive to US airlines the province of Quebec (where Bombardier has its headquarters)
through Investment Quebec provided additional aircraft financing support to the US airlines
23
Finally to the extent even more attractive financing was needed to convince US airlines to
purchase Canadian or Brazilian‐manufactured regional aircraft the manufacturers themselves
provided residual value guarantees with respect to such aircraft to the airline or to the
financiers (ie to the equity investor in a US leveraged lease or the creditors financing the
aircraft)
The next major development in aircraft financing used by US airlines was the development in
the 1990s of the Enhanced Equipment Trust Certificate (ldquoEETCrdquo) which was an ETC with certain
structural enhancements The most important of these enhancements is a liquidity facility to
ensure that if there is a default the financiers would continue to receive current interest
during the period of time while the aircraft is being repossessed and remarketed A key
element in the development of the EETC was the existence of Section 1110 of the US
Bankruptcy Code which gives a type of ldquopreferred creditorrdquo status to financiers of aircraft for
US airlines This ldquopreferred creditorrdquo status exempts aircraft financiers of US airlines from
the automatic stay generally imposed following a bankruptcy filing by a borrower subject to the
protections of the US Bankruptcy Code Section 1110 of the US Bankruptcy Code
accomplishes this by requiring the airline within 60 days of such bankruptcy filing to either (i)
resume payments under the originally agreed aircraft financing or (ii) return the aircraft to the
financier
The first EETC was done in 1994 and the practice has now been successfully used by almost
every major US airline including Alaska Airlines America West Airlines American Airlines
Continental Airlines Delta Airlines Hawaiian Airlines Jet Blue Airlines Northwest Airlines
Southwest Airlines United Airlines and US Airways The overall financing cost of a US airline
acquiring an aircraft through the use of the EETC ndash which includes the amount of financing
repayment term amortization profile effective cost of the financing etc ndash has generally been
significantly more attractive than (i) what such US airline could have achieved under an export
credit‐supported aircraft financing for such airline and (ii) what a similarly rated foreign airline
could have achieved under an export credit‐supported aircraft financing
This is particularly true for the financing of new aircraft The development of the EETC market
provided enormous financing flexibility to US airlines for the financing of new aircraft the
EETC provided the airline with the option to finance on a simple secured mortgage basis or the
US airline could opt for a leveraged lease with all of the benefits associated with a leveraged
lease described above
Beginning in 1997 US airlines had the ability to raise money in the capital markets when the
overall financing terms were most attractive They were able to ldquolock‐inrdquo such favorable
financing terms to fund new aircraft that were scheduled to be delivered in the future by
issuing a ldquopre‐fundedrdquo EETC These pre‐funded EETCs were used to great success by US
24
airlines in the late 1990s through 2001 a period in which the US airlines were taking delivery
of a significant number of aircraft
As a result of the downturn in the US airline industry following the September 11 2001
terrorist attacks many US airlines deferred or cancelled their orders for new aircraft This
reduced the need for US airlines to finance new aircraft when the financing terms available to
such US airlines via the EETC were not as favorable due to (i) the perceived increased credit
risks of the US airline industry following the September 11 terrorist attacks and (ii) the
temporary disequilibrium in the credit markets following the 200820092010 credit crisis
Now that the US airlines have once again begun to take delivery of a significant number of
new aircraft the pre‐funded EETC continues to be the preferred source of financing for US
airlines as evidenced by the number and amount of EETC issuances during 2012 and 2013
Based on an analysis of the EETC transactions occurring during 2012 and 2013 EETCs are once
again generally considered to provide more attractive overall financing terms than what could
be achieved by an airline under an export credit‐supported financing done under the terms of
the 2011 Aircraft Sector Understanding
25
GLOSSARY
ldquoAdverse Economic Impactrdquo is the short‐hand term used to refer to any serious negative effects on US industries or US jobs as set forth in the Bankrsquos Charter that result from Ex‐Im Bank loans guarantees or insurance The Bankrsquos Charter contains three provisions that address adverse economic impact found at 12 USC sectsect 635(b)(1) 635a‐2 635(e)
ldquoAir Indiardquo is an airline owned by the Government of the Republic of India ldquoAir India Transactionsrdquo are the two final commitments approved by Ex‐Im Bank on September
30 2011 for loan guarantees for the purchase of a number of 787 ldquoDreamlinerrdquo aircraft from Boeing and to be financed by a commercial lender not identified at the time As of the date of this paper Ex‐Im Bank has not issued any of its loan guarantees but is expected to do so in the coming months Ten of the aircraft involved in these two final commitments have been delivered to Air India and are in use by Air India on routes outside the United States The deliveries of the ten aircraft were made using private short‐term financing as to which Ex‐Im Bank had no involvement
ldquoAirbusrdquo Airbus SAS is a Europe‐based manufacturer of large commercial aircraft Airbus is the only competitor to Boeing the US manufacturer Airbus sales are supported by the ECAs of Germany France and the UK
ldquoAircraft Sector also known as the ASU is an agreement among members of the OECD Understandingrdquo that manufacture aircraft and Brazil The ASU requires that Export
Credit Agencies that support the export of aircraft follow certain rules and restrictions that set forth the most favorable terms that can be provided These rules and restrictions include the Export Credit Agency must charge a minimum risk premium which is determined by the ASU the term of any loan made by or supported by the Export Credit Agency for the purchase of aircraft cannot exceed 12 years the Export Credit Agency today can lend or guarantee only up to 85 of the actual purchase price of the aircraft being exported and the use of risk mitigants The ASU was preceded by the Large Aircraft Sector Understanding which governed these issues until the enactment of the 2007 ASU The ASU was again updated and revised in 2011 (See also the Large Aircraft Sector Understanding)
ldquoArrangementrdquo is the agreement among Export Credit Agencies governing the terms by which they will provide loans guarantees or insurance in support of exports from their respective countries Among other things the Arrangement requires Export Credit Agencies to charge a minimum risk premium which is governed by the Arrangement See also Organization for Economic Cooperation and Development
ldquoASUrdquo see Aircraft Sector Understanding ldquoAverage Weighted Liferdquo for purposes of this paper refers to the average number of years that
each dollar of unpaid principal on a loan remains outstanding For example a loan with equal principal payments throughout the loan term will have an average weighted life close to the middle of the whole loan term
26
ldquoBank Actrdquo is the Export‐Import Bank Act of 1945 12 USC sect635 as amended ldquoBank Advisory Committeerdquo is the official Advisory Committee of the Bank appointed in accordance
with the Bank Act and the Advisory Committee Act The Bank Advisory Committee is comprised of representatives of various industry and market sectors as well as representatives of labor and international trade experts
ldquoBasis pointsrdquo are a numerical measure applied to interest rates One basis point equals 1100th of one percent or 100 basis points equals one percent
ldquoCapital Equipmentrdquo is equipment used to manufacture a product provide a service or sell store or deliver merchandise A wide‐body aircraft is a piece of capital equipment
ldquoCharterrdquo is the Bank Act as well the provisions of the Export Import Bank Reauthorization Act of 2012 (Public Law 112‐122) that are not codified in the Bank Act
ldquoDreamlinerrdquo is the name given to a Boeing 787 wide‐body commercial aircraft ldquoECArdquo see Export Credit Agencies ldquoEconomic Impact Proceduresrdquo
are procedures adopted by Ex‐Im Bank to assess whether transactions supported by the Bank cause a serious adverse economic impact to US industries and US jobs See also Adverse Economic Impact
ldquoEETCrdquo see Enhanced Equipment Trust Certificate ldquoEnhanced Equipment Trust Certificaterdquo
also known as an EETC is a type of secured bond issued by a borrower in the capital markets The EETC is secured by the equipment being purchased with the proceeds of the bond issuance EETCs are used primarily for aircraft and since the late 1990s has been the dominant financing tool used by US airlines to purchase aircraft Section 1110 of the US Bankruptcy Codemdashwhich allows creditors of aircraft borrowers to obtain their collateral within 60 days if the payments on their debt is not current ndash has provided creditors of US airlines a level of comfort not available to creditors of foreign airlines until recently This generally provided US airlines with a significant financial advantage vis a vis their foreign competitors Recently the adoption of the Cape Town Convention and the related Aircraft Equipment Protocol has provided creditors of foreign airlines with protections similar to the protections provided by section 1110 of the US Bankruptcy Code Recently this has led to the beginnings of an international EETC market
ldquoEquipment Trust Certificaterdquo
also known as an ETC was the predecessor to the Enhanced Equipment Trust Certificate
ldquoETCrdquo see Equipment Trust Certificate ldquoEx‐Im Bankrdquo or ldquoBankrdquo See The Export‐Import Bank of the United States ldquoExport Credit Agenciesrdquo are agencies or ministries of government that have the official role of
providing loans guarantees or insurance in support of exports from their respective countries or in support of exports by sales of companies from their respective countries Ex‐Im Bank is the official Export Credit Agency of the United States of America
ldquoexportable goods screenrdquo is a screen or filter adopted by Ex‐Im Bank in its 2001 Economic Impact Procedures The exportable goods screen is utilized along with other screens to balance the Bankrsquos obligation to consider the adverse
27
economic effects of its transactions on US industries and US jobs with the Bankrsquos mandate to support US export transactions in a timely manner so as to fully support the exporterrsquos business opportunity The exportable goods screen filtered out transactions that supported exports which could only be used by a foreign buyer to provide services rather than produce goods
ldquoExport‐Import Bank of the is an independent agency of the Federal Government of the United United Statesrdquo States of America Also known as ldquoEx‐Im Bankrdquo Ex‐Im Bankrsquos mission
is to support US jobs by supporting US exports See 12 USC 635 et seq
ldquoExposure Feerdquo is the risk premium charged by Ex‐Im Bank in exchange for its guarantee in certain transactions The exposure fee must be at least equal to the minimum risk premium required by the terms of the Arrangement and the Aircraft Sector Understanding
ldquoForeign Sales Corporationrdquo is a company created under the terms of a former provision of the US Internal Revenue Code Foreign Sales Corporations received significant tax benefits
ldquoFSCrdquo see Foreign Sales Corporation ldquoInvestment Tax Creditrdquo is a credit permitted under the US Internal Revenue Code for the
purchase of certain types of equipment in certain circumstances See also Leveraged Leases
ldquoKFWrdquo the development bank for the Federal Republic of Germany KFW is an Export Credit Agency but it also operates through a ldquomarket windowrdquo which is not subject to the Home Market Rule Thus KFW provides support to Airbus for its sales of aircraft to US airlines The United States does not have an equivalent institution and Ex‐Im Bank does not have a ldquomarket windowrdquo
ldquoLarge Aircraft Sector also known as LASU was the predecessor to the Aircraft Sector Understandingrdquo Understanding The LASU governed the same general issues as are set
forth in the Aircraft Sector Understanding except that the minimum risk premium was lower than that required in the 2007 ASU and 2011 ASU When the 2007 ASU was enacted grandfathering provisions allowed ECA‐supported financing for a limited number of aircraft to be governed by LASU
ldquoLASUrdquo see Large Aircraft Sector Understanding ldquoLeveraged Leaserdquo is a lease of equipment and is designed to allow the lessor to take
advantage of certain tax code provisions such as the depreciation deduction and the investment tax credit while allowing the lessee to obtain the equipment involved at a significantly lower cost Leveraged Leases were a very popular means for US airlines to acquire aircraft throughout the 1980s and 1990s The value of the tax deductions to the lessor were significant so that the implicit interest rate in the lease payments by the US airline were extremely low Usually the US airline did not have sufficient profit to take advantage of the favorable tax code provisions By using a leveraged lease another company that could shelter income by using the tax code provisions would buy the equipment and lease the equipment to the US airline Usually at the end of the lease term the US airline would purchase the aircraft
28
ldquoLIBORrdquo is the London Inter‐bank Offering Rate It is commonly used as a reference rate in loan transactions that have floating or adjustable interest rates LIBOR reflects the rate at which banks will lend money to each other LIBOR is set for various loan terms (eg 3 months 6 months etc) and is widely published making it a convenient rate to use as a reference rate
ldquoNet pricerdquo is the price paid after all discounts have been deducted The net price is the actual price paid for a piece of equipment In aircraft transactions pursuant to the ASU Ex‐Im Bank will only support up to 85 of the net price of an aircraft EETC transactions on the other hand often support the nominal purchase price of an aircraft and thus result in a significantly higher amount financed
ldquoOECDrdquo see the Organization for Economic Cooperation and Development Open Skies Agreement Is a type of bilateral agreement between countries that govern the
rights of airlines from the two countries to fly into the other country Open Skies Agreements generally allow free access to fly as many routes to a country as an airline may choose but then usually restrict the ability to fly within the other country Generally it is a ldquofly in and outrdquo rule although there are exceptions
ldquoOrganization for Economic Cooperation and Developmentrdquo
also known as the OECD is an organization comprised of 34 member countries that work together to promote development The United States is a member With regard to Ex‐Im Bank the OECD is the organization through which the US Government negotiates an agreement among Export Credit Agencies known as the Arrangement and the ASU (and its predecessor the LASU)
ldquoPass Through Certificaterdquo also known as a PTC is a group of Equipment Trust Certificates pooled together to form the basis for a bond issuance
ldquoPTCrdquo See Pass Through Certificate ldquoRyanairrdquo is a low‐cost Irish airline that began business after European
deregulation of airlines in 1997 Ryanair rapidly expanded during the first decade of the 2000s creating significant competition for other airlines
ldquoScreensrdquo are a type of filter used by Ex‐Im Bank in its Economic Impact Procedures Screens are designed to identify those transactions which are not likely to cause an adverse economic impact to US industries or US jobs so that such transactions can be processed more quickly and efficiently as required by the Bank Act
ldquoSubstantial Injuryrdquo is a term defined in Ex‐Im Bankrsquos Charter to be applied in connection with the Bankrsquos economic impact procedures 12 USC sect635(e)(4) The Charter states ldquohellipthe extension of any credit or guarantee by the Bank will cause substantial injury if the amount of the capacity for production established or the amount of the increase in such capacity expanded by such credit or guarantee equals or exceeds 1 percent of United States productionrdquo
ldquoTPCCrdquo see Trade Promotion Coordinating Committee ldquoTrade Promotion Coordinating Committeerdquo
also known as the TPCC is an interagency committee of the US Government chaired by the Secretary of Commerce It was established under the Export Enhancement Act of 1992 to provide a
29
unifying framework to coordinate the export promotion and export financing activities of the US government and to develop a government‐wide strategic plan for carrying out such programs
ldquoTrade Sanctionsrdquo refers to any of a number of sanctions imposed by the US Government against companies countries industries or products usually as a result of an accusation of adjudication of a violation of an international trade agreement The Bank Act requires Ex‐Im Bank to take certain trade sanctions into account in its economic impact procedures
30
Table A ndash Congressional Actions and Ex-Im Bank Responses
Year Congressional Action Ex‐Im Bank Response
1968 Bank directed to take into account the possible adverse effect [of its loans and guarantees] upon the United States economy
Bank adds this transactions
factor to analysis of
1975 1 Standard refined to take into account any serious adverse effect of loans and guarantees on competitive position of US industry availability of scarce materials in US and employment in US
2 Bank directed to be competitive with rates terms and conditions offered by principal countries whose exporters compete with US exporters
3 Bank directed to submit semi‐annual report on competitiveness and conduct survey of US exporters and lenders to determine experience in meeting financing competition
Bank adds these of transactions
considerations to analysis
Year Congressional Action Ex‐Im Bank Response
1978 ‐ 1979
1 Bank directed to take into account any serious adverse effect of loans on competitive position of US industry and scarce materials Bank directed to emphasize strengthening competitive position of US exporters and expanding total US exports
2 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [From Appropriations Act Restated in Bank Charter in 1986]
3 Bank directed to implement regulations and procedures to insure full consideration of extent to which loan or guarantee is likely to have adverse effect on industries and employment in US either by reducing demand for US produced goods or increasing imports to the US
Bank develops framework and set of written economic impact procedures
1 Exclude exports the use of which remained localized in foreign country This
is first ldquoforeign localized goods and services screenrdquo
2 ldquoIntent and stimulus for projectrdquo examined to determine likelihood of substantial adverse economic impact Does transaction involve ldquorunaway industryrdquo
(leaving US for cheaper foreign labor)
3 Does export of capital equipment result in ldquobuy backrdquo of product being imported into the US
4 Is net impact on US economy and jobs positive or negative and to what degree
32
Year Congressional Action Ex‐Im Bank Response
1986 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [Originally from 1978 Appropriations incorporated into Bank Charter in 1986]
Senate Report recognizes knowledge and experience of Bank and need to respond to exportersrsquo requests for support in a timely and confidential fashion Economic impact procedures are to be practical and workable and not reduce Bankrsquos competitiveness and flexibility nor ignore positive aspects of export sale
Bank develops ldquoSummary of Adverse Economic Guidelinesrdquo to be applied to both
goods and services (a) is commodity to be produced surplus or likely to compete with US‐produced surplus (b) will Bankrsquos
assistance cause substantial injury to US producers of competing commodity (c)
will injury to US producers of competing commodity outweigh the short‐ and long‐
term benefits to US industry and employment If answer is no then no
further economic impact analysis
1988 Congress establishes test for ldquosubstantial injuryrdquo if the amount of capacity for production established or amount of increase in such capacity expanded by Bankrsquos credit or guarantee exceeds 1 of US production
Bankrsquos Board recognizes requirement to balance (a) possibility of substantial harm
to US production and employment with (b) being responsive competitive and efficient New economic impact procedures ask (a) will the project be in direct competition with US production (b) is the Bankrsquos support significantly associated with the project (c) will the output of the project
cause substantial injury to US producers of the same similar or competing
commodity If answer is no then no further economic impact analysis is required
33
Year Congressional Action Ex‐Im Bank Response
1998 Bank revised procedures involving countries against which trade sanctions were pending or imposed
2001
2006 ‐2007
1 Bank required to determine whether extension of credit or guarantee is likely to produce same or other commodities and whether the production may cause substantial injury to US producers
2 Bank prohibited from providing a loan or guarantee that will facilitate circumvention of trade law order or determination
3 Bank required to designate sensitive commercial sectors and products for which Bank financing deemed unlikely due to potential for adverse economic impact on US
4 Bank required to aggregate financial thresholds on rolling 24‐month basis
Bank develops ldquoexportable goods screenrdquo Does Ex‐Im Bank support result in production of exportable good from the foreign buyerrsquos country If not no further economic impact analysis is required Notice and request for comments were published in the Federal Register US airline industry did not respond
Bank issues 2007 Economic Impact Procedures ldquoExportable goods screenrdquo is modified Will the transaction (capital goods and services) result in either new or additional production capacity of an exportable good
34
II History of the Bankrsquos Economic Impact Procedures Congressional Requirements Ex‐Im Bank Responses Development of Analytical Screens
A Ex‐Im Bankrsquos Charter and Mission Balancing Support for Exports Competition and Economic Impact
The Bank was established in 1934 to facilitate exports of goods and services and in so doing to contribute to the employment of United States workers Congress has directed the Bank in carrying out its mission to provide export financing that is ldquofully competitiverdquo with export financing provided by other governments6 At the same time Congress has required the Bank to take into account the potential ldquoadverse economic impactrdquo of its financing decisions
The cumulative intent of Congress is clear
a) the Bankrsquos fundamental mission is to promote US jobs by supporting exports b) the Bank should evaluate its transactions efficiently so as not to impede the
transactions which often need to proceed expeditiously to capture the export opportunity and
c) the Bank should focus its adverse impact analysis only on those instances where the potential adverse effect is substantial
In response to these statutory mandates the Bank developed formal ldquoeconomic impact proceduresrdquo designed to identify transactions likely to produce a substantial adverse effect on US industry and to subject those transactions to thorough analysis Between the Bankrsquos inception in 1934 and 1968 when Congress first required the Bank to ldquotake into accountrdquo possible adverse effects of its transactions the Bank had completed many thousands of transactions Through this experience the Bank accumulated a significant wealth of knowledge about the industries with which it worked and the effects of its financing on domestic and foreign industries Based on this accumulated knowledge the Bank early on determined that the best way to identify those transactions that were likely to have a substantial adverse effect was by categorizing transactions that had certain characteristics so as to identify and remove from detailed economic impact review those transactions that were not likely to result in a substantial adverse effect on US industry or employment Transactions that were filtered out in this way could proceed without delay Eventually the different categorizations came to be called ldquoscreensrdquo
B ldquoAdverse Economic Impactrdquo ndash Chronology of Congressional Actions and Ex‐Im Bank Responses7
This section of the response to the Court provides a chronology of Congressional requirements and Ex‐Im Bank responses with a focus on the development of procedures to ascertain the existence of ldquoadverse economic impactrdquo The ldquoexportable goods screenrdquo first adopted in 2001 is examined briefly here and discussed more extensively in Part II below While all Bank transactions are subjected to the Bankrsquos economic impact procedures this screen categorically
6 Delta Air Lines Inc v Exp‐Imp Bank of the US 718 F3d 974 978 (DC Cir 2013) 7 Congressional actions and Ex‐Im Bank responses are summarized in tabular form on Table A
2
excluded from further economic impact analysis those transactions that did not support the financing of US exports which the foreign buyer could use to produce an exportable good Put another way this screen categorically excluded from further economic impact analysis those transactions in which the foreign buyer could only use the US exports to provide a service As explained more fully below the exportable goods screen reflected the Bankrsquos judgment that such transactions were unlikely to cause substantial adverse economic effects on US industry This judgment was and continues to be based on the Bankrsquos accumulated expertise in assessing economic impact pursuant to its Charter on its knowledge of financing markets and on input from trade groups industry stakeholders and other government agencies
1 1968 ndash The First ldquoEconomic Impactrdquo Requirements Are Added to the Bankrsquos Charter
The first of the Bankrsquos ldquoeconomic impactrdquo requirements was added to its Charter in 1968 requiring the Bank to ldquotake into account the possible adverse effects [of its loans and guarantees] upon the United States economyrdquo8 The Bank has historically interpreted this provision as an additional factor to consider in analyzing transactions for the purpose of supporting US jobs and exports
2 1975 ndash Congress Directs the Bank to Be Competitive with Other Countries and to Consider ldquoSerious Adverse Effectsrdquo on US Industry and Employment
In 1975 Congress enacted several amendments to the Bankrsquos Charter First the Bank is to consider only serious adverse economic effects of its loans and guarantees Congress required the Bank to
take into account any serious adverse effect of such loan[s] or guarantee[s] on the competitive position of United States industry the availability of materials which are in short supply in the United States and employment in the United Statesrdquo9
Congress also directed the Bank to be ldquocompetitive with the government‐supported rates and terms and other conditions available for the financing of exports from the principal countries whose exporters compete with United States exportersrdquo10 The Bank was further required to submit a semi‐annual competitiveness report a practice continued to date albeit on an annual basis Finally the Bank was ordered to ldquosurvey a representative number of US exporters and US commercial lending institutions which provide export credit to determine their experience in meeting financing competition from other countries whose exporters compete with United States exportersrdquo11
These requirements formed the foundation for Ex‐Im Bankrsquos regular practice of seeking input from stakeholders industry representatives and government agencies This is undertaken with a view to determine whether the Bankrsquos actions comport with its overall mission to support US jobs and exports without causing serious adverse effects on the United States economy
8 12 USC sect 635(b)(1)(B)(ii) PL 90‐267 82 Stat 47 (1968) 9 12 USC sect 635(b)(1)(B) PL 93‐646 88 Stat 2333 (1975) 10 12 USC sect 635(b)(1)(A) PL 93‐646 88 Stat 2333 (1975) 11 Id
3
3 1978 ndash Congress Directs the Bank to Strengthen the Competitive Position of United States Exporters and Expand US Exports
In 1978 Congress enacted three important changes relative to economic impact First Congress added language emphasizing the need to strengthen US exportersrsquo competitive position12
Second Congress prohibited Bank financing from being used to support exports that produce commodities that are in surplus or which would cause substantial injury to US producers of the same or similar commodity unless the Bankrsquos Board of Directors determines that benefits to US industry and employment outweigh injury to US producers13 This balancing test acknowledged the judgment that the Bank had to bring to bear in making such determinations
Third the Bank was directed to implement procedures to ensure consideration of the extent to which financing would have an adverse effect on US industries and employment either by reducing demand for US produced goods or increasing imports to the US14
4 1979 ndash The Bank Develops Comprehensive Economic Impact Procedures with the First Use of Analytical ldquoScreensrdquo in Response to Congressional Requirements
The following year the Bank developed a set of written economic impact procedures in order to address the various statutory requirements enacted by Congress in 1978 The general objective was to devise a framework to identify both those transactions that were relatively unlikely to result in a substantial adverse economic impact as well as those that were
As an operating premise for these procedures the Bank determined that exports involving certain kinds of capital equipment (eg locomotives) and certain projects (eg power plants) were not likely to have any serious adverse impact on US industries or jobs These types of transactions which amounted at the time to 80 to 90 of the value of all transactions supported by the Bank had little to no potential for a substantial adverse impact on the US
12 The Bank is directed to take into account any serious adverse effect of such loan[s] or guarantee[s] on the competitive position of United States industry the availability of materials which are in short supply in the United States and shall give particular emphasis to the objective of strengthening the competitive position of United States exporters and thereby of expanding total United States exportsrdquo PL 95‐630 92 Stat 3641 (1978) 13 ldquo[N]one of the funds otherwise made available pursuant to the act to the Export‐Import Bank and the Overseas Private Investment Corporation shall be obligated or expended to finance any loan any assistance or any other financial commitments for establishing or expanding production of any commodity for export by any country other than the United States if the commodity is likely to be in surplus on world markets at the time the resulting productive capacity is expected to become operative and if the assistance will cause substantial injury to United States producers of the same similar or competing commodity Provided that such prohibition shall not apply to the Export‐Import Bank if in the judgment of its Board of Directors the benefits to industry and employment in the United States are likely to outweigh the injury to United States producers of the same similar or competing commodityrdquo PL 95‐481 92 Stat 1591 (1978) This section of the Appropriations Act is the predecessor to what would become section 2(e) of the Charter in 198614 The Bank shall ldquoimplement such regulations and procedures as may be appropriate to insure that full consideration is given to the extent to which any loan or financial guarantee is likely to have an adverse effect on industries including agriculture and employment in the United States either by reducing demand for goods produced in the United States or by increasing imports to the United Statesrdquo PL 95‐630 92 Stat 3641 codified at 12 USC sect 635a‐2 (1978)
4
economy because the economic effects of the transactions were local in nature While not identified as such at the time this operating premise became the Bankrsquos first ldquoscreenrdquo in its economic impact procedures The screen eliminated from further economic impact analysis those transactions that resulted in foreign localized goods or services because they were unlikely to have a substantial adverse economic impact on US industry and jobs
For those transactions that cleared this first ldquoforeign localized goods and services screenrdquo the 1979 procedures then set forth factors for the Bank to consider in further analyzing economic impact
Categorization of transactions by ldquothe intent behind and stimulus for the projectrdquo was important in identifying transactions that were more likely to create a substantial adverse economic impact For example transactions involving ldquorunawayrdquo industries ndash ie industries that were leaving the US to seek cheaper labor in foreign countries ndash were generally suspect because they would tend to simply increase net imports into the United States
Similarly transactions involving ldquobuy‐backrdquo arrangements ndash where capital equipment is exported but there is an agreement that the resulting production will be ldquobought‐backrdquo by a party in the United States ndash were suspect because they also would tend to result in a net increase in imports
The Bank used these categorizations as tools at this stage of the analysis although additional factors were considered before the Bank approved or rejected a transaction Specifically the Bank considered (a) whether the net impact on the US economy and jobs was positive or negative by comparing the benefits from the export with the adverse impact of the transaction and (b) the seriousness of the impact or effect on the US economy if any15
5 1986 ndash Congress Directs the Bank to Balance the Benefits to US Industry and Employment Against Potential Injury
In 1986 Congress added to the Bankrsquos Charter the balancing test provisions previously contained in sect608 of the Foreign Operations Appropriations Act of 197816
The Senate Report accompanying this 1986 amendment emphasized that the Bank was to implement its provisions in a way that did not undermine the Bankrsquos primary function of financing transactions to support the export of United States goods and services
ldquothe Committee recognized the need for [the Bank] to respond to exportersrsquo requests for support in a timely and confidential fashion and intends that the Bank implement its adverse economic impact analysis procedures in a practical and workable fashionrdquo17
15 In connection with the presentation for approval of the 1979 economic impact procedures to the Ex‐Im Bank Board of Directors the Bankrsquos staff analyzed the three economic impact provisions in the Memorandum to the Board of Directors Pertinent provisions of this Memorandum are attached as Appendix A The Memorandum sets forth the Bankrsquos reasoning for interpreting the three applicable economic impact provisions in a holistic manner16 See text accompanying note 13 supra 17 See S Rep No 99‐274 at 8 (1986)
5
Explicitly recognizing the Bankrsquos expertise the Report also noted that the revised Charter ldquodoes not require the Bank to conduct further analysis if it views its existing body of knowledge as sufficientrdquo18 The Committee stressed that the ldquoprovision should be implemented in a way that does not reduce the Bankrsquos competitiveness and flexibility in assisting US exporters nor ignore the positive aspects of the export salerdquo19
This recognition of the need of the Bank to use its expertise to ensure competitiveness and flexibility in assisting US exporters was and has been incorporated as a guiding principle for the Bankrsquos analytical frameworks in assessing whether substantial adverse economic impact exists for each transaction considered
Following enactment of the 1986 provisions the Bank revised its economic impact procedures to categorize transactions These categories acted as filters posing two ldquoyes or nordquo questions summarized as follows
‐ Is the commodity to be produced likely to be in surplus on world markets at the time of production or is it likely to compete with US production of a competing commodity
‐ Will the Bankrsquos extension of a loan or guarantee cause substantial injury to US producers of a competing commodity
A ldquonordquo answer to either of these two questions in sequence would mean that no further analysis was necessary If answers to both questions were affirmative then the Bank would conduct a detailed economic impact analysis and would determine whether the short and long‐term benefits of the transaction to US industry and employment outweighed any injury to US producers of a competing commodity
6 1988 ndash Congress Defines ldquoSubstantial Injuryrdquo and Adds a 1 Test which the Bank Uses to Refine Its Economic Impact Procedures
In 1988 Congress amended sect2(e) of the Bankrsquos Charter by defining ldquosubstantial injuryrdquo for purposes of analyzing adverse economic impact Specifically Congress defined ldquosubstantial injuryrdquo to mean ldquoif the amount of capacity for production established or the amount of the increase in such capacity expanded by [the Bankrsquos] credit or guarantee equals or exceeds 1 percent of United States productionrdquo20
In November 1988 the Board of Directors approved a new set of economic impact procedures As noted in the staffrsquos Memorandum to the Board of Directors dated November 14 1988
ldquo[t]he Congressional debates on the various adverse economic impact provisions have made it clear that the focus of concern is the possibility of substantial harm to US
18 Id 19 Id 20 PL 100‐418 102 Stat 1107 (1988)
6
production and employment there was no desire to make [the Bank] less responsive or competitive by slowing down the processing of cases not likely to cause injuryrdquo21
In an effort to achieve this required balance the new economic impact procedures posed the following three questions
- Will the project be in direct competition with US production - Is [the Bankrsquos] support significantly associated with this project - Will the output of the project likely cause substantial injury to US producers of the
same similar or competing commodity
As before a negative answer to any of the three questions would mean that the Bank would not conduct a detailed economic impact analysis to determine whether the short‐ and long‐term benefits of the transaction to US industry and employment outweighed any injury to US producers of a competing commodity
7 1998 ndash The Bank Modifies Its Economic Impact Procedures to Include Consideration of Trade Sanctions
The Bank was reauthorized in 1997 and no changes were made to any of the economic impact provisions in the Bankrsquos Charter Nevertheless the Bank revised its existing procedures to include additional focus that Congress had required on transactions involving countries or industries against which certain trade sanctions were pending or imposed
8 2001 ndash After Public Notice and a Request for Comments the Bank Further Refines Its Economic Impact Procedures to Reflect Congressional Requirements and the Need to Timely Process Applications
In 2001 the Bank further updated its economic impact procedures During the preceding 20 years the nature of the Bankrsquos transactions had changed to include many more involving private sector borrowers rather than state‐owned entities The new procedures attempted to balance a thorough timely examination of economic impact issues with the need to process transactions within a short timeframe that would satisfy the speed required by commercial realities The Bank determined that it could best comply with its statutory mandate to provide competitive financing for US exports by focusing any detailed economic impact analysis only on those transactions likely to result in substantial adverse economic impact
The first stage or screen of the economic impact evaluation was to determine if the exports involved in a transaction would result in the production of an exportable good from the buyerrsquos country Hence the name ldquoexportable goodsrdquo screen As with its prior screens if the answer to this question was ldquonordquo then no further economic impact analysis was conducted
The Bank had determined that transactions that would result in the provision of exportable services from foreign countries would not cause substantial adverse economic impact on US
21 Memorandum to Board of Directors Country Risk Analysis Div ldquoProcedures for Economic Impact Analysisrdquo P 3 Nov 14 1988
7
industries The focus on exportable goods rather than exportable services was a result of several factors These included the Bankrsquos accumulated expertise with the relevant industries involved in transactions the Bank supported such as the airline sector and the financing available to such industries which indicated that US airlines generally had access to financing that was more favorable than the financing provided by Ex‐Im Bank to foreign airlines In addition the Bank took into account feedback and other input from trade groups industry stakeholders and other government agencies which would be expected to voice concerns if the Bankrsquos procedures were working to the detriment of any domestic industry
Notably the US airline sector had not raised any concerns about adverse economic impact since 1984 This lack of articulated concern by the US airline industry was consistent with the Bankrsquos own expertise and understanding of the airline sector and aircraft financing As noted above the Bank understood from its considerable involvement in aircraft finance that US airlines generally had access to financing that was more favorable than the financing provided by Ex‐Im Bank to foreign airlines Thus US airlines had no reason to complain
In anticipation of the 2001 revisions to its economic impact procedures although not required to do so the Bank published a notice in the Federal Register Its proposed new economic impact procedures were posted on its website and public comment was invited As before the US airline industry made no comments in response to the Bankrsquos proposed 2001 procedures which included among other things the adoption of the ldquoexportable goodsrdquo screen
The Bank adopted these procedures after repeated and extensive consultation with its core stakeholders including US industry labor its Advisory Committee and exporters22 In addition the Bank reached out to relevant experts in both the academic and consulting worlds who provided comments on the Bankrsquos proposed changes23 Finally the Bank requested and obtained input from other US Government agencies such as the Departments of Commerce Treasury and State as well as the Office of the US Trade Representative and the Office of Management amp Budget
The Bank considered and analyzed all the input it received and revised the procedures accordingly For example other US Government agencies had specific concerns with respect to how the Bank treated applications implicated by trade measures and the Bank modified its approach to these applications Given the lack of any articulated concerns about the airline sector and the Bankrsquos own knowledge and expertise regarding aircraft financing the Bank had no reason to believe that the proposed ldquoexportable goodsrdquo screen would not be an appropriate way to take account of adverse economic impact on the airline industry
22 The Bankrsquos Advisory Committee is created pursuant to its Charter and is ldquobroadly representative of environment production commerce finance agriculture labor services State government and the textile industryrdquo 12 USCsect635a(d)23 A partial list of those consulted includes former Congressman Bill Frenzel of the Brookings Institute Dr Robert Hahn of the American Enterprise Institute Dr Jerry Hausman of the Massachusetts Institute of Technology Dr J David Richardson of Syracuse University Dr Marina Whitman of the University of Michigan the National Foreign Trade Council the Coalition for Employment through Exports the American Iron and Steel Institute the AFL‐CIO the International Association of Machinists and Aerospace Workers NUCOR Bechtel Corporation Caterpillar Inc Delta Brands Inc and Air Tractor Inc
8
9 2006 ndash Congress Further Amends the Charter
In 2006 Congress made several substantive changes to the Bankrsquos Charter Among these were
‐ A requirement to determine whether the extension of a credit or guarantee is likely to result in the production of the same or similar commodities and whether such production may cause substantial injury to US producers
‐ A prohibition against providing a loan or guarantee that will facilitate the circumvention of any trade law order or determination
‐ A requirement for the Bank to designate sensitive commercial sectors and products for which the Bank is not likely to provide financing due to strong potential for adverse economic impact on US industry and
‐ A requirement to aggregate financial thresholds for purposes of assessing economic impact or otherwise on a rolling 24‐month basis24
In addition Congress added certain notice‐and‐comment requirements that apply ldquoif the Bank intends to conduct a detailed economic impact analysis or similar studyrdquo25
10 2007 ndash The Bank Responds to New Congressional Requirements with the 2007 Economic Impact Procedures
In response to the 2006 changes to the Charter the Bank modified its economic impact procedures The ldquoexportable goodsrdquo screen was amended to read
ldquoThe first stage of the economic impact analysis is to determine if the exports involved in a transaction will result in the production of an exportable good Therefore only exports of capital goods and services (eg manufacturing equipment licensing agreements) that will result in the foreign production of an exportable good are subject to further economic impact analysis in Stage II of these procedures The capital goods and services exports may be associated with new foreign production capacity or existing production capacity (eg applicable exports include replacement equipment in an existing production facility to maintain existing production capacity)rdquo26
Thus beginning with its first set of Economic Impact Procedures in 1968 and continuing through to 2007 the Bank has consistently made use of various kinds of filters or screens to remove those categories of transactions that are unlikely to produce a substantial adverse impact on domestic industry from detailed economic impact analysis This approach has allowed unaffected transactions to proceed without delay so that the Bank may capture the export opportunity Finally use of the screens has enabled the Bank to concentrate its resources on transactions that are more likely to cause substantial adverse economic impact
24 PL 109‐438 120 Stat 3268 (2006) 25 Id 26 Memorandum to Board of Directors Policy Analysis Div ldquoRevisions to Economic Impact Proceduresrdquo P 9 April 4 2007
9
III Discussion How the Bankrsquos Economic Impact Procedures and Exportable Goods Screen Satisfy the Requirements of the Bankrsquos Charter
In remanding the matter to the Bank the Court of Appeals required the Bank to provide a reasonable explanation to justify its use of the ldquoexportable goods screenrdquo The use of the ldquoexportable goods screenrdquo properly satisfies the various requirements of the Bankrsquos Charter When the screen was adopted the Bank knew that US airlines the industry most likely to be affected generally had access to financing at costs that were significantly more favorable than the cost of aircraft financing provided by the Bank For this very reason the Bank had not heard any economic impact concerns from any US airlines in the 17 years prior to the adoption of the screen Indeed the screen was in place for almost a decade before any US airline raised any questions about it When a single US airline did raise questions about the Bankrsquos financing to foreign airlines the analysis it submitted to the Bank did not support its claim that the Bankrsquos financing provided a financing cost advantage to foreign airlines Moreover the complaint was raised at a time and in the context of negotiations by export credit agencies (ldquoECAsrdquo) regarding the Aircraft Sector Understanding discussed below The Bank understood that the negotiations regarding the Aircraft Sector Understanding would address any concerns by US airlines which were also involved in the negotiations Finally the Bank was also aware throughout the first decade of the 2000s that the major US airlines involved in international flights were not in a mode of purchasing new aircraft and thus that any financing advantage was theoretical only In short the Bankrsquos adoption and continued use of the ldquoexportable goods screenrdquo was eminently reasonable and based on the Bankrsquos considerable expertise with the financial dynamics of aircraft financing
Section III outlines the Bankrsquos responses to evolving Congressional requirements for the Bank to consider whether its actions would have a serious or significant adverse effect on US industry or employment The Bankrsquos responses were formulated with a view to also ensure that it remains competitive with other export credit agencies as requires by its Charter and fulfills its mission to support US jobs through exports
A The US Airline Industry Financing Dynamics 1985 to Early 2001
The Bankrsquos experience over the past 45 years since the first legislated economic impact provisions were enacted has shown that most transactions for which the Bank receives applications are not likely to result in substantial adverse economic impact on the US economy or US jobs For example most of the Bankrsquos transactions are simply too small or too localized to have any significant likelihood of having an adverse impact on US industries or jobs Other examples are transactions supporting sales of consumable goods such as pickle exports to China and transactions supporting exports to be used in a power plant in a foreign country where the power generated will never be sent to the United States to compete with domestic power producers Therefore consistent with the Bankrsquos Charter not every application is subjected to a full‐blown ldquodetailed economic impact analysisrdquo
A detailed economic impact analysis can substantially delay the processing of a transaction and jeopardize the ability of the US exporter to capture the export opportunity Given the number of transactions the Bank finances each year ndash approximately 3800 in Fiscal Year 2012 ndash the
10
Bank would not be able to accomplish its mission of promoting US exports if it were to perform a ldquodetailed economic impact analysisrdquo on every transaction or even for a significant percentage of the transactions
Recognizing the dilatory effects of conducting unnecessary detailed economic impact analyses the Bankrsquos categorical approach to the economic impact provisions of the Bankrsquos Charter has always been to screen out transactions that were not likely to have a substantial adverse effect on US industries or US jobs Ex‐Im Bankrsquos experience in this area over the decades indicates three critical determinants of whether a contemplated transaction has potential to cause substantial adverse impact
1) whether the transaction is too small to have a significant impact
2) whether the transaction involves exports that are to be used for the production of goods or provision of services which are only likely to be used locally in the foreign buyerrsquos country and
3) whether the transaction relates to an industry (eg aircraft) in which the available financing for US domestic sales indicates that Ex‐Im Bank financing for foreign sales generally would not disadvantage the US industry
In 2001 when the Bankrsquos ldquoexportable goodsrdquo screen was first adopted the Bank had substantial reason to believe that transactions resulting in services being exported by foreign countries would be unlikely to have a substantial adverse economic impact on the US services sector
The Bank had for several decades received input from trade groups industry stakeholders and other government agencies regarding the domestic adverse impact of Ex‐Im Bank financing In the Bankrsquos experience such representatives could be relied upon to notify the Bank if they were concerned that the Bankrsquos policies procedures or actions threatened to cause any harm or disruption to a specific industry or sector Concerns raised by industry representatives or the absence of any voiced concerns were a significant tool for the Bank to check the soundness of its categorical judgments as reflected in the screens
As of 2001 when the ldquoexportable goodsrdquo screen was put in place the Bank had heard no concerns about Ex‐Im Bank transactions from the US airline industry in 17 years In 1984 Pan American World Airways (Pan Am) had argued that Ex‐Im Bank support resulted in lower financing costs for foreign airlines than the US airlines could themselves obtain To assess these concerns the Bank analyzed the overall costs of financing for US domestic airlines as compared to the costs of financing to a foreign airline in an Ex‐Im Bank‐guaranteed transaction The analysis compared not just the interest rates charged by lenders in the two different scenarios but also incorporated other factors so as to produce a true ldquoapples‐to‐applesrdquo comparison of the relative financing costs
These other factors included the cost of the Ex‐Im Bank guarantee fee (which the Bank now calls the ldquoexposure feerdquo) as well as the costs of financing the portion of the purchase price that
11
was not supported by the Ex‐Im Bank guarantee The Bank analyzed all of these factors and concluded that in fact Ex‐Im Bank support did not generally result in financing terms for foreign airlines that were more favorable than the financing available to US airlines Pan Am did not contest the Bankrsquos analysis at that time or at any subsequent time Nor did any other US airline or trade group raise any concerns in the intervening 17 years leading up to the adoption of the ldquoexportable goods screenrdquo in 2001 or indeed thereafter until 2010
Between 1990 and 1999 the Bank financed 440 aircraft involving the export of US‐manufactured aircraft representing a total value of approximately $22 billion dollars Given this significant expertise in the aircraft financing sector Ex‐Im Bank had ample and consistent evidence that major US airlines flying international routes had access to more favorable financing relative to the financing available to foreign airlines through ECAs such as Ex‐Im Bank Annexed as Appendix B is a detailed history and explanation of the types of financing that were available to US airlines which in turn had led the Bank to conclude that Bank financing to foreign airlines did not pose any financial competitive harm to US airlines
In contrast to the commercial bank financing available through Ex‐Im Bank in the 1980s and 1990s the principal method used by US airlines to acquire aircraft was through a ldquoleveraged leaserdquo A leveraged lease provides significant tax benefits to an entity that wants to shelter income through additional tax deductions The entity purchases the aircraft and then leases it to the airline The purchaser continues to own the aircraft and thus can take the depreciation deductions and investment tax credits on its tax returns during the term of the lease Once the lease term is over title to the aircraft may be transferred to the airline through various mechanisms The leveraged lease was very beneficial to US airlines in several respects
a) The effective cost of a leveraged lease structure was very attractive as compared to aloan to purchase the aircraft The purchaserlessor passed a portion of the tax benefitsback to the airline by way of lower lease payments
b) In most instances the airline could finance up to 100 of the appraised or ldquomarketrdquovalue of the individual aircraft In contrast under ECA financing from Ex‐Im Bank aforeign airline could only finance up to 85 of the ldquonetrdquo or actual price In short theUS airline could finance a larger percentage of a larger amount as compared to aforeign airline purchasing the same aircraft This translated into a significant financialadvantage for the US airlines
c) Under the leveraged lease structure the repayment terms offered to US airlines wereoften 18 to 22 years In contrast Ex‐Im Bank offered much shorter 10 to 12 yearrepayment terms Longer repayment terms mean lower payments which are of coursea significant benefit
As of 2001 Ex‐Im Bank was also aware that US airlines could avail themselves of commercial market financing known originally as equipment trust certificates and later as enhanced equipment trust certificates (ldquoEETCsrdquo) An EETC is a structure whereby investors can provide financing directly through the capital markets as opposed to loan financing provided by banks The EETCs provided significant cost advantages to US airlines and were generally not available
12
to foreign airlines Even for the rare foreign EETC the terms were not as favorable as the terms available to US airlines
The EETC was premised on sect 1110 of the US Bankruptcy Code which only applied to US airlines27 Section 1110 protects a secured creditor of an airline in bankruptcy by either a)requiring the debtor airline within 60 days of the bankruptcy petition date to cure any payment defaults and stay current with loan payments or b) permitting the secured creditor to obtain possession of the creditorrsquos collateral (ie the aircraft) 60 days after the bankruptcy petition date notwithstanding the automatic stay provision that applies to creditors of other types of debtors This certainty of access to collateral ndash and thus to payment ndash provided and continues to provide decreased risk to creditors of US airlines This certainty in turn allows these creditors to provide more favorable financing terms than creditors of foreign airlines In the boom years of 2000 to 2001 US airlines raised $19 billion in the EETC market primarily to purchase new aircraft
Throughout the years leading up to the adoption of the exportable goods screen in 2001 Ex‐Im Bank aircraft financing was provided in accordance with the guidelines set forth in the Large Aircraft Sector Understanding (ldquoLASUrdquo) under the auspices of the Organization for Economic Cooperation and Development (ldquoOECDrdquo) The LASU was followed later by evolving versions of the Aircraft Sector Understanding (ldquoASUrdquo) The LASU and the ASU wereare agreements that set forth guidelines to be followed by ECAs in supporting exports of aircraft manufactured in the home country of the relevant ECA The LASUASU guidelines set forth the maximum repayment term for the financing the maximum advance rate of the financing as a percentage of the net price of the aircraft and the minimum fee that the ECA was required to charge to the airline for the ECA support These terms and conditions resulted in financing that was significantly more expensive than that which could be obtained by US airlines in the private market
In light of the foregoing the Bank reasonably believed that US airlines would not suffer any adverse economic impact from the Bankrsquos financing of foreign airlinesrsquo acquisition of US‐manufactured aircraft In other words when Ex‐Im Bank first adopted the ldquoexportable goodsrdquo screen in 2001 the Bank was confident that its use of the screen would provide efficiencies in transaction‐processing time by focusing the Bankrsquos resources on transactions that could reasonably be expected to raise substantial adverse economic impact concerns
B The US Airline Industry Financing Dynamics Late 2001 to Early 2007
The decade of the 2000s presented the global airline industry with new challenges and new
opportunities ndash both of which created problems for US airlines
27 11 USC sect1110 (2001)
13
The terrorist attacks of September 11 2001 resulted in a sudden and protracted reduction in
demand for airline passenger services This was particularly prolonged in the United States and
Europe As a result of that drop in demand as well as other financial pressures the major US
airlines began a decade‐long process of mergers28 During the 2000s the major US airlines also
were able to shed costs and debtmdasheg pensionsmdashin a way not available to foreign airlines
under the US Bankruptcy Code29
As a result of this downsizing and restructuring US airlines focused on consolidation and
survival not expansion of their fleets by purchasing new aircraft US airline purchases of new
passenger aircraft almost disappeared after 2001 reappeared briefly in 2007 and then
disappeared again until sometime in 2010 Instead of ordering new aircraft US airlines
primarily relied upon the aircraft that they had purchased with EETC financing in the 2001‐2002
period
Nonetheless the data that are available indicate that through 2007 the US airlines generally
had access to aircraft financing that was no less favorable than financing provided by ECAs such
as Ex‐Im Bank In the midst of these developments starting in 2005 the various countries and
constituencies that were involved with ECA aircraft financing began negotiating a new ASU
During negotiations of the new ASU European airlines alleged that ECA financing was more
favorable than the financing to which they had access In June 2007 a new ASU agreement was
reached The European airlines explicitly approved thus signaling that the new agreement
eliminated any ECA financing advantage At the same time none of the US airlines raised any
economic impact concerns about the new ASU As Ex‐Im Bank reviewed and revised its
Economic Impact Procedures in 2007 there were no complaints raised by US airlines or any
other parties regarding aircraft transactions Likewise the new 2007 ASU had explicitly quelled
similar concerns in Europe All of the other relevant factors that led to adoption of the
ldquoexportable goodsrdquo screen in 2001 remained true in 2007 As a result in slightly varied form
the ldquoexportable goodsrdquo screen was carried through the 2002 and 2007 economic impact
procedures
C The US Airline Industry Financing Dynamics Late 2007 to 2012
After the 2007 ASU took effect the worldwide financial crisis emerged in 2008 and had a major
impact on global financial markets including those for large aircraft purchases From mid‐2008
to the beginning of 2010 the financial markets experienced significant volatility and distress
28 These included TWA and American Airlines in 2001 America West and US Airways in 2005 Northwest Airlines and Delta Air Lines in 2008 Continental Airlines and United Airlines in 2010 and Air Tran and Southwest Airlines in 2010 American Airlines and US Air announced merger plans in 201229 Bankruptcies of the major US Airlines from 2001‐2010 included US Airways in 2002 and 2004 United Airlines in 2002 Northwest Airlines in 2005 Delta Air Lines in 2005 Frontier Airlines in 2008 Mesa Airlines in 2010 American Airlines later filed for bankruptcy protection in 2012
14
Then after a short calm in 2010 the European sovereign debt and related European banking
crises rattled financial markets from mid‐2011 to mid‐2012 The result was another period of
extreme interest rate volatility
During this period the global financial market for commercial jet aircraft had been
characterized by (a) extreme volatility in both interest rates and availability of financing and
(b) major growth in demand for aircraft by airlines in the emerging markets and resource‐rich
OECD countries At the same time (and until only recently) there was very little demand for
aircraft by US airlines
There was also a fundamental shift in the key financial tools used for aircraft purchasesmdashwith
commercial banks playing a much diminished role EETC financing from the capital markets
emerged and matured into the most favorable source of financing
As noted before in early 2010 one US airline raised concerns that the financing provided by
the Bank to Ryanair an up‐and‐coming and successful discount airline in Europe was more
favorable than the financing available to US airlines The complaining airline asserted that Ex‐
Im Bank financing to Ryanair was significantly more favorable than financing that the
complaining airline itself had received in a recent EETC offering
Ex‐Im Bank reviewed and analyzed the assertions and determined that they were flawed in that
the purported difference in financial costs ignored pertinent factors and thus did not indicate
that ECA financing would be more favorable in a true ldquoapples to applesrdquo comparison Some key
factors ignored in the analysis provided by the one US airline were
a The credit‐worthiness of the US airline in question was publically rated at B‐ which in
common investment terms puts it in the ldquojunkrdquo group of ratings Ryanair by comparison is rated as investment grade a significantly higher rating Naturally a difference in credit ratings is going to result in a difference in the cost of financing
b The US airline was re‐financing a group of 10 to 12 year old aircraft while Ryanair was
financing brand‐new aircraft In both cases the aircraft being financed formed the
collateral pool for the loan Older aircraft represent a higher risk due to the poorer
quality of collateral therefore resulting in higher costs of financing
At the same time that this US airline was raising its concerns with the Bank it was also raising
similar concerns in the context of new ASU negotiations By the end of 2010 the ECAs reached
agreement on a new ASU (the 2011 ASU) which went into effect on February 1 2011 This
agreement included a built‐in adjustment mechanism to reflect changes in the financial
markets as they occurred This was designed to ensure that ECA financing and commercial bank
financing were generally equivalent The Bank continues to monitor the 2011 ASU to ensure
that the adjustment mechanism built into that agreement does in fact generally work to
15
enforce an equilibrium between the cost of ECA aircraft financings and the financing available
to US airlines in the private market In addition this very issue continues to be a regular topic
of discussion among the ASU participant countries as well Based on the data that have been
developed and presented to date the Bank believes that the 2011 ASU properly serves its
intended function of ensuring that airlines using private market financing do not suffer a
competitive disadvantage when compared to ECA financing of aircraft under the ASU
IV Conclusion
Ex‐Im Bankrsquos exportable goods screen complied with the Bankrsquos statutory requirements to
assess the potential adverse effects of all transactions and to focus on those transactions that
were likely to result in a substantial adverse economic impact on US industry Historically
financing available to US airlines for the purchase of new wide‐body aircraft has been either
more favorable than or equally favorable as Ex‐Im Bank financing to foreign airlines for the
purchase of equivalent aircraft The exportable goods screen was an appropriate reasonable
and efficient response to the realities of aircraft financing It properly balanced the
Congressional directives to assess the likelihood of substantial economic impact on US
industry and US jobs with the need to finance transactions in an efficient manner so as to
support US exports and US jobs
November 22 2013
Export‐Import Bank of the United States 811 Vermont Ave NW Washington DC 20571
16
Appendix A
Excerpt from Staff Memorandum to Ex‐Im Bank Board of Directors Accompanying 1979
Economic Impact Procedures30
Thus Section 2(b)(1)(B) of the Act requires the Board of Directors to take into account ldquoany
serious adverse effectrdquo which loans or guarantees may have on US industry materials in short
supply and employment Section 1911 of the 1978 Amendments requires consideration by the
Bank of the extent to which a loan or financial guarantee ldquois likely to have an adverse
effecthellipeither by reducing demand for goods produced in the United States or by increasing
imports to the United Statesrdquo and Section 608 of the Appropriations Act requires a finding that
the commodity ultimately produced as a result of [Bank] financing will be in surplus when the
production comes on‐stream and that US producers of the same similar or competing
commodity will be substantially injured It is apparent that the latter two statutory provisions
are explications of the basic mandate of the Act and do not expand the Bankrsquos mandate to
examine domestic impact but rather suggest factors to be considered in that examination To
a great extent the 1978 Amendments language and the Appropriations Act provisions set forth
the same concept in different ways Thus the reference in Section 1911 of the 1978
Amendments to ldquoreducing demand for goods in the United Statesrdquo and ldquoincreasing imports to
the United Statesrdquo is no more than the inevitable consequence of a commodity being ldquoin
surplusrdquo as stated in Section 608 of the Appropriations Act
Section 2(b)(1)(B) is the broadest formulation of the basic concept since it contains the most
general language ie ldquoany serious impactrdquo and encompasses all types of exports Section
1911 is primarily procedural in nature directing the Bank not only to implement appropriate
regulations and procedures to ensure full consideration of adverse impact but also to request a
report from the International Trade Commission Section 1911 includes a more detailed
description of events which would constitute adverse impactmdashie a reduction in demand for
US produced goods or an increase in imports to the US Finally this section contains an
explicit reference to agriculture which was only implicitly covered by Section 2(b)(1)(B) It
should be noted that this is one of several references to agriculture which were added to the
Act by the 1978 Amendments
The Appropriations Act provision explicitly refers to a balancing by the Board of Directors of the
benefits of the [Bank]‐supported export against the injury to US [producers] of the commodity
in question At the same time the Act has always necessitated such a balancing by requiring
the Bank to take into account ldquoserious adverse effects upon the US economyrdquo at the same
time it carries out the Bankrsquos basic mandate to ldquofacilitate exportsrdquo and to ldquofoster expansion of
exportsrdquo Under either provision therefore the Board of Directors will be taking into
30 Memorandum ldquoProcedures Regarding Adverse Domestic Impact of Eximbank Financingrdquo Pp 7‐12 Jan 5 1979 17
consideration the results of the balancing as one of the many factors involved in making a
decision to provide financing It should be noted that Section 1911 of the 1978 Amendments is
consistent with both of these provisions since it only seeks to ensure that ldquofull considerationrdquo is
given to adverse effects upon the US economy
Section 2(b)(1)(B) of the Act refers to ldquoserious adverse effectrdquo upon the US economy as a
whole whereas Section 608 of the Appropriations Act imposes a more stringent test by
focusing on a single industry ndash the domestic producers of the commodity to be produced by the
project supported by [the Bank] ndash and requiring a determination of substantial injury for that
industry alone However a reading of the entire Section shows that such a determination
would have to be made only if the net effect upon the US economy of the project for which
support was requested from [the Bank] is negative and if the commodity is likely to be in
surplus on world markets at the time the project becomes operative In any event under
Section 2(b)(1)(B) the Board would have to take into account any serious adverse effects of the
transaction upon the US economy Only if the Board decides to proceed with the transaction
regardless of such effects would it be necessary to determine if there will be substantial injury
to US producers of the commodity and thus trigger the prohibition contained in Section 608
It should also be noted that Section 1911 of the 1978 Amendments speaks in terms only of ldquoany
adverse effectrdquo However the language of that provision clearly shows that it was not intended
to set up a substantive test but rather as was mentioned above to insure that formal
procedures to take into account impacts upon the US economy are established by [Ex‐Im
Bank] as well as to enable the Bank to obtain a report from the International Trade
Commissionrdquo PL 95‐630 92 Stat 3641 (1978)
18
Appendix B
Financial Tools Available to US Airlines
Generally over the past several decades US airlines have had access to a broad range of
aircraft financing options
Accordingly at different times during the past several decades US airlines took advantage of
whichever financing option provided the most attractive overall financing terms from such
airlinesrsquo perspective For instance a US airline would be able to maximize the amount of the
financing thereby minimizing the amount of its own money it had to invest in the aircraft (ie
the ldquodown paymentrdquo) It might also maximize the amount of money in excess of the actual cost
of the aircraft it could raise against the aircraft obtain the longest possible repayment term and
the slowest possible amortization schedule (ie the longest ldquoweighted average liferdquo) obtain
the lowest interest rate and risk premium obtain the least restrictive operational and financial
covenants provide the least amount of collateral or other security or obtain other benefits
Due to the fact that the United States is seen as not presenting any ldquocountry riskrdquo and has well‐
developed and well‐regarded legal and judicial systems that are seen as being protective of
creditorsrsquo rights US airlines have usually had access to secured aircraft financings from
commercial banks from around the world During the past several decades commercial banks
from different regions have been at the forefront of the aircraft finance industry and have
provided financing to US airlines on attractive financing terms Initially US‐based banks
provided most of the aircraft financing to US airlines but during the 1980s Japanese banks
became very significant lenders to the US airlines During the 1990s and 2000s the European
banks (German French British and Swiss banks) were the most significant source of
commercial bank funding for US airlines
In addition to commercial bank financing during the 1970s and 1980s US airlines obtained
long‐term financing from US‐based institutional investors (eg insurance companies and
pension funds) through the use of the Equipment Trust Certificate (ldquoETCrdquo) financing structure or
the Pass Through Certificate (ldquoPTCrdquo) financing structure The ETC is a financing provided by
institutional investors that is secured by one or more items of equipment (eg aircraft) The
PTC is a group of ETCs combined into a public debt security that is sold into the capital markets
to institutional investors
However during the 1980s the simplest and most prevalent form of aircraft financing for US
airlines was the US leveraged lease
The US leveraged lease allowed US airlines to take advantage of the US tax code which
generally provides for all types of capital assets to be depreciated and thereby reduces or
defers taxes due to the deductibility of tax depreciation Because US airlines generally did not 19
have sufficient income to fully take advantage of the benefit of the tax depreciation deductions
associated with acquiring aircraft the US airlines entered into US leveraged leases Under a
leveraged lease the benefits of the tax depreciation deductions related to the aircraft were
transferred to profitable companies that had income they wanted to shelter from tax In
return the company was willing to provide the equity in a US leverage lease (approximately
20 of the appraised value of the aircraft) and to ldquoleaserdquo the aircraft back to the airline for the
airlinersquos use A number of different entities entered into such leases including banks insurance
companies and other financial institutions such as Ford Motor Credit as well as finance
subsidiaries of other corporate entities including consumer product companies such as Phillip
Morris or entertainment companies such as Disney The fact that these were ldquoleveragedrdquo
leases (as opposed to ldquosingle investor leasesrdquo) also enabled the equity providers to deduct the
interest expense associated with the US leveraged lease
Through the use of a combination of lease equity and debt a US leveraged lease allowed US
airlines to arrange financing for up to 100 of the appraised value of an aircraft This was
particularly attractive to major US airlines because due to their size and relative importance
to the aircraft manufacturers every major US airline generally was able to negotiate aircraft
purchases with the aircraft manufacturers that enabled the airline to buy the aircraft for
amounts significantly less than the appraised value The result was that by using a US
leveraged lease to finance its aircraft a US airline was able to ldquoover‐financerdquo the aircraft (ie
finance the aircraft for more than the airline was paying for the aircraft) resulting in the airline
effectively having the ability each time the airline financed an aircraft to arrange 100
financing for its aircraft and at the same time arrange a long‐term working capital loan This is
the equivalent of a home buyer being able to buy a house with no money down (no down
payment) and also receiving a long‐term loan for non‐home expenses
In contrast Ex‐Im Bank‐supported aircraft financing is for only 85 (and sometimes less) of the
actual ldquonet pricerdquo that the airline is paying the US aircraft manufacturer (after deducting all
discounts and other concessions the airline has negotiated with the US aircraft manufacturer
which results in a net price that is almost always less than the appraised value) This requires
the foreign airline that is using Ex‐Im Bank support to come up with a down payment of at least
15 of the net price of the aircraft As a result US airlines were able to obtain more financing
under a US leveraged lease (without putting any money down) than foreign airlines could
under an Ex‐Im Bank supported aircraft financing (which required a down payment)
In addition US leveraged leases used by US airlines always had very long repayment terms
Generally speaking the longer the repayment the longer the tax deferral and the more
advantageous the terms of the US leveraged lease As a result it was not unusual for the US
leveraged leases used by US airlines to have a repayment term of between 18 and 22 years
and sometimes as long as 25 years The only constraint was that the lease term of the
20
leveraged lease should not exceed 80 of the economic useful life of the aircraft which in
some instances was more than 30 years
In contrast the repayment term in an Ex‐Im Bank‐supported aircraft financing is never longer
than 12 years which is the maximum repayment term Ex‐Im Bank is permitted to offer for an
aircraft financing under the guidelines for export credits promulgated by the Organization for
Economic Cooperation and Development (the ldquoOECDrdquo) with which guidelines the US
Government (including Ex‐Im Bank) has agreed to abide This difference in repayment terms is
significant it is similar to the difference in monthly payments under a 15 year home mortgage
versus a 30 year home mortgage As a result US airlines were able to obtain significantly
longer financing under a US leveraged lease (which generally resulted in a smaller periodic
principal repayment burden due to the longer repayment term) than foreign airlines could
under an Ex‐Im Bank‐supported financing
US leveraged leases used by US airlines also had a slower amortization profile with a very
long weighted average life (ie small amounts of debt amortization in the early years of the
financing) of at least 10 years In the same manner that a longer repayment term increased the
tax deferral a longer weighted average life also increased the tax deferral
In contrast the amortization profile in an Ex‐Im Bank supported aircraft financing for a foreign
airline is usually between 6 years and 65 years (at least 4 years shorter than the weighted
average life of the US leveraged leases historically used by US airlines) which imposes a
much greater cash flow burden on the foreign airline in comparison with the cash flows
required of a US airline under a US leveraged lease
Although the absolute interest rate on the debt in a US leveraged lease fluctuated over time
with the overall level of interest rates the providers of the debt into these US leveraged leases
(primarily insurance companies and other institutional investors) were generally willing to
accept an interest rate margin of less than 100 basis points31 over LIBOR32 on a fixed rate
equivalent basis (and sometimes significantly less than 100 basis points)
In contrast the interest rate margin on the debt on an Ex‐Im Bank‐supported aircraft financing
was generally between a few basis points over LIBOR to 50 basis points over LIBOR because the
interest on the Ex‐Im Bank‐guaranteed aircraft financing is guaranteed by Ex‐Im Bank and
reflects the low risk associated with a US Government guaranteed loan However the interest
rate margin on an Ex‐Im Bank‐guaranteed aircraft financing does not reflect the Ex‐Im Bank
exposure fee (or risk premium) that is paid to Ex‐Im Bank in view of the underlying risk of the
foreign airline The minimum exposure fee charged by Ex‐Im Bank was 2 during the 1980s
31 100 basis points equals 1 percent 32 LIBOR is the London Inter‐Bank Offering Rate and is a common reference rate such as ldquoPrimerdquo or ldquoTreasury Raterdquo used in adjustable interest rate transactions
21
and early 1990s and 3 until 2007 when the OECD promulgated a new set of guidelines for
export credits for aircraft (known as the ldquo2007 Aircraft Sector Understandingrdquo or the ldquo2007
ASUrdquo) This exposure fee was required to be paid ldquoup frontrdquo ndash ie at the inception of the loan
On a per annum basis this equates to between 30 basis points and 50 basis points which
should be added to the interest rate margin received by the guaranteed lender to obtain the
equivalent interest rate paid by a foreign airline under Ex‐Im Bank‐supported financing (for
purposes of comparing the overall financing cost to those incurred by US airlines) The Ex‐Im
Bank exposure fee is similar to a homeowner having to pay ldquopointsrdquo up front at the time he
obtains his mortgage The effect of paying points up front and paying an Ex‐Im Bank exposure
fee effectively increases the cost of the financing In comparing the overall cost of financing
through ECA support including the exposure fee to the overall cost of a leveraged lease for
borrowers with comparable credit profiles the overall cost of the US leveraged lease was
considerably more favorable than what could be achieved through an Ex‐Im Bank‐supported
aircraft financing
Although the US leveraged lease was itself a very attractive financing structure for US
airlines at different times the basic US leveraged lease was made even more attractive due to
other provisions of the US and foreign tax codes
For instance from the 1960s (during the Kennedy Administration) until its repeal under the Tax
Reform Act of 1986 the US tax code provided for an investment tax credit which was intended
to encourage investment in capital goods and therefore allowed airlines or the equity investor
in a US leveraged lease to get a credit against the taxes it would otherwise be required to pay
This credit was a permanent reduction in taxes paid as opposed to only the deferral of taxes
(postponement of when taxes had to be paid) that could be achieved through the use of the
US leveraged lease
Similarly from the 1980s to the mid‐1990s it was common for a US airline to combine a US
leveraged lease with a lease into a foreign jurisdiction that had a ldquoform over substancerdquo
approach to its tax code (as opposed to the United States which has a ldquosubstance over formrdquo
approach to its tax code) Taking advantage of the disparity a US airline could ldquosellrdquo the
aircraft to both (i) an equity investor in the United States and (ii) an equity investor in a foreign
country such as Japan Germany or Hong Kong and each equity investor could depreciate the
same aircraft and therefore shelter its respective income Over time due to changes in the
respective tax codes these more aggressive tax advantaged cross‐border leasing structures
(ldquoDouble Dipsrdquo and even on occasion ldquoTriple Dipsrdquo) were disallowed but not before US airlines
financed billions of dollars of aircraft using such tax advantaged leasing structures
During the 1990s the basic US leveraged lease was made even more attractive by taking
advantage of another provision of the US tax code that allowed additional US taxes to be
22
deferred if the equity investor in the transaction used an offshore subsidiary that qualified as a
Foreign Sales Corporation (ldquoFSCrdquo) under the US tax code and structured the deal as a
Commission FSC
In addition during the 1980s and 1990s US airlines had access to other sources of financing
with overall financing terms that were much more attractive than what was available to foreign
airlines via Ex‐Im Bank‐supported export credits For example during the late 1980s and 1990s
Airbus made its first significant sales to US airlines In order to do so Airbus arranged and
provided very attractive and flexible financing terms to US airlines to encourage them to
purchase European‐manufactured Airbus aircraft instead of US‐manufactured Boeing or
McDonnell Douglas aircraft The US airlines were more than willing to accept these incentives
During this period some US airlines entered into ldquowalk awayrdquo leases of Airbus aircraft
pursuant to which Airbus North America (backed by the joint and several guarantees of each of
the four countries that are members of Airbus SAS) entered into a US leveraged lease of the
Airbus aircraft and then subleased the aircraft to a US airline on terms that (i) passed along
most of the tax benefits to the US airline through lower lease rentals and (ii) permitted the
US airline to terminate the sublease and simply ldquowalk awayrdquo from the lease upon a relatively
short notice period
Under the ldquoHome Market Rulerdquo the European export credit agencies (including those of
France Germany and the United Kingdom) that usually support the financing of Airbus aircraft
could not provide such support to US airlines Therefore Airbus arranged for Kreditanstalt fur
Wiederaufbau the development bank of Germany to provide very attractive financing for the
Airbus aircraft being acquired by US airlines These financings occurred on terms much more
favorable (with 18‐ to 22‐year repayment terms) than what export credit agencies could
provide (with a maximum repayment term of 12‐years)
Similarly during the 1990s US airlines began to acquire a large number of 35 to 50 seat
regional jet aircraft manufactured by Bombardier of Canada and Embraer of Brazil Many of
these aircraft were acquired by the US airlines by using export credit support from Canada and
Brazil Some of the financing terms (ie the repayment terms) of these Brazilian and Canadian
government‐supported export credit financings were even more attractive (15‐ to 18‐year
repayment terms) than what was available from the export credit agencies of France Germany
and the United Kingdom with respect to Airbus aircraft or from Ex‐Im Bank with respect to
Boeing aircraft (10‐ to 12‐year repayment terms)
To make the financing of Canadian‐manufactured Bombardier regional jets even more
attractive to US airlines the province of Quebec (where Bombardier has its headquarters)
through Investment Quebec provided additional aircraft financing support to the US airlines
23
Finally to the extent even more attractive financing was needed to convince US airlines to
purchase Canadian or Brazilian‐manufactured regional aircraft the manufacturers themselves
provided residual value guarantees with respect to such aircraft to the airline or to the
financiers (ie to the equity investor in a US leveraged lease or the creditors financing the
aircraft)
The next major development in aircraft financing used by US airlines was the development in
the 1990s of the Enhanced Equipment Trust Certificate (ldquoEETCrdquo) which was an ETC with certain
structural enhancements The most important of these enhancements is a liquidity facility to
ensure that if there is a default the financiers would continue to receive current interest
during the period of time while the aircraft is being repossessed and remarketed A key
element in the development of the EETC was the existence of Section 1110 of the US
Bankruptcy Code which gives a type of ldquopreferred creditorrdquo status to financiers of aircraft for
US airlines This ldquopreferred creditorrdquo status exempts aircraft financiers of US airlines from
the automatic stay generally imposed following a bankruptcy filing by a borrower subject to the
protections of the US Bankruptcy Code Section 1110 of the US Bankruptcy Code
accomplishes this by requiring the airline within 60 days of such bankruptcy filing to either (i)
resume payments under the originally agreed aircraft financing or (ii) return the aircraft to the
financier
The first EETC was done in 1994 and the practice has now been successfully used by almost
every major US airline including Alaska Airlines America West Airlines American Airlines
Continental Airlines Delta Airlines Hawaiian Airlines Jet Blue Airlines Northwest Airlines
Southwest Airlines United Airlines and US Airways The overall financing cost of a US airline
acquiring an aircraft through the use of the EETC ndash which includes the amount of financing
repayment term amortization profile effective cost of the financing etc ndash has generally been
significantly more attractive than (i) what such US airline could have achieved under an export
credit‐supported aircraft financing for such airline and (ii) what a similarly rated foreign airline
could have achieved under an export credit‐supported aircraft financing
This is particularly true for the financing of new aircraft The development of the EETC market
provided enormous financing flexibility to US airlines for the financing of new aircraft the
EETC provided the airline with the option to finance on a simple secured mortgage basis or the
US airline could opt for a leveraged lease with all of the benefits associated with a leveraged
lease described above
Beginning in 1997 US airlines had the ability to raise money in the capital markets when the
overall financing terms were most attractive They were able to ldquolock‐inrdquo such favorable
financing terms to fund new aircraft that were scheduled to be delivered in the future by
issuing a ldquopre‐fundedrdquo EETC These pre‐funded EETCs were used to great success by US
24
airlines in the late 1990s through 2001 a period in which the US airlines were taking delivery
of a significant number of aircraft
As a result of the downturn in the US airline industry following the September 11 2001
terrorist attacks many US airlines deferred or cancelled their orders for new aircraft This
reduced the need for US airlines to finance new aircraft when the financing terms available to
such US airlines via the EETC were not as favorable due to (i) the perceived increased credit
risks of the US airline industry following the September 11 terrorist attacks and (ii) the
temporary disequilibrium in the credit markets following the 200820092010 credit crisis
Now that the US airlines have once again begun to take delivery of a significant number of
new aircraft the pre‐funded EETC continues to be the preferred source of financing for US
airlines as evidenced by the number and amount of EETC issuances during 2012 and 2013
Based on an analysis of the EETC transactions occurring during 2012 and 2013 EETCs are once
again generally considered to provide more attractive overall financing terms than what could
be achieved by an airline under an export credit‐supported financing done under the terms of
the 2011 Aircraft Sector Understanding
25
GLOSSARY
ldquoAdverse Economic Impactrdquo is the short‐hand term used to refer to any serious negative effects on US industries or US jobs as set forth in the Bankrsquos Charter that result from Ex‐Im Bank loans guarantees or insurance The Bankrsquos Charter contains three provisions that address adverse economic impact found at 12 USC sectsect 635(b)(1) 635a‐2 635(e)
ldquoAir Indiardquo is an airline owned by the Government of the Republic of India ldquoAir India Transactionsrdquo are the two final commitments approved by Ex‐Im Bank on September
30 2011 for loan guarantees for the purchase of a number of 787 ldquoDreamlinerrdquo aircraft from Boeing and to be financed by a commercial lender not identified at the time As of the date of this paper Ex‐Im Bank has not issued any of its loan guarantees but is expected to do so in the coming months Ten of the aircraft involved in these two final commitments have been delivered to Air India and are in use by Air India on routes outside the United States The deliveries of the ten aircraft were made using private short‐term financing as to which Ex‐Im Bank had no involvement
ldquoAirbusrdquo Airbus SAS is a Europe‐based manufacturer of large commercial aircraft Airbus is the only competitor to Boeing the US manufacturer Airbus sales are supported by the ECAs of Germany France and the UK
ldquoAircraft Sector also known as the ASU is an agreement among members of the OECD Understandingrdquo that manufacture aircraft and Brazil The ASU requires that Export
Credit Agencies that support the export of aircraft follow certain rules and restrictions that set forth the most favorable terms that can be provided These rules and restrictions include the Export Credit Agency must charge a minimum risk premium which is determined by the ASU the term of any loan made by or supported by the Export Credit Agency for the purchase of aircraft cannot exceed 12 years the Export Credit Agency today can lend or guarantee only up to 85 of the actual purchase price of the aircraft being exported and the use of risk mitigants The ASU was preceded by the Large Aircraft Sector Understanding which governed these issues until the enactment of the 2007 ASU The ASU was again updated and revised in 2011 (See also the Large Aircraft Sector Understanding)
ldquoArrangementrdquo is the agreement among Export Credit Agencies governing the terms by which they will provide loans guarantees or insurance in support of exports from their respective countries Among other things the Arrangement requires Export Credit Agencies to charge a minimum risk premium which is governed by the Arrangement See also Organization for Economic Cooperation and Development
ldquoASUrdquo see Aircraft Sector Understanding ldquoAverage Weighted Liferdquo for purposes of this paper refers to the average number of years that
each dollar of unpaid principal on a loan remains outstanding For example a loan with equal principal payments throughout the loan term will have an average weighted life close to the middle of the whole loan term
26
ldquoBank Actrdquo is the Export‐Import Bank Act of 1945 12 USC sect635 as amended ldquoBank Advisory Committeerdquo is the official Advisory Committee of the Bank appointed in accordance
with the Bank Act and the Advisory Committee Act The Bank Advisory Committee is comprised of representatives of various industry and market sectors as well as representatives of labor and international trade experts
ldquoBasis pointsrdquo are a numerical measure applied to interest rates One basis point equals 1100th of one percent or 100 basis points equals one percent
ldquoCapital Equipmentrdquo is equipment used to manufacture a product provide a service or sell store or deliver merchandise A wide‐body aircraft is a piece of capital equipment
ldquoCharterrdquo is the Bank Act as well the provisions of the Export Import Bank Reauthorization Act of 2012 (Public Law 112‐122) that are not codified in the Bank Act
ldquoDreamlinerrdquo is the name given to a Boeing 787 wide‐body commercial aircraft ldquoECArdquo see Export Credit Agencies ldquoEconomic Impact Proceduresrdquo
are procedures adopted by Ex‐Im Bank to assess whether transactions supported by the Bank cause a serious adverse economic impact to US industries and US jobs See also Adverse Economic Impact
ldquoEETCrdquo see Enhanced Equipment Trust Certificate ldquoEnhanced Equipment Trust Certificaterdquo
also known as an EETC is a type of secured bond issued by a borrower in the capital markets The EETC is secured by the equipment being purchased with the proceeds of the bond issuance EETCs are used primarily for aircraft and since the late 1990s has been the dominant financing tool used by US airlines to purchase aircraft Section 1110 of the US Bankruptcy Codemdashwhich allows creditors of aircraft borrowers to obtain their collateral within 60 days if the payments on their debt is not current ndash has provided creditors of US airlines a level of comfort not available to creditors of foreign airlines until recently This generally provided US airlines with a significant financial advantage vis a vis their foreign competitors Recently the adoption of the Cape Town Convention and the related Aircraft Equipment Protocol has provided creditors of foreign airlines with protections similar to the protections provided by section 1110 of the US Bankruptcy Code Recently this has led to the beginnings of an international EETC market
ldquoEquipment Trust Certificaterdquo
also known as an ETC was the predecessor to the Enhanced Equipment Trust Certificate
ldquoETCrdquo see Equipment Trust Certificate ldquoEx‐Im Bankrdquo or ldquoBankrdquo See The Export‐Import Bank of the United States ldquoExport Credit Agenciesrdquo are agencies or ministries of government that have the official role of
providing loans guarantees or insurance in support of exports from their respective countries or in support of exports by sales of companies from their respective countries Ex‐Im Bank is the official Export Credit Agency of the United States of America
ldquoexportable goods screenrdquo is a screen or filter adopted by Ex‐Im Bank in its 2001 Economic Impact Procedures The exportable goods screen is utilized along with other screens to balance the Bankrsquos obligation to consider the adverse
27
economic effects of its transactions on US industries and US jobs with the Bankrsquos mandate to support US export transactions in a timely manner so as to fully support the exporterrsquos business opportunity The exportable goods screen filtered out transactions that supported exports which could only be used by a foreign buyer to provide services rather than produce goods
ldquoExport‐Import Bank of the is an independent agency of the Federal Government of the United United Statesrdquo States of America Also known as ldquoEx‐Im Bankrdquo Ex‐Im Bankrsquos mission
is to support US jobs by supporting US exports See 12 USC 635 et seq
ldquoExposure Feerdquo is the risk premium charged by Ex‐Im Bank in exchange for its guarantee in certain transactions The exposure fee must be at least equal to the minimum risk premium required by the terms of the Arrangement and the Aircraft Sector Understanding
ldquoForeign Sales Corporationrdquo is a company created under the terms of a former provision of the US Internal Revenue Code Foreign Sales Corporations received significant tax benefits
ldquoFSCrdquo see Foreign Sales Corporation ldquoInvestment Tax Creditrdquo is a credit permitted under the US Internal Revenue Code for the
purchase of certain types of equipment in certain circumstances See also Leveraged Leases
ldquoKFWrdquo the development bank for the Federal Republic of Germany KFW is an Export Credit Agency but it also operates through a ldquomarket windowrdquo which is not subject to the Home Market Rule Thus KFW provides support to Airbus for its sales of aircraft to US airlines The United States does not have an equivalent institution and Ex‐Im Bank does not have a ldquomarket windowrdquo
ldquoLarge Aircraft Sector also known as LASU was the predecessor to the Aircraft Sector Understandingrdquo Understanding The LASU governed the same general issues as are set
forth in the Aircraft Sector Understanding except that the minimum risk premium was lower than that required in the 2007 ASU and 2011 ASU When the 2007 ASU was enacted grandfathering provisions allowed ECA‐supported financing for a limited number of aircraft to be governed by LASU
ldquoLASUrdquo see Large Aircraft Sector Understanding ldquoLeveraged Leaserdquo is a lease of equipment and is designed to allow the lessor to take
advantage of certain tax code provisions such as the depreciation deduction and the investment tax credit while allowing the lessee to obtain the equipment involved at a significantly lower cost Leveraged Leases were a very popular means for US airlines to acquire aircraft throughout the 1980s and 1990s The value of the tax deductions to the lessor were significant so that the implicit interest rate in the lease payments by the US airline were extremely low Usually the US airline did not have sufficient profit to take advantage of the favorable tax code provisions By using a leveraged lease another company that could shelter income by using the tax code provisions would buy the equipment and lease the equipment to the US airline Usually at the end of the lease term the US airline would purchase the aircraft
28
ldquoLIBORrdquo is the London Inter‐bank Offering Rate It is commonly used as a reference rate in loan transactions that have floating or adjustable interest rates LIBOR reflects the rate at which banks will lend money to each other LIBOR is set for various loan terms (eg 3 months 6 months etc) and is widely published making it a convenient rate to use as a reference rate
ldquoNet pricerdquo is the price paid after all discounts have been deducted The net price is the actual price paid for a piece of equipment In aircraft transactions pursuant to the ASU Ex‐Im Bank will only support up to 85 of the net price of an aircraft EETC transactions on the other hand often support the nominal purchase price of an aircraft and thus result in a significantly higher amount financed
ldquoOECDrdquo see the Organization for Economic Cooperation and Development Open Skies Agreement Is a type of bilateral agreement between countries that govern the
rights of airlines from the two countries to fly into the other country Open Skies Agreements generally allow free access to fly as many routes to a country as an airline may choose but then usually restrict the ability to fly within the other country Generally it is a ldquofly in and outrdquo rule although there are exceptions
ldquoOrganization for Economic Cooperation and Developmentrdquo
also known as the OECD is an organization comprised of 34 member countries that work together to promote development The United States is a member With regard to Ex‐Im Bank the OECD is the organization through which the US Government negotiates an agreement among Export Credit Agencies known as the Arrangement and the ASU (and its predecessor the LASU)
ldquoPass Through Certificaterdquo also known as a PTC is a group of Equipment Trust Certificates pooled together to form the basis for a bond issuance
ldquoPTCrdquo See Pass Through Certificate ldquoRyanairrdquo is a low‐cost Irish airline that began business after European
deregulation of airlines in 1997 Ryanair rapidly expanded during the first decade of the 2000s creating significant competition for other airlines
ldquoScreensrdquo are a type of filter used by Ex‐Im Bank in its Economic Impact Procedures Screens are designed to identify those transactions which are not likely to cause an adverse economic impact to US industries or US jobs so that such transactions can be processed more quickly and efficiently as required by the Bank Act
ldquoSubstantial Injuryrdquo is a term defined in Ex‐Im Bankrsquos Charter to be applied in connection with the Bankrsquos economic impact procedures 12 USC sect635(e)(4) The Charter states ldquohellipthe extension of any credit or guarantee by the Bank will cause substantial injury if the amount of the capacity for production established or the amount of the increase in such capacity expanded by such credit or guarantee equals or exceeds 1 percent of United States productionrdquo
ldquoTPCCrdquo see Trade Promotion Coordinating Committee ldquoTrade Promotion Coordinating Committeerdquo
also known as the TPCC is an interagency committee of the US Government chaired by the Secretary of Commerce It was established under the Export Enhancement Act of 1992 to provide a
29
unifying framework to coordinate the export promotion and export financing activities of the US government and to develop a government‐wide strategic plan for carrying out such programs
ldquoTrade Sanctionsrdquo refers to any of a number of sanctions imposed by the US Government against companies countries industries or products usually as a result of an accusation of adjudication of a violation of an international trade agreement The Bank Act requires Ex‐Im Bank to take certain trade sanctions into account in its economic impact procedures
30
Table A ndash Congressional Actions and Ex-Im Bank Responses
Year Congressional Action Ex‐Im Bank Response
1968 Bank directed to take into account the possible adverse effect [of its loans and guarantees] upon the United States economy
Bank adds this transactions
factor to analysis of
1975 1 Standard refined to take into account any serious adverse effect of loans and guarantees on competitive position of US industry availability of scarce materials in US and employment in US
2 Bank directed to be competitive with rates terms and conditions offered by principal countries whose exporters compete with US exporters
3 Bank directed to submit semi‐annual report on competitiveness and conduct survey of US exporters and lenders to determine experience in meeting financing competition
Bank adds these of transactions
considerations to analysis
Year Congressional Action Ex‐Im Bank Response
1978 ‐ 1979
1 Bank directed to take into account any serious adverse effect of loans on competitive position of US industry and scarce materials Bank directed to emphasize strengthening competitive position of US exporters and expanding total US exports
2 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [From Appropriations Act Restated in Bank Charter in 1986]
3 Bank directed to implement regulations and procedures to insure full consideration of extent to which loan or guarantee is likely to have adverse effect on industries and employment in US either by reducing demand for US produced goods or increasing imports to the US
Bank develops framework and set of written economic impact procedures
1 Exclude exports the use of which remained localized in foreign country This
is first ldquoforeign localized goods and services screenrdquo
2 ldquoIntent and stimulus for projectrdquo examined to determine likelihood of substantial adverse economic impact Does transaction involve ldquorunaway industryrdquo
(leaving US for cheaper foreign labor)
3 Does export of capital equipment result in ldquobuy backrdquo of product being imported into the US
4 Is net impact on US economy and jobs positive or negative and to what degree
32
Year Congressional Action Ex‐Im Bank Response
1986 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [Originally from 1978 Appropriations incorporated into Bank Charter in 1986]
Senate Report recognizes knowledge and experience of Bank and need to respond to exportersrsquo requests for support in a timely and confidential fashion Economic impact procedures are to be practical and workable and not reduce Bankrsquos competitiveness and flexibility nor ignore positive aspects of export sale
Bank develops ldquoSummary of Adverse Economic Guidelinesrdquo to be applied to both
goods and services (a) is commodity to be produced surplus or likely to compete with US‐produced surplus (b) will Bankrsquos
assistance cause substantial injury to US producers of competing commodity (c)
will injury to US producers of competing commodity outweigh the short‐ and long‐
term benefits to US industry and employment If answer is no then no
further economic impact analysis
1988 Congress establishes test for ldquosubstantial injuryrdquo if the amount of capacity for production established or amount of increase in such capacity expanded by Bankrsquos credit or guarantee exceeds 1 of US production
Bankrsquos Board recognizes requirement to balance (a) possibility of substantial harm
to US production and employment with (b) being responsive competitive and efficient New economic impact procedures ask (a) will the project be in direct competition with US production (b) is the Bankrsquos support significantly associated with the project (c) will the output of the project
cause substantial injury to US producers of the same similar or competing
commodity If answer is no then no further economic impact analysis is required
33
Year Congressional Action Ex‐Im Bank Response
1998 Bank revised procedures involving countries against which trade sanctions were pending or imposed
2001
2006 ‐2007
1 Bank required to determine whether extension of credit or guarantee is likely to produce same or other commodities and whether the production may cause substantial injury to US producers
2 Bank prohibited from providing a loan or guarantee that will facilitate circumvention of trade law order or determination
3 Bank required to designate sensitive commercial sectors and products for which Bank financing deemed unlikely due to potential for adverse economic impact on US
4 Bank required to aggregate financial thresholds on rolling 24‐month basis
Bank develops ldquoexportable goods screenrdquo Does Ex‐Im Bank support result in production of exportable good from the foreign buyerrsquos country If not no further economic impact analysis is required Notice and request for comments were published in the Federal Register US airline industry did not respond
Bank issues 2007 Economic Impact Procedures ldquoExportable goods screenrdquo is modified Will the transaction (capital goods and services) result in either new or additional production capacity of an exportable good
34
excluded from further economic impact analysis those transactions that did not support the financing of US exports which the foreign buyer could use to produce an exportable good Put another way this screen categorically excluded from further economic impact analysis those transactions in which the foreign buyer could only use the US exports to provide a service As explained more fully below the exportable goods screen reflected the Bankrsquos judgment that such transactions were unlikely to cause substantial adverse economic effects on US industry This judgment was and continues to be based on the Bankrsquos accumulated expertise in assessing economic impact pursuant to its Charter on its knowledge of financing markets and on input from trade groups industry stakeholders and other government agencies
1 1968 ndash The First ldquoEconomic Impactrdquo Requirements Are Added to the Bankrsquos Charter
The first of the Bankrsquos ldquoeconomic impactrdquo requirements was added to its Charter in 1968 requiring the Bank to ldquotake into account the possible adverse effects [of its loans and guarantees] upon the United States economyrdquo8 The Bank has historically interpreted this provision as an additional factor to consider in analyzing transactions for the purpose of supporting US jobs and exports
2 1975 ndash Congress Directs the Bank to Be Competitive with Other Countries and to Consider ldquoSerious Adverse Effectsrdquo on US Industry and Employment
In 1975 Congress enacted several amendments to the Bankrsquos Charter First the Bank is to consider only serious adverse economic effects of its loans and guarantees Congress required the Bank to
take into account any serious adverse effect of such loan[s] or guarantee[s] on the competitive position of United States industry the availability of materials which are in short supply in the United States and employment in the United Statesrdquo9
Congress also directed the Bank to be ldquocompetitive with the government‐supported rates and terms and other conditions available for the financing of exports from the principal countries whose exporters compete with United States exportersrdquo10 The Bank was further required to submit a semi‐annual competitiveness report a practice continued to date albeit on an annual basis Finally the Bank was ordered to ldquosurvey a representative number of US exporters and US commercial lending institutions which provide export credit to determine their experience in meeting financing competition from other countries whose exporters compete with United States exportersrdquo11
These requirements formed the foundation for Ex‐Im Bankrsquos regular practice of seeking input from stakeholders industry representatives and government agencies This is undertaken with a view to determine whether the Bankrsquos actions comport with its overall mission to support US jobs and exports without causing serious adverse effects on the United States economy
8 12 USC sect 635(b)(1)(B)(ii) PL 90‐267 82 Stat 47 (1968) 9 12 USC sect 635(b)(1)(B) PL 93‐646 88 Stat 2333 (1975) 10 12 USC sect 635(b)(1)(A) PL 93‐646 88 Stat 2333 (1975) 11 Id
3
3 1978 ndash Congress Directs the Bank to Strengthen the Competitive Position of United States Exporters and Expand US Exports
In 1978 Congress enacted three important changes relative to economic impact First Congress added language emphasizing the need to strengthen US exportersrsquo competitive position12
Second Congress prohibited Bank financing from being used to support exports that produce commodities that are in surplus or which would cause substantial injury to US producers of the same or similar commodity unless the Bankrsquos Board of Directors determines that benefits to US industry and employment outweigh injury to US producers13 This balancing test acknowledged the judgment that the Bank had to bring to bear in making such determinations
Third the Bank was directed to implement procedures to ensure consideration of the extent to which financing would have an adverse effect on US industries and employment either by reducing demand for US produced goods or increasing imports to the US14
4 1979 ndash The Bank Develops Comprehensive Economic Impact Procedures with the First Use of Analytical ldquoScreensrdquo in Response to Congressional Requirements
The following year the Bank developed a set of written economic impact procedures in order to address the various statutory requirements enacted by Congress in 1978 The general objective was to devise a framework to identify both those transactions that were relatively unlikely to result in a substantial adverse economic impact as well as those that were
As an operating premise for these procedures the Bank determined that exports involving certain kinds of capital equipment (eg locomotives) and certain projects (eg power plants) were not likely to have any serious adverse impact on US industries or jobs These types of transactions which amounted at the time to 80 to 90 of the value of all transactions supported by the Bank had little to no potential for a substantial adverse impact on the US
12 The Bank is directed to take into account any serious adverse effect of such loan[s] or guarantee[s] on the competitive position of United States industry the availability of materials which are in short supply in the United States and shall give particular emphasis to the objective of strengthening the competitive position of United States exporters and thereby of expanding total United States exportsrdquo PL 95‐630 92 Stat 3641 (1978) 13 ldquo[N]one of the funds otherwise made available pursuant to the act to the Export‐Import Bank and the Overseas Private Investment Corporation shall be obligated or expended to finance any loan any assistance or any other financial commitments for establishing or expanding production of any commodity for export by any country other than the United States if the commodity is likely to be in surplus on world markets at the time the resulting productive capacity is expected to become operative and if the assistance will cause substantial injury to United States producers of the same similar or competing commodity Provided that such prohibition shall not apply to the Export‐Import Bank if in the judgment of its Board of Directors the benefits to industry and employment in the United States are likely to outweigh the injury to United States producers of the same similar or competing commodityrdquo PL 95‐481 92 Stat 1591 (1978) This section of the Appropriations Act is the predecessor to what would become section 2(e) of the Charter in 198614 The Bank shall ldquoimplement such regulations and procedures as may be appropriate to insure that full consideration is given to the extent to which any loan or financial guarantee is likely to have an adverse effect on industries including agriculture and employment in the United States either by reducing demand for goods produced in the United States or by increasing imports to the United Statesrdquo PL 95‐630 92 Stat 3641 codified at 12 USC sect 635a‐2 (1978)
4
economy because the economic effects of the transactions were local in nature While not identified as such at the time this operating premise became the Bankrsquos first ldquoscreenrdquo in its economic impact procedures The screen eliminated from further economic impact analysis those transactions that resulted in foreign localized goods or services because they were unlikely to have a substantial adverse economic impact on US industry and jobs
For those transactions that cleared this first ldquoforeign localized goods and services screenrdquo the 1979 procedures then set forth factors for the Bank to consider in further analyzing economic impact
Categorization of transactions by ldquothe intent behind and stimulus for the projectrdquo was important in identifying transactions that were more likely to create a substantial adverse economic impact For example transactions involving ldquorunawayrdquo industries ndash ie industries that were leaving the US to seek cheaper labor in foreign countries ndash were generally suspect because they would tend to simply increase net imports into the United States
Similarly transactions involving ldquobuy‐backrdquo arrangements ndash where capital equipment is exported but there is an agreement that the resulting production will be ldquobought‐backrdquo by a party in the United States ndash were suspect because they also would tend to result in a net increase in imports
The Bank used these categorizations as tools at this stage of the analysis although additional factors were considered before the Bank approved or rejected a transaction Specifically the Bank considered (a) whether the net impact on the US economy and jobs was positive or negative by comparing the benefits from the export with the adverse impact of the transaction and (b) the seriousness of the impact or effect on the US economy if any15
5 1986 ndash Congress Directs the Bank to Balance the Benefits to US Industry and Employment Against Potential Injury
In 1986 Congress added to the Bankrsquos Charter the balancing test provisions previously contained in sect608 of the Foreign Operations Appropriations Act of 197816
The Senate Report accompanying this 1986 amendment emphasized that the Bank was to implement its provisions in a way that did not undermine the Bankrsquos primary function of financing transactions to support the export of United States goods and services
ldquothe Committee recognized the need for [the Bank] to respond to exportersrsquo requests for support in a timely and confidential fashion and intends that the Bank implement its adverse economic impact analysis procedures in a practical and workable fashionrdquo17
15 In connection with the presentation for approval of the 1979 economic impact procedures to the Ex‐Im Bank Board of Directors the Bankrsquos staff analyzed the three economic impact provisions in the Memorandum to the Board of Directors Pertinent provisions of this Memorandum are attached as Appendix A The Memorandum sets forth the Bankrsquos reasoning for interpreting the three applicable economic impact provisions in a holistic manner16 See text accompanying note 13 supra 17 See S Rep No 99‐274 at 8 (1986)
5
Explicitly recognizing the Bankrsquos expertise the Report also noted that the revised Charter ldquodoes not require the Bank to conduct further analysis if it views its existing body of knowledge as sufficientrdquo18 The Committee stressed that the ldquoprovision should be implemented in a way that does not reduce the Bankrsquos competitiveness and flexibility in assisting US exporters nor ignore the positive aspects of the export salerdquo19
This recognition of the need of the Bank to use its expertise to ensure competitiveness and flexibility in assisting US exporters was and has been incorporated as a guiding principle for the Bankrsquos analytical frameworks in assessing whether substantial adverse economic impact exists for each transaction considered
Following enactment of the 1986 provisions the Bank revised its economic impact procedures to categorize transactions These categories acted as filters posing two ldquoyes or nordquo questions summarized as follows
‐ Is the commodity to be produced likely to be in surplus on world markets at the time of production or is it likely to compete with US production of a competing commodity
‐ Will the Bankrsquos extension of a loan or guarantee cause substantial injury to US producers of a competing commodity
A ldquonordquo answer to either of these two questions in sequence would mean that no further analysis was necessary If answers to both questions were affirmative then the Bank would conduct a detailed economic impact analysis and would determine whether the short and long‐term benefits of the transaction to US industry and employment outweighed any injury to US producers of a competing commodity
6 1988 ndash Congress Defines ldquoSubstantial Injuryrdquo and Adds a 1 Test which the Bank Uses to Refine Its Economic Impact Procedures
In 1988 Congress amended sect2(e) of the Bankrsquos Charter by defining ldquosubstantial injuryrdquo for purposes of analyzing adverse economic impact Specifically Congress defined ldquosubstantial injuryrdquo to mean ldquoif the amount of capacity for production established or the amount of the increase in such capacity expanded by [the Bankrsquos] credit or guarantee equals or exceeds 1 percent of United States productionrdquo20
In November 1988 the Board of Directors approved a new set of economic impact procedures As noted in the staffrsquos Memorandum to the Board of Directors dated November 14 1988
ldquo[t]he Congressional debates on the various adverse economic impact provisions have made it clear that the focus of concern is the possibility of substantial harm to US
18 Id 19 Id 20 PL 100‐418 102 Stat 1107 (1988)
6
production and employment there was no desire to make [the Bank] less responsive or competitive by slowing down the processing of cases not likely to cause injuryrdquo21
In an effort to achieve this required balance the new economic impact procedures posed the following three questions
- Will the project be in direct competition with US production - Is [the Bankrsquos] support significantly associated with this project - Will the output of the project likely cause substantial injury to US producers of the
same similar or competing commodity
As before a negative answer to any of the three questions would mean that the Bank would not conduct a detailed economic impact analysis to determine whether the short‐ and long‐term benefits of the transaction to US industry and employment outweighed any injury to US producers of a competing commodity
7 1998 ndash The Bank Modifies Its Economic Impact Procedures to Include Consideration of Trade Sanctions
The Bank was reauthorized in 1997 and no changes were made to any of the economic impact provisions in the Bankrsquos Charter Nevertheless the Bank revised its existing procedures to include additional focus that Congress had required on transactions involving countries or industries against which certain trade sanctions were pending or imposed
8 2001 ndash After Public Notice and a Request for Comments the Bank Further Refines Its Economic Impact Procedures to Reflect Congressional Requirements and the Need to Timely Process Applications
In 2001 the Bank further updated its economic impact procedures During the preceding 20 years the nature of the Bankrsquos transactions had changed to include many more involving private sector borrowers rather than state‐owned entities The new procedures attempted to balance a thorough timely examination of economic impact issues with the need to process transactions within a short timeframe that would satisfy the speed required by commercial realities The Bank determined that it could best comply with its statutory mandate to provide competitive financing for US exports by focusing any detailed economic impact analysis only on those transactions likely to result in substantial adverse economic impact
The first stage or screen of the economic impact evaluation was to determine if the exports involved in a transaction would result in the production of an exportable good from the buyerrsquos country Hence the name ldquoexportable goodsrdquo screen As with its prior screens if the answer to this question was ldquonordquo then no further economic impact analysis was conducted
The Bank had determined that transactions that would result in the provision of exportable services from foreign countries would not cause substantial adverse economic impact on US
21 Memorandum to Board of Directors Country Risk Analysis Div ldquoProcedures for Economic Impact Analysisrdquo P 3 Nov 14 1988
7
industries The focus on exportable goods rather than exportable services was a result of several factors These included the Bankrsquos accumulated expertise with the relevant industries involved in transactions the Bank supported such as the airline sector and the financing available to such industries which indicated that US airlines generally had access to financing that was more favorable than the financing provided by Ex‐Im Bank to foreign airlines In addition the Bank took into account feedback and other input from trade groups industry stakeholders and other government agencies which would be expected to voice concerns if the Bankrsquos procedures were working to the detriment of any domestic industry
Notably the US airline sector had not raised any concerns about adverse economic impact since 1984 This lack of articulated concern by the US airline industry was consistent with the Bankrsquos own expertise and understanding of the airline sector and aircraft financing As noted above the Bank understood from its considerable involvement in aircraft finance that US airlines generally had access to financing that was more favorable than the financing provided by Ex‐Im Bank to foreign airlines Thus US airlines had no reason to complain
In anticipation of the 2001 revisions to its economic impact procedures although not required to do so the Bank published a notice in the Federal Register Its proposed new economic impact procedures were posted on its website and public comment was invited As before the US airline industry made no comments in response to the Bankrsquos proposed 2001 procedures which included among other things the adoption of the ldquoexportable goodsrdquo screen
The Bank adopted these procedures after repeated and extensive consultation with its core stakeholders including US industry labor its Advisory Committee and exporters22 In addition the Bank reached out to relevant experts in both the academic and consulting worlds who provided comments on the Bankrsquos proposed changes23 Finally the Bank requested and obtained input from other US Government agencies such as the Departments of Commerce Treasury and State as well as the Office of the US Trade Representative and the Office of Management amp Budget
The Bank considered and analyzed all the input it received and revised the procedures accordingly For example other US Government agencies had specific concerns with respect to how the Bank treated applications implicated by trade measures and the Bank modified its approach to these applications Given the lack of any articulated concerns about the airline sector and the Bankrsquos own knowledge and expertise regarding aircraft financing the Bank had no reason to believe that the proposed ldquoexportable goodsrdquo screen would not be an appropriate way to take account of adverse economic impact on the airline industry
22 The Bankrsquos Advisory Committee is created pursuant to its Charter and is ldquobroadly representative of environment production commerce finance agriculture labor services State government and the textile industryrdquo 12 USCsect635a(d)23 A partial list of those consulted includes former Congressman Bill Frenzel of the Brookings Institute Dr Robert Hahn of the American Enterprise Institute Dr Jerry Hausman of the Massachusetts Institute of Technology Dr J David Richardson of Syracuse University Dr Marina Whitman of the University of Michigan the National Foreign Trade Council the Coalition for Employment through Exports the American Iron and Steel Institute the AFL‐CIO the International Association of Machinists and Aerospace Workers NUCOR Bechtel Corporation Caterpillar Inc Delta Brands Inc and Air Tractor Inc
8
9 2006 ndash Congress Further Amends the Charter
In 2006 Congress made several substantive changes to the Bankrsquos Charter Among these were
‐ A requirement to determine whether the extension of a credit or guarantee is likely to result in the production of the same or similar commodities and whether such production may cause substantial injury to US producers
‐ A prohibition against providing a loan or guarantee that will facilitate the circumvention of any trade law order or determination
‐ A requirement for the Bank to designate sensitive commercial sectors and products for which the Bank is not likely to provide financing due to strong potential for adverse economic impact on US industry and
‐ A requirement to aggregate financial thresholds for purposes of assessing economic impact or otherwise on a rolling 24‐month basis24
In addition Congress added certain notice‐and‐comment requirements that apply ldquoif the Bank intends to conduct a detailed economic impact analysis or similar studyrdquo25
10 2007 ndash The Bank Responds to New Congressional Requirements with the 2007 Economic Impact Procedures
In response to the 2006 changes to the Charter the Bank modified its economic impact procedures The ldquoexportable goodsrdquo screen was amended to read
ldquoThe first stage of the economic impact analysis is to determine if the exports involved in a transaction will result in the production of an exportable good Therefore only exports of capital goods and services (eg manufacturing equipment licensing agreements) that will result in the foreign production of an exportable good are subject to further economic impact analysis in Stage II of these procedures The capital goods and services exports may be associated with new foreign production capacity or existing production capacity (eg applicable exports include replacement equipment in an existing production facility to maintain existing production capacity)rdquo26
Thus beginning with its first set of Economic Impact Procedures in 1968 and continuing through to 2007 the Bank has consistently made use of various kinds of filters or screens to remove those categories of transactions that are unlikely to produce a substantial adverse impact on domestic industry from detailed economic impact analysis This approach has allowed unaffected transactions to proceed without delay so that the Bank may capture the export opportunity Finally use of the screens has enabled the Bank to concentrate its resources on transactions that are more likely to cause substantial adverse economic impact
24 PL 109‐438 120 Stat 3268 (2006) 25 Id 26 Memorandum to Board of Directors Policy Analysis Div ldquoRevisions to Economic Impact Proceduresrdquo P 9 April 4 2007
9
III Discussion How the Bankrsquos Economic Impact Procedures and Exportable Goods Screen Satisfy the Requirements of the Bankrsquos Charter
In remanding the matter to the Bank the Court of Appeals required the Bank to provide a reasonable explanation to justify its use of the ldquoexportable goods screenrdquo The use of the ldquoexportable goods screenrdquo properly satisfies the various requirements of the Bankrsquos Charter When the screen was adopted the Bank knew that US airlines the industry most likely to be affected generally had access to financing at costs that were significantly more favorable than the cost of aircraft financing provided by the Bank For this very reason the Bank had not heard any economic impact concerns from any US airlines in the 17 years prior to the adoption of the screen Indeed the screen was in place for almost a decade before any US airline raised any questions about it When a single US airline did raise questions about the Bankrsquos financing to foreign airlines the analysis it submitted to the Bank did not support its claim that the Bankrsquos financing provided a financing cost advantage to foreign airlines Moreover the complaint was raised at a time and in the context of negotiations by export credit agencies (ldquoECAsrdquo) regarding the Aircraft Sector Understanding discussed below The Bank understood that the negotiations regarding the Aircraft Sector Understanding would address any concerns by US airlines which were also involved in the negotiations Finally the Bank was also aware throughout the first decade of the 2000s that the major US airlines involved in international flights were not in a mode of purchasing new aircraft and thus that any financing advantage was theoretical only In short the Bankrsquos adoption and continued use of the ldquoexportable goods screenrdquo was eminently reasonable and based on the Bankrsquos considerable expertise with the financial dynamics of aircraft financing
Section III outlines the Bankrsquos responses to evolving Congressional requirements for the Bank to consider whether its actions would have a serious or significant adverse effect on US industry or employment The Bankrsquos responses were formulated with a view to also ensure that it remains competitive with other export credit agencies as requires by its Charter and fulfills its mission to support US jobs through exports
A The US Airline Industry Financing Dynamics 1985 to Early 2001
The Bankrsquos experience over the past 45 years since the first legislated economic impact provisions were enacted has shown that most transactions for which the Bank receives applications are not likely to result in substantial adverse economic impact on the US economy or US jobs For example most of the Bankrsquos transactions are simply too small or too localized to have any significant likelihood of having an adverse impact on US industries or jobs Other examples are transactions supporting sales of consumable goods such as pickle exports to China and transactions supporting exports to be used in a power plant in a foreign country where the power generated will never be sent to the United States to compete with domestic power producers Therefore consistent with the Bankrsquos Charter not every application is subjected to a full‐blown ldquodetailed economic impact analysisrdquo
A detailed economic impact analysis can substantially delay the processing of a transaction and jeopardize the ability of the US exporter to capture the export opportunity Given the number of transactions the Bank finances each year ndash approximately 3800 in Fiscal Year 2012 ndash the
10
Bank would not be able to accomplish its mission of promoting US exports if it were to perform a ldquodetailed economic impact analysisrdquo on every transaction or even for a significant percentage of the transactions
Recognizing the dilatory effects of conducting unnecessary detailed economic impact analyses the Bankrsquos categorical approach to the economic impact provisions of the Bankrsquos Charter has always been to screen out transactions that were not likely to have a substantial adverse effect on US industries or US jobs Ex‐Im Bankrsquos experience in this area over the decades indicates three critical determinants of whether a contemplated transaction has potential to cause substantial adverse impact
1) whether the transaction is too small to have a significant impact
2) whether the transaction involves exports that are to be used for the production of goods or provision of services which are only likely to be used locally in the foreign buyerrsquos country and
3) whether the transaction relates to an industry (eg aircraft) in which the available financing for US domestic sales indicates that Ex‐Im Bank financing for foreign sales generally would not disadvantage the US industry
In 2001 when the Bankrsquos ldquoexportable goodsrdquo screen was first adopted the Bank had substantial reason to believe that transactions resulting in services being exported by foreign countries would be unlikely to have a substantial adverse economic impact on the US services sector
The Bank had for several decades received input from trade groups industry stakeholders and other government agencies regarding the domestic adverse impact of Ex‐Im Bank financing In the Bankrsquos experience such representatives could be relied upon to notify the Bank if they were concerned that the Bankrsquos policies procedures or actions threatened to cause any harm or disruption to a specific industry or sector Concerns raised by industry representatives or the absence of any voiced concerns were a significant tool for the Bank to check the soundness of its categorical judgments as reflected in the screens
As of 2001 when the ldquoexportable goodsrdquo screen was put in place the Bank had heard no concerns about Ex‐Im Bank transactions from the US airline industry in 17 years In 1984 Pan American World Airways (Pan Am) had argued that Ex‐Im Bank support resulted in lower financing costs for foreign airlines than the US airlines could themselves obtain To assess these concerns the Bank analyzed the overall costs of financing for US domestic airlines as compared to the costs of financing to a foreign airline in an Ex‐Im Bank‐guaranteed transaction The analysis compared not just the interest rates charged by lenders in the two different scenarios but also incorporated other factors so as to produce a true ldquoapples‐to‐applesrdquo comparison of the relative financing costs
These other factors included the cost of the Ex‐Im Bank guarantee fee (which the Bank now calls the ldquoexposure feerdquo) as well as the costs of financing the portion of the purchase price that
11
was not supported by the Ex‐Im Bank guarantee The Bank analyzed all of these factors and concluded that in fact Ex‐Im Bank support did not generally result in financing terms for foreign airlines that were more favorable than the financing available to US airlines Pan Am did not contest the Bankrsquos analysis at that time or at any subsequent time Nor did any other US airline or trade group raise any concerns in the intervening 17 years leading up to the adoption of the ldquoexportable goods screenrdquo in 2001 or indeed thereafter until 2010
Between 1990 and 1999 the Bank financed 440 aircraft involving the export of US‐manufactured aircraft representing a total value of approximately $22 billion dollars Given this significant expertise in the aircraft financing sector Ex‐Im Bank had ample and consistent evidence that major US airlines flying international routes had access to more favorable financing relative to the financing available to foreign airlines through ECAs such as Ex‐Im Bank Annexed as Appendix B is a detailed history and explanation of the types of financing that were available to US airlines which in turn had led the Bank to conclude that Bank financing to foreign airlines did not pose any financial competitive harm to US airlines
In contrast to the commercial bank financing available through Ex‐Im Bank in the 1980s and 1990s the principal method used by US airlines to acquire aircraft was through a ldquoleveraged leaserdquo A leveraged lease provides significant tax benefits to an entity that wants to shelter income through additional tax deductions The entity purchases the aircraft and then leases it to the airline The purchaser continues to own the aircraft and thus can take the depreciation deductions and investment tax credits on its tax returns during the term of the lease Once the lease term is over title to the aircraft may be transferred to the airline through various mechanisms The leveraged lease was very beneficial to US airlines in several respects
a) The effective cost of a leveraged lease structure was very attractive as compared to aloan to purchase the aircraft The purchaserlessor passed a portion of the tax benefitsback to the airline by way of lower lease payments
b) In most instances the airline could finance up to 100 of the appraised or ldquomarketrdquovalue of the individual aircraft In contrast under ECA financing from Ex‐Im Bank aforeign airline could only finance up to 85 of the ldquonetrdquo or actual price In short theUS airline could finance a larger percentage of a larger amount as compared to aforeign airline purchasing the same aircraft This translated into a significant financialadvantage for the US airlines
c) Under the leveraged lease structure the repayment terms offered to US airlines wereoften 18 to 22 years In contrast Ex‐Im Bank offered much shorter 10 to 12 yearrepayment terms Longer repayment terms mean lower payments which are of coursea significant benefit
As of 2001 Ex‐Im Bank was also aware that US airlines could avail themselves of commercial market financing known originally as equipment trust certificates and later as enhanced equipment trust certificates (ldquoEETCsrdquo) An EETC is a structure whereby investors can provide financing directly through the capital markets as opposed to loan financing provided by banks The EETCs provided significant cost advantages to US airlines and were generally not available
12
to foreign airlines Even for the rare foreign EETC the terms were not as favorable as the terms available to US airlines
The EETC was premised on sect 1110 of the US Bankruptcy Code which only applied to US airlines27 Section 1110 protects a secured creditor of an airline in bankruptcy by either a)requiring the debtor airline within 60 days of the bankruptcy petition date to cure any payment defaults and stay current with loan payments or b) permitting the secured creditor to obtain possession of the creditorrsquos collateral (ie the aircraft) 60 days after the bankruptcy petition date notwithstanding the automatic stay provision that applies to creditors of other types of debtors This certainty of access to collateral ndash and thus to payment ndash provided and continues to provide decreased risk to creditors of US airlines This certainty in turn allows these creditors to provide more favorable financing terms than creditors of foreign airlines In the boom years of 2000 to 2001 US airlines raised $19 billion in the EETC market primarily to purchase new aircraft
Throughout the years leading up to the adoption of the exportable goods screen in 2001 Ex‐Im Bank aircraft financing was provided in accordance with the guidelines set forth in the Large Aircraft Sector Understanding (ldquoLASUrdquo) under the auspices of the Organization for Economic Cooperation and Development (ldquoOECDrdquo) The LASU was followed later by evolving versions of the Aircraft Sector Understanding (ldquoASUrdquo) The LASU and the ASU wereare agreements that set forth guidelines to be followed by ECAs in supporting exports of aircraft manufactured in the home country of the relevant ECA The LASUASU guidelines set forth the maximum repayment term for the financing the maximum advance rate of the financing as a percentage of the net price of the aircraft and the minimum fee that the ECA was required to charge to the airline for the ECA support These terms and conditions resulted in financing that was significantly more expensive than that which could be obtained by US airlines in the private market
In light of the foregoing the Bank reasonably believed that US airlines would not suffer any adverse economic impact from the Bankrsquos financing of foreign airlinesrsquo acquisition of US‐manufactured aircraft In other words when Ex‐Im Bank first adopted the ldquoexportable goodsrdquo screen in 2001 the Bank was confident that its use of the screen would provide efficiencies in transaction‐processing time by focusing the Bankrsquos resources on transactions that could reasonably be expected to raise substantial adverse economic impact concerns
B The US Airline Industry Financing Dynamics Late 2001 to Early 2007
The decade of the 2000s presented the global airline industry with new challenges and new
opportunities ndash both of which created problems for US airlines
27 11 USC sect1110 (2001)
13
The terrorist attacks of September 11 2001 resulted in a sudden and protracted reduction in
demand for airline passenger services This was particularly prolonged in the United States and
Europe As a result of that drop in demand as well as other financial pressures the major US
airlines began a decade‐long process of mergers28 During the 2000s the major US airlines also
were able to shed costs and debtmdasheg pensionsmdashin a way not available to foreign airlines
under the US Bankruptcy Code29
As a result of this downsizing and restructuring US airlines focused on consolidation and
survival not expansion of their fleets by purchasing new aircraft US airline purchases of new
passenger aircraft almost disappeared after 2001 reappeared briefly in 2007 and then
disappeared again until sometime in 2010 Instead of ordering new aircraft US airlines
primarily relied upon the aircraft that they had purchased with EETC financing in the 2001‐2002
period
Nonetheless the data that are available indicate that through 2007 the US airlines generally
had access to aircraft financing that was no less favorable than financing provided by ECAs such
as Ex‐Im Bank In the midst of these developments starting in 2005 the various countries and
constituencies that were involved with ECA aircraft financing began negotiating a new ASU
During negotiations of the new ASU European airlines alleged that ECA financing was more
favorable than the financing to which they had access In June 2007 a new ASU agreement was
reached The European airlines explicitly approved thus signaling that the new agreement
eliminated any ECA financing advantage At the same time none of the US airlines raised any
economic impact concerns about the new ASU As Ex‐Im Bank reviewed and revised its
Economic Impact Procedures in 2007 there were no complaints raised by US airlines or any
other parties regarding aircraft transactions Likewise the new 2007 ASU had explicitly quelled
similar concerns in Europe All of the other relevant factors that led to adoption of the
ldquoexportable goodsrdquo screen in 2001 remained true in 2007 As a result in slightly varied form
the ldquoexportable goodsrdquo screen was carried through the 2002 and 2007 economic impact
procedures
C The US Airline Industry Financing Dynamics Late 2007 to 2012
After the 2007 ASU took effect the worldwide financial crisis emerged in 2008 and had a major
impact on global financial markets including those for large aircraft purchases From mid‐2008
to the beginning of 2010 the financial markets experienced significant volatility and distress
28 These included TWA and American Airlines in 2001 America West and US Airways in 2005 Northwest Airlines and Delta Air Lines in 2008 Continental Airlines and United Airlines in 2010 and Air Tran and Southwest Airlines in 2010 American Airlines and US Air announced merger plans in 201229 Bankruptcies of the major US Airlines from 2001‐2010 included US Airways in 2002 and 2004 United Airlines in 2002 Northwest Airlines in 2005 Delta Air Lines in 2005 Frontier Airlines in 2008 Mesa Airlines in 2010 American Airlines later filed for bankruptcy protection in 2012
14
Then after a short calm in 2010 the European sovereign debt and related European banking
crises rattled financial markets from mid‐2011 to mid‐2012 The result was another period of
extreme interest rate volatility
During this period the global financial market for commercial jet aircraft had been
characterized by (a) extreme volatility in both interest rates and availability of financing and
(b) major growth in demand for aircraft by airlines in the emerging markets and resource‐rich
OECD countries At the same time (and until only recently) there was very little demand for
aircraft by US airlines
There was also a fundamental shift in the key financial tools used for aircraft purchasesmdashwith
commercial banks playing a much diminished role EETC financing from the capital markets
emerged and matured into the most favorable source of financing
As noted before in early 2010 one US airline raised concerns that the financing provided by
the Bank to Ryanair an up‐and‐coming and successful discount airline in Europe was more
favorable than the financing available to US airlines The complaining airline asserted that Ex‐
Im Bank financing to Ryanair was significantly more favorable than financing that the
complaining airline itself had received in a recent EETC offering
Ex‐Im Bank reviewed and analyzed the assertions and determined that they were flawed in that
the purported difference in financial costs ignored pertinent factors and thus did not indicate
that ECA financing would be more favorable in a true ldquoapples to applesrdquo comparison Some key
factors ignored in the analysis provided by the one US airline were
a The credit‐worthiness of the US airline in question was publically rated at B‐ which in
common investment terms puts it in the ldquojunkrdquo group of ratings Ryanair by comparison is rated as investment grade a significantly higher rating Naturally a difference in credit ratings is going to result in a difference in the cost of financing
b The US airline was re‐financing a group of 10 to 12 year old aircraft while Ryanair was
financing brand‐new aircraft In both cases the aircraft being financed formed the
collateral pool for the loan Older aircraft represent a higher risk due to the poorer
quality of collateral therefore resulting in higher costs of financing
At the same time that this US airline was raising its concerns with the Bank it was also raising
similar concerns in the context of new ASU negotiations By the end of 2010 the ECAs reached
agreement on a new ASU (the 2011 ASU) which went into effect on February 1 2011 This
agreement included a built‐in adjustment mechanism to reflect changes in the financial
markets as they occurred This was designed to ensure that ECA financing and commercial bank
financing were generally equivalent The Bank continues to monitor the 2011 ASU to ensure
that the adjustment mechanism built into that agreement does in fact generally work to
15
enforce an equilibrium between the cost of ECA aircraft financings and the financing available
to US airlines in the private market In addition this very issue continues to be a regular topic
of discussion among the ASU participant countries as well Based on the data that have been
developed and presented to date the Bank believes that the 2011 ASU properly serves its
intended function of ensuring that airlines using private market financing do not suffer a
competitive disadvantage when compared to ECA financing of aircraft under the ASU
IV Conclusion
Ex‐Im Bankrsquos exportable goods screen complied with the Bankrsquos statutory requirements to
assess the potential adverse effects of all transactions and to focus on those transactions that
were likely to result in a substantial adverse economic impact on US industry Historically
financing available to US airlines for the purchase of new wide‐body aircraft has been either
more favorable than or equally favorable as Ex‐Im Bank financing to foreign airlines for the
purchase of equivalent aircraft The exportable goods screen was an appropriate reasonable
and efficient response to the realities of aircraft financing It properly balanced the
Congressional directives to assess the likelihood of substantial economic impact on US
industry and US jobs with the need to finance transactions in an efficient manner so as to
support US exports and US jobs
November 22 2013
Export‐Import Bank of the United States 811 Vermont Ave NW Washington DC 20571
16
Appendix A
Excerpt from Staff Memorandum to Ex‐Im Bank Board of Directors Accompanying 1979
Economic Impact Procedures30
Thus Section 2(b)(1)(B) of the Act requires the Board of Directors to take into account ldquoany
serious adverse effectrdquo which loans or guarantees may have on US industry materials in short
supply and employment Section 1911 of the 1978 Amendments requires consideration by the
Bank of the extent to which a loan or financial guarantee ldquois likely to have an adverse
effecthellipeither by reducing demand for goods produced in the United States or by increasing
imports to the United Statesrdquo and Section 608 of the Appropriations Act requires a finding that
the commodity ultimately produced as a result of [Bank] financing will be in surplus when the
production comes on‐stream and that US producers of the same similar or competing
commodity will be substantially injured It is apparent that the latter two statutory provisions
are explications of the basic mandate of the Act and do not expand the Bankrsquos mandate to
examine domestic impact but rather suggest factors to be considered in that examination To
a great extent the 1978 Amendments language and the Appropriations Act provisions set forth
the same concept in different ways Thus the reference in Section 1911 of the 1978
Amendments to ldquoreducing demand for goods in the United Statesrdquo and ldquoincreasing imports to
the United Statesrdquo is no more than the inevitable consequence of a commodity being ldquoin
surplusrdquo as stated in Section 608 of the Appropriations Act
Section 2(b)(1)(B) is the broadest formulation of the basic concept since it contains the most
general language ie ldquoany serious impactrdquo and encompasses all types of exports Section
1911 is primarily procedural in nature directing the Bank not only to implement appropriate
regulations and procedures to ensure full consideration of adverse impact but also to request a
report from the International Trade Commission Section 1911 includes a more detailed
description of events which would constitute adverse impactmdashie a reduction in demand for
US produced goods or an increase in imports to the US Finally this section contains an
explicit reference to agriculture which was only implicitly covered by Section 2(b)(1)(B) It
should be noted that this is one of several references to agriculture which were added to the
Act by the 1978 Amendments
The Appropriations Act provision explicitly refers to a balancing by the Board of Directors of the
benefits of the [Bank]‐supported export against the injury to US [producers] of the commodity
in question At the same time the Act has always necessitated such a balancing by requiring
the Bank to take into account ldquoserious adverse effects upon the US economyrdquo at the same
time it carries out the Bankrsquos basic mandate to ldquofacilitate exportsrdquo and to ldquofoster expansion of
exportsrdquo Under either provision therefore the Board of Directors will be taking into
30 Memorandum ldquoProcedures Regarding Adverse Domestic Impact of Eximbank Financingrdquo Pp 7‐12 Jan 5 1979 17
consideration the results of the balancing as one of the many factors involved in making a
decision to provide financing It should be noted that Section 1911 of the 1978 Amendments is
consistent with both of these provisions since it only seeks to ensure that ldquofull considerationrdquo is
given to adverse effects upon the US economy
Section 2(b)(1)(B) of the Act refers to ldquoserious adverse effectrdquo upon the US economy as a
whole whereas Section 608 of the Appropriations Act imposes a more stringent test by
focusing on a single industry ndash the domestic producers of the commodity to be produced by the
project supported by [the Bank] ndash and requiring a determination of substantial injury for that
industry alone However a reading of the entire Section shows that such a determination
would have to be made only if the net effect upon the US economy of the project for which
support was requested from [the Bank] is negative and if the commodity is likely to be in
surplus on world markets at the time the project becomes operative In any event under
Section 2(b)(1)(B) the Board would have to take into account any serious adverse effects of the
transaction upon the US economy Only if the Board decides to proceed with the transaction
regardless of such effects would it be necessary to determine if there will be substantial injury
to US producers of the commodity and thus trigger the prohibition contained in Section 608
It should also be noted that Section 1911 of the 1978 Amendments speaks in terms only of ldquoany
adverse effectrdquo However the language of that provision clearly shows that it was not intended
to set up a substantive test but rather as was mentioned above to insure that formal
procedures to take into account impacts upon the US economy are established by [Ex‐Im
Bank] as well as to enable the Bank to obtain a report from the International Trade
Commissionrdquo PL 95‐630 92 Stat 3641 (1978)
18
Appendix B
Financial Tools Available to US Airlines
Generally over the past several decades US airlines have had access to a broad range of
aircraft financing options
Accordingly at different times during the past several decades US airlines took advantage of
whichever financing option provided the most attractive overall financing terms from such
airlinesrsquo perspective For instance a US airline would be able to maximize the amount of the
financing thereby minimizing the amount of its own money it had to invest in the aircraft (ie
the ldquodown paymentrdquo) It might also maximize the amount of money in excess of the actual cost
of the aircraft it could raise against the aircraft obtain the longest possible repayment term and
the slowest possible amortization schedule (ie the longest ldquoweighted average liferdquo) obtain
the lowest interest rate and risk premium obtain the least restrictive operational and financial
covenants provide the least amount of collateral or other security or obtain other benefits
Due to the fact that the United States is seen as not presenting any ldquocountry riskrdquo and has well‐
developed and well‐regarded legal and judicial systems that are seen as being protective of
creditorsrsquo rights US airlines have usually had access to secured aircraft financings from
commercial banks from around the world During the past several decades commercial banks
from different regions have been at the forefront of the aircraft finance industry and have
provided financing to US airlines on attractive financing terms Initially US‐based banks
provided most of the aircraft financing to US airlines but during the 1980s Japanese banks
became very significant lenders to the US airlines During the 1990s and 2000s the European
banks (German French British and Swiss banks) were the most significant source of
commercial bank funding for US airlines
In addition to commercial bank financing during the 1970s and 1980s US airlines obtained
long‐term financing from US‐based institutional investors (eg insurance companies and
pension funds) through the use of the Equipment Trust Certificate (ldquoETCrdquo) financing structure or
the Pass Through Certificate (ldquoPTCrdquo) financing structure The ETC is a financing provided by
institutional investors that is secured by one or more items of equipment (eg aircraft) The
PTC is a group of ETCs combined into a public debt security that is sold into the capital markets
to institutional investors
However during the 1980s the simplest and most prevalent form of aircraft financing for US
airlines was the US leveraged lease
The US leveraged lease allowed US airlines to take advantage of the US tax code which
generally provides for all types of capital assets to be depreciated and thereby reduces or
defers taxes due to the deductibility of tax depreciation Because US airlines generally did not 19
have sufficient income to fully take advantage of the benefit of the tax depreciation deductions
associated with acquiring aircraft the US airlines entered into US leveraged leases Under a
leveraged lease the benefits of the tax depreciation deductions related to the aircraft were
transferred to profitable companies that had income they wanted to shelter from tax In
return the company was willing to provide the equity in a US leverage lease (approximately
20 of the appraised value of the aircraft) and to ldquoleaserdquo the aircraft back to the airline for the
airlinersquos use A number of different entities entered into such leases including banks insurance
companies and other financial institutions such as Ford Motor Credit as well as finance
subsidiaries of other corporate entities including consumer product companies such as Phillip
Morris or entertainment companies such as Disney The fact that these were ldquoleveragedrdquo
leases (as opposed to ldquosingle investor leasesrdquo) also enabled the equity providers to deduct the
interest expense associated with the US leveraged lease
Through the use of a combination of lease equity and debt a US leveraged lease allowed US
airlines to arrange financing for up to 100 of the appraised value of an aircraft This was
particularly attractive to major US airlines because due to their size and relative importance
to the aircraft manufacturers every major US airline generally was able to negotiate aircraft
purchases with the aircraft manufacturers that enabled the airline to buy the aircraft for
amounts significantly less than the appraised value The result was that by using a US
leveraged lease to finance its aircraft a US airline was able to ldquoover‐financerdquo the aircraft (ie
finance the aircraft for more than the airline was paying for the aircraft) resulting in the airline
effectively having the ability each time the airline financed an aircraft to arrange 100
financing for its aircraft and at the same time arrange a long‐term working capital loan This is
the equivalent of a home buyer being able to buy a house with no money down (no down
payment) and also receiving a long‐term loan for non‐home expenses
In contrast Ex‐Im Bank‐supported aircraft financing is for only 85 (and sometimes less) of the
actual ldquonet pricerdquo that the airline is paying the US aircraft manufacturer (after deducting all
discounts and other concessions the airline has negotiated with the US aircraft manufacturer
which results in a net price that is almost always less than the appraised value) This requires
the foreign airline that is using Ex‐Im Bank support to come up with a down payment of at least
15 of the net price of the aircraft As a result US airlines were able to obtain more financing
under a US leveraged lease (without putting any money down) than foreign airlines could
under an Ex‐Im Bank supported aircraft financing (which required a down payment)
In addition US leveraged leases used by US airlines always had very long repayment terms
Generally speaking the longer the repayment the longer the tax deferral and the more
advantageous the terms of the US leveraged lease As a result it was not unusual for the US
leveraged leases used by US airlines to have a repayment term of between 18 and 22 years
and sometimes as long as 25 years The only constraint was that the lease term of the
20
leveraged lease should not exceed 80 of the economic useful life of the aircraft which in
some instances was more than 30 years
In contrast the repayment term in an Ex‐Im Bank‐supported aircraft financing is never longer
than 12 years which is the maximum repayment term Ex‐Im Bank is permitted to offer for an
aircraft financing under the guidelines for export credits promulgated by the Organization for
Economic Cooperation and Development (the ldquoOECDrdquo) with which guidelines the US
Government (including Ex‐Im Bank) has agreed to abide This difference in repayment terms is
significant it is similar to the difference in monthly payments under a 15 year home mortgage
versus a 30 year home mortgage As a result US airlines were able to obtain significantly
longer financing under a US leveraged lease (which generally resulted in a smaller periodic
principal repayment burden due to the longer repayment term) than foreign airlines could
under an Ex‐Im Bank‐supported financing
US leveraged leases used by US airlines also had a slower amortization profile with a very
long weighted average life (ie small amounts of debt amortization in the early years of the
financing) of at least 10 years In the same manner that a longer repayment term increased the
tax deferral a longer weighted average life also increased the tax deferral
In contrast the amortization profile in an Ex‐Im Bank supported aircraft financing for a foreign
airline is usually between 6 years and 65 years (at least 4 years shorter than the weighted
average life of the US leveraged leases historically used by US airlines) which imposes a
much greater cash flow burden on the foreign airline in comparison with the cash flows
required of a US airline under a US leveraged lease
Although the absolute interest rate on the debt in a US leveraged lease fluctuated over time
with the overall level of interest rates the providers of the debt into these US leveraged leases
(primarily insurance companies and other institutional investors) were generally willing to
accept an interest rate margin of less than 100 basis points31 over LIBOR32 on a fixed rate
equivalent basis (and sometimes significantly less than 100 basis points)
In contrast the interest rate margin on the debt on an Ex‐Im Bank‐supported aircraft financing
was generally between a few basis points over LIBOR to 50 basis points over LIBOR because the
interest on the Ex‐Im Bank‐guaranteed aircraft financing is guaranteed by Ex‐Im Bank and
reflects the low risk associated with a US Government guaranteed loan However the interest
rate margin on an Ex‐Im Bank‐guaranteed aircraft financing does not reflect the Ex‐Im Bank
exposure fee (or risk premium) that is paid to Ex‐Im Bank in view of the underlying risk of the
foreign airline The minimum exposure fee charged by Ex‐Im Bank was 2 during the 1980s
31 100 basis points equals 1 percent 32 LIBOR is the London Inter‐Bank Offering Rate and is a common reference rate such as ldquoPrimerdquo or ldquoTreasury Raterdquo used in adjustable interest rate transactions
21
and early 1990s and 3 until 2007 when the OECD promulgated a new set of guidelines for
export credits for aircraft (known as the ldquo2007 Aircraft Sector Understandingrdquo or the ldquo2007
ASUrdquo) This exposure fee was required to be paid ldquoup frontrdquo ndash ie at the inception of the loan
On a per annum basis this equates to between 30 basis points and 50 basis points which
should be added to the interest rate margin received by the guaranteed lender to obtain the
equivalent interest rate paid by a foreign airline under Ex‐Im Bank‐supported financing (for
purposes of comparing the overall financing cost to those incurred by US airlines) The Ex‐Im
Bank exposure fee is similar to a homeowner having to pay ldquopointsrdquo up front at the time he
obtains his mortgage The effect of paying points up front and paying an Ex‐Im Bank exposure
fee effectively increases the cost of the financing In comparing the overall cost of financing
through ECA support including the exposure fee to the overall cost of a leveraged lease for
borrowers with comparable credit profiles the overall cost of the US leveraged lease was
considerably more favorable than what could be achieved through an Ex‐Im Bank‐supported
aircraft financing
Although the US leveraged lease was itself a very attractive financing structure for US
airlines at different times the basic US leveraged lease was made even more attractive due to
other provisions of the US and foreign tax codes
For instance from the 1960s (during the Kennedy Administration) until its repeal under the Tax
Reform Act of 1986 the US tax code provided for an investment tax credit which was intended
to encourage investment in capital goods and therefore allowed airlines or the equity investor
in a US leveraged lease to get a credit against the taxes it would otherwise be required to pay
This credit was a permanent reduction in taxes paid as opposed to only the deferral of taxes
(postponement of when taxes had to be paid) that could be achieved through the use of the
US leveraged lease
Similarly from the 1980s to the mid‐1990s it was common for a US airline to combine a US
leveraged lease with a lease into a foreign jurisdiction that had a ldquoform over substancerdquo
approach to its tax code (as opposed to the United States which has a ldquosubstance over formrdquo
approach to its tax code) Taking advantage of the disparity a US airline could ldquosellrdquo the
aircraft to both (i) an equity investor in the United States and (ii) an equity investor in a foreign
country such as Japan Germany or Hong Kong and each equity investor could depreciate the
same aircraft and therefore shelter its respective income Over time due to changes in the
respective tax codes these more aggressive tax advantaged cross‐border leasing structures
(ldquoDouble Dipsrdquo and even on occasion ldquoTriple Dipsrdquo) were disallowed but not before US airlines
financed billions of dollars of aircraft using such tax advantaged leasing structures
During the 1990s the basic US leveraged lease was made even more attractive by taking
advantage of another provision of the US tax code that allowed additional US taxes to be
22
deferred if the equity investor in the transaction used an offshore subsidiary that qualified as a
Foreign Sales Corporation (ldquoFSCrdquo) under the US tax code and structured the deal as a
Commission FSC
In addition during the 1980s and 1990s US airlines had access to other sources of financing
with overall financing terms that were much more attractive than what was available to foreign
airlines via Ex‐Im Bank‐supported export credits For example during the late 1980s and 1990s
Airbus made its first significant sales to US airlines In order to do so Airbus arranged and
provided very attractive and flexible financing terms to US airlines to encourage them to
purchase European‐manufactured Airbus aircraft instead of US‐manufactured Boeing or
McDonnell Douglas aircraft The US airlines were more than willing to accept these incentives
During this period some US airlines entered into ldquowalk awayrdquo leases of Airbus aircraft
pursuant to which Airbus North America (backed by the joint and several guarantees of each of
the four countries that are members of Airbus SAS) entered into a US leveraged lease of the
Airbus aircraft and then subleased the aircraft to a US airline on terms that (i) passed along
most of the tax benefits to the US airline through lower lease rentals and (ii) permitted the
US airline to terminate the sublease and simply ldquowalk awayrdquo from the lease upon a relatively
short notice period
Under the ldquoHome Market Rulerdquo the European export credit agencies (including those of
France Germany and the United Kingdom) that usually support the financing of Airbus aircraft
could not provide such support to US airlines Therefore Airbus arranged for Kreditanstalt fur
Wiederaufbau the development bank of Germany to provide very attractive financing for the
Airbus aircraft being acquired by US airlines These financings occurred on terms much more
favorable (with 18‐ to 22‐year repayment terms) than what export credit agencies could
provide (with a maximum repayment term of 12‐years)
Similarly during the 1990s US airlines began to acquire a large number of 35 to 50 seat
regional jet aircraft manufactured by Bombardier of Canada and Embraer of Brazil Many of
these aircraft were acquired by the US airlines by using export credit support from Canada and
Brazil Some of the financing terms (ie the repayment terms) of these Brazilian and Canadian
government‐supported export credit financings were even more attractive (15‐ to 18‐year
repayment terms) than what was available from the export credit agencies of France Germany
and the United Kingdom with respect to Airbus aircraft or from Ex‐Im Bank with respect to
Boeing aircraft (10‐ to 12‐year repayment terms)
To make the financing of Canadian‐manufactured Bombardier regional jets even more
attractive to US airlines the province of Quebec (where Bombardier has its headquarters)
through Investment Quebec provided additional aircraft financing support to the US airlines
23
Finally to the extent even more attractive financing was needed to convince US airlines to
purchase Canadian or Brazilian‐manufactured regional aircraft the manufacturers themselves
provided residual value guarantees with respect to such aircraft to the airline or to the
financiers (ie to the equity investor in a US leveraged lease or the creditors financing the
aircraft)
The next major development in aircraft financing used by US airlines was the development in
the 1990s of the Enhanced Equipment Trust Certificate (ldquoEETCrdquo) which was an ETC with certain
structural enhancements The most important of these enhancements is a liquidity facility to
ensure that if there is a default the financiers would continue to receive current interest
during the period of time while the aircraft is being repossessed and remarketed A key
element in the development of the EETC was the existence of Section 1110 of the US
Bankruptcy Code which gives a type of ldquopreferred creditorrdquo status to financiers of aircraft for
US airlines This ldquopreferred creditorrdquo status exempts aircraft financiers of US airlines from
the automatic stay generally imposed following a bankruptcy filing by a borrower subject to the
protections of the US Bankruptcy Code Section 1110 of the US Bankruptcy Code
accomplishes this by requiring the airline within 60 days of such bankruptcy filing to either (i)
resume payments under the originally agreed aircraft financing or (ii) return the aircraft to the
financier
The first EETC was done in 1994 and the practice has now been successfully used by almost
every major US airline including Alaska Airlines America West Airlines American Airlines
Continental Airlines Delta Airlines Hawaiian Airlines Jet Blue Airlines Northwest Airlines
Southwest Airlines United Airlines and US Airways The overall financing cost of a US airline
acquiring an aircraft through the use of the EETC ndash which includes the amount of financing
repayment term amortization profile effective cost of the financing etc ndash has generally been
significantly more attractive than (i) what such US airline could have achieved under an export
credit‐supported aircraft financing for such airline and (ii) what a similarly rated foreign airline
could have achieved under an export credit‐supported aircraft financing
This is particularly true for the financing of new aircraft The development of the EETC market
provided enormous financing flexibility to US airlines for the financing of new aircraft the
EETC provided the airline with the option to finance on a simple secured mortgage basis or the
US airline could opt for a leveraged lease with all of the benefits associated with a leveraged
lease described above
Beginning in 1997 US airlines had the ability to raise money in the capital markets when the
overall financing terms were most attractive They were able to ldquolock‐inrdquo such favorable
financing terms to fund new aircraft that were scheduled to be delivered in the future by
issuing a ldquopre‐fundedrdquo EETC These pre‐funded EETCs were used to great success by US
24
airlines in the late 1990s through 2001 a period in which the US airlines were taking delivery
of a significant number of aircraft
As a result of the downturn in the US airline industry following the September 11 2001
terrorist attacks many US airlines deferred or cancelled their orders for new aircraft This
reduced the need for US airlines to finance new aircraft when the financing terms available to
such US airlines via the EETC were not as favorable due to (i) the perceived increased credit
risks of the US airline industry following the September 11 terrorist attacks and (ii) the
temporary disequilibrium in the credit markets following the 200820092010 credit crisis
Now that the US airlines have once again begun to take delivery of a significant number of
new aircraft the pre‐funded EETC continues to be the preferred source of financing for US
airlines as evidenced by the number and amount of EETC issuances during 2012 and 2013
Based on an analysis of the EETC transactions occurring during 2012 and 2013 EETCs are once
again generally considered to provide more attractive overall financing terms than what could
be achieved by an airline under an export credit‐supported financing done under the terms of
the 2011 Aircraft Sector Understanding
25
GLOSSARY
ldquoAdverse Economic Impactrdquo is the short‐hand term used to refer to any serious negative effects on US industries or US jobs as set forth in the Bankrsquos Charter that result from Ex‐Im Bank loans guarantees or insurance The Bankrsquos Charter contains three provisions that address adverse economic impact found at 12 USC sectsect 635(b)(1) 635a‐2 635(e)
ldquoAir Indiardquo is an airline owned by the Government of the Republic of India ldquoAir India Transactionsrdquo are the two final commitments approved by Ex‐Im Bank on September
30 2011 for loan guarantees for the purchase of a number of 787 ldquoDreamlinerrdquo aircraft from Boeing and to be financed by a commercial lender not identified at the time As of the date of this paper Ex‐Im Bank has not issued any of its loan guarantees but is expected to do so in the coming months Ten of the aircraft involved in these two final commitments have been delivered to Air India and are in use by Air India on routes outside the United States The deliveries of the ten aircraft were made using private short‐term financing as to which Ex‐Im Bank had no involvement
ldquoAirbusrdquo Airbus SAS is a Europe‐based manufacturer of large commercial aircraft Airbus is the only competitor to Boeing the US manufacturer Airbus sales are supported by the ECAs of Germany France and the UK
ldquoAircraft Sector also known as the ASU is an agreement among members of the OECD Understandingrdquo that manufacture aircraft and Brazil The ASU requires that Export
Credit Agencies that support the export of aircraft follow certain rules and restrictions that set forth the most favorable terms that can be provided These rules and restrictions include the Export Credit Agency must charge a minimum risk premium which is determined by the ASU the term of any loan made by or supported by the Export Credit Agency for the purchase of aircraft cannot exceed 12 years the Export Credit Agency today can lend or guarantee only up to 85 of the actual purchase price of the aircraft being exported and the use of risk mitigants The ASU was preceded by the Large Aircraft Sector Understanding which governed these issues until the enactment of the 2007 ASU The ASU was again updated and revised in 2011 (See also the Large Aircraft Sector Understanding)
ldquoArrangementrdquo is the agreement among Export Credit Agencies governing the terms by which they will provide loans guarantees or insurance in support of exports from their respective countries Among other things the Arrangement requires Export Credit Agencies to charge a minimum risk premium which is governed by the Arrangement See also Organization for Economic Cooperation and Development
ldquoASUrdquo see Aircraft Sector Understanding ldquoAverage Weighted Liferdquo for purposes of this paper refers to the average number of years that
each dollar of unpaid principal on a loan remains outstanding For example a loan with equal principal payments throughout the loan term will have an average weighted life close to the middle of the whole loan term
26
ldquoBank Actrdquo is the Export‐Import Bank Act of 1945 12 USC sect635 as amended ldquoBank Advisory Committeerdquo is the official Advisory Committee of the Bank appointed in accordance
with the Bank Act and the Advisory Committee Act The Bank Advisory Committee is comprised of representatives of various industry and market sectors as well as representatives of labor and international trade experts
ldquoBasis pointsrdquo are a numerical measure applied to interest rates One basis point equals 1100th of one percent or 100 basis points equals one percent
ldquoCapital Equipmentrdquo is equipment used to manufacture a product provide a service or sell store or deliver merchandise A wide‐body aircraft is a piece of capital equipment
ldquoCharterrdquo is the Bank Act as well the provisions of the Export Import Bank Reauthorization Act of 2012 (Public Law 112‐122) that are not codified in the Bank Act
ldquoDreamlinerrdquo is the name given to a Boeing 787 wide‐body commercial aircraft ldquoECArdquo see Export Credit Agencies ldquoEconomic Impact Proceduresrdquo
are procedures adopted by Ex‐Im Bank to assess whether transactions supported by the Bank cause a serious adverse economic impact to US industries and US jobs See also Adverse Economic Impact
ldquoEETCrdquo see Enhanced Equipment Trust Certificate ldquoEnhanced Equipment Trust Certificaterdquo
also known as an EETC is a type of secured bond issued by a borrower in the capital markets The EETC is secured by the equipment being purchased with the proceeds of the bond issuance EETCs are used primarily for aircraft and since the late 1990s has been the dominant financing tool used by US airlines to purchase aircraft Section 1110 of the US Bankruptcy Codemdashwhich allows creditors of aircraft borrowers to obtain their collateral within 60 days if the payments on their debt is not current ndash has provided creditors of US airlines a level of comfort not available to creditors of foreign airlines until recently This generally provided US airlines with a significant financial advantage vis a vis their foreign competitors Recently the adoption of the Cape Town Convention and the related Aircraft Equipment Protocol has provided creditors of foreign airlines with protections similar to the protections provided by section 1110 of the US Bankruptcy Code Recently this has led to the beginnings of an international EETC market
ldquoEquipment Trust Certificaterdquo
also known as an ETC was the predecessor to the Enhanced Equipment Trust Certificate
ldquoETCrdquo see Equipment Trust Certificate ldquoEx‐Im Bankrdquo or ldquoBankrdquo See The Export‐Import Bank of the United States ldquoExport Credit Agenciesrdquo are agencies or ministries of government that have the official role of
providing loans guarantees or insurance in support of exports from their respective countries or in support of exports by sales of companies from their respective countries Ex‐Im Bank is the official Export Credit Agency of the United States of America
ldquoexportable goods screenrdquo is a screen or filter adopted by Ex‐Im Bank in its 2001 Economic Impact Procedures The exportable goods screen is utilized along with other screens to balance the Bankrsquos obligation to consider the adverse
27
economic effects of its transactions on US industries and US jobs with the Bankrsquos mandate to support US export transactions in a timely manner so as to fully support the exporterrsquos business opportunity The exportable goods screen filtered out transactions that supported exports which could only be used by a foreign buyer to provide services rather than produce goods
ldquoExport‐Import Bank of the is an independent agency of the Federal Government of the United United Statesrdquo States of America Also known as ldquoEx‐Im Bankrdquo Ex‐Im Bankrsquos mission
is to support US jobs by supporting US exports See 12 USC 635 et seq
ldquoExposure Feerdquo is the risk premium charged by Ex‐Im Bank in exchange for its guarantee in certain transactions The exposure fee must be at least equal to the minimum risk premium required by the terms of the Arrangement and the Aircraft Sector Understanding
ldquoForeign Sales Corporationrdquo is a company created under the terms of a former provision of the US Internal Revenue Code Foreign Sales Corporations received significant tax benefits
ldquoFSCrdquo see Foreign Sales Corporation ldquoInvestment Tax Creditrdquo is a credit permitted under the US Internal Revenue Code for the
purchase of certain types of equipment in certain circumstances See also Leveraged Leases
ldquoKFWrdquo the development bank for the Federal Republic of Germany KFW is an Export Credit Agency but it also operates through a ldquomarket windowrdquo which is not subject to the Home Market Rule Thus KFW provides support to Airbus for its sales of aircraft to US airlines The United States does not have an equivalent institution and Ex‐Im Bank does not have a ldquomarket windowrdquo
ldquoLarge Aircraft Sector also known as LASU was the predecessor to the Aircraft Sector Understandingrdquo Understanding The LASU governed the same general issues as are set
forth in the Aircraft Sector Understanding except that the minimum risk premium was lower than that required in the 2007 ASU and 2011 ASU When the 2007 ASU was enacted grandfathering provisions allowed ECA‐supported financing for a limited number of aircraft to be governed by LASU
ldquoLASUrdquo see Large Aircraft Sector Understanding ldquoLeveraged Leaserdquo is a lease of equipment and is designed to allow the lessor to take
advantage of certain tax code provisions such as the depreciation deduction and the investment tax credit while allowing the lessee to obtain the equipment involved at a significantly lower cost Leveraged Leases were a very popular means for US airlines to acquire aircraft throughout the 1980s and 1990s The value of the tax deductions to the lessor were significant so that the implicit interest rate in the lease payments by the US airline were extremely low Usually the US airline did not have sufficient profit to take advantage of the favorable tax code provisions By using a leveraged lease another company that could shelter income by using the tax code provisions would buy the equipment and lease the equipment to the US airline Usually at the end of the lease term the US airline would purchase the aircraft
28
ldquoLIBORrdquo is the London Inter‐bank Offering Rate It is commonly used as a reference rate in loan transactions that have floating or adjustable interest rates LIBOR reflects the rate at which banks will lend money to each other LIBOR is set for various loan terms (eg 3 months 6 months etc) and is widely published making it a convenient rate to use as a reference rate
ldquoNet pricerdquo is the price paid after all discounts have been deducted The net price is the actual price paid for a piece of equipment In aircraft transactions pursuant to the ASU Ex‐Im Bank will only support up to 85 of the net price of an aircraft EETC transactions on the other hand often support the nominal purchase price of an aircraft and thus result in a significantly higher amount financed
ldquoOECDrdquo see the Organization for Economic Cooperation and Development Open Skies Agreement Is a type of bilateral agreement between countries that govern the
rights of airlines from the two countries to fly into the other country Open Skies Agreements generally allow free access to fly as many routes to a country as an airline may choose but then usually restrict the ability to fly within the other country Generally it is a ldquofly in and outrdquo rule although there are exceptions
ldquoOrganization for Economic Cooperation and Developmentrdquo
also known as the OECD is an organization comprised of 34 member countries that work together to promote development The United States is a member With regard to Ex‐Im Bank the OECD is the organization through which the US Government negotiates an agreement among Export Credit Agencies known as the Arrangement and the ASU (and its predecessor the LASU)
ldquoPass Through Certificaterdquo also known as a PTC is a group of Equipment Trust Certificates pooled together to form the basis for a bond issuance
ldquoPTCrdquo See Pass Through Certificate ldquoRyanairrdquo is a low‐cost Irish airline that began business after European
deregulation of airlines in 1997 Ryanair rapidly expanded during the first decade of the 2000s creating significant competition for other airlines
ldquoScreensrdquo are a type of filter used by Ex‐Im Bank in its Economic Impact Procedures Screens are designed to identify those transactions which are not likely to cause an adverse economic impact to US industries or US jobs so that such transactions can be processed more quickly and efficiently as required by the Bank Act
ldquoSubstantial Injuryrdquo is a term defined in Ex‐Im Bankrsquos Charter to be applied in connection with the Bankrsquos economic impact procedures 12 USC sect635(e)(4) The Charter states ldquohellipthe extension of any credit or guarantee by the Bank will cause substantial injury if the amount of the capacity for production established or the amount of the increase in such capacity expanded by such credit or guarantee equals or exceeds 1 percent of United States productionrdquo
ldquoTPCCrdquo see Trade Promotion Coordinating Committee ldquoTrade Promotion Coordinating Committeerdquo
also known as the TPCC is an interagency committee of the US Government chaired by the Secretary of Commerce It was established under the Export Enhancement Act of 1992 to provide a
29
unifying framework to coordinate the export promotion and export financing activities of the US government and to develop a government‐wide strategic plan for carrying out such programs
ldquoTrade Sanctionsrdquo refers to any of a number of sanctions imposed by the US Government against companies countries industries or products usually as a result of an accusation of adjudication of a violation of an international trade agreement The Bank Act requires Ex‐Im Bank to take certain trade sanctions into account in its economic impact procedures
30
Table A ndash Congressional Actions and Ex-Im Bank Responses
Year Congressional Action Ex‐Im Bank Response
1968 Bank directed to take into account the possible adverse effect [of its loans and guarantees] upon the United States economy
Bank adds this transactions
factor to analysis of
1975 1 Standard refined to take into account any serious adverse effect of loans and guarantees on competitive position of US industry availability of scarce materials in US and employment in US
2 Bank directed to be competitive with rates terms and conditions offered by principal countries whose exporters compete with US exporters
3 Bank directed to submit semi‐annual report on competitiveness and conduct survey of US exporters and lenders to determine experience in meeting financing competition
Bank adds these of transactions
considerations to analysis
Year Congressional Action Ex‐Im Bank Response
1978 ‐ 1979
1 Bank directed to take into account any serious adverse effect of loans on competitive position of US industry and scarce materials Bank directed to emphasize strengthening competitive position of US exporters and expanding total US exports
2 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [From Appropriations Act Restated in Bank Charter in 1986]
3 Bank directed to implement regulations and procedures to insure full consideration of extent to which loan or guarantee is likely to have adverse effect on industries and employment in US either by reducing demand for US produced goods or increasing imports to the US
Bank develops framework and set of written economic impact procedures
1 Exclude exports the use of which remained localized in foreign country This
is first ldquoforeign localized goods and services screenrdquo
2 ldquoIntent and stimulus for projectrdquo examined to determine likelihood of substantial adverse economic impact Does transaction involve ldquorunaway industryrdquo
(leaving US for cheaper foreign labor)
3 Does export of capital equipment result in ldquobuy backrdquo of product being imported into the US
4 Is net impact on US economy and jobs positive or negative and to what degree
32
Year Congressional Action Ex‐Im Bank Response
1986 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [Originally from 1978 Appropriations incorporated into Bank Charter in 1986]
Senate Report recognizes knowledge and experience of Bank and need to respond to exportersrsquo requests for support in a timely and confidential fashion Economic impact procedures are to be practical and workable and not reduce Bankrsquos competitiveness and flexibility nor ignore positive aspects of export sale
Bank develops ldquoSummary of Adverse Economic Guidelinesrdquo to be applied to both
goods and services (a) is commodity to be produced surplus or likely to compete with US‐produced surplus (b) will Bankrsquos
assistance cause substantial injury to US producers of competing commodity (c)
will injury to US producers of competing commodity outweigh the short‐ and long‐
term benefits to US industry and employment If answer is no then no
further economic impact analysis
1988 Congress establishes test for ldquosubstantial injuryrdquo if the amount of capacity for production established or amount of increase in such capacity expanded by Bankrsquos credit or guarantee exceeds 1 of US production
Bankrsquos Board recognizes requirement to balance (a) possibility of substantial harm
to US production and employment with (b) being responsive competitive and efficient New economic impact procedures ask (a) will the project be in direct competition with US production (b) is the Bankrsquos support significantly associated with the project (c) will the output of the project
cause substantial injury to US producers of the same similar or competing
commodity If answer is no then no further economic impact analysis is required
33
Year Congressional Action Ex‐Im Bank Response
1998 Bank revised procedures involving countries against which trade sanctions were pending or imposed
2001
2006 ‐2007
1 Bank required to determine whether extension of credit or guarantee is likely to produce same or other commodities and whether the production may cause substantial injury to US producers
2 Bank prohibited from providing a loan or guarantee that will facilitate circumvention of trade law order or determination
3 Bank required to designate sensitive commercial sectors and products for which Bank financing deemed unlikely due to potential for adverse economic impact on US
4 Bank required to aggregate financial thresholds on rolling 24‐month basis
Bank develops ldquoexportable goods screenrdquo Does Ex‐Im Bank support result in production of exportable good from the foreign buyerrsquos country If not no further economic impact analysis is required Notice and request for comments were published in the Federal Register US airline industry did not respond
Bank issues 2007 Economic Impact Procedures ldquoExportable goods screenrdquo is modified Will the transaction (capital goods and services) result in either new or additional production capacity of an exportable good
34
3 1978 ndash Congress Directs the Bank to Strengthen the Competitive Position of United States Exporters and Expand US Exports
In 1978 Congress enacted three important changes relative to economic impact First Congress added language emphasizing the need to strengthen US exportersrsquo competitive position12
Second Congress prohibited Bank financing from being used to support exports that produce commodities that are in surplus or which would cause substantial injury to US producers of the same or similar commodity unless the Bankrsquos Board of Directors determines that benefits to US industry and employment outweigh injury to US producers13 This balancing test acknowledged the judgment that the Bank had to bring to bear in making such determinations
Third the Bank was directed to implement procedures to ensure consideration of the extent to which financing would have an adverse effect on US industries and employment either by reducing demand for US produced goods or increasing imports to the US14
4 1979 ndash The Bank Develops Comprehensive Economic Impact Procedures with the First Use of Analytical ldquoScreensrdquo in Response to Congressional Requirements
The following year the Bank developed a set of written economic impact procedures in order to address the various statutory requirements enacted by Congress in 1978 The general objective was to devise a framework to identify both those transactions that were relatively unlikely to result in a substantial adverse economic impact as well as those that were
As an operating premise for these procedures the Bank determined that exports involving certain kinds of capital equipment (eg locomotives) and certain projects (eg power plants) were not likely to have any serious adverse impact on US industries or jobs These types of transactions which amounted at the time to 80 to 90 of the value of all transactions supported by the Bank had little to no potential for a substantial adverse impact on the US
12 The Bank is directed to take into account any serious adverse effect of such loan[s] or guarantee[s] on the competitive position of United States industry the availability of materials which are in short supply in the United States and shall give particular emphasis to the objective of strengthening the competitive position of United States exporters and thereby of expanding total United States exportsrdquo PL 95‐630 92 Stat 3641 (1978) 13 ldquo[N]one of the funds otherwise made available pursuant to the act to the Export‐Import Bank and the Overseas Private Investment Corporation shall be obligated or expended to finance any loan any assistance or any other financial commitments for establishing or expanding production of any commodity for export by any country other than the United States if the commodity is likely to be in surplus on world markets at the time the resulting productive capacity is expected to become operative and if the assistance will cause substantial injury to United States producers of the same similar or competing commodity Provided that such prohibition shall not apply to the Export‐Import Bank if in the judgment of its Board of Directors the benefits to industry and employment in the United States are likely to outweigh the injury to United States producers of the same similar or competing commodityrdquo PL 95‐481 92 Stat 1591 (1978) This section of the Appropriations Act is the predecessor to what would become section 2(e) of the Charter in 198614 The Bank shall ldquoimplement such regulations and procedures as may be appropriate to insure that full consideration is given to the extent to which any loan or financial guarantee is likely to have an adverse effect on industries including agriculture and employment in the United States either by reducing demand for goods produced in the United States or by increasing imports to the United Statesrdquo PL 95‐630 92 Stat 3641 codified at 12 USC sect 635a‐2 (1978)
4
economy because the economic effects of the transactions were local in nature While not identified as such at the time this operating premise became the Bankrsquos first ldquoscreenrdquo in its economic impact procedures The screen eliminated from further economic impact analysis those transactions that resulted in foreign localized goods or services because they were unlikely to have a substantial adverse economic impact on US industry and jobs
For those transactions that cleared this first ldquoforeign localized goods and services screenrdquo the 1979 procedures then set forth factors for the Bank to consider in further analyzing economic impact
Categorization of transactions by ldquothe intent behind and stimulus for the projectrdquo was important in identifying transactions that were more likely to create a substantial adverse economic impact For example transactions involving ldquorunawayrdquo industries ndash ie industries that were leaving the US to seek cheaper labor in foreign countries ndash were generally suspect because they would tend to simply increase net imports into the United States
Similarly transactions involving ldquobuy‐backrdquo arrangements ndash where capital equipment is exported but there is an agreement that the resulting production will be ldquobought‐backrdquo by a party in the United States ndash were suspect because they also would tend to result in a net increase in imports
The Bank used these categorizations as tools at this stage of the analysis although additional factors were considered before the Bank approved or rejected a transaction Specifically the Bank considered (a) whether the net impact on the US economy and jobs was positive or negative by comparing the benefits from the export with the adverse impact of the transaction and (b) the seriousness of the impact or effect on the US economy if any15
5 1986 ndash Congress Directs the Bank to Balance the Benefits to US Industry and Employment Against Potential Injury
In 1986 Congress added to the Bankrsquos Charter the balancing test provisions previously contained in sect608 of the Foreign Operations Appropriations Act of 197816
The Senate Report accompanying this 1986 amendment emphasized that the Bank was to implement its provisions in a way that did not undermine the Bankrsquos primary function of financing transactions to support the export of United States goods and services
ldquothe Committee recognized the need for [the Bank] to respond to exportersrsquo requests for support in a timely and confidential fashion and intends that the Bank implement its adverse economic impact analysis procedures in a practical and workable fashionrdquo17
15 In connection with the presentation for approval of the 1979 economic impact procedures to the Ex‐Im Bank Board of Directors the Bankrsquos staff analyzed the three economic impact provisions in the Memorandum to the Board of Directors Pertinent provisions of this Memorandum are attached as Appendix A The Memorandum sets forth the Bankrsquos reasoning for interpreting the three applicable economic impact provisions in a holistic manner16 See text accompanying note 13 supra 17 See S Rep No 99‐274 at 8 (1986)
5
Explicitly recognizing the Bankrsquos expertise the Report also noted that the revised Charter ldquodoes not require the Bank to conduct further analysis if it views its existing body of knowledge as sufficientrdquo18 The Committee stressed that the ldquoprovision should be implemented in a way that does not reduce the Bankrsquos competitiveness and flexibility in assisting US exporters nor ignore the positive aspects of the export salerdquo19
This recognition of the need of the Bank to use its expertise to ensure competitiveness and flexibility in assisting US exporters was and has been incorporated as a guiding principle for the Bankrsquos analytical frameworks in assessing whether substantial adverse economic impact exists for each transaction considered
Following enactment of the 1986 provisions the Bank revised its economic impact procedures to categorize transactions These categories acted as filters posing two ldquoyes or nordquo questions summarized as follows
‐ Is the commodity to be produced likely to be in surplus on world markets at the time of production or is it likely to compete with US production of a competing commodity
‐ Will the Bankrsquos extension of a loan or guarantee cause substantial injury to US producers of a competing commodity
A ldquonordquo answer to either of these two questions in sequence would mean that no further analysis was necessary If answers to both questions were affirmative then the Bank would conduct a detailed economic impact analysis and would determine whether the short and long‐term benefits of the transaction to US industry and employment outweighed any injury to US producers of a competing commodity
6 1988 ndash Congress Defines ldquoSubstantial Injuryrdquo and Adds a 1 Test which the Bank Uses to Refine Its Economic Impact Procedures
In 1988 Congress amended sect2(e) of the Bankrsquos Charter by defining ldquosubstantial injuryrdquo for purposes of analyzing adverse economic impact Specifically Congress defined ldquosubstantial injuryrdquo to mean ldquoif the amount of capacity for production established or the amount of the increase in such capacity expanded by [the Bankrsquos] credit or guarantee equals or exceeds 1 percent of United States productionrdquo20
In November 1988 the Board of Directors approved a new set of economic impact procedures As noted in the staffrsquos Memorandum to the Board of Directors dated November 14 1988
ldquo[t]he Congressional debates on the various adverse economic impact provisions have made it clear that the focus of concern is the possibility of substantial harm to US
18 Id 19 Id 20 PL 100‐418 102 Stat 1107 (1988)
6
production and employment there was no desire to make [the Bank] less responsive or competitive by slowing down the processing of cases not likely to cause injuryrdquo21
In an effort to achieve this required balance the new economic impact procedures posed the following three questions
- Will the project be in direct competition with US production - Is [the Bankrsquos] support significantly associated with this project - Will the output of the project likely cause substantial injury to US producers of the
same similar or competing commodity
As before a negative answer to any of the three questions would mean that the Bank would not conduct a detailed economic impact analysis to determine whether the short‐ and long‐term benefits of the transaction to US industry and employment outweighed any injury to US producers of a competing commodity
7 1998 ndash The Bank Modifies Its Economic Impact Procedures to Include Consideration of Trade Sanctions
The Bank was reauthorized in 1997 and no changes were made to any of the economic impact provisions in the Bankrsquos Charter Nevertheless the Bank revised its existing procedures to include additional focus that Congress had required on transactions involving countries or industries against which certain trade sanctions were pending or imposed
8 2001 ndash After Public Notice and a Request for Comments the Bank Further Refines Its Economic Impact Procedures to Reflect Congressional Requirements and the Need to Timely Process Applications
In 2001 the Bank further updated its economic impact procedures During the preceding 20 years the nature of the Bankrsquos transactions had changed to include many more involving private sector borrowers rather than state‐owned entities The new procedures attempted to balance a thorough timely examination of economic impact issues with the need to process transactions within a short timeframe that would satisfy the speed required by commercial realities The Bank determined that it could best comply with its statutory mandate to provide competitive financing for US exports by focusing any detailed economic impact analysis only on those transactions likely to result in substantial adverse economic impact
The first stage or screen of the economic impact evaluation was to determine if the exports involved in a transaction would result in the production of an exportable good from the buyerrsquos country Hence the name ldquoexportable goodsrdquo screen As with its prior screens if the answer to this question was ldquonordquo then no further economic impact analysis was conducted
The Bank had determined that transactions that would result in the provision of exportable services from foreign countries would not cause substantial adverse economic impact on US
21 Memorandum to Board of Directors Country Risk Analysis Div ldquoProcedures for Economic Impact Analysisrdquo P 3 Nov 14 1988
7
industries The focus on exportable goods rather than exportable services was a result of several factors These included the Bankrsquos accumulated expertise with the relevant industries involved in transactions the Bank supported such as the airline sector and the financing available to such industries which indicated that US airlines generally had access to financing that was more favorable than the financing provided by Ex‐Im Bank to foreign airlines In addition the Bank took into account feedback and other input from trade groups industry stakeholders and other government agencies which would be expected to voice concerns if the Bankrsquos procedures were working to the detriment of any domestic industry
Notably the US airline sector had not raised any concerns about adverse economic impact since 1984 This lack of articulated concern by the US airline industry was consistent with the Bankrsquos own expertise and understanding of the airline sector and aircraft financing As noted above the Bank understood from its considerable involvement in aircraft finance that US airlines generally had access to financing that was more favorable than the financing provided by Ex‐Im Bank to foreign airlines Thus US airlines had no reason to complain
In anticipation of the 2001 revisions to its economic impact procedures although not required to do so the Bank published a notice in the Federal Register Its proposed new economic impact procedures were posted on its website and public comment was invited As before the US airline industry made no comments in response to the Bankrsquos proposed 2001 procedures which included among other things the adoption of the ldquoexportable goodsrdquo screen
The Bank adopted these procedures after repeated and extensive consultation with its core stakeholders including US industry labor its Advisory Committee and exporters22 In addition the Bank reached out to relevant experts in both the academic and consulting worlds who provided comments on the Bankrsquos proposed changes23 Finally the Bank requested and obtained input from other US Government agencies such as the Departments of Commerce Treasury and State as well as the Office of the US Trade Representative and the Office of Management amp Budget
The Bank considered and analyzed all the input it received and revised the procedures accordingly For example other US Government agencies had specific concerns with respect to how the Bank treated applications implicated by trade measures and the Bank modified its approach to these applications Given the lack of any articulated concerns about the airline sector and the Bankrsquos own knowledge and expertise regarding aircraft financing the Bank had no reason to believe that the proposed ldquoexportable goodsrdquo screen would not be an appropriate way to take account of adverse economic impact on the airline industry
22 The Bankrsquos Advisory Committee is created pursuant to its Charter and is ldquobroadly representative of environment production commerce finance agriculture labor services State government and the textile industryrdquo 12 USCsect635a(d)23 A partial list of those consulted includes former Congressman Bill Frenzel of the Brookings Institute Dr Robert Hahn of the American Enterprise Institute Dr Jerry Hausman of the Massachusetts Institute of Technology Dr J David Richardson of Syracuse University Dr Marina Whitman of the University of Michigan the National Foreign Trade Council the Coalition for Employment through Exports the American Iron and Steel Institute the AFL‐CIO the International Association of Machinists and Aerospace Workers NUCOR Bechtel Corporation Caterpillar Inc Delta Brands Inc and Air Tractor Inc
8
9 2006 ndash Congress Further Amends the Charter
In 2006 Congress made several substantive changes to the Bankrsquos Charter Among these were
‐ A requirement to determine whether the extension of a credit or guarantee is likely to result in the production of the same or similar commodities and whether such production may cause substantial injury to US producers
‐ A prohibition against providing a loan or guarantee that will facilitate the circumvention of any trade law order or determination
‐ A requirement for the Bank to designate sensitive commercial sectors and products for which the Bank is not likely to provide financing due to strong potential for adverse economic impact on US industry and
‐ A requirement to aggregate financial thresholds for purposes of assessing economic impact or otherwise on a rolling 24‐month basis24
In addition Congress added certain notice‐and‐comment requirements that apply ldquoif the Bank intends to conduct a detailed economic impact analysis or similar studyrdquo25
10 2007 ndash The Bank Responds to New Congressional Requirements with the 2007 Economic Impact Procedures
In response to the 2006 changes to the Charter the Bank modified its economic impact procedures The ldquoexportable goodsrdquo screen was amended to read
ldquoThe first stage of the economic impact analysis is to determine if the exports involved in a transaction will result in the production of an exportable good Therefore only exports of capital goods and services (eg manufacturing equipment licensing agreements) that will result in the foreign production of an exportable good are subject to further economic impact analysis in Stage II of these procedures The capital goods and services exports may be associated with new foreign production capacity or existing production capacity (eg applicable exports include replacement equipment in an existing production facility to maintain existing production capacity)rdquo26
Thus beginning with its first set of Economic Impact Procedures in 1968 and continuing through to 2007 the Bank has consistently made use of various kinds of filters or screens to remove those categories of transactions that are unlikely to produce a substantial adverse impact on domestic industry from detailed economic impact analysis This approach has allowed unaffected transactions to proceed without delay so that the Bank may capture the export opportunity Finally use of the screens has enabled the Bank to concentrate its resources on transactions that are more likely to cause substantial adverse economic impact
24 PL 109‐438 120 Stat 3268 (2006) 25 Id 26 Memorandum to Board of Directors Policy Analysis Div ldquoRevisions to Economic Impact Proceduresrdquo P 9 April 4 2007
9
III Discussion How the Bankrsquos Economic Impact Procedures and Exportable Goods Screen Satisfy the Requirements of the Bankrsquos Charter
In remanding the matter to the Bank the Court of Appeals required the Bank to provide a reasonable explanation to justify its use of the ldquoexportable goods screenrdquo The use of the ldquoexportable goods screenrdquo properly satisfies the various requirements of the Bankrsquos Charter When the screen was adopted the Bank knew that US airlines the industry most likely to be affected generally had access to financing at costs that were significantly more favorable than the cost of aircraft financing provided by the Bank For this very reason the Bank had not heard any economic impact concerns from any US airlines in the 17 years prior to the adoption of the screen Indeed the screen was in place for almost a decade before any US airline raised any questions about it When a single US airline did raise questions about the Bankrsquos financing to foreign airlines the analysis it submitted to the Bank did not support its claim that the Bankrsquos financing provided a financing cost advantage to foreign airlines Moreover the complaint was raised at a time and in the context of negotiations by export credit agencies (ldquoECAsrdquo) regarding the Aircraft Sector Understanding discussed below The Bank understood that the negotiations regarding the Aircraft Sector Understanding would address any concerns by US airlines which were also involved in the negotiations Finally the Bank was also aware throughout the first decade of the 2000s that the major US airlines involved in international flights were not in a mode of purchasing new aircraft and thus that any financing advantage was theoretical only In short the Bankrsquos adoption and continued use of the ldquoexportable goods screenrdquo was eminently reasonable and based on the Bankrsquos considerable expertise with the financial dynamics of aircraft financing
Section III outlines the Bankrsquos responses to evolving Congressional requirements for the Bank to consider whether its actions would have a serious or significant adverse effect on US industry or employment The Bankrsquos responses were formulated with a view to also ensure that it remains competitive with other export credit agencies as requires by its Charter and fulfills its mission to support US jobs through exports
A The US Airline Industry Financing Dynamics 1985 to Early 2001
The Bankrsquos experience over the past 45 years since the first legislated economic impact provisions were enacted has shown that most transactions for which the Bank receives applications are not likely to result in substantial adverse economic impact on the US economy or US jobs For example most of the Bankrsquos transactions are simply too small or too localized to have any significant likelihood of having an adverse impact on US industries or jobs Other examples are transactions supporting sales of consumable goods such as pickle exports to China and transactions supporting exports to be used in a power plant in a foreign country where the power generated will never be sent to the United States to compete with domestic power producers Therefore consistent with the Bankrsquos Charter not every application is subjected to a full‐blown ldquodetailed economic impact analysisrdquo
A detailed economic impact analysis can substantially delay the processing of a transaction and jeopardize the ability of the US exporter to capture the export opportunity Given the number of transactions the Bank finances each year ndash approximately 3800 in Fiscal Year 2012 ndash the
10
Bank would not be able to accomplish its mission of promoting US exports if it were to perform a ldquodetailed economic impact analysisrdquo on every transaction or even for a significant percentage of the transactions
Recognizing the dilatory effects of conducting unnecessary detailed economic impact analyses the Bankrsquos categorical approach to the economic impact provisions of the Bankrsquos Charter has always been to screen out transactions that were not likely to have a substantial adverse effect on US industries or US jobs Ex‐Im Bankrsquos experience in this area over the decades indicates three critical determinants of whether a contemplated transaction has potential to cause substantial adverse impact
1) whether the transaction is too small to have a significant impact
2) whether the transaction involves exports that are to be used for the production of goods or provision of services which are only likely to be used locally in the foreign buyerrsquos country and
3) whether the transaction relates to an industry (eg aircraft) in which the available financing for US domestic sales indicates that Ex‐Im Bank financing for foreign sales generally would not disadvantage the US industry
In 2001 when the Bankrsquos ldquoexportable goodsrdquo screen was first adopted the Bank had substantial reason to believe that transactions resulting in services being exported by foreign countries would be unlikely to have a substantial adverse economic impact on the US services sector
The Bank had for several decades received input from trade groups industry stakeholders and other government agencies regarding the domestic adverse impact of Ex‐Im Bank financing In the Bankrsquos experience such representatives could be relied upon to notify the Bank if they were concerned that the Bankrsquos policies procedures or actions threatened to cause any harm or disruption to a specific industry or sector Concerns raised by industry representatives or the absence of any voiced concerns were a significant tool for the Bank to check the soundness of its categorical judgments as reflected in the screens
As of 2001 when the ldquoexportable goodsrdquo screen was put in place the Bank had heard no concerns about Ex‐Im Bank transactions from the US airline industry in 17 years In 1984 Pan American World Airways (Pan Am) had argued that Ex‐Im Bank support resulted in lower financing costs for foreign airlines than the US airlines could themselves obtain To assess these concerns the Bank analyzed the overall costs of financing for US domestic airlines as compared to the costs of financing to a foreign airline in an Ex‐Im Bank‐guaranteed transaction The analysis compared not just the interest rates charged by lenders in the two different scenarios but also incorporated other factors so as to produce a true ldquoapples‐to‐applesrdquo comparison of the relative financing costs
These other factors included the cost of the Ex‐Im Bank guarantee fee (which the Bank now calls the ldquoexposure feerdquo) as well as the costs of financing the portion of the purchase price that
11
was not supported by the Ex‐Im Bank guarantee The Bank analyzed all of these factors and concluded that in fact Ex‐Im Bank support did not generally result in financing terms for foreign airlines that were more favorable than the financing available to US airlines Pan Am did not contest the Bankrsquos analysis at that time or at any subsequent time Nor did any other US airline or trade group raise any concerns in the intervening 17 years leading up to the adoption of the ldquoexportable goods screenrdquo in 2001 or indeed thereafter until 2010
Between 1990 and 1999 the Bank financed 440 aircraft involving the export of US‐manufactured aircraft representing a total value of approximately $22 billion dollars Given this significant expertise in the aircraft financing sector Ex‐Im Bank had ample and consistent evidence that major US airlines flying international routes had access to more favorable financing relative to the financing available to foreign airlines through ECAs such as Ex‐Im Bank Annexed as Appendix B is a detailed history and explanation of the types of financing that were available to US airlines which in turn had led the Bank to conclude that Bank financing to foreign airlines did not pose any financial competitive harm to US airlines
In contrast to the commercial bank financing available through Ex‐Im Bank in the 1980s and 1990s the principal method used by US airlines to acquire aircraft was through a ldquoleveraged leaserdquo A leveraged lease provides significant tax benefits to an entity that wants to shelter income through additional tax deductions The entity purchases the aircraft and then leases it to the airline The purchaser continues to own the aircraft and thus can take the depreciation deductions and investment tax credits on its tax returns during the term of the lease Once the lease term is over title to the aircraft may be transferred to the airline through various mechanisms The leveraged lease was very beneficial to US airlines in several respects
a) The effective cost of a leveraged lease structure was very attractive as compared to aloan to purchase the aircraft The purchaserlessor passed a portion of the tax benefitsback to the airline by way of lower lease payments
b) In most instances the airline could finance up to 100 of the appraised or ldquomarketrdquovalue of the individual aircraft In contrast under ECA financing from Ex‐Im Bank aforeign airline could only finance up to 85 of the ldquonetrdquo or actual price In short theUS airline could finance a larger percentage of a larger amount as compared to aforeign airline purchasing the same aircraft This translated into a significant financialadvantage for the US airlines
c) Under the leveraged lease structure the repayment terms offered to US airlines wereoften 18 to 22 years In contrast Ex‐Im Bank offered much shorter 10 to 12 yearrepayment terms Longer repayment terms mean lower payments which are of coursea significant benefit
As of 2001 Ex‐Im Bank was also aware that US airlines could avail themselves of commercial market financing known originally as equipment trust certificates and later as enhanced equipment trust certificates (ldquoEETCsrdquo) An EETC is a structure whereby investors can provide financing directly through the capital markets as opposed to loan financing provided by banks The EETCs provided significant cost advantages to US airlines and were generally not available
12
to foreign airlines Even for the rare foreign EETC the terms were not as favorable as the terms available to US airlines
The EETC was premised on sect 1110 of the US Bankruptcy Code which only applied to US airlines27 Section 1110 protects a secured creditor of an airline in bankruptcy by either a)requiring the debtor airline within 60 days of the bankruptcy petition date to cure any payment defaults and stay current with loan payments or b) permitting the secured creditor to obtain possession of the creditorrsquos collateral (ie the aircraft) 60 days after the bankruptcy petition date notwithstanding the automatic stay provision that applies to creditors of other types of debtors This certainty of access to collateral ndash and thus to payment ndash provided and continues to provide decreased risk to creditors of US airlines This certainty in turn allows these creditors to provide more favorable financing terms than creditors of foreign airlines In the boom years of 2000 to 2001 US airlines raised $19 billion in the EETC market primarily to purchase new aircraft
Throughout the years leading up to the adoption of the exportable goods screen in 2001 Ex‐Im Bank aircraft financing was provided in accordance with the guidelines set forth in the Large Aircraft Sector Understanding (ldquoLASUrdquo) under the auspices of the Organization for Economic Cooperation and Development (ldquoOECDrdquo) The LASU was followed later by evolving versions of the Aircraft Sector Understanding (ldquoASUrdquo) The LASU and the ASU wereare agreements that set forth guidelines to be followed by ECAs in supporting exports of aircraft manufactured in the home country of the relevant ECA The LASUASU guidelines set forth the maximum repayment term for the financing the maximum advance rate of the financing as a percentage of the net price of the aircraft and the minimum fee that the ECA was required to charge to the airline for the ECA support These terms and conditions resulted in financing that was significantly more expensive than that which could be obtained by US airlines in the private market
In light of the foregoing the Bank reasonably believed that US airlines would not suffer any adverse economic impact from the Bankrsquos financing of foreign airlinesrsquo acquisition of US‐manufactured aircraft In other words when Ex‐Im Bank first adopted the ldquoexportable goodsrdquo screen in 2001 the Bank was confident that its use of the screen would provide efficiencies in transaction‐processing time by focusing the Bankrsquos resources on transactions that could reasonably be expected to raise substantial adverse economic impact concerns
B The US Airline Industry Financing Dynamics Late 2001 to Early 2007
The decade of the 2000s presented the global airline industry with new challenges and new
opportunities ndash both of which created problems for US airlines
27 11 USC sect1110 (2001)
13
The terrorist attacks of September 11 2001 resulted in a sudden and protracted reduction in
demand for airline passenger services This was particularly prolonged in the United States and
Europe As a result of that drop in demand as well as other financial pressures the major US
airlines began a decade‐long process of mergers28 During the 2000s the major US airlines also
were able to shed costs and debtmdasheg pensionsmdashin a way not available to foreign airlines
under the US Bankruptcy Code29
As a result of this downsizing and restructuring US airlines focused on consolidation and
survival not expansion of their fleets by purchasing new aircraft US airline purchases of new
passenger aircraft almost disappeared after 2001 reappeared briefly in 2007 and then
disappeared again until sometime in 2010 Instead of ordering new aircraft US airlines
primarily relied upon the aircraft that they had purchased with EETC financing in the 2001‐2002
period
Nonetheless the data that are available indicate that through 2007 the US airlines generally
had access to aircraft financing that was no less favorable than financing provided by ECAs such
as Ex‐Im Bank In the midst of these developments starting in 2005 the various countries and
constituencies that were involved with ECA aircraft financing began negotiating a new ASU
During negotiations of the new ASU European airlines alleged that ECA financing was more
favorable than the financing to which they had access In June 2007 a new ASU agreement was
reached The European airlines explicitly approved thus signaling that the new agreement
eliminated any ECA financing advantage At the same time none of the US airlines raised any
economic impact concerns about the new ASU As Ex‐Im Bank reviewed and revised its
Economic Impact Procedures in 2007 there were no complaints raised by US airlines or any
other parties regarding aircraft transactions Likewise the new 2007 ASU had explicitly quelled
similar concerns in Europe All of the other relevant factors that led to adoption of the
ldquoexportable goodsrdquo screen in 2001 remained true in 2007 As a result in slightly varied form
the ldquoexportable goodsrdquo screen was carried through the 2002 and 2007 economic impact
procedures
C The US Airline Industry Financing Dynamics Late 2007 to 2012
After the 2007 ASU took effect the worldwide financial crisis emerged in 2008 and had a major
impact on global financial markets including those for large aircraft purchases From mid‐2008
to the beginning of 2010 the financial markets experienced significant volatility and distress
28 These included TWA and American Airlines in 2001 America West and US Airways in 2005 Northwest Airlines and Delta Air Lines in 2008 Continental Airlines and United Airlines in 2010 and Air Tran and Southwest Airlines in 2010 American Airlines and US Air announced merger plans in 201229 Bankruptcies of the major US Airlines from 2001‐2010 included US Airways in 2002 and 2004 United Airlines in 2002 Northwest Airlines in 2005 Delta Air Lines in 2005 Frontier Airlines in 2008 Mesa Airlines in 2010 American Airlines later filed for bankruptcy protection in 2012
14
Then after a short calm in 2010 the European sovereign debt and related European banking
crises rattled financial markets from mid‐2011 to mid‐2012 The result was another period of
extreme interest rate volatility
During this period the global financial market for commercial jet aircraft had been
characterized by (a) extreme volatility in both interest rates and availability of financing and
(b) major growth in demand for aircraft by airlines in the emerging markets and resource‐rich
OECD countries At the same time (and until only recently) there was very little demand for
aircraft by US airlines
There was also a fundamental shift in the key financial tools used for aircraft purchasesmdashwith
commercial banks playing a much diminished role EETC financing from the capital markets
emerged and matured into the most favorable source of financing
As noted before in early 2010 one US airline raised concerns that the financing provided by
the Bank to Ryanair an up‐and‐coming and successful discount airline in Europe was more
favorable than the financing available to US airlines The complaining airline asserted that Ex‐
Im Bank financing to Ryanair was significantly more favorable than financing that the
complaining airline itself had received in a recent EETC offering
Ex‐Im Bank reviewed and analyzed the assertions and determined that they were flawed in that
the purported difference in financial costs ignored pertinent factors and thus did not indicate
that ECA financing would be more favorable in a true ldquoapples to applesrdquo comparison Some key
factors ignored in the analysis provided by the one US airline were
a The credit‐worthiness of the US airline in question was publically rated at B‐ which in
common investment terms puts it in the ldquojunkrdquo group of ratings Ryanair by comparison is rated as investment grade a significantly higher rating Naturally a difference in credit ratings is going to result in a difference in the cost of financing
b The US airline was re‐financing a group of 10 to 12 year old aircraft while Ryanair was
financing brand‐new aircraft In both cases the aircraft being financed formed the
collateral pool for the loan Older aircraft represent a higher risk due to the poorer
quality of collateral therefore resulting in higher costs of financing
At the same time that this US airline was raising its concerns with the Bank it was also raising
similar concerns in the context of new ASU negotiations By the end of 2010 the ECAs reached
agreement on a new ASU (the 2011 ASU) which went into effect on February 1 2011 This
agreement included a built‐in adjustment mechanism to reflect changes in the financial
markets as they occurred This was designed to ensure that ECA financing and commercial bank
financing were generally equivalent The Bank continues to monitor the 2011 ASU to ensure
that the adjustment mechanism built into that agreement does in fact generally work to
15
enforce an equilibrium between the cost of ECA aircraft financings and the financing available
to US airlines in the private market In addition this very issue continues to be a regular topic
of discussion among the ASU participant countries as well Based on the data that have been
developed and presented to date the Bank believes that the 2011 ASU properly serves its
intended function of ensuring that airlines using private market financing do not suffer a
competitive disadvantage when compared to ECA financing of aircraft under the ASU
IV Conclusion
Ex‐Im Bankrsquos exportable goods screen complied with the Bankrsquos statutory requirements to
assess the potential adverse effects of all transactions and to focus on those transactions that
were likely to result in a substantial adverse economic impact on US industry Historically
financing available to US airlines for the purchase of new wide‐body aircraft has been either
more favorable than or equally favorable as Ex‐Im Bank financing to foreign airlines for the
purchase of equivalent aircraft The exportable goods screen was an appropriate reasonable
and efficient response to the realities of aircraft financing It properly balanced the
Congressional directives to assess the likelihood of substantial economic impact on US
industry and US jobs with the need to finance transactions in an efficient manner so as to
support US exports and US jobs
November 22 2013
Export‐Import Bank of the United States 811 Vermont Ave NW Washington DC 20571
16
Appendix A
Excerpt from Staff Memorandum to Ex‐Im Bank Board of Directors Accompanying 1979
Economic Impact Procedures30
Thus Section 2(b)(1)(B) of the Act requires the Board of Directors to take into account ldquoany
serious adverse effectrdquo which loans or guarantees may have on US industry materials in short
supply and employment Section 1911 of the 1978 Amendments requires consideration by the
Bank of the extent to which a loan or financial guarantee ldquois likely to have an adverse
effecthellipeither by reducing demand for goods produced in the United States or by increasing
imports to the United Statesrdquo and Section 608 of the Appropriations Act requires a finding that
the commodity ultimately produced as a result of [Bank] financing will be in surplus when the
production comes on‐stream and that US producers of the same similar or competing
commodity will be substantially injured It is apparent that the latter two statutory provisions
are explications of the basic mandate of the Act and do not expand the Bankrsquos mandate to
examine domestic impact but rather suggest factors to be considered in that examination To
a great extent the 1978 Amendments language and the Appropriations Act provisions set forth
the same concept in different ways Thus the reference in Section 1911 of the 1978
Amendments to ldquoreducing demand for goods in the United Statesrdquo and ldquoincreasing imports to
the United Statesrdquo is no more than the inevitable consequence of a commodity being ldquoin
surplusrdquo as stated in Section 608 of the Appropriations Act
Section 2(b)(1)(B) is the broadest formulation of the basic concept since it contains the most
general language ie ldquoany serious impactrdquo and encompasses all types of exports Section
1911 is primarily procedural in nature directing the Bank not only to implement appropriate
regulations and procedures to ensure full consideration of adverse impact but also to request a
report from the International Trade Commission Section 1911 includes a more detailed
description of events which would constitute adverse impactmdashie a reduction in demand for
US produced goods or an increase in imports to the US Finally this section contains an
explicit reference to agriculture which was only implicitly covered by Section 2(b)(1)(B) It
should be noted that this is one of several references to agriculture which were added to the
Act by the 1978 Amendments
The Appropriations Act provision explicitly refers to a balancing by the Board of Directors of the
benefits of the [Bank]‐supported export against the injury to US [producers] of the commodity
in question At the same time the Act has always necessitated such a balancing by requiring
the Bank to take into account ldquoserious adverse effects upon the US economyrdquo at the same
time it carries out the Bankrsquos basic mandate to ldquofacilitate exportsrdquo and to ldquofoster expansion of
exportsrdquo Under either provision therefore the Board of Directors will be taking into
30 Memorandum ldquoProcedures Regarding Adverse Domestic Impact of Eximbank Financingrdquo Pp 7‐12 Jan 5 1979 17
consideration the results of the balancing as one of the many factors involved in making a
decision to provide financing It should be noted that Section 1911 of the 1978 Amendments is
consistent with both of these provisions since it only seeks to ensure that ldquofull considerationrdquo is
given to adverse effects upon the US economy
Section 2(b)(1)(B) of the Act refers to ldquoserious adverse effectrdquo upon the US economy as a
whole whereas Section 608 of the Appropriations Act imposes a more stringent test by
focusing on a single industry ndash the domestic producers of the commodity to be produced by the
project supported by [the Bank] ndash and requiring a determination of substantial injury for that
industry alone However a reading of the entire Section shows that such a determination
would have to be made only if the net effect upon the US economy of the project for which
support was requested from [the Bank] is negative and if the commodity is likely to be in
surplus on world markets at the time the project becomes operative In any event under
Section 2(b)(1)(B) the Board would have to take into account any serious adverse effects of the
transaction upon the US economy Only if the Board decides to proceed with the transaction
regardless of such effects would it be necessary to determine if there will be substantial injury
to US producers of the commodity and thus trigger the prohibition contained in Section 608
It should also be noted that Section 1911 of the 1978 Amendments speaks in terms only of ldquoany
adverse effectrdquo However the language of that provision clearly shows that it was not intended
to set up a substantive test but rather as was mentioned above to insure that formal
procedures to take into account impacts upon the US economy are established by [Ex‐Im
Bank] as well as to enable the Bank to obtain a report from the International Trade
Commissionrdquo PL 95‐630 92 Stat 3641 (1978)
18
Appendix B
Financial Tools Available to US Airlines
Generally over the past several decades US airlines have had access to a broad range of
aircraft financing options
Accordingly at different times during the past several decades US airlines took advantage of
whichever financing option provided the most attractive overall financing terms from such
airlinesrsquo perspective For instance a US airline would be able to maximize the amount of the
financing thereby minimizing the amount of its own money it had to invest in the aircraft (ie
the ldquodown paymentrdquo) It might also maximize the amount of money in excess of the actual cost
of the aircraft it could raise against the aircraft obtain the longest possible repayment term and
the slowest possible amortization schedule (ie the longest ldquoweighted average liferdquo) obtain
the lowest interest rate and risk premium obtain the least restrictive operational and financial
covenants provide the least amount of collateral or other security or obtain other benefits
Due to the fact that the United States is seen as not presenting any ldquocountry riskrdquo and has well‐
developed and well‐regarded legal and judicial systems that are seen as being protective of
creditorsrsquo rights US airlines have usually had access to secured aircraft financings from
commercial banks from around the world During the past several decades commercial banks
from different regions have been at the forefront of the aircraft finance industry and have
provided financing to US airlines on attractive financing terms Initially US‐based banks
provided most of the aircraft financing to US airlines but during the 1980s Japanese banks
became very significant lenders to the US airlines During the 1990s and 2000s the European
banks (German French British and Swiss banks) were the most significant source of
commercial bank funding for US airlines
In addition to commercial bank financing during the 1970s and 1980s US airlines obtained
long‐term financing from US‐based institutional investors (eg insurance companies and
pension funds) through the use of the Equipment Trust Certificate (ldquoETCrdquo) financing structure or
the Pass Through Certificate (ldquoPTCrdquo) financing structure The ETC is a financing provided by
institutional investors that is secured by one or more items of equipment (eg aircraft) The
PTC is a group of ETCs combined into a public debt security that is sold into the capital markets
to institutional investors
However during the 1980s the simplest and most prevalent form of aircraft financing for US
airlines was the US leveraged lease
The US leveraged lease allowed US airlines to take advantage of the US tax code which
generally provides for all types of capital assets to be depreciated and thereby reduces or
defers taxes due to the deductibility of tax depreciation Because US airlines generally did not 19
have sufficient income to fully take advantage of the benefit of the tax depreciation deductions
associated with acquiring aircraft the US airlines entered into US leveraged leases Under a
leveraged lease the benefits of the tax depreciation deductions related to the aircraft were
transferred to profitable companies that had income they wanted to shelter from tax In
return the company was willing to provide the equity in a US leverage lease (approximately
20 of the appraised value of the aircraft) and to ldquoleaserdquo the aircraft back to the airline for the
airlinersquos use A number of different entities entered into such leases including banks insurance
companies and other financial institutions such as Ford Motor Credit as well as finance
subsidiaries of other corporate entities including consumer product companies such as Phillip
Morris or entertainment companies such as Disney The fact that these were ldquoleveragedrdquo
leases (as opposed to ldquosingle investor leasesrdquo) also enabled the equity providers to deduct the
interest expense associated with the US leveraged lease
Through the use of a combination of lease equity and debt a US leveraged lease allowed US
airlines to arrange financing for up to 100 of the appraised value of an aircraft This was
particularly attractive to major US airlines because due to their size and relative importance
to the aircraft manufacturers every major US airline generally was able to negotiate aircraft
purchases with the aircraft manufacturers that enabled the airline to buy the aircraft for
amounts significantly less than the appraised value The result was that by using a US
leveraged lease to finance its aircraft a US airline was able to ldquoover‐financerdquo the aircraft (ie
finance the aircraft for more than the airline was paying for the aircraft) resulting in the airline
effectively having the ability each time the airline financed an aircraft to arrange 100
financing for its aircraft and at the same time arrange a long‐term working capital loan This is
the equivalent of a home buyer being able to buy a house with no money down (no down
payment) and also receiving a long‐term loan for non‐home expenses
In contrast Ex‐Im Bank‐supported aircraft financing is for only 85 (and sometimes less) of the
actual ldquonet pricerdquo that the airline is paying the US aircraft manufacturer (after deducting all
discounts and other concessions the airline has negotiated with the US aircraft manufacturer
which results in a net price that is almost always less than the appraised value) This requires
the foreign airline that is using Ex‐Im Bank support to come up with a down payment of at least
15 of the net price of the aircraft As a result US airlines were able to obtain more financing
under a US leveraged lease (without putting any money down) than foreign airlines could
under an Ex‐Im Bank supported aircraft financing (which required a down payment)
In addition US leveraged leases used by US airlines always had very long repayment terms
Generally speaking the longer the repayment the longer the tax deferral and the more
advantageous the terms of the US leveraged lease As a result it was not unusual for the US
leveraged leases used by US airlines to have a repayment term of between 18 and 22 years
and sometimes as long as 25 years The only constraint was that the lease term of the
20
leveraged lease should not exceed 80 of the economic useful life of the aircraft which in
some instances was more than 30 years
In contrast the repayment term in an Ex‐Im Bank‐supported aircraft financing is never longer
than 12 years which is the maximum repayment term Ex‐Im Bank is permitted to offer for an
aircraft financing under the guidelines for export credits promulgated by the Organization for
Economic Cooperation and Development (the ldquoOECDrdquo) with which guidelines the US
Government (including Ex‐Im Bank) has agreed to abide This difference in repayment terms is
significant it is similar to the difference in monthly payments under a 15 year home mortgage
versus a 30 year home mortgage As a result US airlines were able to obtain significantly
longer financing under a US leveraged lease (which generally resulted in a smaller periodic
principal repayment burden due to the longer repayment term) than foreign airlines could
under an Ex‐Im Bank‐supported financing
US leveraged leases used by US airlines also had a slower amortization profile with a very
long weighted average life (ie small amounts of debt amortization in the early years of the
financing) of at least 10 years In the same manner that a longer repayment term increased the
tax deferral a longer weighted average life also increased the tax deferral
In contrast the amortization profile in an Ex‐Im Bank supported aircraft financing for a foreign
airline is usually between 6 years and 65 years (at least 4 years shorter than the weighted
average life of the US leveraged leases historically used by US airlines) which imposes a
much greater cash flow burden on the foreign airline in comparison with the cash flows
required of a US airline under a US leveraged lease
Although the absolute interest rate on the debt in a US leveraged lease fluctuated over time
with the overall level of interest rates the providers of the debt into these US leveraged leases
(primarily insurance companies and other institutional investors) were generally willing to
accept an interest rate margin of less than 100 basis points31 over LIBOR32 on a fixed rate
equivalent basis (and sometimes significantly less than 100 basis points)
In contrast the interest rate margin on the debt on an Ex‐Im Bank‐supported aircraft financing
was generally between a few basis points over LIBOR to 50 basis points over LIBOR because the
interest on the Ex‐Im Bank‐guaranteed aircraft financing is guaranteed by Ex‐Im Bank and
reflects the low risk associated with a US Government guaranteed loan However the interest
rate margin on an Ex‐Im Bank‐guaranteed aircraft financing does not reflect the Ex‐Im Bank
exposure fee (or risk premium) that is paid to Ex‐Im Bank in view of the underlying risk of the
foreign airline The minimum exposure fee charged by Ex‐Im Bank was 2 during the 1980s
31 100 basis points equals 1 percent 32 LIBOR is the London Inter‐Bank Offering Rate and is a common reference rate such as ldquoPrimerdquo or ldquoTreasury Raterdquo used in adjustable interest rate transactions
21
and early 1990s and 3 until 2007 when the OECD promulgated a new set of guidelines for
export credits for aircraft (known as the ldquo2007 Aircraft Sector Understandingrdquo or the ldquo2007
ASUrdquo) This exposure fee was required to be paid ldquoup frontrdquo ndash ie at the inception of the loan
On a per annum basis this equates to between 30 basis points and 50 basis points which
should be added to the interest rate margin received by the guaranteed lender to obtain the
equivalent interest rate paid by a foreign airline under Ex‐Im Bank‐supported financing (for
purposes of comparing the overall financing cost to those incurred by US airlines) The Ex‐Im
Bank exposure fee is similar to a homeowner having to pay ldquopointsrdquo up front at the time he
obtains his mortgage The effect of paying points up front and paying an Ex‐Im Bank exposure
fee effectively increases the cost of the financing In comparing the overall cost of financing
through ECA support including the exposure fee to the overall cost of a leveraged lease for
borrowers with comparable credit profiles the overall cost of the US leveraged lease was
considerably more favorable than what could be achieved through an Ex‐Im Bank‐supported
aircraft financing
Although the US leveraged lease was itself a very attractive financing structure for US
airlines at different times the basic US leveraged lease was made even more attractive due to
other provisions of the US and foreign tax codes
For instance from the 1960s (during the Kennedy Administration) until its repeal under the Tax
Reform Act of 1986 the US tax code provided for an investment tax credit which was intended
to encourage investment in capital goods and therefore allowed airlines or the equity investor
in a US leveraged lease to get a credit against the taxes it would otherwise be required to pay
This credit was a permanent reduction in taxes paid as opposed to only the deferral of taxes
(postponement of when taxes had to be paid) that could be achieved through the use of the
US leveraged lease
Similarly from the 1980s to the mid‐1990s it was common for a US airline to combine a US
leveraged lease with a lease into a foreign jurisdiction that had a ldquoform over substancerdquo
approach to its tax code (as opposed to the United States which has a ldquosubstance over formrdquo
approach to its tax code) Taking advantage of the disparity a US airline could ldquosellrdquo the
aircraft to both (i) an equity investor in the United States and (ii) an equity investor in a foreign
country such as Japan Germany or Hong Kong and each equity investor could depreciate the
same aircraft and therefore shelter its respective income Over time due to changes in the
respective tax codes these more aggressive tax advantaged cross‐border leasing structures
(ldquoDouble Dipsrdquo and even on occasion ldquoTriple Dipsrdquo) were disallowed but not before US airlines
financed billions of dollars of aircraft using such tax advantaged leasing structures
During the 1990s the basic US leveraged lease was made even more attractive by taking
advantage of another provision of the US tax code that allowed additional US taxes to be
22
deferred if the equity investor in the transaction used an offshore subsidiary that qualified as a
Foreign Sales Corporation (ldquoFSCrdquo) under the US tax code and structured the deal as a
Commission FSC
In addition during the 1980s and 1990s US airlines had access to other sources of financing
with overall financing terms that were much more attractive than what was available to foreign
airlines via Ex‐Im Bank‐supported export credits For example during the late 1980s and 1990s
Airbus made its first significant sales to US airlines In order to do so Airbus arranged and
provided very attractive and flexible financing terms to US airlines to encourage them to
purchase European‐manufactured Airbus aircraft instead of US‐manufactured Boeing or
McDonnell Douglas aircraft The US airlines were more than willing to accept these incentives
During this period some US airlines entered into ldquowalk awayrdquo leases of Airbus aircraft
pursuant to which Airbus North America (backed by the joint and several guarantees of each of
the four countries that are members of Airbus SAS) entered into a US leveraged lease of the
Airbus aircraft and then subleased the aircraft to a US airline on terms that (i) passed along
most of the tax benefits to the US airline through lower lease rentals and (ii) permitted the
US airline to terminate the sublease and simply ldquowalk awayrdquo from the lease upon a relatively
short notice period
Under the ldquoHome Market Rulerdquo the European export credit agencies (including those of
France Germany and the United Kingdom) that usually support the financing of Airbus aircraft
could not provide such support to US airlines Therefore Airbus arranged for Kreditanstalt fur
Wiederaufbau the development bank of Germany to provide very attractive financing for the
Airbus aircraft being acquired by US airlines These financings occurred on terms much more
favorable (with 18‐ to 22‐year repayment terms) than what export credit agencies could
provide (with a maximum repayment term of 12‐years)
Similarly during the 1990s US airlines began to acquire a large number of 35 to 50 seat
regional jet aircraft manufactured by Bombardier of Canada and Embraer of Brazil Many of
these aircraft were acquired by the US airlines by using export credit support from Canada and
Brazil Some of the financing terms (ie the repayment terms) of these Brazilian and Canadian
government‐supported export credit financings were even more attractive (15‐ to 18‐year
repayment terms) than what was available from the export credit agencies of France Germany
and the United Kingdom with respect to Airbus aircraft or from Ex‐Im Bank with respect to
Boeing aircraft (10‐ to 12‐year repayment terms)
To make the financing of Canadian‐manufactured Bombardier regional jets even more
attractive to US airlines the province of Quebec (where Bombardier has its headquarters)
through Investment Quebec provided additional aircraft financing support to the US airlines
23
Finally to the extent even more attractive financing was needed to convince US airlines to
purchase Canadian or Brazilian‐manufactured regional aircraft the manufacturers themselves
provided residual value guarantees with respect to such aircraft to the airline or to the
financiers (ie to the equity investor in a US leveraged lease or the creditors financing the
aircraft)
The next major development in aircraft financing used by US airlines was the development in
the 1990s of the Enhanced Equipment Trust Certificate (ldquoEETCrdquo) which was an ETC with certain
structural enhancements The most important of these enhancements is a liquidity facility to
ensure that if there is a default the financiers would continue to receive current interest
during the period of time while the aircraft is being repossessed and remarketed A key
element in the development of the EETC was the existence of Section 1110 of the US
Bankruptcy Code which gives a type of ldquopreferred creditorrdquo status to financiers of aircraft for
US airlines This ldquopreferred creditorrdquo status exempts aircraft financiers of US airlines from
the automatic stay generally imposed following a bankruptcy filing by a borrower subject to the
protections of the US Bankruptcy Code Section 1110 of the US Bankruptcy Code
accomplishes this by requiring the airline within 60 days of such bankruptcy filing to either (i)
resume payments under the originally agreed aircraft financing or (ii) return the aircraft to the
financier
The first EETC was done in 1994 and the practice has now been successfully used by almost
every major US airline including Alaska Airlines America West Airlines American Airlines
Continental Airlines Delta Airlines Hawaiian Airlines Jet Blue Airlines Northwest Airlines
Southwest Airlines United Airlines and US Airways The overall financing cost of a US airline
acquiring an aircraft through the use of the EETC ndash which includes the amount of financing
repayment term amortization profile effective cost of the financing etc ndash has generally been
significantly more attractive than (i) what such US airline could have achieved under an export
credit‐supported aircraft financing for such airline and (ii) what a similarly rated foreign airline
could have achieved under an export credit‐supported aircraft financing
This is particularly true for the financing of new aircraft The development of the EETC market
provided enormous financing flexibility to US airlines for the financing of new aircraft the
EETC provided the airline with the option to finance on a simple secured mortgage basis or the
US airline could opt for a leveraged lease with all of the benefits associated with a leveraged
lease described above
Beginning in 1997 US airlines had the ability to raise money in the capital markets when the
overall financing terms were most attractive They were able to ldquolock‐inrdquo such favorable
financing terms to fund new aircraft that were scheduled to be delivered in the future by
issuing a ldquopre‐fundedrdquo EETC These pre‐funded EETCs were used to great success by US
24
airlines in the late 1990s through 2001 a period in which the US airlines were taking delivery
of a significant number of aircraft
As a result of the downturn in the US airline industry following the September 11 2001
terrorist attacks many US airlines deferred or cancelled their orders for new aircraft This
reduced the need for US airlines to finance new aircraft when the financing terms available to
such US airlines via the EETC were not as favorable due to (i) the perceived increased credit
risks of the US airline industry following the September 11 terrorist attacks and (ii) the
temporary disequilibrium in the credit markets following the 200820092010 credit crisis
Now that the US airlines have once again begun to take delivery of a significant number of
new aircraft the pre‐funded EETC continues to be the preferred source of financing for US
airlines as evidenced by the number and amount of EETC issuances during 2012 and 2013
Based on an analysis of the EETC transactions occurring during 2012 and 2013 EETCs are once
again generally considered to provide more attractive overall financing terms than what could
be achieved by an airline under an export credit‐supported financing done under the terms of
the 2011 Aircraft Sector Understanding
25
GLOSSARY
ldquoAdverse Economic Impactrdquo is the short‐hand term used to refer to any serious negative effects on US industries or US jobs as set forth in the Bankrsquos Charter that result from Ex‐Im Bank loans guarantees or insurance The Bankrsquos Charter contains three provisions that address adverse economic impact found at 12 USC sectsect 635(b)(1) 635a‐2 635(e)
ldquoAir Indiardquo is an airline owned by the Government of the Republic of India ldquoAir India Transactionsrdquo are the two final commitments approved by Ex‐Im Bank on September
30 2011 for loan guarantees for the purchase of a number of 787 ldquoDreamlinerrdquo aircraft from Boeing and to be financed by a commercial lender not identified at the time As of the date of this paper Ex‐Im Bank has not issued any of its loan guarantees but is expected to do so in the coming months Ten of the aircraft involved in these two final commitments have been delivered to Air India and are in use by Air India on routes outside the United States The deliveries of the ten aircraft were made using private short‐term financing as to which Ex‐Im Bank had no involvement
ldquoAirbusrdquo Airbus SAS is a Europe‐based manufacturer of large commercial aircraft Airbus is the only competitor to Boeing the US manufacturer Airbus sales are supported by the ECAs of Germany France and the UK
ldquoAircraft Sector also known as the ASU is an agreement among members of the OECD Understandingrdquo that manufacture aircraft and Brazil The ASU requires that Export
Credit Agencies that support the export of aircraft follow certain rules and restrictions that set forth the most favorable terms that can be provided These rules and restrictions include the Export Credit Agency must charge a minimum risk premium which is determined by the ASU the term of any loan made by or supported by the Export Credit Agency for the purchase of aircraft cannot exceed 12 years the Export Credit Agency today can lend or guarantee only up to 85 of the actual purchase price of the aircraft being exported and the use of risk mitigants The ASU was preceded by the Large Aircraft Sector Understanding which governed these issues until the enactment of the 2007 ASU The ASU was again updated and revised in 2011 (See also the Large Aircraft Sector Understanding)
ldquoArrangementrdquo is the agreement among Export Credit Agencies governing the terms by which they will provide loans guarantees or insurance in support of exports from their respective countries Among other things the Arrangement requires Export Credit Agencies to charge a minimum risk premium which is governed by the Arrangement See also Organization for Economic Cooperation and Development
ldquoASUrdquo see Aircraft Sector Understanding ldquoAverage Weighted Liferdquo for purposes of this paper refers to the average number of years that
each dollar of unpaid principal on a loan remains outstanding For example a loan with equal principal payments throughout the loan term will have an average weighted life close to the middle of the whole loan term
26
ldquoBank Actrdquo is the Export‐Import Bank Act of 1945 12 USC sect635 as amended ldquoBank Advisory Committeerdquo is the official Advisory Committee of the Bank appointed in accordance
with the Bank Act and the Advisory Committee Act The Bank Advisory Committee is comprised of representatives of various industry and market sectors as well as representatives of labor and international trade experts
ldquoBasis pointsrdquo are a numerical measure applied to interest rates One basis point equals 1100th of one percent or 100 basis points equals one percent
ldquoCapital Equipmentrdquo is equipment used to manufacture a product provide a service or sell store or deliver merchandise A wide‐body aircraft is a piece of capital equipment
ldquoCharterrdquo is the Bank Act as well the provisions of the Export Import Bank Reauthorization Act of 2012 (Public Law 112‐122) that are not codified in the Bank Act
ldquoDreamlinerrdquo is the name given to a Boeing 787 wide‐body commercial aircraft ldquoECArdquo see Export Credit Agencies ldquoEconomic Impact Proceduresrdquo
are procedures adopted by Ex‐Im Bank to assess whether transactions supported by the Bank cause a serious adverse economic impact to US industries and US jobs See also Adverse Economic Impact
ldquoEETCrdquo see Enhanced Equipment Trust Certificate ldquoEnhanced Equipment Trust Certificaterdquo
also known as an EETC is a type of secured bond issued by a borrower in the capital markets The EETC is secured by the equipment being purchased with the proceeds of the bond issuance EETCs are used primarily for aircraft and since the late 1990s has been the dominant financing tool used by US airlines to purchase aircraft Section 1110 of the US Bankruptcy Codemdashwhich allows creditors of aircraft borrowers to obtain their collateral within 60 days if the payments on their debt is not current ndash has provided creditors of US airlines a level of comfort not available to creditors of foreign airlines until recently This generally provided US airlines with a significant financial advantage vis a vis their foreign competitors Recently the adoption of the Cape Town Convention and the related Aircraft Equipment Protocol has provided creditors of foreign airlines with protections similar to the protections provided by section 1110 of the US Bankruptcy Code Recently this has led to the beginnings of an international EETC market
ldquoEquipment Trust Certificaterdquo
also known as an ETC was the predecessor to the Enhanced Equipment Trust Certificate
ldquoETCrdquo see Equipment Trust Certificate ldquoEx‐Im Bankrdquo or ldquoBankrdquo See The Export‐Import Bank of the United States ldquoExport Credit Agenciesrdquo are agencies or ministries of government that have the official role of
providing loans guarantees or insurance in support of exports from their respective countries or in support of exports by sales of companies from their respective countries Ex‐Im Bank is the official Export Credit Agency of the United States of America
ldquoexportable goods screenrdquo is a screen or filter adopted by Ex‐Im Bank in its 2001 Economic Impact Procedures The exportable goods screen is utilized along with other screens to balance the Bankrsquos obligation to consider the adverse
27
economic effects of its transactions on US industries and US jobs with the Bankrsquos mandate to support US export transactions in a timely manner so as to fully support the exporterrsquos business opportunity The exportable goods screen filtered out transactions that supported exports which could only be used by a foreign buyer to provide services rather than produce goods
ldquoExport‐Import Bank of the is an independent agency of the Federal Government of the United United Statesrdquo States of America Also known as ldquoEx‐Im Bankrdquo Ex‐Im Bankrsquos mission
is to support US jobs by supporting US exports See 12 USC 635 et seq
ldquoExposure Feerdquo is the risk premium charged by Ex‐Im Bank in exchange for its guarantee in certain transactions The exposure fee must be at least equal to the minimum risk premium required by the terms of the Arrangement and the Aircraft Sector Understanding
ldquoForeign Sales Corporationrdquo is a company created under the terms of a former provision of the US Internal Revenue Code Foreign Sales Corporations received significant tax benefits
ldquoFSCrdquo see Foreign Sales Corporation ldquoInvestment Tax Creditrdquo is a credit permitted under the US Internal Revenue Code for the
purchase of certain types of equipment in certain circumstances See also Leveraged Leases
ldquoKFWrdquo the development bank for the Federal Republic of Germany KFW is an Export Credit Agency but it also operates through a ldquomarket windowrdquo which is not subject to the Home Market Rule Thus KFW provides support to Airbus for its sales of aircraft to US airlines The United States does not have an equivalent institution and Ex‐Im Bank does not have a ldquomarket windowrdquo
ldquoLarge Aircraft Sector also known as LASU was the predecessor to the Aircraft Sector Understandingrdquo Understanding The LASU governed the same general issues as are set
forth in the Aircraft Sector Understanding except that the minimum risk premium was lower than that required in the 2007 ASU and 2011 ASU When the 2007 ASU was enacted grandfathering provisions allowed ECA‐supported financing for a limited number of aircraft to be governed by LASU
ldquoLASUrdquo see Large Aircraft Sector Understanding ldquoLeveraged Leaserdquo is a lease of equipment and is designed to allow the lessor to take
advantage of certain tax code provisions such as the depreciation deduction and the investment tax credit while allowing the lessee to obtain the equipment involved at a significantly lower cost Leveraged Leases were a very popular means for US airlines to acquire aircraft throughout the 1980s and 1990s The value of the tax deductions to the lessor were significant so that the implicit interest rate in the lease payments by the US airline were extremely low Usually the US airline did not have sufficient profit to take advantage of the favorable tax code provisions By using a leveraged lease another company that could shelter income by using the tax code provisions would buy the equipment and lease the equipment to the US airline Usually at the end of the lease term the US airline would purchase the aircraft
28
ldquoLIBORrdquo is the London Inter‐bank Offering Rate It is commonly used as a reference rate in loan transactions that have floating or adjustable interest rates LIBOR reflects the rate at which banks will lend money to each other LIBOR is set for various loan terms (eg 3 months 6 months etc) and is widely published making it a convenient rate to use as a reference rate
ldquoNet pricerdquo is the price paid after all discounts have been deducted The net price is the actual price paid for a piece of equipment In aircraft transactions pursuant to the ASU Ex‐Im Bank will only support up to 85 of the net price of an aircraft EETC transactions on the other hand often support the nominal purchase price of an aircraft and thus result in a significantly higher amount financed
ldquoOECDrdquo see the Organization for Economic Cooperation and Development Open Skies Agreement Is a type of bilateral agreement between countries that govern the
rights of airlines from the two countries to fly into the other country Open Skies Agreements generally allow free access to fly as many routes to a country as an airline may choose but then usually restrict the ability to fly within the other country Generally it is a ldquofly in and outrdquo rule although there are exceptions
ldquoOrganization for Economic Cooperation and Developmentrdquo
also known as the OECD is an organization comprised of 34 member countries that work together to promote development The United States is a member With regard to Ex‐Im Bank the OECD is the organization through which the US Government negotiates an agreement among Export Credit Agencies known as the Arrangement and the ASU (and its predecessor the LASU)
ldquoPass Through Certificaterdquo also known as a PTC is a group of Equipment Trust Certificates pooled together to form the basis for a bond issuance
ldquoPTCrdquo See Pass Through Certificate ldquoRyanairrdquo is a low‐cost Irish airline that began business after European
deregulation of airlines in 1997 Ryanair rapidly expanded during the first decade of the 2000s creating significant competition for other airlines
ldquoScreensrdquo are a type of filter used by Ex‐Im Bank in its Economic Impact Procedures Screens are designed to identify those transactions which are not likely to cause an adverse economic impact to US industries or US jobs so that such transactions can be processed more quickly and efficiently as required by the Bank Act
ldquoSubstantial Injuryrdquo is a term defined in Ex‐Im Bankrsquos Charter to be applied in connection with the Bankrsquos economic impact procedures 12 USC sect635(e)(4) The Charter states ldquohellipthe extension of any credit or guarantee by the Bank will cause substantial injury if the amount of the capacity for production established or the amount of the increase in such capacity expanded by such credit or guarantee equals or exceeds 1 percent of United States productionrdquo
ldquoTPCCrdquo see Trade Promotion Coordinating Committee ldquoTrade Promotion Coordinating Committeerdquo
also known as the TPCC is an interagency committee of the US Government chaired by the Secretary of Commerce It was established under the Export Enhancement Act of 1992 to provide a
29
unifying framework to coordinate the export promotion and export financing activities of the US government and to develop a government‐wide strategic plan for carrying out such programs
ldquoTrade Sanctionsrdquo refers to any of a number of sanctions imposed by the US Government against companies countries industries or products usually as a result of an accusation of adjudication of a violation of an international trade agreement The Bank Act requires Ex‐Im Bank to take certain trade sanctions into account in its economic impact procedures
30
Table A ndash Congressional Actions and Ex-Im Bank Responses
Year Congressional Action Ex‐Im Bank Response
1968 Bank directed to take into account the possible adverse effect [of its loans and guarantees] upon the United States economy
Bank adds this transactions
factor to analysis of
1975 1 Standard refined to take into account any serious adverse effect of loans and guarantees on competitive position of US industry availability of scarce materials in US and employment in US
2 Bank directed to be competitive with rates terms and conditions offered by principal countries whose exporters compete with US exporters
3 Bank directed to submit semi‐annual report on competitiveness and conduct survey of US exporters and lenders to determine experience in meeting financing competition
Bank adds these of transactions
considerations to analysis
Year Congressional Action Ex‐Im Bank Response
1978 ‐ 1979
1 Bank directed to take into account any serious adverse effect of loans on competitive position of US industry and scarce materials Bank directed to emphasize strengthening competitive position of US exporters and expanding total US exports
2 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [From Appropriations Act Restated in Bank Charter in 1986]
3 Bank directed to implement regulations and procedures to insure full consideration of extent to which loan or guarantee is likely to have adverse effect on industries and employment in US either by reducing demand for US produced goods or increasing imports to the US
Bank develops framework and set of written economic impact procedures
1 Exclude exports the use of which remained localized in foreign country This
is first ldquoforeign localized goods and services screenrdquo
2 ldquoIntent and stimulus for projectrdquo examined to determine likelihood of substantial adverse economic impact Does transaction involve ldquorunaway industryrdquo
(leaving US for cheaper foreign labor)
3 Does export of capital equipment result in ldquobuy backrdquo of product being imported into the US
4 Is net impact on US economy and jobs positive or negative and to what degree
32
Year Congressional Action Ex‐Im Bank Response
1986 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [Originally from 1978 Appropriations incorporated into Bank Charter in 1986]
Senate Report recognizes knowledge and experience of Bank and need to respond to exportersrsquo requests for support in a timely and confidential fashion Economic impact procedures are to be practical and workable and not reduce Bankrsquos competitiveness and flexibility nor ignore positive aspects of export sale
Bank develops ldquoSummary of Adverse Economic Guidelinesrdquo to be applied to both
goods and services (a) is commodity to be produced surplus or likely to compete with US‐produced surplus (b) will Bankrsquos
assistance cause substantial injury to US producers of competing commodity (c)
will injury to US producers of competing commodity outweigh the short‐ and long‐
term benefits to US industry and employment If answer is no then no
further economic impact analysis
1988 Congress establishes test for ldquosubstantial injuryrdquo if the amount of capacity for production established or amount of increase in such capacity expanded by Bankrsquos credit or guarantee exceeds 1 of US production
Bankrsquos Board recognizes requirement to balance (a) possibility of substantial harm
to US production and employment with (b) being responsive competitive and efficient New economic impact procedures ask (a) will the project be in direct competition with US production (b) is the Bankrsquos support significantly associated with the project (c) will the output of the project
cause substantial injury to US producers of the same similar or competing
commodity If answer is no then no further economic impact analysis is required
33
Year Congressional Action Ex‐Im Bank Response
1998 Bank revised procedures involving countries against which trade sanctions were pending or imposed
2001
2006 ‐2007
1 Bank required to determine whether extension of credit or guarantee is likely to produce same or other commodities and whether the production may cause substantial injury to US producers
2 Bank prohibited from providing a loan or guarantee that will facilitate circumvention of trade law order or determination
3 Bank required to designate sensitive commercial sectors and products for which Bank financing deemed unlikely due to potential for adverse economic impact on US
4 Bank required to aggregate financial thresholds on rolling 24‐month basis
Bank develops ldquoexportable goods screenrdquo Does Ex‐Im Bank support result in production of exportable good from the foreign buyerrsquos country If not no further economic impact analysis is required Notice and request for comments were published in the Federal Register US airline industry did not respond
Bank issues 2007 Economic Impact Procedures ldquoExportable goods screenrdquo is modified Will the transaction (capital goods and services) result in either new or additional production capacity of an exportable good
34
economy because the economic effects of the transactions were local in nature While not identified as such at the time this operating premise became the Bankrsquos first ldquoscreenrdquo in its economic impact procedures The screen eliminated from further economic impact analysis those transactions that resulted in foreign localized goods or services because they were unlikely to have a substantial adverse economic impact on US industry and jobs
For those transactions that cleared this first ldquoforeign localized goods and services screenrdquo the 1979 procedures then set forth factors for the Bank to consider in further analyzing economic impact
Categorization of transactions by ldquothe intent behind and stimulus for the projectrdquo was important in identifying transactions that were more likely to create a substantial adverse economic impact For example transactions involving ldquorunawayrdquo industries ndash ie industries that were leaving the US to seek cheaper labor in foreign countries ndash were generally suspect because they would tend to simply increase net imports into the United States
Similarly transactions involving ldquobuy‐backrdquo arrangements ndash where capital equipment is exported but there is an agreement that the resulting production will be ldquobought‐backrdquo by a party in the United States ndash were suspect because they also would tend to result in a net increase in imports
The Bank used these categorizations as tools at this stage of the analysis although additional factors were considered before the Bank approved or rejected a transaction Specifically the Bank considered (a) whether the net impact on the US economy and jobs was positive or negative by comparing the benefits from the export with the adverse impact of the transaction and (b) the seriousness of the impact or effect on the US economy if any15
5 1986 ndash Congress Directs the Bank to Balance the Benefits to US Industry and Employment Against Potential Injury
In 1986 Congress added to the Bankrsquos Charter the balancing test provisions previously contained in sect608 of the Foreign Operations Appropriations Act of 197816
The Senate Report accompanying this 1986 amendment emphasized that the Bank was to implement its provisions in a way that did not undermine the Bankrsquos primary function of financing transactions to support the export of United States goods and services
ldquothe Committee recognized the need for [the Bank] to respond to exportersrsquo requests for support in a timely and confidential fashion and intends that the Bank implement its adverse economic impact analysis procedures in a practical and workable fashionrdquo17
15 In connection with the presentation for approval of the 1979 economic impact procedures to the Ex‐Im Bank Board of Directors the Bankrsquos staff analyzed the three economic impact provisions in the Memorandum to the Board of Directors Pertinent provisions of this Memorandum are attached as Appendix A The Memorandum sets forth the Bankrsquos reasoning for interpreting the three applicable economic impact provisions in a holistic manner16 See text accompanying note 13 supra 17 See S Rep No 99‐274 at 8 (1986)
5
Explicitly recognizing the Bankrsquos expertise the Report also noted that the revised Charter ldquodoes not require the Bank to conduct further analysis if it views its existing body of knowledge as sufficientrdquo18 The Committee stressed that the ldquoprovision should be implemented in a way that does not reduce the Bankrsquos competitiveness and flexibility in assisting US exporters nor ignore the positive aspects of the export salerdquo19
This recognition of the need of the Bank to use its expertise to ensure competitiveness and flexibility in assisting US exporters was and has been incorporated as a guiding principle for the Bankrsquos analytical frameworks in assessing whether substantial adverse economic impact exists for each transaction considered
Following enactment of the 1986 provisions the Bank revised its economic impact procedures to categorize transactions These categories acted as filters posing two ldquoyes or nordquo questions summarized as follows
‐ Is the commodity to be produced likely to be in surplus on world markets at the time of production or is it likely to compete with US production of a competing commodity
‐ Will the Bankrsquos extension of a loan or guarantee cause substantial injury to US producers of a competing commodity
A ldquonordquo answer to either of these two questions in sequence would mean that no further analysis was necessary If answers to both questions were affirmative then the Bank would conduct a detailed economic impact analysis and would determine whether the short and long‐term benefits of the transaction to US industry and employment outweighed any injury to US producers of a competing commodity
6 1988 ndash Congress Defines ldquoSubstantial Injuryrdquo and Adds a 1 Test which the Bank Uses to Refine Its Economic Impact Procedures
In 1988 Congress amended sect2(e) of the Bankrsquos Charter by defining ldquosubstantial injuryrdquo for purposes of analyzing adverse economic impact Specifically Congress defined ldquosubstantial injuryrdquo to mean ldquoif the amount of capacity for production established or the amount of the increase in such capacity expanded by [the Bankrsquos] credit or guarantee equals or exceeds 1 percent of United States productionrdquo20
In November 1988 the Board of Directors approved a new set of economic impact procedures As noted in the staffrsquos Memorandum to the Board of Directors dated November 14 1988
ldquo[t]he Congressional debates on the various adverse economic impact provisions have made it clear that the focus of concern is the possibility of substantial harm to US
18 Id 19 Id 20 PL 100‐418 102 Stat 1107 (1988)
6
production and employment there was no desire to make [the Bank] less responsive or competitive by slowing down the processing of cases not likely to cause injuryrdquo21
In an effort to achieve this required balance the new economic impact procedures posed the following three questions
- Will the project be in direct competition with US production - Is [the Bankrsquos] support significantly associated with this project - Will the output of the project likely cause substantial injury to US producers of the
same similar or competing commodity
As before a negative answer to any of the three questions would mean that the Bank would not conduct a detailed economic impact analysis to determine whether the short‐ and long‐term benefits of the transaction to US industry and employment outweighed any injury to US producers of a competing commodity
7 1998 ndash The Bank Modifies Its Economic Impact Procedures to Include Consideration of Trade Sanctions
The Bank was reauthorized in 1997 and no changes were made to any of the economic impact provisions in the Bankrsquos Charter Nevertheless the Bank revised its existing procedures to include additional focus that Congress had required on transactions involving countries or industries against which certain trade sanctions were pending or imposed
8 2001 ndash After Public Notice and a Request for Comments the Bank Further Refines Its Economic Impact Procedures to Reflect Congressional Requirements and the Need to Timely Process Applications
In 2001 the Bank further updated its economic impact procedures During the preceding 20 years the nature of the Bankrsquos transactions had changed to include many more involving private sector borrowers rather than state‐owned entities The new procedures attempted to balance a thorough timely examination of economic impact issues with the need to process transactions within a short timeframe that would satisfy the speed required by commercial realities The Bank determined that it could best comply with its statutory mandate to provide competitive financing for US exports by focusing any detailed economic impact analysis only on those transactions likely to result in substantial adverse economic impact
The first stage or screen of the economic impact evaluation was to determine if the exports involved in a transaction would result in the production of an exportable good from the buyerrsquos country Hence the name ldquoexportable goodsrdquo screen As with its prior screens if the answer to this question was ldquonordquo then no further economic impact analysis was conducted
The Bank had determined that transactions that would result in the provision of exportable services from foreign countries would not cause substantial adverse economic impact on US
21 Memorandum to Board of Directors Country Risk Analysis Div ldquoProcedures for Economic Impact Analysisrdquo P 3 Nov 14 1988
7
industries The focus on exportable goods rather than exportable services was a result of several factors These included the Bankrsquos accumulated expertise with the relevant industries involved in transactions the Bank supported such as the airline sector and the financing available to such industries which indicated that US airlines generally had access to financing that was more favorable than the financing provided by Ex‐Im Bank to foreign airlines In addition the Bank took into account feedback and other input from trade groups industry stakeholders and other government agencies which would be expected to voice concerns if the Bankrsquos procedures were working to the detriment of any domestic industry
Notably the US airline sector had not raised any concerns about adverse economic impact since 1984 This lack of articulated concern by the US airline industry was consistent with the Bankrsquos own expertise and understanding of the airline sector and aircraft financing As noted above the Bank understood from its considerable involvement in aircraft finance that US airlines generally had access to financing that was more favorable than the financing provided by Ex‐Im Bank to foreign airlines Thus US airlines had no reason to complain
In anticipation of the 2001 revisions to its economic impact procedures although not required to do so the Bank published a notice in the Federal Register Its proposed new economic impact procedures were posted on its website and public comment was invited As before the US airline industry made no comments in response to the Bankrsquos proposed 2001 procedures which included among other things the adoption of the ldquoexportable goodsrdquo screen
The Bank adopted these procedures after repeated and extensive consultation with its core stakeholders including US industry labor its Advisory Committee and exporters22 In addition the Bank reached out to relevant experts in both the academic and consulting worlds who provided comments on the Bankrsquos proposed changes23 Finally the Bank requested and obtained input from other US Government agencies such as the Departments of Commerce Treasury and State as well as the Office of the US Trade Representative and the Office of Management amp Budget
The Bank considered and analyzed all the input it received and revised the procedures accordingly For example other US Government agencies had specific concerns with respect to how the Bank treated applications implicated by trade measures and the Bank modified its approach to these applications Given the lack of any articulated concerns about the airline sector and the Bankrsquos own knowledge and expertise regarding aircraft financing the Bank had no reason to believe that the proposed ldquoexportable goodsrdquo screen would not be an appropriate way to take account of adverse economic impact on the airline industry
22 The Bankrsquos Advisory Committee is created pursuant to its Charter and is ldquobroadly representative of environment production commerce finance agriculture labor services State government and the textile industryrdquo 12 USCsect635a(d)23 A partial list of those consulted includes former Congressman Bill Frenzel of the Brookings Institute Dr Robert Hahn of the American Enterprise Institute Dr Jerry Hausman of the Massachusetts Institute of Technology Dr J David Richardson of Syracuse University Dr Marina Whitman of the University of Michigan the National Foreign Trade Council the Coalition for Employment through Exports the American Iron and Steel Institute the AFL‐CIO the International Association of Machinists and Aerospace Workers NUCOR Bechtel Corporation Caterpillar Inc Delta Brands Inc and Air Tractor Inc
8
9 2006 ndash Congress Further Amends the Charter
In 2006 Congress made several substantive changes to the Bankrsquos Charter Among these were
‐ A requirement to determine whether the extension of a credit or guarantee is likely to result in the production of the same or similar commodities and whether such production may cause substantial injury to US producers
‐ A prohibition against providing a loan or guarantee that will facilitate the circumvention of any trade law order or determination
‐ A requirement for the Bank to designate sensitive commercial sectors and products for which the Bank is not likely to provide financing due to strong potential for adverse economic impact on US industry and
‐ A requirement to aggregate financial thresholds for purposes of assessing economic impact or otherwise on a rolling 24‐month basis24
In addition Congress added certain notice‐and‐comment requirements that apply ldquoif the Bank intends to conduct a detailed economic impact analysis or similar studyrdquo25
10 2007 ndash The Bank Responds to New Congressional Requirements with the 2007 Economic Impact Procedures
In response to the 2006 changes to the Charter the Bank modified its economic impact procedures The ldquoexportable goodsrdquo screen was amended to read
ldquoThe first stage of the economic impact analysis is to determine if the exports involved in a transaction will result in the production of an exportable good Therefore only exports of capital goods and services (eg manufacturing equipment licensing agreements) that will result in the foreign production of an exportable good are subject to further economic impact analysis in Stage II of these procedures The capital goods and services exports may be associated with new foreign production capacity or existing production capacity (eg applicable exports include replacement equipment in an existing production facility to maintain existing production capacity)rdquo26
Thus beginning with its first set of Economic Impact Procedures in 1968 and continuing through to 2007 the Bank has consistently made use of various kinds of filters or screens to remove those categories of transactions that are unlikely to produce a substantial adverse impact on domestic industry from detailed economic impact analysis This approach has allowed unaffected transactions to proceed without delay so that the Bank may capture the export opportunity Finally use of the screens has enabled the Bank to concentrate its resources on transactions that are more likely to cause substantial adverse economic impact
24 PL 109‐438 120 Stat 3268 (2006) 25 Id 26 Memorandum to Board of Directors Policy Analysis Div ldquoRevisions to Economic Impact Proceduresrdquo P 9 April 4 2007
9
III Discussion How the Bankrsquos Economic Impact Procedures and Exportable Goods Screen Satisfy the Requirements of the Bankrsquos Charter
In remanding the matter to the Bank the Court of Appeals required the Bank to provide a reasonable explanation to justify its use of the ldquoexportable goods screenrdquo The use of the ldquoexportable goods screenrdquo properly satisfies the various requirements of the Bankrsquos Charter When the screen was adopted the Bank knew that US airlines the industry most likely to be affected generally had access to financing at costs that were significantly more favorable than the cost of aircraft financing provided by the Bank For this very reason the Bank had not heard any economic impact concerns from any US airlines in the 17 years prior to the adoption of the screen Indeed the screen was in place for almost a decade before any US airline raised any questions about it When a single US airline did raise questions about the Bankrsquos financing to foreign airlines the analysis it submitted to the Bank did not support its claim that the Bankrsquos financing provided a financing cost advantage to foreign airlines Moreover the complaint was raised at a time and in the context of negotiations by export credit agencies (ldquoECAsrdquo) regarding the Aircraft Sector Understanding discussed below The Bank understood that the negotiations regarding the Aircraft Sector Understanding would address any concerns by US airlines which were also involved in the negotiations Finally the Bank was also aware throughout the first decade of the 2000s that the major US airlines involved in international flights were not in a mode of purchasing new aircraft and thus that any financing advantage was theoretical only In short the Bankrsquos adoption and continued use of the ldquoexportable goods screenrdquo was eminently reasonable and based on the Bankrsquos considerable expertise with the financial dynamics of aircraft financing
Section III outlines the Bankrsquos responses to evolving Congressional requirements for the Bank to consider whether its actions would have a serious or significant adverse effect on US industry or employment The Bankrsquos responses were formulated with a view to also ensure that it remains competitive with other export credit agencies as requires by its Charter and fulfills its mission to support US jobs through exports
A The US Airline Industry Financing Dynamics 1985 to Early 2001
The Bankrsquos experience over the past 45 years since the first legislated economic impact provisions were enacted has shown that most transactions for which the Bank receives applications are not likely to result in substantial adverse economic impact on the US economy or US jobs For example most of the Bankrsquos transactions are simply too small or too localized to have any significant likelihood of having an adverse impact on US industries or jobs Other examples are transactions supporting sales of consumable goods such as pickle exports to China and transactions supporting exports to be used in a power plant in a foreign country where the power generated will never be sent to the United States to compete with domestic power producers Therefore consistent with the Bankrsquos Charter not every application is subjected to a full‐blown ldquodetailed economic impact analysisrdquo
A detailed economic impact analysis can substantially delay the processing of a transaction and jeopardize the ability of the US exporter to capture the export opportunity Given the number of transactions the Bank finances each year ndash approximately 3800 in Fiscal Year 2012 ndash the
10
Bank would not be able to accomplish its mission of promoting US exports if it were to perform a ldquodetailed economic impact analysisrdquo on every transaction or even for a significant percentage of the transactions
Recognizing the dilatory effects of conducting unnecessary detailed economic impact analyses the Bankrsquos categorical approach to the economic impact provisions of the Bankrsquos Charter has always been to screen out transactions that were not likely to have a substantial adverse effect on US industries or US jobs Ex‐Im Bankrsquos experience in this area over the decades indicates three critical determinants of whether a contemplated transaction has potential to cause substantial adverse impact
1) whether the transaction is too small to have a significant impact
2) whether the transaction involves exports that are to be used for the production of goods or provision of services which are only likely to be used locally in the foreign buyerrsquos country and
3) whether the transaction relates to an industry (eg aircraft) in which the available financing for US domestic sales indicates that Ex‐Im Bank financing for foreign sales generally would not disadvantage the US industry
In 2001 when the Bankrsquos ldquoexportable goodsrdquo screen was first adopted the Bank had substantial reason to believe that transactions resulting in services being exported by foreign countries would be unlikely to have a substantial adverse economic impact on the US services sector
The Bank had for several decades received input from trade groups industry stakeholders and other government agencies regarding the domestic adverse impact of Ex‐Im Bank financing In the Bankrsquos experience such representatives could be relied upon to notify the Bank if they were concerned that the Bankrsquos policies procedures or actions threatened to cause any harm or disruption to a specific industry or sector Concerns raised by industry representatives or the absence of any voiced concerns were a significant tool for the Bank to check the soundness of its categorical judgments as reflected in the screens
As of 2001 when the ldquoexportable goodsrdquo screen was put in place the Bank had heard no concerns about Ex‐Im Bank transactions from the US airline industry in 17 years In 1984 Pan American World Airways (Pan Am) had argued that Ex‐Im Bank support resulted in lower financing costs for foreign airlines than the US airlines could themselves obtain To assess these concerns the Bank analyzed the overall costs of financing for US domestic airlines as compared to the costs of financing to a foreign airline in an Ex‐Im Bank‐guaranteed transaction The analysis compared not just the interest rates charged by lenders in the two different scenarios but also incorporated other factors so as to produce a true ldquoapples‐to‐applesrdquo comparison of the relative financing costs
These other factors included the cost of the Ex‐Im Bank guarantee fee (which the Bank now calls the ldquoexposure feerdquo) as well as the costs of financing the portion of the purchase price that
11
was not supported by the Ex‐Im Bank guarantee The Bank analyzed all of these factors and concluded that in fact Ex‐Im Bank support did not generally result in financing terms for foreign airlines that were more favorable than the financing available to US airlines Pan Am did not contest the Bankrsquos analysis at that time or at any subsequent time Nor did any other US airline or trade group raise any concerns in the intervening 17 years leading up to the adoption of the ldquoexportable goods screenrdquo in 2001 or indeed thereafter until 2010
Between 1990 and 1999 the Bank financed 440 aircraft involving the export of US‐manufactured aircraft representing a total value of approximately $22 billion dollars Given this significant expertise in the aircraft financing sector Ex‐Im Bank had ample and consistent evidence that major US airlines flying international routes had access to more favorable financing relative to the financing available to foreign airlines through ECAs such as Ex‐Im Bank Annexed as Appendix B is a detailed history and explanation of the types of financing that were available to US airlines which in turn had led the Bank to conclude that Bank financing to foreign airlines did not pose any financial competitive harm to US airlines
In contrast to the commercial bank financing available through Ex‐Im Bank in the 1980s and 1990s the principal method used by US airlines to acquire aircraft was through a ldquoleveraged leaserdquo A leveraged lease provides significant tax benefits to an entity that wants to shelter income through additional tax deductions The entity purchases the aircraft and then leases it to the airline The purchaser continues to own the aircraft and thus can take the depreciation deductions and investment tax credits on its tax returns during the term of the lease Once the lease term is over title to the aircraft may be transferred to the airline through various mechanisms The leveraged lease was very beneficial to US airlines in several respects
a) The effective cost of a leveraged lease structure was very attractive as compared to aloan to purchase the aircraft The purchaserlessor passed a portion of the tax benefitsback to the airline by way of lower lease payments
b) In most instances the airline could finance up to 100 of the appraised or ldquomarketrdquovalue of the individual aircraft In contrast under ECA financing from Ex‐Im Bank aforeign airline could only finance up to 85 of the ldquonetrdquo or actual price In short theUS airline could finance a larger percentage of a larger amount as compared to aforeign airline purchasing the same aircraft This translated into a significant financialadvantage for the US airlines
c) Under the leveraged lease structure the repayment terms offered to US airlines wereoften 18 to 22 years In contrast Ex‐Im Bank offered much shorter 10 to 12 yearrepayment terms Longer repayment terms mean lower payments which are of coursea significant benefit
As of 2001 Ex‐Im Bank was also aware that US airlines could avail themselves of commercial market financing known originally as equipment trust certificates and later as enhanced equipment trust certificates (ldquoEETCsrdquo) An EETC is a structure whereby investors can provide financing directly through the capital markets as opposed to loan financing provided by banks The EETCs provided significant cost advantages to US airlines and were generally not available
12
to foreign airlines Even for the rare foreign EETC the terms were not as favorable as the terms available to US airlines
The EETC was premised on sect 1110 of the US Bankruptcy Code which only applied to US airlines27 Section 1110 protects a secured creditor of an airline in bankruptcy by either a)requiring the debtor airline within 60 days of the bankruptcy petition date to cure any payment defaults and stay current with loan payments or b) permitting the secured creditor to obtain possession of the creditorrsquos collateral (ie the aircraft) 60 days after the bankruptcy petition date notwithstanding the automatic stay provision that applies to creditors of other types of debtors This certainty of access to collateral ndash and thus to payment ndash provided and continues to provide decreased risk to creditors of US airlines This certainty in turn allows these creditors to provide more favorable financing terms than creditors of foreign airlines In the boom years of 2000 to 2001 US airlines raised $19 billion in the EETC market primarily to purchase new aircraft
Throughout the years leading up to the adoption of the exportable goods screen in 2001 Ex‐Im Bank aircraft financing was provided in accordance with the guidelines set forth in the Large Aircraft Sector Understanding (ldquoLASUrdquo) under the auspices of the Organization for Economic Cooperation and Development (ldquoOECDrdquo) The LASU was followed later by evolving versions of the Aircraft Sector Understanding (ldquoASUrdquo) The LASU and the ASU wereare agreements that set forth guidelines to be followed by ECAs in supporting exports of aircraft manufactured in the home country of the relevant ECA The LASUASU guidelines set forth the maximum repayment term for the financing the maximum advance rate of the financing as a percentage of the net price of the aircraft and the minimum fee that the ECA was required to charge to the airline for the ECA support These terms and conditions resulted in financing that was significantly more expensive than that which could be obtained by US airlines in the private market
In light of the foregoing the Bank reasonably believed that US airlines would not suffer any adverse economic impact from the Bankrsquos financing of foreign airlinesrsquo acquisition of US‐manufactured aircraft In other words when Ex‐Im Bank first adopted the ldquoexportable goodsrdquo screen in 2001 the Bank was confident that its use of the screen would provide efficiencies in transaction‐processing time by focusing the Bankrsquos resources on transactions that could reasonably be expected to raise substantial adverse economic impact concerns
B The US Airline Industry Financing Dynamics Late 2001 to Early 2007
The decade of the 2000s presented the global airline industry with new challenges and new
opportunities ndash both of which created problems for US airlines
27 11 USC sect1110 (2001)
13
The terrorist attacks of September 11 2001 resulted in a sudden and protracted reduction in
demand for airline passenger services This was particularly prolonged in the United States and
Europe As a result of that drop in demand as well as other financial pressures the major US
airlines began a decade‐long process of mergers28 During the 2000s the major US airlines also
were able to shed costs and debtmdasheg pensionsmdashin a way not available to foreign airlines
under the US Bankruptcy Code29
As a result of this downsizing and restructuring US airlines focused on consolidation and
survival not expansion of their fleets by purchasing new aircraft US airline purchases of new
passenger aircraft almost disappeared after 2001 reappeared briefly in 2007 and then
disappeared again until sometime in 2010 Instead of ordering new aircraft US airlines
primarily relied upon the aircraft that they had purchased with EETC financing in the 2001‐2002
period
Nonetheless the data that are available indicate that through 2007 the US airlines generally
had access to aircraft financing that was no less favorable than financing provided by ECAs such
as Ex‐Im Bank In the midst of these developments starting in 2005 the various countries and
constituencies that were involved with ECA aircraft financing began negotiating a new ASU
During negotiations of the new ASU European airlines alleged that ECA financing was more
favorable than the financing to which they had access In June 2007 a new ASU agreement was
reached The European airlines explicitly approved thus signaling that the new agreement
eliminated any ECA financing advantage At the same time none of the US airlines raised any
economic impact concerns about the new ASU As Ex‐Im Bank reviewed and revised its
Economic Impact Procedures in 2007 there were no complaints raised by US airlines or any
other parties regarding aircraft transactions Likewise the new 2007 ASU had explicitly quelled
similar concerns in Europe All of the other relevant factors that led to adoption of the
ldquoexportable goodsrdquo screen in 2001 remained true in 2007 As a result in slightly varied form
the ldquoexportable goodsrdquo screen was carried through the 2002 and 2007 economic impact
procedures
C The US Airline Industry Financing Dynamics Late 2007 to 2012
After the 2007 ASU took effect the worldwide financial crisis emerged in 2008 and had a major
impact on global financial markets including those for large aircraft purchases From mid‐2008
to the beginning of 2010 the financial markets experienced significant volatility and distress
28 These included TWA and American Airlines in 2001 America West and US Airways in 2005 Northwest Airlines and Delta Air Lines in 2008 Continental Airlines and United Airlines in 2010 and Air Tran and Southwest Airlines in 2010 American Airlines and US Air announced merger plans in 201229 Bankruptcies of the major US Airlines from 2001‐2010 included US Airways in 2002 and 2004 United Airlines in 2002 Northwest Airlines in 2005 Delta Air Lines in 2005 Frontier Airlines in 2008 Mesa Airlines in 2010 American Airlines later filed for bankruptcy protection in 2012
14
Then after a short calm in 2010 the European sovereign debt and related European banking
crises rattled financial markets from mid‐2011 to mid‐2012 The result was another period of
extreme interest rate volatility
During this period the global financial market for commercial jet aircraft had been
characterized by (a) extreme volatility in both interest rates and availability of financing and
(b) major growth in demand for aircraft by airlines in the emerging markets and resource‐rich
OECD countries At the same time (and until only recently) there was very little demand for
aircraft by US airlines
There was also a fundamental shift in the key financial tools used for aircraft purchasesmdashwith
commercial banks playing a much diminished role EETC financing from the capital markets
emerged and matured into the most favorable source of financing
As noted before in early 2010 one US airline raised concerns that the financing provided by
the Bank to Ryanair an up‐and‐coming and successful discount airline in Europe was more
favorable than the financing available to US airlines The complaining airline asserted that Ex‐
Im Bank financing to Ryanair was significantly more favorable than financing that the
complaining airline itself had received in a recent EETC offering
Ex‐Im Bank reviewed and analyzed the assertions and determined that they were flawed in that
the purported difference in financial costs ignored pertinent factors and thus did not indicate
that ECA financing would be more favorable in a true ldquoapples to applesrdquo comparison Some key
factors ignored in the analysis provided by the one US airline were
a The credit‐worthiness of the US airline in question was publically rated at B‐ which in
common investment terms puts it in the ldquojunkrdquo group of ratings Ryanair by comparison is rated as investment grade a significantly higher rating Naturally a difference in credit ratings is going to result in a difference in the cost of financing
b The US airline was re‐financing a group of 10 to 12 year old aircraft while Ryanair was
financing brand‐new aircraft In both cases the aircraft being financed formed the
collateral pool for the loan Older aircraft represent a higher risk due to the poorer
quality of collateral therefore resulting in higher costs of financing
At the same time that this US airline was raising its concerns with the Bank it was also raising
similar concerns in the context of new ASU negotiations By the end of 2010 the ECAs reached
agreement on a new ASU (the 2011 ASU) which went into effect on February 1 2011 This
agreement included a built‐in adjustment mechanism to reflect changes in the financial
markets as they occurred This was designed to ensure that ECA financing and commercial bank
financing were generally equivalent The Bank continues to monitor the 2011 ASU to ensure
that the adjustment mechanism built into that agreement does in fact generally work to
15
enforce an equilibrium between the cost of ECA aircraft financings and the financing available
to US airlines in the private market In addition this very issue continues to be a regular topic
of discussion among the ASU participant countries as well Based on the data that have been
developed and presented to date the Bank believes that the 2011 ASU properly serves its
intended function of ensuring that airlines using private market financing do not suffer a
competitive disadvantage when compared to ECA financing of aircraft under the ASU
IV Conclusion
Ex‐Im Bankrsquos exportable goods screen complied with the Bankrsquos statutory requirements to
assess the potential adverse effects of all transactions and to focus on those transactions that
were likely to result in a substantial adverse economic impact on US industry Historically
financing available to US airlines for the purchase of new wide‐body aircraft has been either
more favorable than or equally favorable as Ex‐Im Bank financing to foreign airlines for the
purchase of equivalent aircraft The exportable goods screen was an appropriate reasonable
and efficient response to the realities of aircraft financing It properly balanced the
Congressional directives to assess the likelihood of substantial economic impact on US
industry and US jobs with the need to finance transactions in an efficient manner so as to
support US exports and US jobs
November 22 2013
Export‐Import Bank of the United States 811 Vermont Ave NW Washington DC 20571
16
Appendix A
Excerpt from Staff Memorandum to Ex‐Im Bank Board of Directors Accompanying 1979
Economic Impact Procedures30
Thus Section 2(b)(1)(B) of the Act requires the Board of Directors to take into account ldquoany
serious adverse effectrdquo which loans or guarantees may have on US industry materials in short
supply and employment Section 1911 of the 1978 Amendments requires consideration by the
Bank of the extent to which a loan or financial guarantee ldquois likely to have an adverse
effecthellipeither by reducing demand for goods produced in the United States or by increasing
imports to the United Statesrdquo and Section 608 of the Appropriations Act requires a finding that
the commodity ultimately produced as a result of [Bank] financing will be in surplus when the
production comes on‐stream and that US producers of the same similar or competing
commodity will be substantially injured It is apparent that the latter two statutory provisions
are explications of the basic mandate of the Act and do not expand the Bankrsquos mandate to
examine domestic impact but rather suggest factors to be considered in that examination To
a great extent the 1978 Amendments language and the Appropriations Act provisions set forth
the same concept in different ways Thus the reference in Section 1911 of the 1978
Amendments to ldquoreducing demand for goods in the United Statesrdquo and ldquoincreasing imports to
the United Statesrdquo is no more than the inevitable consequence of a commodity being ldquoin
surplusrdquo as stated in Section 608 of the Appropriations Act
Section 2(b)(1)(B) is the broadest formulation of the basic concept since it contains the most
general language ie ldquoany serious impactrdquo and encompasses all types of exports Section
1911 is primarily procedural in nature directing the Bank not only to implement appropriate
regulations and procedures to ensure full consideration of adverse impact but also to request a
report from the International Trade Commission Section 1911 includes a more detailed
description of events which would constitute adverse impactmdashie a reduction in demand for
US produced goods or an increase in imports to the US Finally this section contains an
explicit reference to agriculture which was only implicitly covered by Section 2(b)(1)(B) It
should be noted that this is one of several references to agriculture which were added to the
Act by the 1978 Amendments
The Appropriations Act provision explicitly refers to a balancing by the Board of Directors of the
benefits of the [Bank]‐supported export against the injury to US [producers] of the commodity
in question At the same time the Act has always necessitated such a balancing by requiring
the Bank to take into account ldquoserious adverse effects upon the US economyrdquo at the same
time it carries out the Bankrsquos basic mandate to ldquofacilitate exportsrdquo and to ldquofoster expansion of
exportsrdquo Under either provision therefore the Board of Directors will be taking into
30 Memorandum ldquoProcedures Regarding Adverse Domestic Impact of Eximbank Financingrdquo Pp 7‐12 Jan 5 1979 17
consideration the results of the balancing as one of the many factors involved in making a
decision to provide financing It should be noted that Section 1911 of the 1978 Amendments is
consistent with both of these provisions since it only seeks to ensure that ldquofull considerationrdquo is
given to adverse effects upon the US economy
Section 2(b)(1)(B) of the Act refers to ldquoserious adverse effectrdquo upon the US economy as a
whole whereas Section 608 of the Appropriations Act imposes a more stringent test by
focusing on a single industry ndash the domestic producers of the commodity to be produced by the
project supported by [the Bank] ndash and requiring a determination of substantial injury for that
industry alone However a reading of the entire Section shows that such a determination
would have to be made only if the net effect upon the US economy of the project for which
support was requested from [the Bank] is negative and if the commodity is likely to be in
surplus on world markets at the time the project becomes operative In any event under
Section 2(b)(1)(B) the Board would have to take into account any serious adverse effects of the
transaction upon the US economy Only if the Board decides to proceed with the transaction
regardless of such effects would it be necessary to determine if there will be substantial injury
to US producers of the commodity and thus trigger the prohibition contained in Section 608
It should also be noted that Section 1911 of the 1978 Amendments speaks in terms only of ldquoany
adverse effectrdquo However the language of that provision clearly shows that it was not intended
to set up a substantive test but rather as was mentioned above to insure that formal
procedures to take into account impacts upon the US economy are established by [Ex‐Im
Bank] as well as to enable the Bank to obtain a report from the International Trade
Commissionrdquo PL 95‐630 92 Stat 3641 (1978)
18
Appendix B
Financial Tools Available to US Airlines
Generally over the past several decades US airlines have had access to a broad range of
aircraft financing options
Accordingly at different times during the past several decades US airlines took advantage of
whichever financing option provided the most attractive overall financing terms from such
airlinesrsquo perspective For instance a US airline would be able to maximize the amount of the
financing thereby minimizing the amount of its own money it had to invest in the aircraft (ie
the ldquodown paymentrdquo) It might also maximize the amount of money in excess of the actual cost
of the aircraft it could raise against the aircraft obtain the longest possible repayment term and
the slowest possible amortization schedule (ie the longest ldquoweighted average liferdquo) obtain
the lowest interest rate and risk premium obtain the least restrictive operational and financial
covenants provide the least amount of collateral or other security or obtain other benefits
Due to the fact that the United States is seen as not presenting any ldquocountry riskrdquo and has well‐
developed and well‐regarded legal and judicial systems that are seen as being protective of
creditorsrsquo rights US airlines have usually had access to secured aircraft financings from
commercial banks from around the world During the past several decades commercial banks
from different regions have been at the forefront of the aircraft finance industry and have
provided financing to US airlines on attractive financing terms Initially US‐based banks
provided most of the aircraft financing to US airlines but during the 1980s Japanese banks
became very significant lenders to the US airlines During the 1990s and 2000s the European
banks (German French British and Swiss banks) were the most significant source of
commercial bank funding for US airlines
In addition to commercial bank financing during the 1970s and 1980s US airlines obtained
long‐term financing from US‐based institutional investors (eg insurance companies and
pension funds) through the use of the Equipment Trust Certificate (ldquoETCrdquo) financing structure or
the Pass Through Certificate (ldquoPTCrdquo) financing structure The ETC is a financing provided by
institutional investors that is secured by one or more items of equipment (eg aircraft) The
PTC is a group of ETCs combined into a public debt security that is sold into the capital markets
to institutional investors
However during the 1980s the simplest and most prevalent form of aircraft financing for US
airlines was the US leveraged lease
The US leveraged lease allowed US airlines to take advantage of the US tax code which
generally provides for all types of capital assets to be depreciated and thereby reduces or
defers taxes due to the deductibility of tax depreciation Because US airlines generally did not 19
have sufficient income to fully take advantage of the benefit of the tax depreciation deductions
associated with acquiring aircraft the US airlines entered into US leveraged leases Under a
leveraged lease the benefits of the tax depreciation deductions related to the aircraft were
transferred to profitable companies that had income they wanted to shelter from tax In
return the company was willing to provide the equity in a US leverage lease (approximately
20 of the appraised value of the aircraft) and to ldquoleaserdquo the aircraft back to the airline for the
airlinersquos use A number of different entities entered into such leases including banks insurance
companies and other financial institutions such as Ford Motor Credit as well as finance
subsidiaries of other corporate entities including consumer product companies such as Phillip
Morris or entertainment companies such as Disney The fact that these were ldquoleveragedrdquo
leases (as opposed to ldquosingle investor leasesrdquo) also enabled the equity providers to deduct the
interest expense associated with the US leveraged lease
Through the use of a combination of lease equity and debt a US leveraged lease allowed US
airlines to arrange financing for up to 100 of the appraised value of an aircraft This was
particularly attractive to major US airlines because due to their size and relative importance
to the aircraft manufacturers every major US airline generally was able to negotiate aircraft
purchases with the aircraft manufacturers that enabled the airline to buy the aircraft for
amounts significantly less than the appraised value The result was that by using a US
leveraged lease to finance its aircraft a US airline was able to ldquoover‐financerdquo the aircraft (ie
finance the aircraft for more than the airline was paying for the aircraft) resulting in the airline
effectively having the ability each time the airline financed an aircraft to arrange 100
financing for its aircraft and at the same time arrange a long‐term working capital loan This is
the equivalent of a home buyer being able to buy a house with no money down (no down
payment) and also receiving a long‐term loan for non‐home expenses
In contrast Ex‐Im Bank‐supported aircraft financing is for only 85 (and sometimes less) of the
actual ldquonet pricerdquo that the airline is paying the US aircraft manufacturer (after deducting all
discounts and other concessions the airline has negotiated with the US aircraft manufacturer
which results in a net price that is almost always less than the appraised value) This requires
the foreign airline that is using Ex‐Im Bank support to come up with a down payment of at least
15 of the net price of the aircraft As a result US airlines were able to obtain more financing
under a US leveraged lease (without putting any money down) than foreign airlines could
under an Ex‐Im Bank supported aircraft financing (which required a down payment)
In addition US leveraged leases used by US airlines always had very long repayment terms
Generally speaking the longer the repayment the longer the tax deferral and the more
advantageous the terms of the US leveraged lease As a result it was not unusual for the US
leveraged leases used by US airlines to have a repayment term of between 18 and 22 years
and sometimes as long as 25 years The only constraint was that the lease term of the
20
leveraged lease should not exceed 80 of the economic useful life of the aircraft which in
some instances was more than 30 years
In contrast the repayment term in an Ex‐Im Bank‐supported aircraft financing is never longer
than 12 years which is the maximum repayment term Ex‐Im Bank is permitted to offer for an
aircraft financing under the guidelines for export credits promulgated by the Organization for
Economic Cooperation and Development (the ldquoOECDrdquo) with which guidelines the US
Government (including Ex‐Im Bank) has agreed to abide This difference in repayment terms is
significant it is similar to the difference in monthly payments under a 15 year home mortgage
versus a 30 year home mortgage As a result US airlines were able to obtain significantly
longer financing under a US leveraged lease (which generally resulted in a smaller periodic
principal repayment burden due to the longer repayment term) than foreign airlines could
under an Ex‐Im Bank‐supported financing
US leveraged leases used by US airlines also had a slower amortization profile with a very
long weighted average life (ie small amounts of debt amortization in the early years of the
financing) of at least 10 years In the same manner that a longer repayment term increased the
tax deferral a longer weighted average life also increased the tax deferral
In contrast the amortization profile in an Ex‐Im Bank supported aircraft financing for a foreign
airline is usually between 6 years and 65 years (at least 4 years shorter than the weighted
average life of the US leveraged leases historically used by US airlines) which imposes a
much greater cash flow burden on the foreign airline in comparison with the cash flows
required of a US airline under a US leveraged lease
Although the absolute interest rate on the debt in a US leveraged lease fluctuated over time
with the overall level of interest rates the providers of the debt into these US leveraged leases
(primarily insurance companies and other institutional investors) were generally willing to
accept an interest rate margin of less than 100 basis points31 over LIBOR32 on a fixed rate
equivalent basis (and sometimes significantly less than 100 basis points)
In contrast the interest rate margin on the debt on an Ex‐Im Bank‐supported aircraft financing
was generally between a few basis points over LIBOR to 50 basis points over LIBOR because the
interest on the Ex‐Im Bank‐guaranteed aircraft financing is guaranteed by Ex‐Im Bank and
reflects the low risk associated with a US Government guaranteed loan However the interest
rate margin on an Ex‐Im Bank‐guaranteed aircraft financing does not reflect the Ex‐Im Bank
exposure fee (or risk premium) that is paid to Ex‐Im Bank in view of the underlying risk of the
foreign airline The minimum exposure fee charged by Ex‐Im Bank was 2 during the 1980s
31 100 basis points equals 1 percent 32 LIBOR is the London Inter‐Bank Offering Rate and is a common reference rate such as ldquoPrimerdquo or ldquoTreasury Raterdquo used in adjustable interest rate transactions
21
and early 1990s and 3 until 2007 when the OECD promulgated a new set of guidelines for
export credits for aircraft (known as the ldquo2007 Aircraft Sector Understandingrdquo or the ldquo2007
ASUrdquo) This exposure fee was required to be paid ldquoup frontrdquo ndash ie at the inception of the loan
On a per annum basis this equates to between 30 basis points and 50 basis points which
should be added to the interest rate margin received by the guaranteed lender to obtain the
equivalent interest rate paid by a foreign airline under Ex‐Im Bank‐supported financing (for
purposes of comparing the overall financing cost to those incurred by US airlines) The Ex‐Im
Bank exposure fee is similar to a homeowner having to pay ldquopointsrdquo up front at the time he
obtains his mortgage The effect of paying points up front and paying an Ex‐Im Bank exposure
fee effectively increases the cost of the financing In comparing the overall cost of financing
through ECA support including the exposure fee to the overall cost of a leveraged lease for
borrowers with comparable credit profiles the overall cost of the US leveraged lease was
considerably more favorable than what could be achieved through an Ex‐Im Bank‐supported
aircraft financing
Although the US leveraged lease was itself a very attractive financing structure for US
airlines at different times the basic US leveraged lease was made even more attractive due to
other provisions of the US and foreign tax codes
For instance from the 1960s (during the Kennedy Administration) until its repeal under the Tax
Reform Act of 1986 the US tax code provided for an investment tax credit which was intended
to encourage investment in capital goods and therefore allowed airlines or the equity investor
in a US leveraged lease to get a credit against the taxes it would otherwise be required to pay
This credit was a permanent reduction in taxes paid as opposed to only the deferral of taxes
(postponement of when taxes had to be paid) that could be achieved through the use of the
US leveraged lease
Similarly from the 1980s to the mid‐1990s it was common for a US airline to combine a US
leveraged lease with a lease into a foreign jurisdiction that had a ldquoform over substancerdquo
approach to its tax code (as opposed to the United States which has a ldquosubstance over formrdquo
approach to its tax code) Taking advantage of the disparity a US airline could ldquosellrdquo the
aircraft to both (i) an equity investor in the United States and (ii) an equity investor in a foreign
country such as Japan Germany or Hong Kong and each equity investor could depreciate the
same aircraft and therefore shelter its respective income Over time due to changes in the
respective tax codes these more aggressive tax advantaged cross‐border leasing structures
(ldquoDouble Dipsrdquo and even on occasion ldquoTriple Dipsrdquo) were disallowed but not before US airlines
financed billions of dollars of aircraft using such tax advantaged leasing structures
During the 1990s the basic US leveraged lease was made even more attractive by taking
advantage of another provision of the US tax code that allowed additional US taxes to be
22
deferred if the equity investor in the transaction used an offshore subsidiary that qualified as a
Foreign Sales Corporation (ldquoFSCrdquo) under the US tax code and structured the deal as a
Commission FSC
In addition during the 1980s and 1990s US airlines had access to other sources of financing
with overall financing terms that were much more attractive than what was available to foreign
airlines via Ex‐Im Bank‐supported export credits For example during the late 1980s and 1990s
Airbus made its first significant sales to US airlines In order to do so Airbus arranged and
provided very attractive and flexible financing terms to US airlines to encourage them to
purchase European‐manufactured Airbus aircraft instead of US‐manufactured Boeing or
McDonnell Douglas aircraft The US airlines were more than willing to accept these incentives
During this period some US airlines entered into ldquowalk awayrdquo leases of Airbus aircraft
pursuant to which Airbus North America (backed by the joint and several guarantees of each of
the four countries that are members of Airbus SAS) entered into a US leveraged lease of the
Airbus aircraft and then subleased the aircraft to a US airline on terms that (i) passed along
most of the tax benefits to the US airline through lower lease rentals and (ii) permitted the
US airline to terminate the sublease and simply ldquowalk awayrdquo from the lease upon a relatively
short notice period
Under the ldquoHome Market Rulerdquo the European export credit agencies (including those of
France Germany and the United Kingdom) that usually support the financing of Airbus aircraft
could not provide such support to US airlines Therefore Airbus arranged for Kreditanstalt fur
Wiederaufbau the development bank of Germany to provide very attractive financing for the
Airbus aircraft being acquired by US airlines These financings occurred on terms much more
favorable (with 18‐ to 22‐year repayment terms) than what export credit agencies could
provide (with a maximum repayment term of 12‐years)
Similarly during the 1990s US airlines began to acquire a large number of 35 to 50 seat
regional jet aircraft manufactured by Bombardier of Canada and Embraer of Brazil Many of
these aircraft were acquired by the US airlines by using export credit support from Canada and
Brazil Some of the financing terms (ie the repayment terms) of these Brazilian and Canadian
government‐supported export credit financings were even more attractive (15‐ to 18‐year
repayment terms) than what was available from the export credit agencies of France Germany
and the United Kingdom with respect to Airbus aircraft or from Ex‐Im Bank with respect to
Boeing aircraft (10‐ to 12‐year repayment terms)
To make the financing of Canadian‐manufactured Bombardier regional jets even more
attractive to US airlines the province of Quebec (where Bombardier has its headquarters)
through Investment Quebec provided additional aircraft financing support to the US airlines
23
Finally to the extent even more attractive financing was needed to convince US airlines to
purchase Canadian or Brazilian‐manufactured regional aircraft the manufacturers themselves
provided residual value guarantees with respect to such aircraft to the airline or to the
financiers (ie to the equity investor in a US leveraged lease or the creditors financing the
aircraft)
The next major development in aircraft financing used by US airlines was the development in
the 1990s of the Enhanced Equipment Trust Certificate (ldquoEETCrdquo) which was an ETC with certain
structural enhancements The most important of these enhancements is a liquidity facility to
ensure that if there is a default the financiers would continue to receive current interest
during the period of time while the aircraft is being repossessed and remarketed A key
element in the development of the EETC was the existence of Section 1110 of the US
Bankruptcy Code which gives a type of ldquopreferred creditorrdquo status to financiers of aircraft for
US airlines This ldquopreferred creditorrdquo status exempts aircraft financiers of US airlines from
the automatic stay generally imposed following a bankruptcy filing by a borrower subject to the
protections of the US Bankruptcy Code Section 1110 of the US Bankruptcy Code
accomplishes this by requiring the airline within 60 days of such bankruptcy filing to either (i)
resume payments under the originally agreed aircraft financing or (ii) return the aircraft to the
financier
The first EETC was done in 1994 and the practice has now been successfully used by almost
every major US airline including Alaska Airlines America West Airlines American Airlines
Continental Airlines Delta Airlines Hawaiian Airlines Jet Blue Airlines Northwest Airlines
Southwest Airlines United Airlines and US Airways The overall financing cost of a US airline
acquiring an aircraft through the use of the EETC ndash which includes the amount of financing
repayment term amortization profile effective cost of the financing etc ndash has generally been
significantly more attractive than (i) what such US airline could have achieved under an export
credit‐supported aircraft financing for such airline and (ii) what a similarly rated foreign airline
could have achieved under an export credit‐supported aircraft financing
This is particularly true for the financing of new aircraft The development of the EETC market
provided enormous financing flexibility to US airlines for the financing of new aircraft the
EETC provided the airline with the option to finance on a simple secured mortgage basis or the
US airline could opt for a leveraged lease with all of the benefits associated with a leveraged
lease described above
Beginning in 1997 US airlines had the ability to raise money in the capital markets when the
overall financing terms were most attractive They were able to ldquolock‐inrdquo such favorable
financing terms to fund new aircraft that were scheduled to be delivered in the future by
issuing a ldquopre‐fundedrdquo EETC These pre‐funded EETCs were used to great success by US
24
airlines in the late 1990s through 2001 a period in which the US airlines were taking delivery
of a significant number of aircraft
As a result of the downturn in the US airline industry following the September 11 2001
terrorist attacks many US airlines deferred or cancelled their orders for new aircraft This
reduced the need for US airlines to finance new aircraft when the financing terms available to
such US airlines via the EETC were not as favorable due to (i) the perceived increased credit
risks of the US airline industry following the September 11 terrorist attacks and (ii) the
temporary disequilibrium in the credit markets following the 200820092010 credit crisis
Now that the US airlines have once again begun to take delivery of a significant number of
new aircraft the pre‐funded EETC continues to be the preferred source of financing for US
airlines as evidenced by the number and amount of EETC issuances during 2012 and 2013
Based on an analysis of the EETC transactions occurring during 2012 and 2013 EETCs are once
again generally considered to provide more attractive overall financing terms than what could
be achieved by an airline under an export credit‐supported financing done under the terms of
the 2011 Aircraft Sector Understanding
25
GLOSSARY
ldquoAdverse Economic Impactrdquo is the short‐hand term used to refer to any serious negative effects on US industries or US jobs as set forth in the Bankrsquos Charter that result from Ex‐Im Bank loans guarantees or insurance The Bankrsquos Charter contains three provisions that address adverse economic impact found at 12 USC sectsect 635(b)(1) 635a‐2 635(e)
ldquoAir Indiardquo is an airline owned by the Government of the Republic of India ldquoAir India Transactionsrdquo are the two final commitments approved by Ex‐Im Bank on September
30 2011 for loan guarantees for the purchase of a number of 787 ldquoDreamlinerrdquo aircraft from Boeing and to be financed by a commercial lender not identified at the time As of the date of this paper Ex‐Im Bank has not issued any of its loan guarantees but is expected to do so in the coming months Ten of the aircraft involved in these two final commitments have been delivered to Air India and are in use by Air India on routes outside the United States The deliveries of the ten aircraft were made using private short‐term financing as to which Ex‐Im Bank had no involvement
ldquoAirbusrdquo Airbus SAS is a Europe‐based manufacturer of large commercial aircraft Airbus is the only competitor to Boeing the US manufacturer Airbus sales are supported by the ECAs of Germany France and the UK
ldquoAircraft Sector also known as the ASU is an agreement among members of the OECD Understandingrdquo that manufacture aircraft and Brazil The ASU requires that Export
Credit Agencies that support the export of aircraft follow certain rules and restrictions that set forth the most favorable terms that can be provided These rules and restrictions include the Export Credit Agency must charge a minimum risk premium which is determined by the ASU the term of any loan made by or supported by the Export Credit Agency for the purchase of aircraft cannot exceed 12 years the Export Credit Agency today can lend or guarantee only up to 85 of the actual purchase price of the aircraft being exported and the use of risk mitigants The ASU was preceded by the Large Aircraft Sector Understanding which governed these issues until the enactment of the 2007 ASU The ASU was again updated and revised in 2011 (See also the Large Aircraft Sector Understanding)
ldquoArrangementrdquo is the agreement among Export Credit Agencies governing the terms by which they will provide loans guarantees or insurance in support of exports from their respective countries Among other things the Arrangement requires Export Credit Agencies to charge a minimum risk premium which is governed by the Arrangement See also Organization for Economic Cooperation and Development
ldquoASUrdquo see Aircraft Sector Understanding ldquoAverage Weighted Liferdquo for purposes of this paper refers to the average number of years that
each dollar of unpaid principal on a loan remains outstanding For example a loan with equal principal payments throughout the loan term will have an average weighted life close to the middle of the whole loan term
26
ldquoBank Actrdquo is the Export‐Import Bank Act of 1945 12 USC sect635 as amended ldquoBank Advisory Committeerdquo is the official Advisory Committee of the Bank appointed in accordance
with the Bank Act and the Advisory Committee Act The Bank Advisory Committee is comprised of representatives of various industry and market sectors as well as representatives of labor and international trade experts
ldquoBasis pointsrdquo are a numerical measure applied to interest rates One basis point equals 1100th of one percent or 100 basis points equals one percent
ldquoCapital Equipmentrdquo is equipment used to manufacture a product provide a service or sell store or deliver merchandise A wide‐body aircraft is a piece of capital equipment
ldquoCharterrdquo is the Bank Act as well the provisions of the Export Import Bank Reauthorization Act of 2012 (Public Law 112‐122) that are not codified in the Bank Act
ldquoDreamlinerrdquo is the name given to a Boeing 787 wide‐body commercial aircraft ldquoECArdquo see Export Credit Agencies ldquoEconomic Impact Proceduresrdquo
are procedures adopted by Ex‐Im Bank to assess whether transactions supported by the Bank cause a serious adverse economic impact to US industries and US jobs See also Adverse Economic Impact
ldquoEETCrdquo see Enhanced Equipment Trust Certificate ldquoEnhanced Equipment Trust Certificaterdquo
also known as an EETC is a type of secured bond issued by a borrower in the capital markets The EETC is secured by the equipment being purchased with the proceeds of the bond issuance EETCs are used primarily for aircraft and since the late 1990s has been the dominant financing tool used by US airlines to purchase aircraft Section 1110 of the US Bankruptcy Codemdashwhich allows creditors of aircraft borrowers to obtain their collateral within 60 days if the payments on their debt is not current ndash has provided creditors of US airlines a level of comfort not available to creditors of foreign airlines until recently This generally provided US airlines with a significant financial advantage vis a vis their foreign competitors Recently the adoption of the Cape Town Convention and the related Aircraft Equipment Protocol has provided creditors of foreign airlines with protections similar to the protections provided by section 1110 of the US Bankruptcy Code Recently this has led to the beginnings of an international EETC market
ldquoEquipment Trust Certificaterdquo
also known as an ETC was the predecessor to the Enhanced Equipment Trust Certificate
ldquoETCrdquo see Equipment Trust Certificate ldquoEx‐Im Bankrdquo or ldquoBankrdquo See The Export‐Import Bank of the United States ldquoExport Credit Agenciesrdquo are agencies or ministries of government that have the official role of
providing loans guarantees or insurance in support of exports from their respective countries or in support of exports by sales of companies from their respective countries Ex‐Im Bank is the official Export Credit Agency of the United States of America
ldquoexportable goods screenrdquo is a screen or filter adopted by Ex‐Im Bank in its 2001 Economic Impact Procedures The exportable goods screen is utilized along with other screens to balance the Bankrsquos obligation to consider the adverse
27
economic effects of its transactions on US industries and US jobs with the Bankrsquos mandate to support US export transactions in a timely manner so as to fully support the exporterrsquos business opportunity The exportable goods screen filtered out transactions that supported exports which could only be used by a foreign buyer to provide services rather than produce goods
ldquoExport‐Import Bank of the is an independent agency of the Federal Government of the United United Statesrdquo States of America Also known as ldquoEx‐Im Bankrdquo Ex‐Im Bankrsquos mission
is to support US jobs by supporting US exports See 12 USC 635 et seq
ldquoExposure Feerdquo is the risk premium charged by Ex‐Im Bank in exchange for its guarantee in certain transactions The exposure fee must be at least equal to the minimum risk premium required by the terms of the Arrangement and the Aircraft Sector Understanding
ldquoForeign Sales Corporationrdquo is a company created under the terms of a former provision of the US Internal Revenue Code Foreign Sales Corporations received significant tax benefits
ldquoFSCrdquo see Foreign Sales Corporation ldquoInvestment Tax Creditrdquo is a credit permitted under the US Internal Revenue Code for the
purchase of certain types of equipment in certain circumstances See also Leveraged Leases
ldquoKFWrdquo the development bank for the Federal Republic of Germany KFW is an Export Credit Agency but it also operates through a ldquomarket windowrdquo which is not subject to the Home Market Rule Thus KFW provides support to Airbus for its sales of aircraft to US airlines The United States does not have an equivalent institution and Ex‐Im Bank does not have a ldquomarket windowrdquo
ldquoLarge Aircraft Sector also known as LASU was the predecessor to the Aircraft Sector Understandingrdquo Understanding The LASU governed the same general issues as are set
forth in the Aircraft Sector Understanding except that the minimum risk premium was lower than that required in the 2007 ASU and 2011 ASU When the 2007 ASU was enacted grandfathering provisions allowed ECA‐supported financing for a limited number of aircraft to be governed by LASU
ldquoLASUrdquo see Large Aircraft Sector Understanding ldquoLeveraged Leaserdquo is a lease of equipment and is designed to allow the lessor to take
advantage of certain tax code provisions such as the depreciation deduction and the investment tax credit while allowing the lessee to obtain the equipment involved at a significantly lower cost Leveraged Leases were a very popular means for US airlines to acquire aircraft throughout the 1980s and 1990s The value of the tax deductions to the lessor were significant so that the implicit interest rate in the lease payments by the US airline were extremely low Usually the US airline did not have sufficient profit to take advantage of the favorable tax code provisions By using a leveraged lease another company that could shelter income by using the tax code provisions would buy the equipment and lease the equipment to the US airline Usually at the end of the lease term the US airline would purchase the aircraft
28
ldquoLIBORrdquo is the London Inter‐bank Offering Rate It is commonly used as a reference rate in loan transactions that have floating or adjustable interest rates LIBOR reflects the rate at which banks will lend money to each other LIBOR is set for various loan terms (eg 3 months 6 months etc) and is widely published making it a convenient rate to use as a reference rate
ldquoNet pricerdquo is the price paid after all discounts have been deducted The net price is the actual price paid for a piece of equipment In aircraft transactions pursuant to the ASU Ex‐Im Bank will only support up to 85 of the net price of an aircraft EETC transactions on the other hand often support the nominal purchase price of an aircraft and thus result in a significantly higher amount financed
ldquoOECDrdquo see the Organization for Economic Cooperation and Development Open Skies Agreement Is a type of bilateral agreement between countries that govern the
rights of airlines from the two countries to fly into the other country Open Skies Agreements generally allow free access to fly as many routes to a country as an airline may choose but then usually restrict the ability to fly within the other country Generally it is a ldquofly in and outrdquo rule although there are exceptions
ldquoOrganization for Economic Cooperation and Developmentrdquo
also known as the OECD is an organization comprised of 34 member countries that work together to promote development The United States is a member With regard to Ex‐Im Bank the OECD is the organization through which the US Government negotiates an agreement among Export Credit Agencies known as the Arrangement and the ASU (and its predecessor the LASU)
ldquoPass Through Certificaterdquo also known as a PTC is a group of Equipment Trust Certificates pooled together to form the basis for a bond issuance
ldquoPTCrdquo See Pass Through Certificate ldquoRyanairrdquo is a low‐cost Irish airline that began business after European
deregulation of airlines in 1997 Ryanair rapidly expanded during the first decade of the 2000s creating significant competition for other airlines
ldquoScreensrdquo are a type of filter used by Ex‐Im Bank in its Economic Impact Procedures Screens are designed to identify those transactions which are not likely to cause an adverse economic impact to US industries or US jobs so that such transactions can be processed more quickly and efficiently as required by the Bank Act
ldquoSubstantial Injuryrdquo is a term defined in Ex‐Im Bankrsquos Charter to be applied in connection with the Bankrsquos economic impact procedures 12 USC sect635(e)(4) The Charter states ldquohellipthe extension of any credit or guarantee by the Bank will cause substantial injury if the amount of the capacity for production established or the amount of the increase in such capacity expanded by such credit or guarantee equals or exceeds 1 percent of United States productionrdquo
ldquoTPCCrdquo see Trade Promotion Coordinating Committee ldquoTrade Promotion Coordinating Committeerdquo
also known as the TPCC is an interagency committee of the US Government chaired by the Secretary of Commerce It was established under the Export Enhancement Act of 1992 to provide a
29
unifying framework to coordinate the export promotion and export financing activities of the US government and to develop a government‐wide strategic plan for carrying out such programs
ldquoTrade Sanctionsrdquo refers to any of a number of sanctions imposed by the US Government against companies countries industries or products usually as a result of an accusation of adjudication of a violation of an international trade agreement The Bank Act requires Ex‐Im Bank to take certain trade sanctions into account in its economic impact procedures
30
Table A ndash Congressional Actions and Ex-Im Bank Responses
Year Congressional Action Ex‐Im Bank Response
1968 Bank directed to take into account the possible adverse effect [of its loans and guarantees] upon the United States economy
Bank adds this transactions
factor to analysis of
1975 1 Standard refined to take into account any serious adverse effect of loans and guarantees on competitive position of US industry availability of scarce materials in US and employment in US
2 Bank directed to be competitive with rates terms and conditions offered by principal countries whose exporters compete with US exporters
3 Bank directed to submit semi‐annual report on competitiveness and conduct survey of US exporters and lenders to determine experience in meeting financing competition
Bank adds these of transactions
considerations to analysis
Year Congressional Action Ex‐Im Bank Response
1978 ‐ 1979
1 Bank directed to take into account any serious adverse effect of loans on competitive position of US industry and scarce materials Bank directed to emphasize strengthening competitive position of US exporters and expanding total US exports
2 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [From Appropriations Act Restated in Bank Charter in 1986]
3 Bank directed to implement regulations and procedures to insure full consideration of extent to which loan or guarantee is likely to have adverse effect on industries and employment in US either by reducing demand for US produced goods or increasing imports to the US
Bank develops framework and set of written economic impact procedures
1 Exclude exports the use of which remained localized in foreign country This
is first ldquoforeign localized goods and services screenrdquo
2 ldquoIntent and stimulus for projectrdquo examined to determine likelihood of substantial adverse economic impact Does transaction involve ldquorunaway industryrdquo
(leaving US for cheaper foreign labor)
3 Does export of capital equipment result in ldquobuy backrdquo of product being imported into the US
4 Is net impact on US economy and jobs positive or negative and to what degree
32
Year Congressional Action Ex‐Im Bank Response
1986 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [Originally from 1978 Appropriations incorporated into Bank Charter in 1986]
Senate Report recognizes knowledge and experience of Bank and need to respond to exportersrsquo requests for support in a timely and confidential fashion Economic impact procedures are to be practical and workable and not reduce Bankrsquos competitiveness and flexibility nor ignore positive aspects of export sale
Bank develops ldquoSummary of Adverse Economic Guidelinesrdquo to be applied to both
goods and services (a) is commodity to be produced surplus or likely to compete with US‐produced surplus (b) will Bankrsquos
assistance cause substantial injury to US producers of competing commodity (c)
will injury to US producers of competing commodity outweigh the short‐ and long‐
term benefits to US industry and employment If answer is no then no
further economic impact analysis
1988 Congress establishes test for ldquosubstantial injuryrdquo if the amount of capacity for production established or amount of increase in such capacity expanded by Bankrsquos credit or guarantee exceeds 1 of US production
Bankrsquos Board recognizes requirement to balance (a) possibility of substantial harm
to US production and employment with (b) being responsive competitive and efficient New economic impact procedures ask (a) will the project be in direct competition with US production (b) is the Bankrsquos support significantly associated with the project (c) will the output of the project
cause substantial injury to US producers of the same similar or competing
commodity If answer is no then no further economic impact analysis is required
33
Year Congressional Action Ex‐Im Bank Response
1998 Bank revised procedures involving countries against which trade sanctions were pending or imposed
2001
2006 ‐2007
1 Bank required to determine whether extension of credit or guarantee is likely to produce same or other commodities and whether the production may cause substantial injury to US producers
2 Bank prohibited from providing a loan or guarantee that will facilitate circumvention of trade law order or determination
3 Bank required to designate sensitive commercial sectors and products for which Bank financing deemed unlikely due to potential for adverse economic impact on US
4 Bank required to aggregate financial thresholds on rolling 24‐month basis
Bank develops ldquoexportable goods screenrdquo Does Ex‐Im Bank support result in production of exportable good from the foreign buyerrsquos country If not no further economic impact analysis is required Notice and request for comments were published in the Federal Register US airline industry did not respond
Bank issues 2007 Economic Impact Procedures ldquoExportable goods screenrdquo is modified Will the transaction (capital goods and services) result in either new or additional production capacity of an exportable good
34
Explicitly recognizing the Bankrsquos expertise the Report also noted that the revised Charter ldquodoes not require the Bank to conduct further analysis if it views its existing body of knowledge as sufficientrdquo18 The Committee stressed that the ldquoprovision should be implemented in a way that does not reduce the Bankrsquos competitiveness and flexibility in assisting US exporters nor ignore the positive aspects of the export salerdquo19
This recognition of the need of the Bank to use its expertise to ensure competitiveness and flexibility in assisting US exporters was and has been incorporated as a guiding principle for the Bankrsquos analytical frameworks in assessing whether substantial adverse economic impact exists for each transaction considered
Following enactment of the 1986 provisions the Bank revised its economic impact procedures to categorize transactions These categories acted as filters posing two ldquoyes or nordquo questions summarized as follows
‐ Is the commodity to be produced likely to be in surplus on world markets at the time of production or is it likely to compete with US production of a competing commodity
‐ Will the Bankrsquos extension of a loan or guarantee cause substantial injury to US producers of a competing commodity
A ldquonordquo answer to either of these two questions in sequence would mean that no further analysis was necessary If answers to both questions were affirmative then the Bank would conduct a detailed economic impact analysis and would determine whether the short and long‐term benefits of the transaction to US industry and employment outweighed any injury to US producers of a competing commodity
6 1988 ndash Congress Defines ldquoSubstantial Injuryrdquo and Adds a 1 Test which the Bank Uses to Refine Its Economic Impact Procedures
In 1988 Congress amended sect2(e) of the Bankrsquos Charter by defining ldquosubstantial injuryrdquo for purposes of analyzing adverse economic impact Specifically Congress defined ldquosubstantial injuryrdquo to mean ldquoif the amount of capacity for production established or the amount of the increase in such capacity expanded by [the Bankrsquos] credit or guarantee equals or exceeds 1 percent of United States productionrdquo20
In November 1988 the Board of Directors approved a new set of economic impact procedures As noted in the staffrsquos Memorandum to the Board of Directors dated November 14 1988
ldquo[t]he Congressional debates on the various adverse economic impact provisions have made it clear that the focus of concern is the possibility of substantial harm to US
18 Id 19 Id 20 PL 100‐418 102 Stat 1107 (1988)
6
production and employment there was no desire to make [the Bank] less responsive or competitive by slowing down the processing of cases not likely to cause injuryrdquo21
In an effort to achieve this required balance the new economic impact procedures posed the following three questions
- Will the project be in direct competition with US production - Is [the Bankrsquos] support significantly associated with this project - Will the output of the project likely cause substantial injury to US producers of the
same similar or competing commodity
As before a negative answer to any of the three questions would mean that the Bank would not conduct a detailed economic impact analysis to determine whether the short‐ and long‐term benefits of the transaction to US industry and employment outweighed any injury to US producers of a competing commodity
7 1998 ndash The Bank Modifies Its Economic Impact Procedures to Include Consideration of Trade Sanctions
The Bank was reauthorized in 1997 and no changes were made to any of the economic impact provisions in the Bankrsquos Charter Nevertheless the Bank revised its existing procedures to include additional focus that Congress had required on transactions involving countries or industries against which certain trade sanctions were pending or imposed
8 2001 ndash After Public Notice and a Request for Comments the Bank Further Refines Its Economic Impact Procedures to Reflect Congressional Requirements and the Need to Timely Process Applications
In 2001 the Bank further updated its economic impact procedures During the preceding 20 years the nature of the Bankrsquos transactions had changed to include many more involving private sector borrowers rather than state‐owned entities The new procedures attempted to balance a thorough timely examination of economic impact issues with the need to process transactions within a short timeframe that would satisfy the speed required by commercial realities The Bank determined that it could best comply with its statutory mandate to provide competitive financing for US exports by focusing any detailed economic impact analysis only on those transactions likely to result in substantial adverse economic impact
The first stage or screen of the economic impact evaluation was to determine if the exports involved in a transaction would result in the production of an exportable good from the buyerrsquos country Hence the name ldquoexportable goodsrdquo screen As with its prior screens if the answer to this question was ldquonordquo then no further economic impact analysis was conducted
The Bank had determined that transactions that would result in the provision of exportable services from foreign countries would not cause substantial adverse economic impact on US
21 Memorandum to Board of Directors Country Risk Analysis Div ldquoProcedures for Economic Impact Analysisrdquo P 3 Nov 14 1988
7
industries The focus on exportable goods rather than exportable services was a result of several factors These included the Bankrsquos accumulated expertise with the relevant industries involved in transactions the Bank supported such as the airline sector and the financing available to such industries which indicated that US airlines generally had access to financing that was more favorable than the financing provided by Ex‐Im Bank to foreign airlines In addition the Bank took into account feedback and other input from trade groups industry stakeholders and other government agencies which would be expected to voice concerns if the Bankrsquos procedures were working to the detriment of any domestic industry
Notably the US airline sector had not raised any concerns about adverse economic impact since 1984 This lack of articulated concern by the US airline industry was consistent with the Bankrsquos own expertise and understanding of the airline sector and aircraft financing As noted above the Bank understood from its considerable involvement in aircraft finance that US airlines generally had access to financing that was more favorable than the financing provided by Ex‐Im Bank to foreign airlines Thus US airlines had no reason to complain
In anticipation of the 2001 revisions to its economic impact procedures although not required to do so the Bank published a notice in the Federal Register Its proposed new economic impact procedures were posted on its website and public comment was invited As before the US airline industry made no comments in response to the Bankrsquos proposed 2001 procedures which included among other things the adoption of the ldquoexportable goodsrdquo screen
The Bank adopted these procedures after repeated and extensive consultation with its core stakeholders including US industry labor its Advisory Committee and exporters22 In addition the Bank reached out to relevant experts in both the academic and consulting worlds who provided comments on the Bankrsquos proposed changes23 Finally the Bank requested and obtained input from other US Government agencies such as the Departments of Commerce Treasury and State as well as the Office of the US Trade Representative and the Office of Management amp Budget
The Bank considered and analyzed all the input it received and revised the procedures accordingly For example other US Government agencies had specific concerns with respect to how the Bank treated applications implicated by trade measures and the Bank modified its approach to these applications Given the lack of any articulated concerns about the airline sector and the Bankrsquos own knowledge and expertise regarding aircraft financing the Bank had no reason to believe that the proposed ldquoexportable goodsrdquo screen would not be an appropriate way to take account of adverse economic impact on the airline industry
22 The Bankrsquos Advisory Committee is created pursuant to its Charter and is ldquobroadly representative of environment production commerce finance agriculture labor services State government and the textile industryrdquo 12 USCsect635a(d)23 A partial list of those consulted includes former Congressman Bill Frenzel of the Brookings Institute Dr Robert Hahn of the American Enterprise Institute Dr Jerry Hausman of the Massachusetts Institute of Technology Dr J David Richardson of Syracuse University Dr Marina Whitman of the University of Michigan the National Foreign Trade Council the Coalition for Employment through Exports the American Iron and Steel Institute the AFL‐CIO the International Association of Machinists and Aerospace Workers NUCOR Bechtel Corporation Caterpillar Inc Delta Brands Inc and Air Tractor Inc
8
9 2006 ndash Congress Further Amends the Charter
In 2006 Congress made several substantive changes to the Bankrsquos Charter Among these were
‐ A requirement to determine whether the extension of a credit or guarantee is likely to result in the production of the same or similar commodities and whether such production may cause substantial injury to US producers
‐ A prohibition against providing a loan or guarantee that will facilitate the circumvention of any trade law order or determination
‐ A requirement for the Bank to designate sensitive commercial sectors and products for which the Bank is not likely to provide financing due to strong potential for adverse economic impact on US industry and
‐ A requirement to aggregate financial thresholds for purposes of assessing economic impact or otherwise on a rolling 24‐month basis24
In addition Congress added certain notice‐and‐comment requirements that apply ldquoif the Bank intends to conduct a detailed economic impact analysis or similar studyrdquo25
10 2007 ndash The Bank Responds to New Congressional Requirements with the 2007 Economic Impact Procedures
In response to the 2006 changes to the Charter the Bank modified its economic impact procedures The ldquoexportable goodsrdquo screen was amended to read
ldquoThe first stage of the economic impact analysis is to determine if the exports involved in a transaction will result in the production of an exportable good Therefore only exports of capital goods and services (eg manufacturing equipment licensing agreements) that will result in the foreign production of an exportable good are subject to further economic impact analysis in Stage II of these procedures The capital goods and services exports may be associated with new foreign production capacity or existing production capacity (eg applicable exports include replacement equipment in an existing production facility to maintain existing production capacity)rdquo26
Thus beginning with its first set of Economic Impact Procedures in 1968 and continuing through to 2007 the Bank has consistently made use of various kinds of filters or screens to remove those categories of transactions that are unlikely to produce a substantial adverse impact on domestic industry from detailed economic impact analysis This approach has allowed unaffected transactions to proceed without delay so that the Bank may capture the export opportunity Finally use of the screens has enabled the Bank to concentrate its resources on transactions that are more likely to cause substantial adverse economic impact
24 PL 109‐438 120 Stat 3268 (2006) 25 Id 26 Memorandum to Board of Directors Policy Analysis Div ldquoRevisions to Economic Impact Proceduresrdquo P 9 April 4 2007
9
III Discussion How the Bankrsquos Economic Impact Procedures and Exportable Goods Screen Satisfy the Requirements of the Bankrsquos Charter
In remanding the matter to the Bank the Court of Appeals required the Bank to provide a reasonable explanation to justify its use of the ldquoexportable goods screenrdquo The use of the ldquoexportable goods screenrdquo properly satisfies the various requirements of the Bankrsquos Charter When the screen was adopted the Bank knew that US airlines the industry most likely to be affected generally had access to financing at costs that were significantly more favorable than the cost of aircraft financing provided by the Bank For this very reason the Bank had not heard any economic impact concerns from any US airlines in the 17 years prior to the adoption of the screen Indeed the screen was in place for almost a decade before any US airline raised any questions about it When a single US airline did raise questions about the Bankrsquos financing to foreign airlines the analysis it submitted to the Bank did not support its claim that the Bankrsquos financing provided a financing cost advantage to foreign airlines Moreover the complaint was raised at a time and in the context of negotiations by export credit agencies (ldquoECAsrdquo) regarding the Aircraft Sector Understanding discussed below The Bank understood that the negotiations regarding the Aircraft Sector Understanding would address any concerns by US airlines which were also involved in the negotiations Finally the Bank was also aware throughout the first decade of the 2000s that the major US airlines involved in international flights were not in a mode of purchasing new aircraft and thus that any financing advantage was theoretical only In short the Bankrsquos adoption and continued use of the ldquoexportable goods screenrdquo was eminently reasonable and based on the Bankrsquos considerable expertise with the financial dynamics of aircraft financing
Section III outlines the Bankrsquos responses to evolving Congressional requirements for the Bank to consider whether its actions would have a serious or significant adverse effect on US industry or employment The Bankrsquos responses were formulated with a view to also ensure that it remains competitive with other export credit agencies as requires by its Charter and fulfills its mission to support US jobs through exports
A The US Airline Industry Financing Dynamics 1985 to Early 2001
The Bankrsquos experience over the past 45 years since the first legislated economic impact provisions were enacted has shown that most transactions for which the Bank receives applications are not likely to result in substantial adverse economic impact on the US economy or US jobs For example most of the Bankrsquos transactions are simply too small or too localized to have any significant likelihood of having an adverse impact on US industries or jobs Other examples are transactions supporting sales of consumable goods such as pickle exports to China and transactions supporting exports to be used in a power plant in a foreign country where the power generated will never be sent to the United States to compete with domestic power producers Therefore consistent with the Bankrsquos Charter not every application is subjected to a full‐blown ldquodetailed economic impact analysisrdquo
A detailed economic impact analysis can substantially delay the processing of a transaction and jeopardize the ability of the US exporter to capture the export opportunity Given the number of transactions the Bank finances each year ndash approximately 3800 in Fiscal Year 2012 ndash the
10
Bank would not be able to accomplish its mission of promoting US exports if it were to perform a ldquodetailed economic impact analysisrdquo on every transaction or even for a significant percentage of the transactions
Recognizing the dilatory effects of conducting unnecessary detailed economic impact analyses the Bankrsquos categorical approach to the economic impact provisions of the Bankrsquos Charter has always been to screen out transactions that were not likely to have a substantial adverse effect on US industries or US jobs Ex‐Im Bankrsquos experience in this area over the decades indicates three critical determinants of whether a contemplated transaction has potential to cause substantial adverse impact
1) whether the transaction is too small to have a significant impact
2) whether the transaction involves exports that are to be used for the production of goods or provision of services which are only likely to be used locally in the foreign buyerrsquos country and
3) whether the transaction relates to an industry (eg aircraft) in which the available financing for US domestic sales indicates that Ex‐Im Bank financing for foreign sales generally would not disadvantage the US industry
In 2001 when the Bankrsquos ldquoexportable goodsrdquo screen was first adopted the Bank had substantial reason to believe that transactions resulting in services being exported by foreign countries would be unlikely to have a substantial adverse economic impact on the US services sector
The Bank had for several decades received input from trade groups industry stakeholders and other government agencies regarding the domestic adverse impact of Ex‐Im Bank financing In the Bankrsquos experience such representatives could be relied upon to notify the Bank if they were concerned that the Bankrsquos policies procedures or actions threatened to cause any harm or disruption to a specific industry or sector Concerns raised by industry representatives or the absence of any voiced concerns were a significant tool for the Bank to check the soundness of its categorical judgments as reflected in the screens
As of 2001 when the ldquoexportable goodsrdquo screen was put in place the Bank had heard no concerns about Ex‐Im Bank transactions from the US airline industry in 17 years In 1984 Pan American World Airways (Pan Am) had argued that Ex‐Im Bank support resulted in lower financing costs for foreign airlines than the US airlines could themselves obtain To assess these concerns the Bank analyzed the overall costs of financing for US domestic airlines as compared to the costs of financing to a foreign airline in an Ex‐Im Bank‐guaranteed transaction The analysis compared not just the interest rates charged by lenders in the two different scenarios but also incorporated other factors so as to produce a true ldquoapples‐to‐applesrdquo comparison of the relative financing costs
These other factors included the cost of the Ex‐Im Bank guarantee fee (which the Bank now calls the ldquoexposure feerdquo) as well as the costs of financing the portion of the purchase price that
11
was not supported by the Ex‐Im Bank guarantee The Bank analyzed all of these factors and concluded that in fact Ex‐Im Bank support did not generally result in financing terms for foreign airlines that were more favorable than the financing available to US airlines Pan Am did not contest the Bankrsquos analysis at that time or at any subsequent time Nor did any other US airline or trade group raise any concerns in the intervening 17 years leading up to the adoption of the ldquoexportable goods screenrdquo in 2001 or indeed thereafter until 2010
Between 1990 and 1999 the Bank financed 440 aircraft involving the export of US‐manufactured aircraft representing a total value of approximately $22 billion dollars Given this significant expertise in the aircraft financing sector Ex‐Im Bank had ample and consistent evidence that major US airlines flying international routes had access to more favorable financing relative to the financing available to foreign airlines through ECAs such as Ex‐Im Bank Annexed as Appendix B is a detailed history and explanation of the types of financing that were available to US airlines which in turn had led the Bank to conclude that Bank financing to foreign airlines did not pose any financial competitive harm to US airlines
In contrast to the commercial bank financing available through Ex‐Im Bank in the 1980s and 1990s the principal method used by US airlines to acquire aircraft was through a ldquoleveraged leaserdquo A leveraged lease provides significant tax benefits to an entity that wants to shelter income through additional tax deductions The entity purchases the aircraft and then leases it to the airline The purchaser continues to own the aircraft and thus can take the depreciation deductions and investment tax credits on its tax returns during the term of the lease Once the lease term is over title to the aircraft may be transferred to the airline through various mechanisms The leveraged lease was very beneficial to US airlines in several respects
a) The effective cost of a leveraged lease structure was very attractive as compared to aloan to purchase the aircraft The purchaserlessor passed a portion of the tax benefitsback to the airline by way of lower lease payments
b) In most instances the airline could finance up to 100 of the appraised or ldquomarketrdquovalue of the individual aircraft In contrast under ECA financing from Ex‐Im Bank aforeign airline could only finance up to 85 of the ldquonetrdquo or actual price In short theUS airline could finance a larger percentage of a larger amount as compared to aforeign airline purchasing the same aircraft This translated into a significant financialadvantage for the US airlines
c) Under the leveraged lease structure the repayment terms offered to US airlines wereoften 18 to 22 years In contrast Ex‐Im Bank offered much shorter 10 to 12 yearrepayment terms Longer repayment terms mean lower payments which are of coursea significant benefit
As of 2001 Ex‐Im Bank was also aware that US airlines could avail themselves of commercial market financing known originally as equipment trust certificates and later as enhanced equipment trust certificates (ldquoEETCsrdquo) An EETC is a structure whereby investors can provide financing directly through the capital markets as opposed to loan financing provided by banks The EETCs provided significant cost advantages to US airlines and were generally not available
12
to foreign airlines Even for the rare foreign EETC the terms were not as favorable as the terms available to US airlines
The EETC was premised on sect 1110 of the US Bankruptcy Code which only applied to US airlines27 Section 1110 protects a secured creditor of an airline in bankruptcy by either a)requiring the debtor airline within 60 days of the bankruptcy petition date to cure any payment defaults and stay current with loan payments or b) permitting the secured creditor to obtain possession of the creditorrsquos collateral (ie the aircraft) 60 days after the bankruptcy petition date notwithstanding the automatic stay provision that applies to creditors of other types of debtors This certainty of access to collateral ndash and thus to payment ndash provided and continues to provide decreased risk to creditors of US airlines This certainty in turn allows these creditors to provide more favorable financing terms than creditors of foreign airlines In the boom years of 2000 to 2001 US airlines raised $19 billion in the EETC market primarily to purchase new aircraft
Throughout the years leading up to the adoption of the exportable goods screen in 2001 Ex‐Im Bank aircraft financing was provided in accordance with the guidelines set forth in the Large Aircraft Sector Understanding (ldquoLASUrdquo) under the auspices of the Organization for Economic Cooperation and Development (ldquoOECDrdquo) The LASU was followed later by evolving versions of the Aircraft Sector Understanding (ldquoASUrdquo) The LASU and the ASU wereare agreements that set forth guidelines to be followed by ECAs in supporting exports of aircraft manufactured in the home country of the relevant ECA The LASUASU guidelines set forth the maximum repayment term for the financing the maximum advance rate of the financing as a percentage of the net price of the aircraft and the minimum fee that the ECA was required to charge to the airline for the ECA support These terms and conditions resulted in financing that was significantly more expensive than that which could be obtained by US airlines in the private market
In light of the foregoing the Bank reasonably believed that US airlines would not suffer any adverse economic impact from the Bankrsquos financing of foreign airlinesrsquo acquisition of US‐manufactured aircraft In other words when Ex‐Im Bank first adopted the ldquoexportable goodsrdquo screen in 2001 the Bank was confident that its use of the screen would provide efficiencies in transaction‐processing time by focusing the Bankrsquos resources on transactions that could reasonably be expected to raise substantial adverse economic impact concerns
B The US Airline Industry Financing Dynamics Late 2001 to Early 2007
The decade of the 2000s presented the global airline industry with new challenges and new
opportunities ndash both of which created problems for US airlines
27 11 USC sect1110 (2001)
13
The terrorist attacks of September 11 2001 resulted in a sudden and protracted reduction in
demand for airline passenger services This was particularly prolonged in the United States and
Europe As a result of that drop in demand as well as other financial pressures the major US
airlines began a decade‐long process of mergers28 During the 2000s the major US airlines also
were able to shed costs and debtmdasheg pensionsmdashin a way not available to foreign airlines
under the US Bankruptcy Code29
As a result of this downsizing and restructuring US airlines focused on consolidation and
survival not expansion of their fleets by purchasing new aircraft US airline purchases of new
passenger aircraft almost disappeared after 2001 reappeared briefly in 2007 and then
disappeared again until sometime in 2010 Instead of ordering new aircraft US airlines
primarily relied upon the aircraft that they had purchased with EETC financing in the 2001‐2002
period
Nonetheless the data that are available indicate that through 2007 the US airlines generally
had access to aircraft financing that was no less favorable than financing provided by ECAs such
as Ex‐Im Bank In the midst of these developments starting in 2005 the various countries and
constituencies that were involved with ECA aircraft financing began negotiating a new ASU
During negotiations of the new ASU European airlines alleged that ECA financing was more
favorable than the financing to which they had access In June 2007 a new ASU agreement was
reached The European airlines explicitly approved thus signaling that the new agreement
eliminated any ECA financing advantage At the same time none of the US airlines raised any
economic impact concerns about the new ASU As Ex‐Im Bank reviewed and revised its
Economic Impact Procedures in 2007 there were no complaints raised by US airlines or any
other parties regarding aircraft transactions Likewise the new 2007 ASU had explicitly quelled
similar concerns in Europe All of the other relevant factors that led to adoption of the
ldquoexportable goodsrdquo screen in 2001 remained true in 2007 As a result in slightly varied form
the ldquoexportable goodsrdquo screen was carried through the 2002 and 2007 economic impact
procedures
C The US Airline Industry Financing Dynamics Late 2007 to 2012
After the 2007 ASU took effect the worldwide financial crisis emerged in 2008 and had a major
impact on global financial markets including those for large aircraft purchases From mid‐2008
to the beginning of 2010 the financial markets experienced significant volatility and distress
28 These included TWA and American Airlines in 2001 America West and US Airways in 2005 Northwest Airlines and Delta Air Lines in 2008 Continental Airlines and United Airlines in 2010 and Air Tran and Southwest Airlines in 2010 American Airlines and US Air announced merger plans in 201229 Bankruptcies of the major US Airlines from 2001‐2010 included US Airways in 2002 and 2004 United Airlines in 2002 Northwest Airlines in 2005 Delta Air Lines in 2005 Frontier Airlines in 2008 Mesa Airlines in 2010 American Airlines later filed for bankruptcy protection in 2012
14
Then after a short calm in 2010 the European sovereign debt and related European banking
crises rattled financial markets from mid‐2011 to mid‐2012 The result was another period of
extreme interest rate volatility
During this period the global financial market for commercial jet aircraft had been
characterized by (a) extreme volatility in both interest rates and availability of financing and
(b) major growth in demand for aircraft by airlines in the emerging markets and resource‐rich
OECD countries At the same time (and until only recently) there was very little demand for
aircraft by US airlines
There was also a fundamental shift in the key financial tools used for aircraft purchasesmdashwith
commercial banks playing a much diminished role EETC financing from the capital markets
emerged and matured into the most favorable source of financing
As noted before in early 2010 one US airline raised concerns that the financing provided by
the Bank to Ryanair an up‐and‐coming and successful discount airline in Europe was more
favorable than the financing available to US airlines The complaining airline asserted that Ex‐
Im Bank financing to Ryanair was significantly more favorable than financing that the
complaining airline itself had received in a recent EETC offering
Ex‐Im Bank reviewed and analyzed the assertions and determined that they were flawed in that
the purported difference in financial costs ignored pertinent factors and thus did not indicate
that ECA financing would be more favorable in a true ldquoapples to applesrdquo comparison Some key
factors ignored in the analysis provided by the one US airline were
a The credit‐worthiness of the US airline in question was publically rated at B‐ which in
common investment terms puts it in the ldquojunkrdquo group of ratings Ryanair by comparison is rated as investment grade a significantly higher rating Naturally a difference in credit ratings is going to result in a difference in the cost of financing
b The US airline was re‐financing a group of 10 to 12 year old aircraft while Ryanair was
financing brand‐new aircraft In both cases the aircraft being financed formed the
collateral pool for the loan Older aircraft represent a higher risk due to the poorer
quality of collateral therefore resulting in higher costs of financing
At the same time that this US airline was raising its concerns with the Bank it was also raising
similar concerns in the context of new ASU negotiations By the end of 2010 the ECAs reached
agreement on a new ASU (the 2011 ASU) which went into effect on February 1 2011 This
agreement included a built‐in adjustment mechanism to reflect changes in the financial
markets as they occurred This was designed to ensure that ECA financing and commercial bank
financing were generally equivalent The Bank continues to monitor the 2011 ASU to ensure
that the adjustment mechanism built into that agreement does in fact generally work to
15
enforce an equilibrium between the cost of ECA aircraft financings and the financing available
to US airlines in the private market In addition this very issue continues to be a regular topic
of discussion among the ASU participant countries as well Based on the data that have been
developed and presented to date the Bank believes that the 2011 ASU properly serves its
intended function of ensuring that airlines using private market financing do not suffer a
competitive disadvantage when compared to ECA financing of aircraft under the ASU
IV Conclusion
Ex‐Im Bankrsquos exportable goods screen complied with the Bankrsquos statutory requirements to
assess the potential adverse effects of all transactions and to focus on those transactions that
were likely to result in a substantial adverse economic impact on US industry Historically
financing available to US airlines for the purchase of new wide‐body aircraft has been either
more favorable than or equally favorable as Ex‐Im Bank financing to foreign airlines for the
purchase of equivalent aircraft The exportable goods screen was an appropriate reasonable
and efficient response to the realities of aircraft financing It properly balanced the
Congressional directives to assess the likelihood of substantial economic impact on US
industry and US jobs with the need to finance transactions in an efficient manner so as to
support US exports and US jobs
November 22 2013
Export‐Import Bank of the United States 811 Vermont Ave NW Washington DC 20571
16
Appendix A
Excerpt from Staff Memorandum to Ex‐Im Bank Board of Directors Accompanying 1979
Economic Impact Procedures30
Thus Section 2(b)(1)(B) of the Act requires the Board of Directors to take into account ldquoany
serious adverse effectrdquo which loans or guarantees may have on US industry materials in short
supply and employment Section 1911 of the 1978 Amendments requires consideration by the
Bank of the extent to which a loan or financial guarantee ldquois likely to have an adverse
effecthellipeither by reducing demand for goods produced in the United States or by increasing
imports to the United Statesrdquo and Section 608 of the Appropriations Act requires a finding that
the commodity ultimately produced as a result of [Bank] financing will be in surplus when the
production comes on‐stream and that US producers of the same similar or competing
commodity will be substantially injured It is apparent that the latter two statutory provisions
are explications of the basic mandate of the Act and do not expand the Bankrsquos mandate to
examine domestic impact but rather suggest factors to be considered in that examination To
a great extent the 1978 Amendments language and the Appropriations Act provisions set forth
the same concept in different ways Thus the reference in Section 1911 of the 1978
Amendments to ldquoreducing demand for goods in the United Statesrdquo and ldquoincreasing imports to
the United Statesrdquo is no more than the inevitable consequence of a commodity being ldquoin
surplusrdquo as stated in Section 608 of the Appropriations Act
Section 2(b)(1)(B) is the broadest formulation of the basic concept since it contains the most
general language ie ldquoany serious impactrdquo and encompasses all types of exports Section
1911 is primarily procedural in nature directing the Bank not only to implement appropriate
regulations and procedures to ensure full consideration of adverse impact but also to request a
report from the International Trade Commission Section 1911 includes a more detailed
description of events which would constitute adverse impactmdashie a reduction in demand for
US produced goods or an increase in imports to the US Finally this section contains an
explicit reference to agriculture which was only implicitly covered by Section 2(b)(1)(B) It
should be noted that this is one of several references to agriculture which were added to the
Act by the 1978 Amendments
The Appropriations Act provision explicitly refers to a balancing by the Board of Directors of the
benefits of the [Bank]‐supported export against the injury to US [producers] of the commodity
in question At the same time the Act has always necessitated such a balancing by requiring
the Bank to take into account ldquoserious adverse effects upon the US economyrdquo at the same
time it carries out the Bankrsquos basic mandate to ldquofacilitate exportsrdquo and to ldquofoster expansion of
exportsrdquo Under either provision therefore the Board of Directors will be taking into
30 Memorandum ldquoProcedures Regarding Adverse Domestic Impact of Eximbank Financingrdquo Pp 7‐12 Jan 5 1979 17
consideration the results of the balancing as one of the many factors involved in making a
decision to provide financing It should be noted that Section 1911 of the 1978 Amendments is
consistent with both of these provisions since it only seeks to ensure that ldquofull considerationrdquo is
given to adverse effects upon the US economy
Section 2(b)(1)(B) of the Act refers to ldquoserious adverse effectrdquo upon the US economy as a
whole whereas Section 608 of the Appropriations Act imposes a more stringent test by
focusing on a single industry ndash the domestic producers of the commodity to be produced by the
project supported by [the Bank] ndash and requiring a determination of substantial injury for that
industry alone However a reading of the entire Section shows that such a determination
would have to be made only if the net effect upon the US economy of the project for which
support was requested from [the Bank] is negative and if the commodity is likely to be in
surplus on world markets at the time the project becomes operative In any event under
Section 2(b)(1)(B) the Board would have to take into account any serious adverse effects of the
transaction upon the US economy Only if the Board decides to proceed with the transaction
regardless of such effects would it be necessary to determine if there will be substantial injury
to US producers of the commodity and thus trigger the prohibition contained in Section 608
It should also be noted that Section 1911 of the 1978 Amendments speaks in terms only of ldquoany
adverse effectrdquo However the language of that provision clearly shows that it was not intended
to set up a substantive test but rather as was mentioned above to insure that formal
procedures to take into account impacts upon the US economy are established by [Ex‐Im
Bank] as well as to enable the Bank to obtain a report from the International Trade
Commissionrdquo PL 95‐630 92 Stat 3641 (1978)
18
Appendix B
Financial Tools Available to US Airlines
Generally over the past several decades US airlines have had access to a broad range of
aircraft financing options
Accordingly at different times during the past several decades US airlines took advantage of
whichever financing option provided the most attractive overall financing terms from such
airlinesrsquo perspective For instance a US airline would be able to maximize the amount of the
financing thereby minimizing the amount of its own money it had to invest in the aircraft (ie
the ldquodown paymentrdquo) It might also maximize the amount of money in excess of the actual cost
of the aircraft it could raise against the aircraft obtain the longest possible repayment term and
the slowest possible amortization schedule (ie the longest ldquoweighted average liferdquo) obtain
the lowest interest rate and risk premium obtain the least restrictive operational and financial
covenants provide the least amount of collateral or other security or obtain other benefits
Due to the fact that the United States is seen as not presenting any ldquocountry riskrdquo and has well‐
developed and well‐regarded legal and judicial systems that are seen as being protective of
creditorsrsquo rights US airlines have usually had access to secured aircraft financings from
commercial banks from around the world During the past several decades commercial banks
from different regions have been at the forefront of the aircraft finance industry and have
provided financing to US airlines on attractive financing terms Initially US‐based banks
provided most of the aircraft financing to US airlines but during the 1980s Japanese banks
became very significant lenders to the US airlines During the 1990s and 2000s the European
banks (German French British and Swiss banks) were the most significant source of
commercial bank funding for US airlines
In addition to commercial bank financing during the 1970s and 1980s US airlines obtained
long‐term financing from US‐based institutional investors (eg insurance companies and
pension funds) through the use of the Equipment Trust Certificate (ldquoETCrdquo) financing structure or
the Pass Through Certificate (ldquoPTCrdquo) financing structure The ETC is a financing provided by
institutional investors that is secured by one or more items of equipment (eg aircraft) The
PTC is a group of ETCs combined into a public debt security that is sold into the capital markets
to institutional investors
However during the 1980s the simplest and most prevalent form of aircraft financing for US
airlines was the US leveraged lease
The US leveraged lease allowed US airlines to take advantage of the US tax code which
generally provides for all types of capital assets to be depreciated and thereby reduces or
defers taxes due to the deductibility of tax depreciation Because US airlines generally did not 19
have sufficient income to fully take advantage of the benefit of the tax depreciation deductions
associated with acquiring aircraft the US airlines entered into US leveraged leases Under a
leveraged lease the benefits of the tax depreciation deductions related to the aircraft were
transferred to profitable companies that had income they wanted to shelter from tax In
return the company was willing to provide the equity in a US leverage lease (approximately
20 of the appraised value of the aircraft) and to ldquoleaserdquo the aircraft back to the airline for the
airlinersquos use A number of different entities entered into such leases including banks insurance
companies and other financial institutions such as Ford Motor Credit as well as finance
subsidiaries of other corporate entities including consumer product companies such as Phillip
Morris or entertainment companies such as Disney The fact that these were ldquoleveragedrdquo
leases (as opposed to ldquosingle investor leasesrdquo) also enabled the equity providers to deduct the
interest expense associated with the US leveraged lease
Through the use of a combination of lease equity and debt a US leveraged lease allowed US
airlines to arrange financing for up to 100 of the appraised value of an aircraft This was
particularly attractive to major US airlines because due to their size and relative importance
to the aircraft manufacturers every major US airline generally was able to negotiate aircraft
purchases with the aircraft manufacturers that enabled the airline to buy the aircraft for
amounts significantly less than the appraised value The result was that by using a US
leveraged lease to finance its aircraft a US airline was able to ldquoover‐financerdquo the aircraft (ie
finance the aircraft for more than the airline was paying for the aircraft) resulting in the airline
effectively having the ability each time the airline financed an aircraft to arrange 100
financing for its aircraft and at the same time arrange a long‐term working capital loan This is
the equivalent of a home buyer being able to buy a house with no money down (no down
payment) and also receiving a long‐term loan for non‐home expenses
In contrast Ex‐Im Bank‐supported aircraft financing is for only 85 (and sometimes less) of the
actual ldquonet pricerdquo that the airline is paying the US aircraft manufacturer (after deducting all
discounts and other concessions the airline has negotiated with the US aircraft manufacturer
which results in a net price that is almost always less than the appraised value) This requires
the foreign airline that is using Ex‐Im Bank support to come up with a down payment of at least
15 of the net price of the aircraft As a result US airlines were able to obtain more financing
under a US leveraged lease (without putting any money down) than foreign airlines could
under an Ex‐Im Bank supported aircraft financing (which required a down payment)
In addition US leveraged leases used by US airlines always had very long repayment terms
Generally speaking the longer the repayment the longer the tax deferral and the more
advantageous the terms of the US leveraged lease As a result it was not unusual for the US
leveraged leases used by US airlines to have a repayment term of between 18 and 22 years
and sometimes as long as 25 years The only constraint was that the lease term of the
20
leveraged lease should not exceed 80 of the economic useful life of the aircraft which in
some instances was more than 30 years
In contrast the repayment term in an Ex‐Im Bank‐supported aircraft financing is never longer
than 12 years which is the maximum repayment term Ex‐Im Bank is permitted to offer for an
aircraft financing under the guidelines for export credits promulgated by the Organization for
Economic Cooperation and Development (the ldquoOECDrdquo) with which guidelines the US
Government (including Ex‐Im Bank) has agreed to abide This difference in repayment terms is
significant it is similar to the difference in monthly payments under a 15 year home mortgage
versus a 30 year home mortgage As a result US airlines were able to obtain significantly
longer financing under a US leveraged lease (which generally resulted in a smaller periodic
principal repayment burden due to the longer repayment term) than foreign airlines could
under an Ex‐Im Bank‐supported financing
US leveraged leases used by US airlines also had a slower amortization profile with a very
long weighted average life (ie small amounts of debt amortization in the early years of the
financing) of at least 10 years In the same manner that a longer repayment term increased the
tax deferral a longer weighted average life also increased the tax deferral
In contrast the amortization profile in an Ex‐Im Bank supported aircraft financing for a foreign
airline is usually between 6 years and 65 years (at least 4 years shorter than the weighted
average life of the US leveraged leases historically used by US airlines) which imposes a
much greater cash flow burden on the foreign airline in comparison with the cash flows
required of a US airline under a US leveraged lease
Although the absolute interest rate on the debt in a US leveraged lease fluctuated over time
with the overall level of interest rates the providers of the debt into these US leveraged leases
(primarily insurance companies and other institutional investors) were generally willing to
accept an interest rate margin of less than 100 basis points31 over LIBOR32 on a fixed rate
equivalent basis (and sometimes significantly less than 100 basis points)
In contrast the interest rate margin on the debt on an Ex‐Im Bank‐supported aircraft financing
was generally between a few basis points over LIBOR to 50 basis points over LIBOR because the
interest on the Ex‐Im Bank‐guaranteed aircraft financing is guaranteed by Ex‐Im Bank and
reflects the low risk associated with a US Government guaranteed loan However the interest
rate margin on an Ex‐Im Bank‐guaranteed aircraft financing does not reflect the Ex‐Im Bank
exposure fee (or risk premium) that is paid to Ex‐Im Bank in view of the underlying risk of the
foreign airline The minimum exposure fee charged by Ex‐Im Bank was 2 during the 1980s
31 100 basis points equals 1 percent 32 LIBOR is the London Inter‐Bank Offering Rate and is a common reference rate such as ldquoPrimerdquo or ldquoTreasury Raterdquo used in adjustable interest rate transactions
21
and early 1990s and 3 until 2007 when the OECD promulgated a new set of guidelines for
export credits for aircraft (known as the ldquo2007 Aircraft Sector Understandingrdquo or the ldquo2007
ASUrdquo) This exposure fee was required to be paid ldquoup frontrdquo ndash ie at the inception of the loan
On a per annum basis this equates to between 30 basis points and 50 basis points which
should be added to the interest rate margin received by the guaranteed lender to obtain the
equivalent interest rate paid by a foreign airline under Ex‐Im Bank‐supported financing (for
purposes of comparing the overall financing cost to those incurred by US airlines) The Ex‐Im
Bank exposure fee is similar to a homeowner having to pay ldquopointsrdquo up front at the time he
obtains his mortgage The effect of paying points up front and paying an Ex‐Im Bank exposure
fee effectively increases the cost of the financing In comparing the overall cost of financing
through ECA support including the exposure fee to the overall cost of a leveraged lease for
borrowers with comparable credit profiles the overall cost of the US leveraged lease was
considerably more favorable than what could be achieved through an Ex‐Im Bank‐supported
aircraft financing
Although the US leveraged lease was itself a very attractive financing structure for US
airlines at different times the basic US leveraged lease was made even more attractive due to
other provisions of the US and foreign tax codes
For instance from the 1960s (during the Kennedy Administration) until its repeal under the Tax
Reform Act of 1986 the US tax code provided for an investment tax credit which was intended
to encourage investment in capital goods and therefore allowed airlines or the equity investor
in a US leveraged lease to get a credit against the taxes it would otherwise be required to pay
This credit was a permanent reduction in taxes paid as opposed to only the deferral of taxes
(postponement of when taxes had to be paid) that could be achieved through the use of the
US leveraged lease
Similarly from the 1980s to the mid‐1990s it was common for a US airline to combine a US
leveraged lease with a lease into a foreign jurisdiction that had a ldquoform over substancerdquo
approach to its tax code (as opposed to the United States which has a ldquosubstance over formrdquo
approach to its tax code) Taking advantage of the disparity a US airline could ldquosellrdquo the
aircraft to both (i) an equity investor in the United States and (ii) an equity investor in a foreign
country such as Japan Germany or Hong Kong and each equity investor could depreciate the
same aircraft and therefore shelter its respective income Over time due to changes in the
respective tax codes these more aggressive tax advantaged cross‐border leasing structures
(ldquoDouble Dipsrdquo and even on occasion ldquoTriple Dipsrdquo) were disallowed but not before US airlines
financed billions of dollars of aircraft using such tax advantaged leasing structures
During the 1990s the basic US leveraged lease was made even more attractive by taking
advantage of another provision of the US tax code that allowed additional US taxes to be
22
deferred if the equity investor in the transaction used an offshore subsidiary that qualified as a
Foreign Sales Corporation (ldquoFSCrdquo) under the US tax code and structured the deal as a
Commission FSC
In addition during the 1980s and 1990s US airlines had access to other sources of financing
with overall financing terms that were much more attractive than what was available to foreign
airlines via Ex‐Im Bank‐supported export credits For example during the late 1980s and 1990s
Airbus made its first significant sales to US airlines In order to do so Airbus arranged and
provided very attractive and flexible financing terms to US airlines to encourage them to
purchase European‐manufactured Airbus aircraft instead of US‐manufactured Boeing or
McDonnell Douglas aircraft The US airlines were more than willing to accept these incentives
During this period some US airlines entered into ldquowalk awayrdquo leases of Airbus aircraft
pursuant to which Airbus North America (backed by the joint and several guarantees of each of
the four countries that are members of Airbus SAS) entered into a US leveraged lease of the
Airbus aircraft and then subleased the aircraft to a US airline on terms that (i) passed along
most of the tax benefits to the US airline through lower lease rentals and (ii) permitted the
US airline to terminate the sublease and simply ldquowalk awayrdquo from the lease upon a relatively
short notice period
Under the ldquoHome Market Rulerdquo the European export credit agencies (including those of
France Germany and the United Kingdom) that usually support the financing of Airbus aircraft
could not provide such support to US airlines Therefore Airbus arranged for Kreditanstalt fur
Wiederaufbau the development bank of Germany to provide very attractive financing for the
Airbus aircraft being acquired by US airlines These financings occurred on terms much more
favorable (with 18‐ to 22‐year repayment terms) than what export credit agencies could
provide (with a maximum repayment term of 12‐years)
Similarly during the 1990s US airlines began to acquire a large number of 35 to 50 seat
regional jet aircraft manufactured by Bombardier of Canada and Embraer of Brazil Many of
these aircraft were acquired by the US airlines by using export credit support from Canada and
Brazil Some of the financing terms (ie the repayment terms) of these Brazilian and Canadian
government‐supported export credit financings were even more attractive (15‐ to 18‐year
repayment terms) than what was available from the export credit agencies of France Germany
and the United Kingdom with respect to Airbus aircraft or from Ex‐Im Bank with respect to
Boeing aircraft (10‐ to 12‐year repayment terms)
To make the financing of Canadian‐manufactured Bombardier regional jets even more
attractive to US airlines the province of Quebec (where Bombardier has its headquarters)
through Investment Quebec provided additional aircraft financing support to the US airlines
23
Finally to the extent even more attractive financing was needed to convince US airlines to
purchase Canadian or Brazilian‐manufactured regional aircraft the manufacturers themselves
provided residual value guarantees with respect to such aircraft to the airline or to the
financiers (ie to the equity investor in a US leveraged lease or the creditors financing the
aircraft)
The next major development in aircraft financing used by US airlines was the development in
the 1990s of the Enhanced Equipment Trust Certificate (ldquoEETCrdquo) which was an ETC with certain
structural enhancements The most important of these enhancements is a liquidity facility to
ensure that if there is a default the financiers would continue to receive current interest
during the period of time while the aircraft is being repossessed and remarketed A key
element in the development of the EETC was the existence of Section 1110 of the US
Bankruptcy Code which gives a type of ldquopreferred creditorrdquo status to financiers of aircraft for
US airlines This ldquopreferred creditorrdquo status exempts aircraft financiers of US airlines from
the automatic stay generally imposed following a bankruptcy filing by a borrower subject to the
protections of the US Bankruptcy Code Section 1110 of the US Bankruptcy Code
accomplishes this by requiring the airline within 60 days of such bankruptcy filing to either (i)
resume payments under the originally agreed aircraft financing or (ii) return the aircraft to the
financier
The first EETC was done in 1994 and the practice has now been successfully used by almost
every major US airline including Alaska Airlines America West Airlines American Airlines
Continental Airlines Delta Airlines Hawaiian Airlines Jet Blue Airlines Northwest Airlines
Southwest Airlines United Airlines and US Airways The overall financing cost of a US airline
acquiring an aircraft through the use of the EETC ndash which includes the amount of financing
repayment term amortization profile effective cost of the financing etc ndash has generally been
significantly more attractive than (i) what such US airline could have achieved under an export
credit‐supported aircraft financing for such airline and (ii) what a similarly rated foreign airline
could have achieved under an export credit‐supported aircraft financing
This is particularly true for the financing of new aircraft The development of the EETC market
provided enormous financing flexibility to US airlines for the financing of new aircraft the
EETC provided the airline with the option to finance on a simple secured mortgage basis or the
US airline could opt for a leveraged lease with all of the benefits associated with a leveraged
lease described above
Beginning in 1997 US airlines had the ability to raise money in the capital markets when the
overall financing terms were most attractive They were able to ldquolock‐inrdquo such favorable
financing terms to fund new aircraft that were scheduled to be delivered in the future by
issuing a ldquopre‐fundedrdquo EETC These pre‐funded EETCs were used to great success by US
24
airlines in the late 1990s through 2001 a period in which the US airlines were taking delivery
of a significant number of aircraft
As a result of the downturn in the US airline industry following the September 11 2001
terrorist attacks many US airlines deferred or cancelled their orders for new aircraft This
reduced the need for US airlines to finance new aircraft when the financing terms available to
such US airlines via the EETC were not as favorable due to (i) the perceived increased credit
risks of the US airline industry following the September 11 terrorist attacks and (ii) the
temporary disequilibrium in the credit markets following the 200820092010 credit crisis
Now that the US airlines have once again begun to take delivery of a significant number of
new aircraft the pre‐funded EETC continues to be the preferred source of financing for US
airlines as evidenced by the number and amount of EETC issuances during 2012 and 2013
Based on an analysis of the EETC transactions occurring during 2012 and 2013 EETCs are once
again generally considered to provide more attractive overall financing terms than what could
be achieved by an airline under an export credit‐supported financing done under the terms of
the 2011 Aircraft Sector Understanding
25
GLOSSARY
ldquoAdverse Economic Impactrdquo is the short‐hand term used to refer to any serious negative effects on US industries or US jobs as set forth in the Bankrsquos Charter that result from Ex‐Im Bank loans guarantees or insurance The Bankrsquos Charter contains three provisions that address adverse economic impact found at 12 USC sectsect 635(b)(1) 635a‐2 635(e)
ldquoAir Indiardquo is an airline owned by the Government of the Republic of India ldquoAir India Transactionsrdquo are the two final commitments approved by Ex‐Im Bank on September
30 2011 for loan guarantees for the purchase of a number of 787 ldquoDreamlinerrdquo aircraft from Boeing and to be financed by a commercial lender not identified at the time As of the date of this paper Ex‐Im Bank has not issued any of its loan guarantees but is expected to do so in the coming months Ten of the aircraft involved in these two final commitments have been delivered to Air India and are in use by Air India on routes outside the United States The deliveries of the ten aircraft were made using private short‐term financing as to which Ex‐Im Bank had no involvement
ldquoAirbusrdquo Airbus SAS is a Europe‐based manufacturer of large commercial aircraft Airbus is the only competitor to Boeing the US manufacturer Airbus sales are supported by the ECAs of Germany France and the UK
ldquoAircraft Sector also known as the ASU is an agreement among members of the OECD Understandingrdquo that manufacture aircraft and Brazil The ASU requires that Export
Credit Agencies that support the export of aircraft follow certain rules and restrictions that set forth the most favorable terms that can be provided These rules and restrictions include the Export Credit Agency must charge a minimum risk premium which is determined by the ASU the term of any loan made by or supported by the Export Credit Agency for the purchase of aircraft cannot exceed 12 years the Export Credit Agency today can lend or guarantee only up to 85 of the actual purchase price of the aircraft being exported and the use of risk mitigants The ASU was preceded by the Large Aircraft Sector Understanding which governed these issues until the enactment of the 2007 ASU The ASU was again updated and revised in 2011 (See also the Large Aircraft Sector Understanding)
ldquoArrangementrdquo is the agreement among Export Credit Agencies governing the terms by which they will provide loans guarantees or insurance in support of exports from their respective countries Among other things the Arrangement requires Export Credit Agencies to charge a minimum risk premium which is governed by the Arrangement See also Organization for Economic Cooperation and Development
ldquoASUrdquo see Aircraft Sector Understanding ldquoAverage Weighted Liferdquo for purposes of this paper refers to the average number of years that
each dollar of unpaid principal on a loan remains outstanding For example a loan with equal principal payments throughout the loan term will have an average weighted life close to the middle of the whole loan term
26
ldquoBank Actrdquo is the Export‐Import Bank Act of 1945 12 USC sect635 as amended ldquoBank Advisory Committeerdquo is the official Advisory Committee of the Bank appointed in accordance
with the Bank Act and the Advisory Committee Act The Bank Advisory Committee is comprised of representatives of various industry and market sectors as well as representatives of labor and international trade experts
ldquoBasis pointsrdquo are a numerical measure applied to interest rates One basis point equals 1100th of one percent or 100 basis points equals one percent
ldquoCapital Equipmentrdquo is equipment used to manufacture a product provide a service or sell store or deliver merchandise A wide‐body aircraft is a piece of capital equipment
ldquoCharterrdquo is the Bank Act as well the provisions of the Export Import Bank Reauthorization Act of 2012 (Public Law 112‐122) that are not codified in the Bank Act
ldquoDreamlinerrdquo is the name given to a Boeing 787 wide‐body commercial aircraft ldquoECArdquo see Export Credit Agencies ldquoEconomic Impact Proceduresrdquo
are procedures adopted by Ex‐Im Bank to assess whether transactions supported by the Bank cause a serious adverse economic impact to US industries and US jobs See also Adverse Economic Impact
ldquoEETCrdquo see Enhanced Equipment Trust Certificate ldquoEnhanced Equipment Trust Certificaterdquo
also known as an EETC is a type of secured bond issued by a borrower in the capital markets The EETC is secured by the equipment being purchased with the proceeds of the bond issuance EETCs are used primarily for aircraft and since the late 1990s has been the dominant financing tool used by US airlines to purchase aircraft Section 1110 of the US Bankruptcy Codemdashwhich allows creditors of aircraft borrowers to obtain their collateral within 60 days if the payments on their debt is not current ndash has provided creditors of US airlines a level of comfort not available to creditors of foreign airlines until recently This generally provided US airlines with a significant financial advantage vis a vis their foreign competitors Recently the adoption of the Cape Town Convention and the related Aircraft Equipment Protocol has provided creditors of foreign airlines with protections similar to the protections provided by section 1110 of the US Bankruptcy Code Recently this has led to the beginnings of an international EETC market
ldquoEquipment Trust Certificaterdquo
also known as an ETC was the predecessor to the Enhanced Equipment Trust Certificate
ldquoETCrdquo see Equipment Trust Certificate ldquoEx‐Im Bankrdquo or ldquoBankrdquo See The Export‐Import Bank of the United States ldquoExport Credit Agenciesrdquo are agencies or ministries of government that have the official role of
providing loans guarantees or insurance in support of exports from their respective countries or in support of exports by sales of companies from their respective countries Ex‐Im Bank is the official Export Credit Agency of the United States of America
ldquoexportable goods screenrdquo is a screen or filter adopted by Ex‐Im Bank in its 2001 Economic Impact Procedures The exportable goods screen is utilized along with other screens to balance the Bankrsquos obligation to consider the adverse
27
economic effects of its transactions on US industries and US jobs with the Bankrsquos mandate to support US export transactions in a timely manner so as to fully support the exporterrsquos business opportunity The exportable goods screen filtered out transactions that supported exports which could only be used by a foreign buyer to provide services rather than produce goods
ldquoExport‐Import Bank of the is an independent agency of the Federal Government of the United United Statesrdquo States of America Also known as ldquoEx‐Im Bankrdquo Ex‐Im Bankrsquos mission
is to support US jobs by supporting US exports See 12 USC 635 et seq
ldquoExposure Feerdquo is the risk premium charged by Ex‐Im Bank in exchange for its guarantee in certain transactions The exposure fee must be at least equal to the minimum risk premium required by the terms of the Arrangement and the Aircraft Sector Understanding
ldquoForeign Sales Corporationrdquo is a company created under the terms of a former provision of the US Internal Revenue Code Foreign Sales Corporations received significant tax benefits
ldquoFSCrdquo see Foreign Sales Corporation ldquoInvestment Tax Creditrdquo is a credit permitted under the US Internal Revenue Code for the
purchase of certain types of equipment in certain circumstances See also Leveraged Leases
ldquoKFWrdquo the development bank for the Federal Republic of Germany KFW is an Export Credit Agency but it also operates through a ldquomarket windowrdquo which is not subject to the Home Market Rule Thus KFW provides support to Airbus for its sales of aircraft to US airlines The United States does not have an equivalent institution and Ex‐Im Bank does not have a ldquomarket windowrdquo
ldquoLarge Aircraft Sector also known as LASU was the predecessor to the Aircraft Sector Understandingrdquo Understanding The LASU governed the same general issues as are set
forth in the Aircraft Sector Understanding except that the minimum risk premium was lower than that required in the 2007 ASU and 2011 ASU When the 2007 ASU was enacted grandfathering provisions allowed ECA‐supported financing for a limited number of aircraft to be governed by LASU
ldquoLASUrdquo see Large Aircraft Sector Understanding ldquoLeveraged Leaserdquo is a lease of equipment and is designed to allow the lessor to take
advantage of certain tax code provisions such as the depreciation deduction and the investment tax credit while allowing the lessee to obtain the equipment involved at a significantly lower cost Leveraged Leases were a very popular means for US airlines to acquire aircraft throughout the 1980s and 1990s The value of the tax deductions to the lessor were significant so that the implicit interest rate in the lease payments by the US airline were extremely low Usually the US airline did not have sufficient profit to take advantage of the favorable tax code provisions By using a leveraged lease another company that could shelter income by using the tax code provisions would buy the equipment and lease the equipment to the US airline Usually at the end of the lease term the US airline would purchase the aircraft
28
ldquoLIBORrdquo is the London Inter‐bank Offering Rate It is commonly used as a reference rate in loan transactions that have floating or adjustable interest rates LIBOR reflects the rate at which banks will lend money to each other LIBOR is set for various loan terms (eg 3 months 6 months etc) and is widely published making it a convenient rate to use as a reference rate
ldquoNet pricerdquo is the price paid after all discounts have been deducted The net price is the actual price paid for a piece of equipment In aircraft transactions pursuant to the ASU Ex‐Im Bank will only support up to 85 of the net price of an aircraft EETC transactions on the other hand often support the nominal purchase price of an aircraft and thus result in a significantly higher amount financed
ldquoOECDrdquo see the Organization for Economic Cooperation and Development Open Skies Agreement Is a type of bilateral agreement between countries that govern the
rights of airlines from the two countries to fly into the other country Open Skies Agreements generally allow free access to fly as many routes to a country as an airline may choose but then usually restrict the ability to fly within the other country Generally it is a ldquofly in and outrdquo rule although there are exceptions
ldquoOrganization for Economic Cooperation and Developmentrdquo
also known as the OECD is an organization comprised of 34 member countries that work together to promote development The United States is a member With regard to Ex‐Im Bank the OECD is the organization through which the US Government negotiates an agreement among Export Credit Agencies known as the Arrangement and the ASU (and its predecessor the LASU)
ldquoPass Through Certificaterdquo also known as a PTC is a group of Equipment Trust Certificates pooled together to form the basis for a bond issuance
ldquoPTCrdquo See Pass Through Certificate ldquoRyanairrdquo is a low‐cost Irish airline that began business after European
deregulation of airlines in 1997 Ryanair rapidly expanded during the first decade of the 2000s creating significant competition for other airlines
ldquoScreensrdquo are a type of filter used by Ex‐Im Bank in its Economic Impact Procedures Screens are designed to identify those transactions which are not likely to cause an adverse economic impact to US industries or US jobs so that such transactions can be processed more quickly and efficiently as required by the Bank Act
ldquoSubstantial Injuryrdquo is a term defined in Ex‐Im Bankrsquos Charter to be applied in connection with the Bankrsquos economic impact procedures 12 USC sect635(e)(4) The Charter states ldquohellipthe extension of any credit or guarantee by the Bank will cause substantial injury if the amount of the capacity for production established or the amount of the increase in such capacity expanded by such credit or guarantee equals or exceeds 1 percent of United States productionrdquo
ldquoTPCCrdquo see Trade Promotion Coordinating Committee ldquoTrade Promotion Coordinating Committeerdquo
also known as the TPCC is an interagency committee of the US Government chaired by the Secretary of Commerce It was established under the Export Enhancement Act of 1992 to provide a
29
unifying framework to coordinate the export promotion and export financing activities of the US government and to develop a government‐wide strategic plan for carrying out such programs
ldquoTrade Sanctionsrdquo refers to any of a number of sanctions imposed by the US Government against companies countries industries or products usually as a result of an accusation of adjudication of a violation of an international trade agreement The Bank Act requires Ex‐Im Bank to take certain trade sanctions into account in its economic impact procedures
30
Table A ndash Congressional Actions and Ex-Im Bank Responses
Year Congressional Action Ex‐Im Bank Response
1968 Bank directed to take into account the possible adverse effect [of its loans and guarantees] upon the United States economy
Bank adds this transactions
factor to analysis of
1975 1 Standard refined to take into account any serious adverse effect of loans and guarantees on competitive position of US industry availability of scarce materials in US and employment in US
2 Bank directed to be competitive with rates terms and conditions offered by principal countries whose exporters compete with US exporters
3 Bank directed to submit semi‐annual report on competitiveness and conduct survey of US exporters and lenders to determine experience in meeting financing competition
Bank adds these of transactions
considerations to analysis
Year Congressional Action Ex‐Im Bank Response
1978 ‐ 1979
1 Bank directed to take into account any serious adverse effect of loans on competitive position of US industry and scarce materials Bank directed to emphasize strengthening competitive position of US exporters and expanding total US exports
2 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [From Appropriations Act Restated in Bank Charter in 1986]
3 Bank directed to implement regulations and procedures to insure full consideration of extent to which loan or guarantee is likely to have adverse effect on industries and employment in US either by reducing demand for US produced goods or increasing imports to the US
Bank develops framework and set of written economic impact procedures
1 Exclude exports the use of which remained localized in foreign country This
is first ldquoforeign localized goods and services screenrdquo
2 ldquoIntent and stimulus for projectrdquo examined to determine likelihood of substantial adverse economic impact Does transaction involve ldquorunaway industryrdquo
(leaving US for cheaper foreign labor)
3 Does export of capital equipment result in ldquobuy backrdquo of product being imported into the US
4 Is net impact on US economy and jobs positive or negative and to what degree
32
Year Congressional Action Ex‐Im Bank Response
1986 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [Originally from 1978 Appropriations incorporated into Bank Charter in 1986]
Senate Report recognizes knowledge and experience of Bank and need to respond to exportersrsquo requests for support in a timely and confidential fashion Economic impact procedures are to be practical and workable and not reduce Bankrsquos competitiveness and flexibility nor ignore positive aspects of export sale
Bank develops ldquoSummary of Adverse Economic Guidelinesrdquo to be applied to both
goods and services (a) is commodity to be produced surplus or likely to compete with US‐produced surplus (b) will Bankrsquos
assistance cause substantial injury to US producers of competing commodity (c)
will injury to US producers of competing commodity outweigh the short‐ and long‐
term benefits to US industry and employment If answer is no then no
further economic impact analysis
1988 Congress establishes test for ldquosubstantial injuryrdquo if the amount of capacity for production established or amount of increase in such capacity expanded by Bankrsquos credit or guarantee exceeds 1 of US production
Bankrsquos Board recognizes requirement to balance (a) possibility of substantial harm
to US production and employment with (b) being responsive competitive and efficient New economic impact procedures ask (a) will the project be in direct competition with US production (b) is the Bankrsquos support significantly associated with the project (c) will the output of the project
cause substantial injury to US producers of the same similar or competing
commodity If answer is no then no further economic impact analysis is required
33
Year Congressional Action Ex‐Im Bank Response
1998 Bank revised procedures involving countries against which trade sanctions were pending or imposed
2001
2006 ‐2007
1 Bank required to determine whether extension of credit or guarantee is likely to produce same or other commodities and whether the production may cause substantial injury to US producers
2 Bank prohibited from providing a loan or guarantee that will facilitate circumvention of trade law order or determination
3 Bank required to designate sensitive commercial sectors and products for which Bank financing deemed unlikely due to potential for adverse economic impact on US
4 Bank required to aggregate financial thresholds on rolling 24‐month basis
Bank develops ldquoexportable goods screenrdquo Does Ex‐Im Bank support result in production of exportable good from the foreign buyerrsquos country If not no further economic impact analysis is required Notice and request for comments were published in the Federal Register US airline industry did not respond
Bank issues 2007 Economic Impact Procedures ldquoExportable goods screenrdquo is modified Will the transaction (capital goods and services) result in either new or additional production capacity of an exportable good
34
production and employment there was no desire to make [the Bank] less responsive or competitive by slowing down the processing of cases not likely to cause injuryrdquo21
In an effort to achieve this required balance the new economic impact procedures posed the following three questions
- Will the project be in direct competition with US production - Is [the Bankrsquos] support significantly associated with this project - Will the output of the project likely cause substantial injury to US producers of the
same similar or competing commodity
As before a negative answer to any of the three questions would mean that the Bank would not conduct a detailed economic impact analysis to determine whether the short‐ and long‐term benefits of the transaction to US industry and employment outweighed any injury to US producers of a competing commodity
7 1998 ndash The Bank Modifies Its Economic Impact Procedures to Include Consideration of Trade Sanctions
The Bank was reauthorized in 1997 and no changes were made to any of the economic impact provisions in the Bankrsquos Charter Nevertheless the Bank revised its existing procedures to include additional focus that Congress had required on transactions involving countries or industries against which certain trade sanctions were pending or imposed
8 2001 ndash After Public Notice and a Request for Comments the Bank Further Refines Its Economic Impact Procedures to Reflect Congressional Requirements and the Need to Timely Process Applications
In 2001 the Bank further updated its economic impact procedures During the preceding 20 years the nature of the Bankrsquos transactions had changed to include many more involving private sector borrowers rather than state‐owned entities The new procedures attempted to balance a thorough timely examination of economic impact issues with the need to process transactions within a short timeframe that would satisfy the speed required by commercial realities The Bank determined that it could best comply with its statutory mandate to provide competitive financing for US exports by focusing any detailed economic impact analysis only on those transactions likely to result in substantial adverse economic impact
The first stage or screen of the economic impact evaluation was to determine if the exports involved in a transaction would result in the production of an exportable good from the buyerrsquos country Hence the name ldquoexportable goodsrdquo screen As with its prior screens if the answer to this question was ldquonordquo then no further economic impact analysis was conducted
The Bank had determined that transactions that would result in the provision of exportable services from foreign countries would not cause substantial adverse economic impact on US
21 Memorandum to Board of Directors Country Risk Analysis Div ldquoProcedures for Economic Impact Analysisrdquo P 3 Nov 14 1988
7
industries The focus on exportable goods rather than exportable services was a result of several factors These included the Bankrsquos accumulated expertise with the relevant industries involved in transactions the Bank supported such as the airline sector and the financing available to such industries which indicated that US airlines generally had access to financing that was more favorable than the financing provided by Ex‐Im Bank to foreign airlines In addition the Bank took into account feedback and other input from trade groups industry stakeholders and other government agencies which would be expected to voice concerns if the Bankrsquos procedures were working to the detriment of any domestic industry
Notably the US airline sector had not raised any concerns about adverse economic impact since 1984 This lack of articulated concern by the US airline industry was consistent with the Bankrsquos own expertise and understanding of the airline sector and aircraft financing As noted above the Bank understood from its considerable involvement in aircraft finance that US airlines generally had access to financing that was more favorable than the financing provided by Ex‐Im Bank to foreign airlines Thus US airlines had no reason to complain
In anticipation of the 2001 revisions to its economic impact procedures although not required to do so the Bank published a notice in the Federal Register Its proposed new economic impact procedures were posted on its website and public comment was invited As before the US airline industry made no comments in response to the Bankrsquos proposed 2001 procedures which included among other things the adoption of the ldquoexportable goodsrdquo screen
The Bank adopted these procedures after repeated and extensive consultation with its core stakeholders including US industry labor its Advisory Committee and exporters22 In addition the Bank reached out to relevant experts in both the academic and consulting worlds who provided comments on the Bankrsquos proposed changes23 Finally the Bank requested and obtained input from other US Government agencies such as the Departments of Commerce Treasury and State as well as the Office of the US Trade Representative and the Office of Management amp Budget
The Bank considered and analyzed all the input it received and revised the procedures accordingly For example other US Government agencies had specific concerns with respect to how the Bank treated applications implicated by trade measures and the Bank modified its approach to these applications Given the lack of any articulated concerns about the airline sector and the Bankrsquos own knowledge and expertise regarding aircraft financing the Bank had no reason to believe that the proposed ldquoexportable goodsrdquo screen would not be an appropriate way to take account of adverse economic impact on the airline industry
22 The Bankrsquos Advisory Committee is created pursuant to its Charter and is ldquobroadly representative of environment production commerce finance agriculture labor services State government and the textile industryrdquo 12 USCsect635a(d)23 A partial list of those consulted includes former Congressman Bill Frenzel of the Brookings Institute Dr Robert Hahn of the American Enterprise Institute Dr Jerry Hausman of the Massachusetts Institute of Technology Dr J David Richardson of Syracuse University Dr Marina Whitman of the University of Michigan the National Foreign Trade Council the Coalition for Employment through Exports the American Iron and Steel Institute the AFL‐CIO the International Association of Machinists and Aerospace Workers NUCOR Bechtel Corporation Caterpillar Inc Delta Brands Inc and Air Tractor Inc
8
9 2006 ndash Congress Further Amends the Charter
In 2006 Congress made several substantive changes to the Bankrsquos Charter Among these were
‐ A requirement to determine whether the extension of a credit or guarantee is likely to result in the production of the same or similar commodities and whether such production may cause substantial injury to US producers
‐ A prohibition against providing a loan or guarantee that will facilitate the circumvention of any trade law order or determination
‐ A requirement for the Bank to designate sensitive commercial sectors and products for which the Bank is not likely to provide financing due to strong potential for adverse economic impact on US industry and
‐ A requirement to aggregate financial thresholds for purposes of assessing economic impact or otherwise on a rolling 24‐month basis24
In addition Congress added certain notice‐and‐comment requirements that apply ldquoif the Bank intends to conduct a detailed economic impact analysis or similar studyrdquo25
10 2007 ndash The Bank Responds to New Congressional Requirements with the 2007 Economic Impact Procedures
In response to the 2006 changes to the Charter the Bank modified its economic impact procedures The ldquoexportable goodsrdquo screen was amended to read
ldquoThe first stage of the economic impact analysis is to determine if the exports involved in a transaction will result in the production of an exportable good Therefore only exports of capital goods and services (eg manufacturing equipment licensing agreements) that will result in the foreign production of an exportable good are subject to further economic impact analysis in Stage II of these procedures The capital goods and services exports may be associated with new foreign production capacity or existing production capacity (eg applicable exports include replacement equipment in an existing production facility to maintain existing production capacity)rdquo26
Thus beginning with its first set of Economic Impact Procedures in 1968 and continuing through to 2007 the Bank has consistently made use of various kinds of filters or screens to remove those categories of transactions that are unlikely to produce a substantial adverse impact on domestic industry from detailed economic impact analysis This approach has allowed unaffected transactions to proceed without delay so that the Bank may capture the export opportunity Finally use of the screens has enabled the Bank to concentrate its resources on transactions that are more likely to cause substantial adverse economic impact
24 PL 109‐438 120 Stat 3268 (2006) 25 Id 26 Memorandum to Board of Directors Policy Analysis Div ldquoRevisions to Economic Impact Proceduresrdquo P 9 April 4 2007
9
III Discussion How the Bankrsquos Economic Impact Procedures and Exportable Goods Screen Satisfy the Requirements of the Bankrsquos Charter
In remanding the matter to the Bank the Court of Appeals required the Bank to provide a reasonable explanation to justify its use of the ldquoexportable goods screenrdquo The use of the ldquoexportable goods screenrdquo properly satisfies the various requirements of the Bankrsquos Charter When the screen was adopted the Bank knew that US airlines the industry most likely to be affected generally had access to financing at costs that were significantly more favorable than the cost of aircraft financing provided by the Bank For this very reason the Bank had not heard any economic impact concerns from any US airlines in the 17 years prior to the adoption of the screen Indeed the screen was in place for almost a decade before any US airline raised any questions about it When a single US airline did raise questions about the Bankrsquos financing to foreign airlines the analysis it submitted to the Bank did not support its claim that the Bankrsquos financing provided a financing cost advantage to foreign airlines Moreover the complaint was raised at a time and in the context of negotiations by export credit agencies (ldquoECAsrdquo) regarding the Aircraft Sector Understanding discussed below The Bank understood that the negotiations regarding the Aircraft Sector Understanding would address any concerns by US airlines which were also involved in the negotiations Finally the Bank was also aware throughout the first decade of the 2000s that the major US airlines involved in international flights were not in a mode of purchasing new aircraft and thus that any financing advantage was theoretical only In short the Bankrsquos adoption and continued use of the ldquoexportable goods screenrdquo was eminently reasonable and based on the Bankrsquos considerable expertise with the financial dynamics of aircraft financing
Section III outlines the Bankrsquos responses to evolving Congressional requirements for the Bank to consider whether its actions would have a serious or significant adverse effect on US industry or employment The Bankrsquos responses were formulated with a view to also ensure that it remains competitive with other export credit agencies as requires by its Charter and fulfills its mission to support US jobs through exports
A The US Airline Industry Financing Dynamics 1985 to Early 2001
The Bankrsquos experience over the past 45 years since the first legislated economic impact provisions were enacted has shown that most transactions for which the Bank receives applications are not likely to result in substantial adverse economic impact on the US economy or US jobs For example most of the Bankrsquos transactions are simply too small or too localized to have any significant likelihood of having an adverse impact on US industries or jobs Other examples are transactions supporting sales of consumable goods such as pickle exports to China and transactions supporting exports to be used in a power plant in a foreign country where the power generated will never be sent to the United States to compete with domestic power producers Therefore consistent with the Bankrsquos Charter not every application is subjected to a full‐blown ldquodetailed economic impact analysisrdquo
A detailed economic impact analysis can substantially delay the processing of a transaction and jeopardize the ability of the US exporter to capture the export opportunity Given the number of transactions the Bank finances each year ndash approximately 3800 in Fiscal Year 2012 ndash the
10
Bank would not be able to accomplish its mission of promoting US exports if it were to perform a ldquodetailed economic impact analysisrdquo on every transaction or even for a significant percentage of the transactions
Recognizing the dilatory effects of conducting unnecessary detailed economic impact analyses the Bankrsquos categorical approach to the economic impact provisions of the Bankrsquos Charter has always been to screen out transactions that were not likely to have a substantial adverse effect on US industries or US jobs Ex‐Im Bankrsquos experience in this area over the decades indicates three critical determinants of whether a contemplated transaction has potential to cause substantial adverse impact
1) whether the transaction is too small to have a significant impact
2) whether the transaction involves exports that are to be used for the production of goods or provision of services which are only likely to be used locally in the foreign buyerrsquos country and
3) whether the transaction relates to an industry (eg aircraft) in which the available financing for US domestic sales indicates that Ex‐Im Bank financing for foreign sales generally would not disadvantage the US industry
In 2001 when the Bankrsquos ldquoexportable goodsrdquo screen was first adopted the Bank had substantial reason to believe that transactions resulting in services being exported by foreign countries would be unlikely to have a substantial adverse economic impact on the US services sector
The Bank had for several decades received input from trade groups industry stakeholders and other government agencies regarding the domestic adverse impact of Ex‐Im Bank financing In the Bankrsquos experience such representatives could be relied upon to notify the Bank if they were concerned that the Bankrsquos policies procedures or actions threatened to cause any harm or disruption to a specific industry or sector Concerns raised by industry representatives or the absence of any voiced concerns were a significant tool for the Bank to check the soundness of its categorical judgments as reflected in the screens
As of 2001 when the ldquoexportable goodsrdquo screen was put in place the Bank had heard no concerns about Ex‐Im Bank transactions from the US airline industry in 17 years In 1984 Pan American World Airways (Pan Am) had argued that Ex‐Im Bank support resulted in lower financing costs for foreign airlines than the US airlines could themselves obtain To assess these concerns the Bank analyzed the overall costs of financing for US domestic airlines as compared to the costs of financing to a foreign airline in an Ex‐Im Bank‐guaranteed transaction The analysis compared not just the interest rates charged by lenders in the two different scenarios but also incorporated other factors so as to produce a true ldquoapples‐to‐applesrdquo comparison of the relative financing costs
These other factors included the cost of the Ex‐Im Bank guarantee fee (which the Bank now calls the ldquoexposure feerdquo) as well as the costs of financing the portion of the purchase price that
11
was not supported by the Ex‐Im Bank guarantee The Bank analyzed all of these factors and concluded that in fact Ex‐Im Bank support did not generally result in financing terms for foreign airlines that were more favorable than the financing available to US airlines Pan Am did not contest the Bankrsquos analysis at that time or at any subsequent time Nor did any other US airline or trade group raise any concerns in the intervening 17 years leading up to the adoption of the ldquoexportable goods screenrdquo in 2001 or indeed thereafter until 2010
Between 1990 and 1999 the Bank financed 440 aircraft involving the export of US‐manufactured aircraft representing a total value of approximately $22 billion dollars Given this significant expertise in the aircraft financing sector Ex‐Im Bank had ample and consistent evidence that major US airlines flying international routes had access to more favorable financing relative to the financing available to foreign airlines through ECAs such as Ex‐Im Bank Annexed as Appendix B is a detailed history and explanation of the types of financing that were available to US airlines which in turn had led the Bank to conclude that Bank financing to foreign airlines did not pose any financial competitive harm to US airlines
In contrast to the commercial bank financing available through Ex‐Im Bank in the 1980s and 1990s the principal method used by US airlines to acquire aircraft was through a ldquoleveraged leaserdquo A leveraged lease provides significant tax benefits to an entity that wants to shelter income through additional tax deductions The entity purchases the aircraft and then leases it to the airline The purchaser continues to own the aircraft and thus can take the depreciation deductions and investment tax credits on its tax returns during the term of the lease Once the lease term is over title to the aircraft may be transferred to the airline through various mechanisms The leveraged lease was very beneficial to US airlines in several respects
a) The effective cost of a leveraged lease structure was very attractive as compared to aloan to purchase the aircraft The purchaserlessor passed a portion of the tax benefitsback to the airline by way of lower lease payments
b) In most instances the airline could finance up to 100 of the appraised or ldquomarketrdquovalue of the individual aircraft In contrast under ECA financing from Ex‐Im Bank aforeign airline could only finance up to 85 of the ldquonetrdquo or actual price In short theUS airline could finance a larger percentage of a larger amount as compared to aforeign airline purchasing the same aircraft This translated into a significant financialadvantage for the US airlines
c) Under the leveraged lease structure the repayment terms offered to US airlines wereoften 18 to 22 years In contrast Ex‐Im Bank offered much shorter 10 to 12 yearrepayment terms Longer repayment terms mean lower payments which are of coursea significant benefit
As of 2001 Ex‐Im Bank was also aware that US airlines could avail themselves of commercial market financing known originally as equipment trust certificates and later as enhanced equipment trust certificates (ldquoEETCsrdquo) An EETC is a structure whereby investors can provide financing directly through the capital markets as opposed to loan financing provided by banks The EETCs provided significant cost advantages to US airlines and were generally not available
12
to foreign airlines Even for the rare foreign EETC the terms were not as favorable as the terms available to US airlines
The EETC was premised on sect 1110 of the US Bankruptcy Code which only applied to US airlines27 Section 1110 protects a secured creditor of an airline in bankruptcy by either a)requiring the debtor airline within 60 days of the bankruptcy petition date to cure any payment defaults and stay current with loan payments or b) permitting the secured creditor to obtain possession of the creditorrsquos collateral (ie the aircraft) 60 days after the bankruptcy petition date notwithstanding the automatic stay provision that applies to creditors of other types of debtors This certainty of access to collateral ndash and thus to payment ndash provided and continues to provide decreased risk to creditors of US airlines This certainty in turn allows these creditors to provide more favorable financing terms than creditors of foreign airlines In the boom years of 2000 to 2001 US airlines raised $19 billion in the EETC market primarily to purchase new aircraft
Throughout the years leading up to the adoption of the exportable goods screen in 2001 Ex‐Im Bank aircraft financing was provided in accordance with the guidelines set forth in the Large Aircraft Sector Understanding (ldquoLASUrdquo) under the auspices of the Organization for Economic Cooperation and Development (ldquoOECDrdquo) The LASU was followed later by evolving versions of the Aircraft Sector Understanding (ldquoASUrdquo) The LASU and the ASU wereare agreements that set forth guidelines to be followed by ECAs in supporting exports of aircraft manufactured in the home country of the relevant ECA The LASUASU guidelines set forth the maximum repayment term for the financing the maximum advance rate of the financing as a percentage of the net price of the aircraft and the minimum fee that the ECA was required to charge to the airline for the ECA support These terms and conditions resulted in financing that was significantly more expensive than that which could be obtained by US airlines in the private market
In light of the foregoing the Bank reasonably believed that US airlines would not suffer any adverse economic impact from the Bankrsquos financing of foreign airlinesrsquo acquisition of US‐manufactured aircraft In other words when Ex‐Im Bank first adopted the ldquoexportable goodsrdquo screen in 2001 the Bank was confident that its use of the screen would provide efficiencies in transaction‐processing time by focusing the Bankrsquos resources on transactions that could reasonably be expected to raise substantial adverse economic impact concerns
B The US Airline Industry Financing Dynamics Late 2001 to Early 2007
The decade of the 2000s presented the global airline industry with new challenges and new
opportunities ndash both of which created problems for US airlines
27 11 USC sect1110 (2001)
13
The terrorist attacks of September 11 2001 resulted in a sudden and protracted reduction in
demand for airline passenger services This was particularly prolonged in the United States and
Europe As a result of that drop in demand as well as other financial pressures the major US
airlines began a decade‐long process of mergers28 During the 2000s the major US airlines also
were able to shed costs and debtmdasheg pensionsmdashin a way not available to foreign airlines
under the US Bankruptcy Code29
As a result of this downsizing and restructuring US airlines focused on consolidation and
survival not expansion of their fleets by purchasing new aircraft US airline purchases of new
passenger aircraft almost disappeared after 2001 reappeared briefly in 2007 and then
disappeared again until sometime in 2010 Instead of ordering new aircraft US airlines
primarily relied upon the aircraft that they had purchased with EETC financing in the 2001‐2002
period
Nonetheless the data that are available indicate that through 2007 the US airlines generally
had access to aircraft financing that was no less favorable than financing provided by ECAs such
as Ex‐Im Bank In the midst of these developments starting in 2005 the various countries and
constituencies that were involved with ECA aircraft financing began negotiating a new ASU
During negotiations of the new ASU European airlines alleged that ECA financing was more
favorable than the financing to which they had access In June 2007 a new ASU agreement was
reached The European airlines explicitly approved thus signaling that the new agreement
eliminated any ECA financing advantage At the same time none of the US airlines raised any
economic impact concerns about the new ASU As Ex‐Im Bank reviewed and revised its
Economic Impact Procedures in 2007 there were no complaints raised by US airlines or any
other parties regarding aircraft transactions Likewise the new 2007 ASU had explicitly quelled
similar concerns in Europe All of the other relevant factors that led to adoption of the
ldquoexportable goodsrdquo screen in 2001 remained true in 2007 As a result in slightly varied form
the ldquoexportable goodsrdquo screen was carried through the 2002 and 2007 economic impact
procedures
C The US Airline Industry Financing Dynamics Late 2007 to 2012
After the 2007 ASU took effect the worldwide financial crisis emerged in 2008 and had a major
impact on global financial markets including those for large aircraft purchases From mid‐2008
to the beginning of 2010 the financial markets experienced significant volatility and distress
28 These included TWA and American Airlines in 2001 America West and US Airways in 2005 Northwest Airlines and Delta Air Lines in 2008 Continental Airlines and United Airlines in 2010 and Air Tran and Southwest Airlines in 2010 American Airlines and US Air announced merger plans in 201229 Bankruptcies of the major US Airlines from 2001‐2010 included US Airways in 2002 and 2004 United Airlines in 2002 Northwest Airlines in 2005 Delta Air Lines in 2005 Frontier Airlines in 2008 Mesa Airlines in 2010 American Airlines later filed for bankruptcy protection in 2012
14
Then after a short calm in 2010 the European sovereign debt and related European banking
crises rattled financial markets from mid‐2011 to mid‐2012 The result was another period of
extreme interest rate volatility
During this period the global financial market for commercial jet aircraft had been
characterized by (a) extreme volatility in both interest rates and availability of financing and
(b) major growth in demand for aircraft by airlines in the emerging markets and resource‐rich
OECD countries At the same time (and until only recently) there was very little demand for
aircraft by US airlines
There was also a fundamental shift in the key financial tools used for aircraft purchasesmdashwith
commercial banks playing a much diminished role EETC financing from the capital markets
emerged and matured into the most favorable source of financing
As noted before in early 2010 one US airline raised concerns that the financing provided by
the Bank to Ryanair an up‐and‐coming and successful discount airline in Europe was more
favorable than the financing available to US airlines The complaining airline asserted that Ex‐
Im Bank financing to Ryanair was significantly more favorable than financing that the
complaining airline itself had received in a recent EETC offering
Ex‐Im Bank reviewed and analyzed the assertions and determined that they were flawed in that
the purported difference in financial costs ignored pertinent factors and thus did not indicate
that ECA financing would be more favorable in a true ldquoapples to applesrdquo comparison Some key
factors ignored in the analysis provided by the one US airline were
a The credit‐worthiness of the US airline in question was publically rated at B‐ which in
common investment terms puts it in the ldquojunkrdquo group of ratings Ryanair by comparison is rated as investment grade a significantly higher rating Naturally a difference in credit ratings is going to result in a difference in the cost of financing
b The US airline was re‐financing a group of 10 to 12 year old aircraft while Ryanair was
financing brand‐new aircraft In both cases the aircraft being financed formed the
collateral pool for the loan Older aircraft represent a higher risk due to the poorer
quality of collateral therefore resulting in higher costs of financing
At the same time that this US airline was raising its concerns with the Bank it was also raising
similar concerns in the context of new ASU negotiations By the end of 2010 the ECAs reached
agreement on a new ASU (the 2011 ASU) which went into effect on February 1 2011 This
agreement included a built‐in adjustment mechanism to reflect changes in the financial
markets as they occurred This was designed to ensure that ECA financing and commercial bank
financing were generally equivalent The Bank continues to monitor the 2011 ASU to ensure
that the adjustment mechanism built into that agreement does in fact generally work to
15
enforce an equilibrium between the cost of ECA aircraft financings and the financing available
to US airlines in the private market In addition this very issue continues to be a regular topic
of discussion among the ASU participant countries as well Based on the data that have been
developed and presented to date the Bank believes that the 2011 ASU properly serves its
intended function of ensuring that airlines using private market financing do not suffer a
competitive disadvantage when compared to ECA financing of aircraft under the ASU
IV Conclusion
Ex‐Im Bankrsquos exportable goods screen complied with the Bankrsquos statutory requirements to
assess the potential adverse effects of all transactions and to focus on those transactions that
were likely to result in a substantial adverse economic impact on US industry Historically
financing available to US airlines for the purchase of new wide‐body aircraft has been either
more favorable than or equally favorable as Ex‐Im Bank financing to foreign airlines for the
purchase of equivalent aircraft The exportable goods screen was an appropriate reasonable
and efficient response to the realities of aircraft financing It properly balanced the
Congressional directives to assess the likelihood of substantial economic impact on US
industry and US jobs with the need to finance transactions in an efficient manner so as to
support US exports and US jobs
November 22 2013
Export‐Import Bank of the United States 811 Vermont Ave NW Washington DC 20571
16
Appendix A
Excerpt from Staff Memorandum to Ex‐Im Bank Board of Directors Accompanying 1979
Economic Impact Procedures30
Thus Section 2(b)(1)(B) of the Act requires the Board of Directors to take into account ldquoany
serious adverse effectrdquo which loans or guarantees may have on US industry materials in short
supply and employment Section 1911 of the 1978 Amendments requires consideration by the
Bank of the extent to which a loan or financial guarantee ldquois likely to have an adverse
effecthellipeither by reducing demand for goods produced in the United States or by increasing
imports to the United Statesrdquo and Section 608 of the Appropriations Act requires a finding that
the commodity ultimately produced as a result of [Bank] financing will be in surplus when the
production comes on‐stream and that US producers of the same similar or competing
commodity will be substantially injured It is apparent that the latter two statutory provisions
are explications of the basic mandate of the Act and do not expand the Bankrsquos mandate to
examine domestic impact but rather suggest factors to be considered in that examination To
a great extent the 1978 Amendments language and the Appropriations Act provisions set forth
the same concept in different ways Thus the reference in Section 1911 of the 1978
Amendments to ldquoreducing demand for goods in the United Statesrdquo and ldquoincreasing imports to
the United Statesrdquo is no more than the inevitable consequence of a commodity being ldquoin
surplusrdquo as stated in Section 608 of the Appropriations Act
Section 2(b)(1)(B) is the broadest formulation of the basic concept since it contains the most
general language ie ldquoany serious impactrdquo and encompasses all types of exports Section
1911 is primarily procedural in nature directing the Bank not only to implement appropriate
regulations and procedures to ensure full consideration of adverse impact but also to request a
report from the International Trade Commission Section 1911 includes a more detailed
description of events which would constitute adverse impactmdashie a reduction in demand for
US produced goods or an increase in imports to the US Finally this section contains an
explicit reference to agriculture which was only implicitly covered by Section 2(b)(1)(B) It
should be noted that this is one of several references to agriculture which were added to the
Act by the 1978 Amendments
The Appropriations Act provision explicitly refers to a balancing by the Board of Directors of the
benefits of the [Bank]‐supported export against the injury to US [producers] of the commodity
in question At the same time the Act has always necessitated such a balancing by requiring
the Bank to take into account ldquoserious adverse effects upon the US economyrdquo at the same
time it carries out the Bankrsquos basic mandate to ldquofacilitate exportsrdquo and to ldquofoster expansion of
exportsrdquo Under either provision therefore the Board of Directors will be taking into
30 Memorandum ldquoProcedures Regarding Adverse Domestic Impact of Eximbank Financingrdquo Pp 7‐12 Jan 5 1979 17
consideration the results of the balancing as one of the many factors involved in making a
decision to provide financing It should be noted that Section 1911 of the 1978 Amendments is
consistent with both of these provisions since it only seeks to ensure that ldquofull considerationrdquo is
given to adverse effects upon the US economy
Section 2(b)(1)(B) of the Act refers to ldquoserious adverse effectrdquo upon the US economy as a
whole whereas Section 608 of the Appropriations Act imposes a more stringent test by
focusing on a single industry ndash the domestic producers of the commodity to be produced by the
project supported by [the Bank] ndash and requiring a determination of substantial injury for that
industry alone However a reading of the entire Section shows that such a determination
would have to be made only if the net effect upon the US economy of the project for which
support was requested from [the Bank] is negative and if the commodity is likely to be in
surplus on world markets at the time the project becomes operative In any event under
Section 2(b)(1)(B) the Board would have to take into account any serious adverse effects of the
transaction upon the US economy Only if the Board decides to proceed with the transaction
regardless of such effects would it be necessary to determine if there will be substantial injury
to US producers of the commodity and thus trigger the prohibition contained in Section 608
It should also be noted that Section 1911 of the 1978 Amendments speaks in terms only of ldquoany
adverse effectrdquo However the language of that provision clearly shows that it was not intended
to set up a substantive test but rather as was mentioned above to insure that formal
procedures to take into account impacts upon the US economy are established by [Ex‐Im
Bank] as well as to enable the Bank to obtain a report from the International Trade
Commissionrdquo PL 95‐630 92 Stat 3641 (1978)
18
Appendix B
Financial Tools Available to US Airlines
Generally over the past several decades US airlines have had access to a broad range of
aircraft financing options
Accordingly at different times during the past several decades US airlines took advantage of
whichever financing option provided the most attractive overall financing terms from such
airlinesrsquo perspective For instance a US airline would be able to maximize the amount of the
financing thereby minimizing the amount of its own money it had to invest in the aircraft (ie
the ldquodown paymentrdquo) It might also maximize the amount of money in excess of the actual cost
of the aircraft it could raise against the aircraft obtain the longest possible repayment term and
the slowest possible amortization schedule (ie the longest ldquoweighted average liferdquo) obtain
the lowest interest rate and risk premium obtain the least restrictive operational and financial
covenants provide the least amount of collateral or other security or obtain other benefits
Due to the fact that the United States is seen as not presenting any ldquocountry riskrdquo and has well‐
developed and well‐regarded legal and judicial systems that are seen as being protective of
creditorsrsquo rights US airlines have usually had access to secured aircraft financings from
commercial banks from around the world During the past several decades commercial banks
from different regions have been at the forefront of the aircraft finance industry and have
provided financing to US airlines on attractive financing terms Initially US‐based banks
provided most of the aircraft financing to US airlines but during the 1980s Japanese banks
became very significant lenders to the US airlines During the 1990s and 2000s the European
banks (German French British and Swiss banks) were the most significant source of
commercial bank funding for US airlines
In addition to commercial bank financing during the 1970s and 1980s US airlines obtained
long‐term financing from US‐based institutional investors (eg insurance companies and
pension funds) through the use of the Equipment Trust Certificate (ldquoETCrdquo) financing structure or
the Pass Through Certificate (ldquoPTCrdquo) financing structure The ETC is a financing provided by
institutional investors that is secured by one or more items of equipment (eg aircraft) The
PTC is a group of ETCs combined into a public debt security that is sold into the capital markets
to institutional investors
However during the 1980s the simplest and most prevalent form of aircraft financing for US
airlines was the US leveraged lease
The US leveraged lease allowed US airlines to take advantage of the US tax code which
generally provides for all types of capital assets to be depreciated and thereby reduces or
defers taxes due to the deductibility of tax depreciation Because US airlines generally did not 19
have sufficient income to fully take advantage of the benefit of the tax depreciation deductions
associated with acquiring aircraft the US airlines entered into US leveraged leases Under a
leveraged lease the benefits of the tax depreciation deductions related to the aircraft were
transferred to profitable companies that had income they wanted to shelter from tax In
return the company was willing to provide the equity in a US leverage lease (approximately
20 of the appraised value of the aircraft) and to ldquoleaserdquo the aircraft back to the airline for the
airlinersquos use A number of different entities entered into such leases including banks insurance
companies and other financial institutions such as Ford Motor Credit as well as finance
subsidiaries of other corporate entities including consumer product companies such as Phillip
Morris or entertainment companies such as Disney The fact that these were ldquoleveragedrdquo
leases (as opposed to ldquosingle investor leasesrdquo) also enabled the equity providers to deduct the
interest expense associated with the US leveraged lease
Through the use of a combination of lease equity and debt a US leveraged lease allowed US
airlines to arrange financing for up to 100 of the appraised value of an aircraft This was
particularly attractive to major US airlines because due to their size and relative importance
to the aircraft manufacturers every major US airline generally was able to negotiate aircraft
purchases with the aircraft manufacturers that enabled the airline to buy the aircraft for
amounts significantly less than the appraised value The result was that by using a US
leveraged lease to finance its aircraft a US airline was able to ldquoover‐financerdquo the aircraft (ie
finance the aircraft for more than the airline was paying for the aircraft) resulting in the airline
effectively having the ability each time the airline financed an aircraft to arrange 100
financing for its aircraft and at the same time arrange a long‐term working capital loan This is
the equivalent of a home buyer being able to buy a house with no money down (no down
payment) and also receiving a long‐term loan for non‐home expenses
In contrast Ex‐Im Bank‐supported aircraft financing is for only 85 (and sometimes less) of the
actual ldquonet pricerdquo that the airline is paying the US aircraft manufacturer (after deducting all
discounts and other concessions the airline has negotiated with the US aircraft manufacturer
which results in a net price that is almost always less than the appraised value) This requires
the foreign airline that is using Ex‐Im Bank support to come up with a down payment of at least
15 of the net price of the aircraft As a result US airlines were able to obtain more financing
under a US leveraged lease (without putting any money down) than foreign airlines could
under an Ex‐Im Bank supported aircraft financing (which required a down payment)
In addition US leveraged leases used by US airlines always had very long repayment terms
Generally speaking the longer the repayment the longer the tax deferral and the more
advantageous the terms of the US leveraged lease As a result it was not unusual for the US
leveraged leases used by US airlines to have a repayment term of between 18 and 22 years
and sometimes as long as 25 years The only constraint was that the lease term of the
20
leveraged lease should not exceed 80 of the economic useful life of the aircraft which in
some instances was more than 30 years
In contrast the repayment term in an Ex‐Im Bank‐supported aircraft financing is never longer
than 12 years which is the maximum repayment term Ex‐Im Bank is permitted to offer for an
aircraft financing under the guidelines for export credits promulgated by the Organization for
Economic Cooperation and Development (the ldquoOECDrdquo) with which guidelines the US
Government (including Ex‐Im Bank) has agreed to abide This difference in repayment terms is
significant it is similar to the difference in monthly payments under a 15 year home mortgage
versus a 30 year home mortgage As a result US airlines were able to obtain significantly
longer financing under a US leveraged lease (which generally resulted in a smaller periodic
principal repayment burden due to the longer repayment term) than foreign airlines could
under an Ex‐Im Bank‐supported financing
US leveraged leases used by US airlines also had a slower amortization profile with a very
long weighted average life (ie small amounts of debt amortization in the early years of the
financing) of at least 10 years In the same manner that a longer repayment term increased the
tax deferral a longer weighted average life also increased the tax deferral
In contrast the amortization profile in an Ex‐Im Bank supported aircraft financing for a foreign
airline is usually between 6 years and 65 years (at least 4 years shorter than the weighted
average life of the US leveraged leases historically used by US airlines) which imposes a
much greater cash flow burden on the foreign airline in comparison with the cash flows
required of a US airline under a US leveraged lease
Although the absolute interest rate on the debt in a US leveraged lease fluctuated over time
with the overall level of interest rates the providers of the debt into these US leveraged leases
(primarily insurance companies and other institutional investors) were generally willing to
accept an interest rate margin of less than 100 basis points31 over LIBOR32 on a fixed rate
equivalent basis (and sometimes significantly less than 100 basis points)
In contrast the interest rate margin on the debt on an Ex‐Im Bank‐supported aircraft financing
was generally between a few basis points over LIBOR to 50 basis points over LIBOR because the
interest on the Ex‐Im Bank‐guaranteed aircraft financing is guaranteed by Ex‐Im Bank and
reflects the low risk associated with a US Government guaranteed loan However the interest
rate margin on an Ex‐Im Bank‐guaranteed aircraft financing does not reflect the Ex‐Im Bank
exposure fee (or risk premium) that is paid to Ex‐Im Bank in view of the underlying risk of the
foreign airline The minimum exposure fee charged by Ex‐Im Bank was 2 during the 1980s
31 100 basis points equals 1 percent 32 LIBOR is the London Inter‐Bank Offering Rate and is a common reference rate such as ldquoPrimerdquo or ldquoTreasury Raterdquo used in adjustable interest rate transactions
21
and early 1990s and 3 until 2007 when the OECD promulgated a new set of guidelines for
export credits for aircraft (known as the ldquo2007 Aircraft Sector Understandingrdquo or the ldquo2007
ASUrdquo) This exposure fee was required to be paid ldquoup frontrdquo ndash ie at the inception of the loan
On a per annum basis this equates to between 30 basis points and 50 basis points which
should be added to the interest rate margin received by the guaranteed lender to obtain the
equivalent interest rate paid by a foreign airline under Ex‐Im Bank‐supported financing (for
purposes of comparing the overall financing cost to those incurred by US airlines) The Ex‐Im
Bank exposure fee is similar to a homeowner having to pay ldquopointsrdquo up front at the time he
obtains his mortgage The effect of paying points up front and paying an Ex‐Im Bank exposure
fee effectively increases the cost of the financing In comparing the overall cost of financing
through ECA support including the exposure fee to the overall cost of a leveraged lease for
borrowers with comparable credit profiles the overall cost of the US leveraged lease was
considerably more favorable than what could be achieved through an Ex‐Im Bank‐supported
aircraft financing
Although the US leveraged lease was itself a very attractive financing structure for US
airlines at different times the basic US leveraged lease was made even more attractive due to
other provisions of the US and foreign tax codes
For instance from the 1960s (during the Kennedy Administration) until its repeal under the Tax
Reform Act of 1986 the US tax code provided for an investment tax credit which was intended
to encourage investment in capital goods and therefore allowed airlines or the equity investor
in a US leveraged lease to get a credit against the taxes it would otherwise be required to pay
This credit was a permanent reduction in taxes paid as opposed to only the deferral of taxes
(postponement of when taxes had to be paid) that could be achieved through the use of the
US leveraged lease
Similarly from the 1980s to the mid‐1990s it was common for a US airline to combine a US
leveraged lease with a lease into a foreign jurisdiction that had a ldquoform over substancerdquo
approach to its tax code (as opposed to the United States which has a ldquosubstance over formrdquo
approach to its tax code) Taking advantage of the disparity a US airline could ldquosellrdquo the
aircraft to both (i) an equity investor in the United States and (ii) an equity investor in a foreign
country such as Japan Germany or Hong Kong and each equity investor could depreciate the
same aircraft and therefore shelter its respective income Over time due to changes in the
respective tax codes these more aggressive tax advantaged cross‐border leasing structures
(ldquoDouble Dipsrdquo and even on occasion ldquoTriple Dipsrdquo) were disallowed but not before US airlines
financed billions of dollars of aircraft using such tax advantaged leasing structures
During the 1990s the basic US leveraged lease was made even more attractive by taking
advantage of another provision of the US tax code that allowed additional US taxes to be
22
deferred if the equity investor in the transaction used an offshore subsidiary that qualified as a
Foreign Sales Corporation (ldquoFSCrdquo) under the US tax code and structured the deal as a
Commission FSC
In addition during the 1980s and 1990s US airlines had access to other sources of financing
with overall financing terms that were much more attractive than what was available to foreign
airlines via Ex‐Im Bank‐supported export credits For example during the late 1980s and 1990s
Airbus made its first significant sales to US airlines In order to do so Airbus arranged and
provided very attractive and flexible financing terms to US airlines to encourage them to
purchase European‐manufactured Airbus aircraft instead of US‐manufactured Boeing or
McDonnell Douglas aircraft The US airlines were more than willing to accept these incentives
During this period some US airlines entered into ldquowalk awayrdquo leases of Airbus aircraft
pursuant to which Airbus North America (backed by the joint and several guarantees of each of
the four countries that are members of Airbus SAS) entered into a US leveraged lease of the
Airbus aircraft and then subleased the aircraft to a US airline on terms that (i) passed along
most of the tax benefits to the US airline through lower lease rentals and (ii) permitted the
US airline to terminate the sublease and simply ldquowalk awayrdquo from the lease upon a relatively
short notice period
Under the ldquoHome Market Rulerdquo the European export credit agencies (including those of
France Germany and the United Kingdom) that usually support the financing of Airbus aircraft
could not provide such support to US airlines Therefore Airbus arranged for Kreditanstalt fur
Wiederaufbau the development bank of Germany to provide very attractive financing for the
Airbus aircraft being acquired by US airlines These financings occurred on terms much more
favorable (with 18‐ to 22‐year repayment terms) than what export credit agencies could
provide (with a maximum repayment term of 12‐years)
Similarly during the 1990s US airlines began to acquire a large number of 35 to 50 seat
regional jet aircraft manufactured by Bombardier of Canada and Embraer of Brazil Many of
these aircraft were acquired by the US airlines by using export credit support from Canada and
Brazil Some of the financing terms (ie the repayment terms) of these Brazilian and Canadian
government‐supported export credit financings were even more attractive (15‐ to 18‐year
repayment terms) than what was available from the export credit agencies of France Germany
and the United Kingdom with respect to Airbus aircraft or from Ex‐Im Bank with respect to
Boeing aircraft (10‐ to 12‐year repayment terms)
To make the financing of Canadian‐manufactured Bombardier regional jets even more
attractive to US airlines the province of Quebec (where Bombardier has its headquarters)
through Investment Quebec provided additional aircraft financing support to the US airlines
23
Finally to the extent even more attractive financing was needed to convince US airlines to
purchase Canadian or Brazilian‐manufactured regional aircraft the manufacturers themselves
provided residual value guarantees with respect to such aircraft to the airline or to the
financiers (ie to the equity investor in a US leveraged lease or the creditors financing the
aircraft)
The next major development in aircraft financing used by US airlines was the development in
the 1990s of the Enhanced Equipment Trust Certificate (ldquoEETCrdquo) which was an ETC with certain
structural enhancements The most important of these enhancements is a liquidity facility to
ensure that if there is a default the financiers would continue to receive current interest
during the period of time while the aircraft is being repossessed and remarketed A key
element in the development of the EETC was the existence of Section 1110 of the US
Bankruptcy Code which gives a type of ldquopreferred creditorrdquo status to financiers of aircraft for
US airlines This ldquopreferred creditorrdquo status exempts aircraft financiers of US airlines from
the automatic stay generally imposed following a bankruptcy filing by a borrower subject to the
protections of the US Bankruptcy Code Section 1110 of the US Bankruptcy Code
accomplishes this by requiring the airline within 60 days of such bankruptcy filing to either (i)
resume payments under the originally agreed aircraft financing or (ii) return the aircraft to the
financier
The first EETC was done in 1994 and the practice has now been successfully used by almost
every major US airline including Alaska Airlines America West Airlines American Airlines
Continental Airlines Delta Airlines Hawaiian Airlines Jet Blue Airlines Northwest Airlines
Southwest Airlines United Airlines and US Airways The overall financing cost of a US airline
acquiring an aircraft through the use of the EETC ndash which includes the amount of financing
repayment term amortization profile effective cost of the financing etc ndash has generally been
significantly more attractive than (i) what such US airline could have achieved under an export
credit‐supported aircraft financing for such airline and (ii) what a similarly rated foreign airline
could have achieved under an export credit‐supported aircraft financing
This is particularly true for the financing of new aircraft The development of the EETC market
provided enormous financing flexibility to US airlines for the financing of new aircraft the
EETC provided the airline with the option to finance on a simple secured mortgage basis or the
US airline could opt for a leveraged lease with all of the benefits associated with a leveraged
lease described above
Beginning in 1997 US airlines had the ability to raise money in the capital markets when the
overall financing terms were most attractive They were able to ldquolock‐inrdquo such favorable
financing terms to fund new aircraft that were scheduled to be delivered in the future by
issuing a ldquopre‐fundedrdquo EETC These pre‐funded EETCs were used to great success by US
24
airlines in the late 1990s through 2001 a period in which the US airlines were taking delivery
of a significant number of aircraft
As a result of the downturn in the US airline industry following the September 11 2001
terrorist attacks many US airlines deferred or cancelled their orders for new aircraft This
reduced the need for US airlines to finance new aircraft when the financing terms available to
such US airlines via the EETC were not as favorable due to (i) the perceived increased credit
risks of the US airline industry following the September 11 terrorist attacks and (ii) the
temporary disequilibrium in the credit markets following the 200820092010 credit crisis
Now that the US airlines have once again begun to take delivery of a significant number of
new aircraft the pre‐funded EETC continues to be the preferred source of financing for US
airlines as evidenced by the number and amount of EETC issuances during 2012 and 2013
Based on an analysis of the EETC transactions occurring during 2012 and 2013 EETCs are once
again generally considered to provide more attractive overall financing terms than what could
be achieved by an airline under an export credit‐supported financing done under the terms of
the 2011 Aircraft Sector Understanding
25
GLOSSARY
ldquoAdverse Economic Impactrdquo is the short‐hand term used to refer to any serious negative effects on US industries or US jobs as set forth in the Bankrsquos Charter that result from Ex‐Im Bank loans guarantees or insurance The Bankrsquos Charter contains three provisions that address adverse economic impact found at 12 USC sectsect 635(b)(1) 635a‐2 635(e)
ldquoAir Indiardquo is an airline owned by the Government of the Republic of India ldquoAir India Transactionsrdquo are the two final commitments approved by Ex‐Im Bank on September
30 2011 for loan guarantees for the purchase of a number of 787 ldquoDreamlinerrdquo aircraft from Boeing and to be financed by a commercial lender not identified at the time As of the date of this paper Ex‐Im Bank has not issued any of its loan guarantees but is expected to do so in the coming months Ten of the aircraft involved in these two final commitments have been delivered to Air India and are in use by Air India on routes outside the United States The deliveries of the ten aircraft were made using private short‐term financing as to which Ex‐Im Bank had no involvement
ldquoAirbusrdquo Airbus SAS is a Europe‐based manufacturer of large commercial aircraft Airbus is the only competitor to Boeing the US manufacturer Airbus sales are supported by the ECAs of Germany France and the UK
ldquoAircraft Sector also known as the ASU is an agreement among members of the OECD Understandingrdquo that manufacture aircraft and Brazil The ASU requires that Export
Credit Agencies that support the export of aircraft follow certain rules and restrictions that set forth the most favorable terms that can be provided These rules and restrictions include the Export Credit Agency must charge a minimum risk premium which is determined by the ASU the term of any loan made by or supported by the Export Credit Agency for the purchase of aircraft cannot exceed 12 years the Export Credit Agency today can lend or guarantee only up to 85 of the actual purchase price of the aircraft being exported and the use of risk mitigants The ASU was preceded by the Large Aircraft Sector Understanding which governed these issues until the enactment of the 2007 ASU The ASU was again updated and revised in 2011 (See also the Large Aircraft Sector Understanding)
ldquoArrangementrdquo is the agreement among Export Credit Agencies governing the terms by which they will provide loans guarantees or insurance in support of exports from their respective countries Among other things the Arrangement requires Export Credit Agencies to charge a minimum risk premium which is governed by the Arrangement See also Organization for Economic Cooperation and Development
ldquoASUrdquo see Aircraft Sector Understanding ldquoAverage Weighted Liferdquo for purposes of this paper refers to the average number of years that
each dollar of unpaid principal on a loan remains outstanding For example a loan with equal principal payments throughout the loan term will have an average weighted life close to the middle of the whole loan term
26
ldquoBank Actrdquo is the Export‐Import Bank Act of 1945 12 USC sect635 as amended ldquoBank Advisory Committeerdquo is the official Advisory Committee of the Bank appointed in accordance
with the Bank Act and the Advisory Committee Act The Bank Advisory Committee is comprised of representatives of various industry and market sectors as well as representatives of labor and international trade experts
ldquoBasis pointsrdquo are a numerical measure applied to interest rates One basis point equals 1100th of one percent or 100 basis points equals one percent
ldquoCapital Equipmentrdquo is equipment used to manufacture a product provide a service or sell store or deliver merchandise A wide‐body aircraft is a piece of capital equipment
ldquoCharterrdquo is the Bank Act as well the provisions of the Export Import Bank Reauthorization Act of 2012 (Public Law 112‐122) that are not codified in the Bank Act
ldquoDreamlinerrdquo is the name given to a Boeing 787 wide‐body commercial aircraft ldquoECArdquo see Export Credit Agencies ldquoEconomic Impact Proceduresrdquo
are procedures adopted by Ex‐Im Bank to assess whether transactions supported by the Bank cause a serious adverse economic impact to US industries and US jobs See also Adverse Economic Impact
ldquoEETCrdquo see Enhanced Equipment Trust Certificate ldquoEnhanced Equipment Trust Certificaterdquo
also known as an EETC is a type of secured bond issued by a borrower in the capital markets The EETC is secured by the equipment being purchased with the proceeds of the bond issuance EETCs are used primarily for aircraft and since the late 1990s has been the dominant financing tool used by US airlines to purchase aircraft Section 1110 of the US Bankruptcy Codemdashwhich allows creditors of aircraft borrowers to obtain their collateral within 60 days if the payments on their debt is not current ndash has provided creditors of US airlines a level of comfort not available to creditors of foreign airlines until recently This generally provided US airlines with a significant financial advantage vis a vis their foreign competitors Recently the adoption of the Cape Town Convention and the related Aircraft Equipment Protocol has provided creditors of foreign airlines with protections similar to the protections provided by section 1110 of the US Bankruptcy Code Recently this has led to the beginnings of an international EETC market
ldquoEquipment Trust Certificaterdquo
also known as an ETC was the predecessor to the Enhanced Equipment Trust Certificate
ldquoETCrdquo see Equipment Trust Certificate ldquoEx‐Im Bankrdquo or ldquoBankrdquo See The Export‐Import Bank of the United States ldquoExport Credit Agenciesrdquo are agencies or ministries of government that have the official role of
providing loans guarantees or insurance in support of exports from their respective countries or in support of exports by sales of companies from their respective countries Ex‐Im Bank is the official Export Credit Agency of the United States of America
ldquoexportable goods screenrdquo is a screen or filter adopted by Ex‐Im Bank in its 2001 Economic Impact Procedures The exportable goods screen is utilized along with other screens to balance the Bankrsquos obligation to consider the adverse
27
economic effects of its transactions on US industries and US jobs with the Bankrsquos mandate to support US export transactions in a timely manner so as to fully support the exporterrsquos business opportunity The exportable goods screen filtered out transactions that supported exports which could only be used by a foreign buyer to provide services rather than produce goods
ldquoExport‐Import Bank of the is an independent agency of the Federal Government of the United United Statesrdquo States of America Also known as ldquoEx‐Im Bankrdquo Ex‐Im Bankrsquos mission
is to support US jobs by supporting US exports See 12 USC 635 et seq
ldquoExposure Feerdquo is the risk premium charged by Ex‐Im Bank in exchange for its guarantee in certain transactions The exposure fee must be at least equal to the minimum risk premium required by the terms of the Arrangement and the Aircraft Sector Understanding
ldquoForeign Sales Corporationrdquo is a company created under the terms of a former provision of the US Internal Revenue Code Foreign Sales Corporations received significant tax benefits
ldquoFSCrdquo see Foreign Sales Corporation ldquoInvestment Tax Creditrdquo is a credit permitted under the US Internal Revenue Code for the
purchase of certain types of equipment in certain circumstances See also Leveraged Leases
ldquoKFWrdquo the development bank for the Federal Republic of Germany KFW is an Export Credit Agency but it also operates through a ldquomarket windowrdquo which is not subject to the Home Market Rule Thus KFW provides support to Airbus for its sales of aircraft to US airlines The United States does not have an equivalent institution and Ex‐Im Bank does not have a ldquomarket windowrdquo
ldquoLarge Aircraft Sector also known as LASU was the predecessor to the Aircraft Sector Understandingrdquo Understanding The LASU governed the same general issues as are set
forth in the Aircraft Sector Understanding except that the minimum risk premium was lower than that required in the 2007 ASU and 2011 ASU When the 2007 ASU was enacted grandfathering provisions allowed ECA‐supported financing for a limited number of aircraft to be governed by LASU
ldquoLASUrdquo see Large Aircraft Sector Understanding ldquoLeveraged Leaserdquo is a lease of equipment and is designed to allow the lessor to take
advantage of certain tax code provisions such as the depreciation deduction and the investment tax credit while allowing the lessee to obtain the equipment involved at a significantly lower cost Leveraged Leases were a very popular means for US airlines to acquire aircraft throughout the 1980s and 1990s The value of the tax deductions to the lessor were significant so that the implicit interest rate in the lease payments by the US airline were extremely low Usually the US airline did not have sufficient profit to take advantage of the favorable tax code provisions By using a leveraged lease another company that could shelter income by using the tax code provisions would buy the equipment and lease the equipment to the US airline Usually at the end of the lease term the US airline would purchase the aircraft
28
ldquoLIBORrdquo is the London Inter‐bank Offering Rate It is commonly used as a reference rate in loan transactions that have floating or adjustable interest rates LIBOR reflects the rate at which banks will lend money to each other LIBOR is set for various loan terms (eg 3 months 6 months etc) and is widely published making it a convenient rate to use as a reference rate
ldquoNet pricerdquo is the price paid after all discounts have been deducted The net price is the actual price paid for a piece of equipment In aircraft transactions pursuant to the ASU Ex‐Im Bank will only support up to 85 of the net price of an aircraft EETC transactions on the other hand often support the nominal purchase price of an aircraft and thus result in a significantly higher amount financed
ldquoOECDrdquo see the Organization for Economic Cooperation and Development Open Skies Agreement Is a type of bilateral agreement between countries that govern the
rights of airlines from the two countries to fly into the other country Open Skies Agreements generally allow free access to fly as many routes to a country as an airline may choose but then usually restrict the ability to fly within the other country Generally it is a ldquofly in and outrdquo rule although there are exceptions
ldquoOrganization for Economic Cooperation and Developmentrdquo
also known as the OECD is an organization comprised of 34 member countries that work together to promote development The United States is a member With regard to Ex‐Im Bank the OECD is the organization through which the US Government negotiates an agreement among Export Credit Agencies known as the Arrangement and the ASU (and its predecessor the LASU)
ldquoPass Through Certificaterdquo also known as a PTC is a group of Equipment Trust Certificates pooled together to form the basis for a bond issuance
ldquoPTCrdquo See Pass Through Certificate ldquoRyanairrdquo is a low‐cost Irish airline that began business after European
deregulation of airlines in 1997 Ryanair rapidly expanded during the first decade of the 2000s creating significant competition for other airlines
ldquoScreensrdquo are a type of filter used by Ex‐Im Bank in its Economic Impact Procedures Screens are designed to identify those transactions which are not likely to cause an adverse economic impact to US industries or US jobs so that such transactions can be processed more quickly and efficiently as required by the Bank Act
ldquoSubstantial Injuryrdquo is a term defined in Ex‐Im Bankrsquos Charter to be applied in connection with the Bankrsquos economic impact procedures 12 USC sect635(e)(4) The Charter states ldquohellipthe extension of any credit or guarantee by the Bank will cause substantial injury if the amount of the capacity for production established or the amount of the increase in such capacity expanded by such credit or guarantee equals or exceeds 1 percent of United States productionrdquo
ldquoTPCCrdquo see Trade Promotion Coordinating Committee ldquoTrade Promotion Coordinating Committeerdquo
also known as the TPCC is an interagency committee of the US Government chaired by the Secretary of Commerce It was established under the Export Enhancement Act of 1992 to provide a
29
unifying framework to coordinate the export promotion and export financing activities of the US government and to develop a government‐wide strategic plan for carrying out such programs
ldquoTrade Sanctionsrdquo refers to any of a number of sanctions imposed by the US Government against companies countries industries or products usually as a result of an accusation of adjudication of a violation of an international trade agreement The Bank Act requires Ex‐Im Bank to take certain trade sanctions into account in its economic impact procedures
30
Table A ndash Congressional Actions and Ex-Im Bank Responses
Year Congressional Action Ex‐Im Bank Response
1968 Bank directed to take into account the possible adverse effect [of its loans and guarantees] upon the United States economy
Bank adds this transactions
factor to analysis of
1975 1 Standard refined to take into account any serious adverse effect of loans and guarantees on competitive position of US industry availability of scarce materials in US and employment in US
2 Bank directed to be competitive with rates terms and conditions offered by principal countries whose exporters compete with US exporters
3 Bank directed to submit semi‐annual report on competitiveness and conduct survey of US exporters and lenders to determine experience in meeting financing competition
Bank adds these of transactions
considerations to analysis
Year Congressional Action Ex‐Im Bank Response
1978 ‐ 1979
1 Bank directed to take into account any serious adverse effect of loans on competitive position of US industry and scarce materials Bank directed to emphasize strengthening competitive position of US exporters and expanding total US exports
2 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [From Appropriations Act Restated in Bank Charter in 1986]
3 Bank directed to implement regulations and procedures to insure full consideration of extent to which loan or guarantee is likely to have adverse effect on industries and employment in US either by reducing demand for US produced goods or increasing imports to the US
Bank develops framework and set of written economic impact procedures
1 Exclude exports the use of which remained localized in foreign country This
is first ldquoforeign localized goods and services screenrdquo
2 ldquoIntent and stimulus for projectrdquo examined to determine likelihood of substantial adverse economic impact Does transaction involve ldquorunaway industryrdquo
(leaving US for cheaper foreign labor)
3 Does export of capital equipment result in ldquobuy backrdquo of product being imported into the US
4 Is net impact on US economy and jobs positive or negative and to what degree
32
Year Congressional Action Ex‐Im Bank Response
1986 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [Originally from 1978 Appropriations incorporated into Bank Charter in 1986]
Senate Report recognizes knowledge and experience of Bank and need to respond to exportersrsquo requests for support in a timely and confidential fashion Economic impact procedures are to be practical and workable and not reduce Bankrsquos competitiveness and flexibility nor ignore positive aspects of export sale
Bank develops ldquoSummary of Adverse Economic Guidelinesrdquo to be applied to both
goods and services (a) is commodity to be produced surplus or likely to compete with US‐produced surplus (b) will Bankrsquos
assistance cause substantial injury to US producers of competing commodity (c)
will injury to US producers of competing commodity outweigh the short‐ and long‐
term benefits to US industry and employment If answer is no then no
further economic impact analysis
1988 Congress establishes test for ldquosubstantial injuryrdquo if the amount of capacity for production established or amount of increase in such capacity expanded by Bankrsquos credit or guarantee exceeds 1 of US production
Bankrsquos Board recognizes requirement to balance (a) possibility of substantial harm
to US production and employment with (b) being responsive competitive and efficient New economic impact procedures ask (a) will the project be in direct competition with US production (b) is the Bankrsquos support significantly associated with the project (c) will the output of the project
cause substantial injury to US producers of the same similar or competing
commodity If answer is no then no further economic impact analysis is required
33
Year Congressional Action Ex‐Im Bank Response
1998 Bank revised procedures involving countries against which trade sanctions were pending or imposed
2001
2006 ‐2007
1 Bank required to determine whether extension of credit or guarantee is likely to produce same or other commodities and whether the production may cause substantial injury to US producers
2 Bank prohibited from providing a loan or guarantee that will facilitate circumvention of trade law order or determination
3 Bank required to designate sensitive commercial sectors and products for which Bank financing deemed unlikely due to potential for adverse economic impact on US
4 Bank required to aggregate financial thresholds on rolling 24‐month basis
Bank develops ldquoexportable goods screenrdquo Does Ex‐Im Bank support result in production of exportable good from the foreign buyerrsquos country If not no further economic impact analysis is required Notice and request for comments were published in the Federal Register US airline industry did not respond
Bank issues 2007 Economic Impact Procedures ldquoExportable goods screenrdquo is modified Will the transaction (capital goods and services) result in either new or additional production capacity of an exportable good
34
industries The focus on exportable goods rather than exportable services was a result of several factors These included the Bankrsquos accumulated expertise with the relevant industries involved in transactions the Bank supported such as the airline sector and the financing available to such industries which indicated that US airlines generally had access to financing that was more favorable than the financing provided by Ex‐Im Bank to foreign airlines In addition the Bank took into account feedback and other input from trade groups industry stakeholders and other government agencies which would be expected to voice concerns if the Bankrsquos procedures were working to the detriment of any domestic industry
Notably the US airline sector had not raised any concerns about adverse economic impact since 1984 This lack of articulated concern by the US airline industry was consistent with the Bankrsquos own expertise and understanding of the airline sector and aircraft financing As noted above the Bank understood from its considerable involvement in aircraft finance that US airlines generally had access to financing that was more favorable than the financing provided by Ex‐Im Bank to foreign airlines Thus US airlines had no reason to complain
In anticipation of the 2001 revisions to its economic impact procedures although not required to do so the Bank published a notice in the Federal Register Its proposed new economic impact procedures were posted on its website and public comment was invited As before the US airline industry made no comments in response to the Bankrsquos proposed 2001 procedures which included among other things the adoption of the ldquoexportable goodsrdquo screen
The Bank adopted these procedures after repeated and extensive consultation with its core stakeholders including US industry labor its Advisory Committee and exporters22 In addition the Bank reached out to relevant experts in both the academic and consulting worlds who provided comments on the Bankrsquos proposed changes23 Finally the Bank requested and obtained input from other US Government agencies such as the Departments of Commerce Treasury and State as well as the Office of the US Trade Representative and the Office of Management amp Budget
The Bank considered and analyzed all the input it received and revised the procedures accordingly For example other US Government agencies had specific concerns with respect to how the Bank treated applications implicated by trade measures and the Bank modified its approach to these applications Given the lack of any articulated concerns about the airline sector and the Bankrsquos own knowledge and expertise regarding aircraft financing the Bank had no reason to believe that the proposed ldquoexportable goodsrdquo screen would not be an appropriate way to take account of adverse economic impact on the airline industry
22 The Bankrsquos Advisory Committee is created pursuant to its Charter and is ldquobroadly representative of environment production commerce finance agriculture labor services State government and the textile industryrdquo 12 USCsect635a(d)23 A partial list of those consulted includes former Congressman Bill Frenzel of the Brookings Institute Dr Robert Hahn of the American Enterprise Institute Dr Jerry Hausman of the Massachusetts Institute of Technology Dr J David Richardson of Syracuse University Dr Marina Whitman of the University of Michigan the National Foreign Trade Council the Coalition for Employment through Exports the American Iron and Steel Institute the AFL‐CIO the International Association of Machinists and Aerospace Workers NUCOR Bechtel Corporation Caterpillar Inc Delta Brands Inc and Air Tractor Inc
8
9 2006 ndash Congress Further Amends the Charter
In 2006 Congress made several substantive changes to the Bankrsquos Charter Among these were
‐ A requirement to determine whether the extension of a credit or guarantee is likely to result in the production of the same or similar commodities and whether such production may cause substantial injury to US producers
‐ A prohibition against providing a loan or guarantee that will facilitate the circumvention of any trade law order or determination
‐ A requirement for the Bank to designate sensitive commercial sectors and products for which the Bank is not likely to provide financing due to strong potential for adverse economic impact on US industry and
‐ A requirement to aggregate financial thresholds for purposes of assessing economic impact or otherwise on a rolling 24‐month basis24
In addition Congress added certain notice‐and‐comment requirements that apply ldquoif the Bank intends to conduct a detailed economic impact analysis or similar studyrdquo25
10 2007 ndash The Bank Responds to New Congressional Requirements with the 2007 Economic Impact Procedures
In response to the 2006 changes to the Charter the Bank modified its economic impact procedures The ldquoexportable goodsrdquo screen was amended to read
ldquoThe first stage of the economic impact analysis is to determine if the exports involved in a transaction will result in the production of an exportable good Therefore only exports of capital goods and services (eg manufacturing equipment licensing agreements) that will result in the foreign production of an exportable good are subject to further economic impact analysis in Stage II of these procedures The capital goods and services exports may be associated with new foreign production capacity or existing production capacity (eg applicable exports include replacement equipment in an existing production facility to maintain existing production capacity)rdquo26
Thus beginning with its first set of Economic Impact Procedures in 1968 and continuing through to 2007 the Bank has consistently made use of various kinds of filters or screens to remove those categories of transactions that are unlikely to produce a substantial adverse impact on domestic industry from detailed economic impact analysis This approach has allowed unaffected transactions to proceed without delay so that the Bank may capture the export opportunity Finally use of the screens has enabled the Bank to concentrate its resources on transactions that are more likely to cause substantial adverse economic impact
24 PL 109‐438 120 Stat 3268 (2006) 25 Id 26 Memorandum to Board of Directors Policy Analysis Div ldquoRevisions to Economic Impact Proceduresrdquo P 9 April 4 2007
9
III Discussion How the Bankrsquos Economic Impact Procedures and Exportable Goods Screen Satisfy the Requirements of the Bankrsquos Charter
In remanding the matter to the Bank the Court of Appeals required the Bank to provide a reasonable explanation to justify its use of the ldquoexportable goods screenrdquo The use of the ldquoexportable goods screenrdquo properly satisfies the various requirements of the Bankrsquos Charter When the screen was adopted the Bank knew that US airlines the industry most likely to be affected generally had access to financing at costs that were significantly more favorable than the cost of aircraft financing provided by the Bank For this very reason the Bank had not heard any economic impact concerns from any US airlines in the 17 years prior to the adoption of the screen Indeed the screen was in place for almost a decade before any US airline raised any questions about it When a single US airline did raise questions about the Bankrsquos financing to foreign airlines the analysis it submitted to the Bank did not support its claim that the Bankrsquos financing provided a financing cost advantage to foreign airlines Moreover the complaint was raised at a time and in the context of negotiations by export credit agencies (ldquoECAsrdquo) regarding the Aircraft Sector Understanding discussed below The Bank understood that the negotiations regarding the Aircraft Sector Understanding would address any concerns by US airlines which were also involved in the negotiations Finally the Bank was also aware throughout the first decade of the 2000s that the major US airlines involved in international flights were not in a mode of purchasing new aircraft and thus that any financing advantage was theoretical only In short the Bankrsquos adoption and continued use of the ldquoexportable goods screenrdquo was eminently reasonable and based on the Bankrsquos considerable expertise with the financial dynamics of aircraft financing
Section III outlines the Bankrsquos responses to evolving Congressional requirements for the Bank to consider whether its actions would have a serious or significant adverse effect on US industry or employment The Bankrsquos responses were formulated with a view to also ensure that it remains competitive with other export credit agencies as requires by its Charter and fulfills its mission to support US jobs through exports
A The US Airline Industry Financing Dynamics 1985 to Early 2001
The Bankrsquos experience over the past 45 years since the first legislated economic impact provisions were enacted has shown that most transactions for which the Bank receives applications are not likely to result in substantial adverse economic impact on the US economy or US jobs For example most of the Bankrsquos transactions are simply too small or too localized to have any significant likelihood of having an adverse impact on US industries or jobs Other examples are transactions supporting sales of consumable goods such as pickle exports to China and transactions supporting exports to be used in a power plant in a foreign country where the power generated will never be sent to the United States to compete with domestic power producers Therefore consistent with the Bankrsquos Charter not every application is subjected to a full‐blown ldquodetailed economic impact analysisrdquo
A detailed economic impact analysis can substantially delay the processing of a transaction and jeopardize the ability of the US exporter to capture the export opportunity Given the number of transactions the Bank finances each year ndash approximately 3800 in Fiscal Year 2012 ndash the
10
Bank would not be able to accomplish its mission of promoting US exports if it were to perform a ldquodetailed economic impact analysisrdquo on every transaction or even for a significant percentage of the transactions
Recognizing the dilatory effects of conducting unnecessary detailed economic impact analyses the Bankrsquos categorical approach to the economic impact provisions of the Bankrsquos Charter has always been to screen out transactions that were not likely to have a substantial adverse effect on US industries or US jobs Ex‐Im Bankrsquos experience in this area over the decades indicates three critical determinants of whether a contemplated transaction has potential to cause substantial adverse impact
1) whether the transaction is too small to have a significant impact
2) whether the transaction involves exports that are to be used for the production of goods or provision of services which are only likely to be used locally in the foreign buyerrsquos country and
3) whether the transaction relates to an industry (eg aircraft) in which the available financing for US domestic sales indicates that Ex‐Im Bank financing for foreign sales generally would not disadvantage the US industry
In 2001 when the Bankrsquos ldquoexportable goodsrdquo screen was first adopted the Bank had substantial reason to believe that transactions resulting in services being exported by foreign countries would be unlikely to have a substantial adverse economic impact on the US services sector
The Bank had for several decades received input from trade groups industry stakeholders and other government agencies regarding the domestic adverse impact of Ex‐Im Bank financing In the Bankrsquos experience such representatives could be relied upon to notify the Bank if they were concerned that the Bankrsquos policies procedures or actions threatened to cause any harm or disruption to a specific industry or sector Concerns raised by industry representatives or the absence of any voiced concerns were a significant tool for the Bank to check the soundness of its categorical judgments as reflected in the screens
As of 2001 when the ldquoexportable goodsrdquo screen was put in place the Bank had heard no concerns about Ex‐Im Bank transactions from the US airline industry in 17 years In 1984 Pan American World Airways (Pan Am) had argued that Ex‐Im Bank support resulted in lower financing costs for foreign airlines than the US airlines could themselves obtain To assess these concerns the Bank analyzed the overall costs of financing for US domestic airlines as compared to the costs of financing to a foreign airline in an Ex‐Im Bank‐guaranteed transaction The analysis compared not just the interest rates charged by lenders in the two different scenarios but also incorporated other factors so as to produce a true ldquoapples‐to‐applesrdquo comparison of the relative financing costs
These other factors included the cost of the Ex‐Im Bank guarantee fee (which the Bank now calls the ldquoexposure feerdquo) as well as the costs of financing the portion of the purchase price that
11
was not supported by the Ex‐Im Bank guarantee The Bank analyzed all of these factors and concluded that in fact Ex‐Im Bank support did not generally result in financing terms for foreign airlines that were more favorable than the financing available to US airlines Pan Am did not contest the Bankrsquos analysis at that time or at any subsequent time Nor did any other US airline or trade group raise any concerns in the intervening 17 years leading up to the adoption of the ldquoexportable goods screenrdquo in 2001 or indeed thereafter until 2010
Between 1990 and 1999 the Bank financed 440 aircraft involving the export of US‐manufactured aircraft representing a total value of approximately $22 billion dollars Given this significant expertise in the aircraft financing sector Ex‐Im Bank had ample and consistent evidence that major US airlines flying international routes had access to more favorable financing relative to the financing available to foreign airlines through ECAs such as Ex‐Im Bank Annexed as Appendix B is a detailed history and explanation of the types of financing that were available to US airlines which in turn had led the Bank to conclude that Bank financing to foreign airlines did not pose any financial competitive harm to US airlines
In contrast to the commercial bank financing available through Ex‐Im Bank in the 1980s and 1990s the principal method used by US airlines to acquire aircraft was through a ldquoleveraged leaserdquo A leveraged lease provides significant tax benefits to an entity that wants to shelter income through additional tax deductions The entity purchases the aircraft and then leases it to the airline The purchaser continues to own the aircraft and thus can take the depreciation deductions and investment tax credits on its tax returns during the term of the lease Once the lease term is over title to the aircraft may be transferred to the airline through various mechanisms The leveraged lease was very beneficial to US airlines in several respects
a) The effective cost of a leveraged lease structure was very attractive as compared to aloan to purchase the aircraft The purchaserlessor passed a portion of the tax benefitsback to the airline by way of lower lease payments
b) In most instances the airline could finance up to 100 of the appraised or ldquomarketrdquovalue of the individual aircraft In contrast under ECA financing from Ex‐Im Bank aforeign airline could only finance up to 85 of the ldquonetrdquo or actual price In short theUS airline could finance a larger percentage of a larger amount as compared to aforeign airline purchasing the same aircraft This translated into a significant financialadvantage for the US airlines
c) Under the leveraged lease structure the repayment terms offered to US airlines wereoften 18 to 22 years In contrast Ex‐Im Bank offered much shorter 10 to 12 yearrepayment terms Longer repayment terms mean lower payments which are of coursea significant benefit
As of 2001 Ex‐Im Bank was also aware that US airlines could avail themselves of commercial market financing known originally as equipment trust certificates and later as enhanced equipment trust certificates (ldquoEETCsrdquo) An EETC is a structure whereby investors can provide financing directly through the capital markets as opposed to loan financing provided by banks The EETCs provided significant cost advantages to US airlines and were generally not available
12
to foreign airlines Even for the rare foreign EETC the terms were not as favorable as the terms available to US airlines
The EETC was premised on sect 1110 of the US Bankruptcy Code which only applied to US airlines27 Section 1110 protects a secured creditor of an airline in bankruptcy by either a)requiring the debtor airline within 60 days of the bankruptcy petition date to cure any payment defaults and stay current with loan payments or b) permitting the secured creditor to obtain possession of the creditorrsquos collateral (ie the aircraft) 60 days after the bankruptcy petition date notwithstanding the automatic stay provision that applies to creditors of other types of debtors This certainty of access to collateral ndash and thus to payment ndash provided and continues to provide decreased risk to creditors of US airlines This certainty in turn allows these creditors to provide more favorable financing terms than creditors of foreign airlines In the boom years of 2000 to 2001 US airlines raised $19 billion in the EETC market primarily to purchase new aircraft
Throughout the years leading up to the adoption of the exportable goods screen in 2001 Ex‐Im Bank aircraft financing was provided in accordance with the guidelines set forth in the Large Aircraft Sector Understanding (ldquoLASUrdquo) under the auspices of the Organization for Economic Cooperation and Development (ldquoOECDrdquo) The LASU was followed later by evolving versions of the Aircraft Sector Understanding (ldquoASUrdquo) The LASU and the ASU wereare agreements that set forth guidelines to be followed by ECAs in supporting exports of aircraft manufactured in the home country of the relevant ECA The LASUASU guidelines set forth the maximum repayment term for the financing the maximum advance rate of the financing as a percentage of the net price of the aircraft and the minimum fee that the ECA was required to charge to the airline for the ECA support These terms and conditions resulted in financing that was significantly more expensive than that which could be obtained by US airlines in the private market
In light of the foregoing the Bank reasonably believed that US airlines would not suffer any adverse economic impact from the Bankrsquos financing of foreign airlinesrsquo acquisition of US‐manufactured aircraft In other words when Ex‐Im Bank first adopted the ldquoexportable goodsrdquo screen in 2001 the Bank was confident that its use of the screen would provide efficiencies in transaction‐processing time by focusing the Bankrsquos resources on transactions that could reasonably be expected to raise substantial adverse economic impact concerns
B The US Airline Industry Financing Dynamics Late 2001 to Early 2007
The decade of the 2000s presented the global airline industry with new challenges and new
opportunities ndash both of which created problems for US airlines
27 11 USC sect1110 (2001)
13
The terrorist attacks of September 11 2001 resulted in a sudden and protracted reduction in
demand for airline passenger services This was particularly prolonged in the United States and
Europe As a result of that drop in demand as well as other financial pressures the major US
airlines began a decade‐long process of mergers28 During the 2000s the major US airlines also
were able to shed costs and debtmdasheg pensionsmdashin a way not available to foreign airlines
under the US Bankruptcy Code29
As a result of this downsizing and restructuring US airlines focused on consolidation and
survival not expansion of their fleets by purchasing new aircraft US airline purchases of new
passenger aircraft almost disappeared after 2001 reappeared briefly in 2007 and then
disappeared again until sometime in 2010 Instead of ordering new aircraft US airlines
primarily relied upon the aircraft that they had purchased with EETC financing in the 2001‐2002
period
Nonetheless the data that are available indicate that through 2007 the US airlines generally
had access to aircraft financing that was no less favorable than financing provided by ECAs such
as Ex‐Im Bank In the midst of these developments starting in 2005 the various countries and
constituencies that were involved with ECA aircraft financing began negotiating a new ASU
During negotiations of the new ASU European airlines alleged that ECA financing was more
favorable than the financing to which they had access In June 2007 a new ASU agreement was
reached The European airlines explicitly approved thus signaling that the new agreement
eliminated any ECA financing advantage At the same time none of the US airlines raised any
economic impact concerns about the new ASU As Ex‐Im Bank reviewed and revised its
Economic Impact Procedures in 2007 there were no complaints raised by US airlines or any
other parties regarding aircraft transactions Likewise the new 2007 ASU had explicitly quelled
similar concerns in Europe All of the other relevant factors that led to adoption of the
ldquoexportable goodsrdquo screen in 2001 remained true in 2007 As a result in slightly varied form
the ldquoexportable goodsrdquo screen was carried through the 2002 and 2007 economic impact
procedures
C The US Airline Industry Financing Dynamics Late 2007 to 2012
After the 2007 ASU took effect the worldwide financial crisis emerged in 2008 and had a major
impact on global financial markets including those for large aircraft purchases From mid‐2008
to the beginning of 2010 the financial markets experienced significant volatility and distress
28 These included TWA and American Airlines in 2001 America West and US Airways in 2005 Northwest Airlines and Delta Air Lines in 2008 Continental Airlines and United Airlines in 2010 and Air Tran and Southwest Airlines in 2010 American Airlines and US Air announced merger plans in 201229 Bankruptcies of the major US Airlines from 2001‐2010 included US Airways in 2002 and 2004 United Airlines in 2002 Northwest Airlines in 2005 Delta Air Lines in 2005 Frontier Airlines in 2008 Mesa Airlines in 2010 American Airlines later filed for bankruptcy protection in 2012
14
Then after a short calm in 2010 the European sovereign debt and related European banking
crises rattled financial markets from mid‐2011 to mid‐2012 The result was another period of
extreme interest rate volatility
During this period the global financial market for commercial jet aircraft had been
characterized by (a) extreme volatility in both interest rates and availability of financing and
(b) major growth in demand for aircraft by airlines in the emerging markets and resource‐rich
OECD countries At the same time (and until only recently) there was very little demand for
aircraft by US airlines
There was also a fundamental shift in the key financial tools used for aircraft purchasesmdashwith
commercial banks playing a much diminished role EETC financing from the capital markets
emerged and matured into the most favorable source of financing
As noted before in early 2010 one US airline raised concerns that the financing provided by
the Bank to Ryanair an up‐and‐coming and successful discount airline in Europe was more
favorable than the financing available to US airlines The complaining airline asserted that Ex‐
Im Bank financing to Ryanair was significantly more favorable than financing that the
complaining airline itself had received in a recent EETC offering
Ex‐Im Bank reviewed and analyzed the assertions and determined that they were flawed in that
the purported difference in financial costs ignored pertinent factors and thus did not indicate
that ECA financing would be more favorable in a true ldquoapples to applesrdquo comparison Some key
factors ignored in the analysis provided by the one US airline were
a The credit‐worthiness of the US airline in question was publically rated at B‐ which in
common investment terms puts it in the ldquojunkrdquo group of ratings Ryanair by comparison is rated as investment grade a significantly higher rating Naturally a difference in credit ratings is going to result in a difference in the cost of financing
b The US airline was re‐financing a group of 10 to 12 year old aircraft while Ryanair was
financing brand‐new aircraft In both cases the aircraft being financed formed the
collateral pool for the loan Older aircraft represent a higher risk due to the poorer
quality of collateral therefore resulting in higher costs of financing
At the same time that this US airline was raising its concerns with the Bank it was also raising
similar concerns in the context of new ASU negotiations By the end of 2010 the ECAs reached
agreement on a new ASU (the 2011 ASU) which went into effect on February 1 2011 This
agreement included a built‐in adjustment mechanism to reflect changes in the financial
markets as they occurred This was designed to ensure that ECA financing and commercial bank
financing were generally equivalent The Bank continues to monitor the 2011 ASU to ensure
that the adjustment mechanism built into that agreement does in fact generally work to
15
enforce an equilibrium between the cost of ECA aircraft financings and the financing available
to US airlines in the private market In addition this very issue continues to be a regular topic
of discussion among the ASU participant countries as well Based on the data that have been
developed and presented to date the Bank believes that the 2011 ASU properly serves its
intended function of ensuring that airlines using private market financing do not suffer a
competitive disadvantage when compared to ECA financing of aircraft under the ASU
IV Conclusion
Ex‐Im Bankrsquos exportable goods screen complied with the Bankrsquos statutory requirements to
assess the potential adverse effects of all transactions and to focus on those transactions that
were likely to result in a substantial adverse economic impact on US industry Historically
financing available to US airlines for the purchase of new wide‐body aircraft has been either
more favorable than or equally favorable as Ex‐Im Bank financing to foreign airlines for the
purchase of equivalent aircraft The exportable goods screen was an appropriate reasonable
and efficient response to the realities of aircraft financing It properly balanced the
Congressional directives to assess the likelihood of substantial economic impact on US
industry and US jobs with the need to finance transactions in an efficient manner so as to
support US exports and US jobs
November 22 2013
Export‐Import Bank of the United States 811 Vermont Ave NW Washington DC 20571
16
Appendix A
Excerpt from Staff Memorandum to Ex‐Im Bank Board of Directors Accompanying 1979
Economic Impact Procedures30
Thus Section 2(b)(1)(B) of the Act requires the Board of Directors to take into account ldquoany
serious adverse effectrdquo which loans or guarantees may have on US industry materials in short
supply and employment Section 1911 of the 1978 Amendments requires consideration by the
Bank of the extent to which a loan or financial guarantee ldquois likely to have an adverse
effecthellipeither by reducing demand for goods produced in the United States or by increasing
imports to the United Statesrdquo and Section 608 of the Appropriations Act requires a finding that
the commodity ultimately produced as a result of [Bank] financing will be in surplus when the
production comes on‐stream and that US producers of the same similar or competing
commodity will be substantially injured It is apparent that the latter two statutory provisions
are explications of the basic mandate of the Act and do not expand the Bankrsquos mandate to
examine domestic impact but rather suggest factors to be considered in that examination To
a great extent the 1978 Amendments language and the Appropriations Act provisions set forth
the same concept in different ways Thus the reference in Section 1911 of the 1978
Amendments to ldquoreducing demand for goods in the United Statesrdquo and ldquoincreasing imports to
the United Statesrdquo is no more than the inevitable consequence of a commodity being ldquoin
surplusrdquo as stated in Section 608 of the Appropriations Act
Section 2(b)(1)(B) is the broadest formulation of the basic concept since it contains the most
general language ie ldquoany serious impactrdquo and encompasses all types of exports Section
1911 is primarily procedural in nature directing the Bank not only to implement appropriate
regulations and procedures to ensure full consideration of adverse impact but also to request a
report from the International Trade Commission Section 1911 includes a more detailed
description of events which would constitute adverse impactmdashie a reduction in demand for
US produced goods or an increase in imports to the US Finally this section contains an
explicit reference to agriculture which was only implicitly covered by Section 2(b)(1)(B) It
should be noted that this is one of several references to agriculture which were added to the
Act by the 1978 Amendments
The Appropriations Act provision explicitly refers to a balancing by the Board of Directors of the
benefits of the [Bank]‐supported export against the injury to US [producers] of the commodity
in question At the same time the Act has always necessitated such a balancing by requiring
the Bank to take into account ldquoserious adverse effects upon the US economyrdquo at the same
time it carries out the Bankrsquos basic mandate to ldquofacilitate exportsrdquo and to ldquofoster expansion of
exportsrdquo Under either provision therefore the Board of Directors will be taking into
30 Memorandum ldquoProcedures Regarding Adverse Domestic Impact of Eximbank Financingrdquo Pp 7‐12 Jan 5 1979 17
consideration the results of the balancing as one of the many factors involved in making a
decision to provide financing It should be noted that Section 1911 of the 1978 Amendments is
consistent with both of these provisions since it only seeks to ensure that ldquofull considerationrdquo is
given to adverse effects upon the US economy
Section 2(b)(1)(B) of the Act refers to ldquoserious adverse effectrdquo upon the US economy as a
whole whereas Section 608 of the Appropriations Act imposes a more stringent test by
focusing on a single industry ndash the domestic producers of the commodity to be produced by the
project supported by [the Bank] ndash and requiring a determination of substantial injury for that
industry alone However a reading of the entire Section shows that such a determination
would have to be made only if the net effect upon the US economy of the project for which
support was requested from [the Bank] is negative and if the commodity is likely to be in
surplus on world markets at the time the project becomes operative In any event under
Section 2(b)(1)(B) the Board would have to take into account any serious adverse effects of the
transaction upon the US economy Only if the Board decides to proceed with the transaction
regardless of such effects would it be necessary to determine if there will be substantial injury
to US producers of the commodity and thus trigger the prohibition contained in Section 608
It should also be noted that Section 1911 of the 1978 Amendments speaks in terms only of ldquoany
adverse effectrdquo However the language of that provision clearly shows that it was not intended
to set up a substantive test but rather as was mentioned above to insure that formal
procedures to take into account impacts upon the US economy are established by [Ex‐Im
Bank] as well as to enable the Bank to obtain a report from the International Trade
Commissionrdquo PL 95‐630 92 Stat 3641 (1978)
18
Appendix B
Financial Tools Available to US Airlines
Generally over the past several decades US airlines have had access to a broad range of
aircraft financing options
Accordingly at different times during the past several decades US airlines took advantage of
whichever financing option provided the most attractive overall financing terms from such
airlinesrsquo perspective For instance a US airline would be able to maximize the amount of the
financing thereby minimizing the amount of its own money it had to invest in the aircraft (ie
the ldquodown paymentrdquo) It might also maximize the amount of money in excess of the actual cost
of the aircraft it could raise against the aircraft obtain the longest possible repayment term and
the slowest possible amortization schedule (ie the longest ldquoweighted average liferdquo) obtain
the lowest interest rate and risk premium obtain the least restrictive operational and financial
covenants provide the least amount of collateral or other security or obtain other benefits
Due to the fact that the United States is seen as not presenting any ldquocountry riskrdquo and has well‐
developed and well‐regarded legal and judicial systems that are seen as being protective of
creditorsrsquo rights US airlines have usually had access to secured aircraft financings from
commercial banks from around the world During the past several decades commercial banks
from different regions have been at the forefront of the aircraft finance industry and have
provided financing to US airlines on attractive financing terms Initially US‐based banks
provided most of the aircraft financing to US airlines but during the 1980s Japanese banks
became very significant lenders to the US airlines During the 1990s and 2000s the European
banks (German French British and Swiss banks) were the most significant source of
commercial bank funding for US airlines
In addition to commercial bank financing during the 1970s and 1980s US airlines obtained
long‐term financing from US‐based institutional investors (eg insurance companies and
pension funds) through the use of the Equipment Trust Certificate (ldquoETCrdquo) financing structure or
the Pass Through Certificate (ldquoPTCrdquo) financing structure The ETC is a financing provided by
institutional investors that is secured by one or more items of equipment (eg aircraft) The
PTC is a group of ETCs combined into a public debt security that is sold into the capital markets
to institutional investors
However during the 1980s the simplest and most prevalent form of aircraft financing for US
airlines was the US leveraged lease
The US leveraged lease allowed US airlines to take advantage of the US tax code which
generally provides for all types of capital assets to be depreciated and thereby reduces or
defers taxes due to the deductibility of tax depreciation Because US airlines generally did not 19
have sufficient income to fully take advantage of the benefit of the tax depreciation deductions
associated with acquiring aircraft the US airlines entered into US leveraged leases Under a
leveraged lease the benefits of the tax depreciation deductions related to the aircraft were
transferred to profitable companies that had income they wanted to shelter from tax In
return the company was willing to provide the equity in a US leverage lease (approximately
20 of the appraised value of the aircraft) and to ldquoleaserdquo the aircraft back to the airline for the
airlinersquos use A number of different entities entered into such leases including banks insurance
companies and other financial institutions such as Ford Motor Credit as well as finance
subsidiaries of other corporate entities including consumer product companies such as Phillip
Morris or entertainment companies such as Disney The fact that these were ldquoleveragedrdquo
leases (as opposed to ldquosingle investor leasesrdquo) also enabled the equity providers to deduct the
interest expense associated with the US leveraged lease
Through the use of a combination of lease equity and debt a US leveraged lease allowed US
airlines to arrange financing for up to 100 of the appraised value of an aircraft This was
particularly attractive to major US airlines because due to their size and relative importance
to the aircraft manufacturers every major US airline generally was able to negotiate aircraft
purchases with the aircraft manufacturers that enabled the airline to buy the aircraft for
amounts significantly less than the appraised value The result was that by using a US
leveraged lease to finance its aircraft a US airline was able to ldquoover‐financerdquo the aircraft (ie
finance the aircraft for more than the airline was paying for the aircraft) resulting in the airline
effectively having the ability each time the airline financed an aircraft to arrange 100
financing for its aircraft and at the same time arrange a long‐term working capital loan This is
the equivalent of a home buyer being able to buy a house with no money down (no down
payment) and also receiving a long‐term loan for non‐home expenses
In contrast Ex‐Im Bank‐supported aircraft financing is for only 85 (and sometimes less) of the
actual ldquonet pricerdquo that the airline is paying the US aircraft manufacturer (after deducting all
discounts and other concessions the airline has negotiated with the US aircraft manufacturer
which results in a net price that is almost always less than the appraised value) This requires
the foreign airline that is using Ex‐Im Bank support to come up with a down payment of at least
15 of the net price of the aircraft As a result US airlines were able to obtain more financing
under a US leveraged lease (without putting any money down) than foreign airlines could
under an Ex‐Im Bank supported aircraft financing (which required a down payment)
In addition US leveraged leases used by US airlines always had very long repayment terms
Generally speaking the longer the repayment the longer the tax deferral and the more
advantageous the terms of the US leveraged lease As a result it was not unusual for the US
leveraged leases used by US airlines to have a repayment term of between 18 and 22 years
and sometimes as long as 25 years The only constraint was that the lease term of the
20
leveraged lease should not exceed 80 of the economic useful life of the aircraft which in
some instances was more than 30 years
In contrast the repayment term in an Ex‐Im Bank‐supported aircraft financing is never longer
than 12 years which is the maximum repayment term Ex‐Im Bank is permitted to offer for an
aircraft financing under the guidelines for export credits promulgated by the Organization for
Economic Cooperation and Development (the ldquoOECDrdquo) with which guidelines the US
Government (including Ex‐Im Bank) has agreed to abide This difference in repayment terms is
significant it is similar to the difference in monthly payments under a 15 year home mortgage
versus a 30 year home mortgage As a result US airlines were able to obtain significantly
longer financing under a US leveraged lease (which generally resulted in a smaller periodic
principal repayment burden due to the longer repayment term) than foreign airlines could
under an Ex‐Im Bank‐supported financing
US leveraged leases used by US airlines also had a slower amortization profile with a very
long weighted average life (ie small amounts of debt amortization in the early years of the
financing) of at least 10 years In the same manner that a longer repayment term increased the
tax deferral a longer weighted average life also increased the tax deferral
In contrast the amortization profile in an Ex‐Im Bank supported aircraft financing for a foreign
airline is usually between 6 years and 65 years (at least 4 years shorter than the weighted
average life of the US leveraged leases historically used by US airlines) which imposes a
much greater cash flow burden on the foreign airline in comparison with the cash flows
required of a US airline under a US leveraged lease
Although the absolute interest rate on the debt in a US leveraged lease fluctuated over time
with the overall level of interest rates the providers of the debt into these US leveraged leases
(primarily insurance companies and other institutional investors) were generally willing to
accept an interest rate margin of less than 100 basis points31 over LIBOR32 on a fixed rate
equivalent basis (and sometimes significantly less than 100 basis points)
In contrast the interest rate margin on the debt on an Ex‐Im Bank‐supported aircraft financing
was generally between a few basis points over LIBOR to 50 basis points over LIBOR because the
interest on the Ex‐Im Bank‐guaranteed aircraft financing is guaranteed by Ex‐Im Bank and
reflects the low risk associated with a US Government guaranteed loan However the interest
rate margin on an Ex‐Im Bank‐guaranteed aircraft financing does not reflect the Ex‐Im Bank
exposure fee (or risk premium) that is paid to Ex‐Im Bank in view of the underlying risk of the
foreign airline The minimum exposure fee charged by Ex‐Im Bank was 2 during the 1980s
31 100 basis points equals 1 percent 32 LIBOR is the London Inter‐Bank Offering Rate and is a common reference rate such as ldquoPrimerdquo or ldquoTreasury Raterdquo used in adjustable interest rate transactions
21
and early 1990s and 3 until 2007 when the OECD promulgated a new set of guidelines for
export credits for aircraft (known as the ldquo2007 Aircraft Sector Understandingrdquo or the ldquo2007
ASUrdquo) This exposure fee was required to be paid ldquoup frontrdquo ndash ie at the inception of the loan
On a per annum basis this equates to between 30 basis points and 50 basis points which
should be added to the interest rate margin received by the guaranteed lender to obtain the
equivalent interest rate paid by a foreign airline under Ex‐Im Bank‐supported financing (for
purposes of comparing the overall financing cost to those incurred by US airlines) The Ex‐Im
Bank exposure fee is similar to a homeowner having to pay ldquopointsrdquo up front at the time he
obtains his mortgage The effect of paying points up front and paying an Ex‐Im Bank exposure
fee effectively increases the cost of the financing In comparing the overall cost of financing
through ECA support including the exposure fee to the overall cost of a leveraged lease for
borrowers with comparable credit profiles the overall cost of the US leveraged lease was
considerably more favorable than what could be achieved through an Ex‐Im Bank‐supported
aircraft financing
Although the US leveraged lease was itself a very attractive financing structure for US
airlines at different times the basic US leveraged lease was made even more attractive due to
other provisions of the US and foreign tax codes
For instance from the 1960s (during the Kennedy Administration) until its repeal under the Tax
Reform Act of 1986 the US tax code provided for an investment tax credit which was intended
to encourage investment in capital goods and therefore allowed airlines or the equity investor
in a US leveraged lease to get a credit against the taxes it would otherwise be required to pay
This credit was a permanent reduction in taxes paid as opposed to only the deferral of taxes
(postponement of when taxes had to be paid) that could be achieved through the use of the
US leveraged lease
Similarly from the 1980s to the mid‐1990s it was common for a US airline to combine a US
leveraged lease with a lease into a foreign jurisdiction that had a ldquoform over substancerdquo
approach to its tax code (as opposed to the United States which has a ldquosubstance over formrdquo
approach to its tax code) Taking advantage of the disparity a US airline could ldquosellrdquo the
aircraft to both (i) an equity investor in the United States and (ii) an equity investor in a foreign
country such as Japan Germany or Hong Kong and each equity investor could depreciate the
same aircraft and therefore shelter its respective income Over time due to changes in the
respective tax codes these more aggressive tax advantaged cross‐border leasing structures
(ldquoDouble Dipsrdquo and even on occasion ldquoTriple Dipsrdquo) were disallowed but not before US airlines
financed billions of dollars of aircraft using such tax advantaged leasing structures
During the 1990s the basic US leveraged lease was made even more attractive by taking
advantage of another provision of the US tax code that allowed additional US taxes to be
22
deferred if the equity investor in the transaction used an offshore subsidiary that qualified as a
Foreign Sales Corporation (ldquoFSCrdquo) under the US tax code and structured the deal as a
Commission FSC
In addition during the 1980s and 1990s US airlines had access to other sources of financing
with overall financing terms that were much more attractive than what was available to foreign
airlines via Ex‐Im Bank‐supported export credits For example during the late 1980s and 1990s
Airbus made its first significant sales to US airlines In order to do so Airbus arranged and
provided very attractive and flexible financing terms to US airlines to encourage them to
purchase European‐manufactured Airbus aircraft instead of US‐manufactured Boeing or
McDonnell Douglas aircraft The US airlines were more than willing to accept these incentives
During this period some US airlines entered into ldquowalk awayrdquo leases of Airbus aircraft
pursuant to which Airbus North America (backed by the joint and several guarantees of each of
the four countries that are members of Airbus SAS) entered into a US leveraged lease of the
Airbus aircraft and then subleased the aircraft to a US airline on terms that (i) passed along
most of the tax benefits to the US airline through lower lease rentals and (ii) permitted the
US airline to terminate the sublease and simply ldquowalk awayrdquo from the lease upon a relatively
short notice period
Under the ldquoHome Market Rulerdquo the European export credit agencies (including those of
France Germany and the United Kingdom) that usually support the financing of Airbus aircraft
could not provide such support to US airlines Therefore Airbus arranged for Kreditanstalt fur
Wiederaufbau the development bank of Germany to provide very attractive financing for the
Airbus aircraft being acquired by US airlines These financings occurred on terms much more
favorable (with 18‐ to 22‐year repayment terms) than what export credit agencies could
provide (with a maximum repayment term of 12‐years)
Similarly during the 1990s US airlines began to acquire a large number of 35 to 50 seat
regional jet aircraft manufactured by Bombardier of Canada and Embraer of Brazil Many of
these aircraft were acquired by the US airlines by using export credit support from Canada and
Brazil Some of the financing terms (ie the repayment terms) of these Brazilian and Canadian
government‐supported export credit financings were even more attractive (15‐ to 18‐year
repayment terms) than what was available from the export credit agencies of France Germany
and the United Kingdom with respect to Airbus aircraft or from Ex‐Im Bank with respect to
Boeing aircraft (10‐ to 12‐year repayment terms)
To make the financing of Canadian‐manufactured Bombardier regional jets even more
attractive to US airlines the province of Quebec (where Bombardier has its headquarters)
through Investment Quebec provided additional aircraft financing support to the US airlines
23
Finally to the extent even more attractive financing was needed to convince US airlines to
purchase Canadian or Brazilian‐manufactured regional aircraft the manufacturers themselves
provided residual value guarantees with respect to such aircraft to the airline or to the
financiers (ie to the equity investor in a US leveraged lease or the creditors financing the
aircraft)
The next major development in aircraft financing used by US airlines was the development in
the 1990s of the Enhanced Equipment Trust Certificate (ldquoEETCrdquo) which was an ETC with certain
structural enhancements The most important of these enhancements is a liquidity facility to
ensure that if there is a default the financiers would continue to receive current interest
during the period of time while the aircraft is being repossessed and remarketed A key
element in the development of the EETC was the existence of Section 1110 of the US
Bankruptcy Code which gives a type of ldquopreferred creditorrdquo status to financiers of aircraft for
US airlines This ldquopreferred creditorrdquo status exempts aircraft financiers of US airlines from
the automatic stay generally imposed following a bankruptcy filing by a borrower subject to the
protections of the US Bankruptcy Code Section 1110 of the US Bankruptcy Code
accomplishes this by requiring the airline within 60 days of such bankruptcy filing to either (i)
resume payments under the originally agreed aircraft financing or (ii) return the aircraft to the
financier
The first EETC was done in 1994 and the practice has now been successfully used by almost
every major US airline including Alaska Airlines America West Airlines American Airlines
Continental Airlines Delta Airlines Hawaiian Airlines Jet Blue Airlines Northwest Airlines
Southwest Airlines United Airlines and US Airways The overall financing cost of a US airline
acquiring an aircraft through the use of the EETC ndash which includes the amount of financing
repayment term amortization profile effective cost of the financing etc ndash has generally been
significantly more attractive than (i) what such US airline could have achieved under an export
credit‐supported aircraft financing for such airline and (ii) what a similarly rated foreign airline
could have achieved under an export credit‐supported aircraft financing
This is particularly true for the financing of new aircraft The development of the EETC market
provided enormous financing flexibility to US airlines for the financing of new aircraft the
EETC provided the airline with the option to finance on a simple secured mortgage basis or the
US airline could opt for a leveraged lease with all of the benefits associated with a leveraged
lease described above
Beginning in 1997 US airlines had the ability to raise money in the capital markets when the
overall financing terms were most attractive They were able to ldquolock‐inrdquo such favorable
financing terms to fund new aircraft that were scheduled to be delivered in the future by
issuing a ldquopre‐fundedrdquo EETC These pre‐funded EETCs were used to great success by US
24
airlines in the late 1990s through 2001 a period in which the US airlines were taking delivery
of a significant number of aircraft
As a result of the downturn in the US airline industry following the September 11 2001
terrorist attacks many US airlines deferred or cancelled their orders for new aircraft This
reduced the need for US airlines to finance new aircraft when the financing terms available to
such US airlines via the EETC were not as favorable due to (i) the perceived increased credit
risks of the US airline industry following the September 11 terrorist attacks and (ii) the
temporary disequilibrium in the credit markets following the 200820092010 credit crisis
Now that the US airlines have once again begun to take delivery of a significant number of
new aircraft the pre‐funded EETC continues to be the preferred source of financing for US
airlines as evidenced by the number and amount of EETC issuances during 2012 and 2013
Based on an analysis of the EETC transactions occurring during 2012 and 2013 EETCs are once
again generally considered to provide more attractive overall financing terms than what could
be achieved by an airline under an export credit‐supported financing done under the terms of
the 2011 Aircraft Sector Understanding
25
GLOSSARY
ldquoAdverse Economic Impactrdquo is the short‐hand term used to refer to any serious negative effects on US industries or US jobs as set forth in the Bankrsquos Charter that result from Ex‐Im Bank loans guarantees or insurance The Bankrsquos Charter contains three provisions that address adverse economic impact found at 12 USC sectsect 635(b)(1) 635a‐2 635(e)
ldquoAir Indiardquo is an airline owned by the Government of the Republic of India ldquoAir India Transactionsrdquo are the two final commitments approved by Ex‐Im Bank on September
30 2011 for loan guarantees for the purchase of a number of 787 ldquoDreamlinerrdquo aircraft from Boeing and to be financed by a commercial lender not identified at the time As of the date of this paper Ex‐Im Bank has not issued any of its loan guarantees but is expected to do so in the coming months Ten of the aircraft involved in these two final commitments have been delivered to Air India and are in use by Air India on routes outside the United States The deliveries of the ten aircraft were made using private short‐term financing as to which Ex‐Im Bank had no involvement
ldquoAirbusrdquo Airbus SAS is a Europe‐based manufacturer of large commercial aircraft Airbus is the only competitor to Boeing the US manufacturer Airbus sales are supported by the ECAs of Germany France and the UK
ldquoAircraft Sector also known as the ASU is an agreement among members of the OECD Understandingrdquo that manufacture aircraft and Brazil The ASU requires that Export
Credit Agencies that support the export of aircraft follow certain rules and restrictions that set forth the most favorable terms that can be provided These rules and restrictions include the Export Credit Agency must charge a minimum risk premium which is determined by the ASU the term of any loan made by or supported by the Export Credit Agency for the purchase of aircraft cannot exceed 12 years the Export Credit Agency today can lend or guarantee only up to 85 of the actual purchase price of the aircraft being exported and the use of risk mitigants The ASU was preceded by the Large Aircraft Sector Understanding which governed these issues until the enactment of the 2007 ASU The ASU was again updated and revised in 2011 (See also the Large Aircraft Sector Understanding)
ldquoArrangementrdquo is the agreement among Export Credit Agencies governing the terms by which they will provide loans guarantees or insurance in support of exports from their respective countries Among other things the Arrangement requires Export Credit Agencies to charge a minimum risk premium which is governed by the Arrangement See also Organization for Economic Cooperation and Development
ldquoASUrdquo see Aircraft Sector Understanding ldquoAverage Weighted Liferdquo for purposes of this paper refers to the average number of years that
each dollar of unpaid principal on a loan remains outstanding For example a loan with equal principal payments throughout the loan term will have an average weighted life close to the middle of the whole loan term
26
ldquoBank Actrdquo is the Export‐Import Bank Act of 1945 12 USC sect635 as amended ldquoBank Advisory Committeerdquo is the official Advisory Committee of the Bank appointed in accordance
with the Bank Act and the Advisory Committee Act The Bank Advisory Committee is comprised of representatives of various industry and market sectors as well as representatives of labor and international trade experts
ldquoBasis pointsrdquo are a numerical measure applied to interest rates One basis point equals 1100th of one percent or 100 basis points equals one percent
ldquoCapital Equipmentrdquo is equipment used to manufacture a product provide a service or sell store or deliver merchandise A wide‐body aircraft is a piece of capital equipment
ldquoCharterrdquo is the Bank Act as well the provisions of the Export Import Bank Reauthorization Act of 2012 (Public Law 112‐122) that are not codified in the Bank Act
ldquoDreamlinerrdquo is the name given to a Boeing 787 wide‐body commercial aircraft ldquoECArdquo see Export Credit Agencies ldquoEconomic Impact Proceduresrdquo
are procedures adopted by Ex‐Im Bank to assess whether transactions supported by the Bank cause a serious adverse economic impact to US industries and US jobs See also Adverse Economic Impact
ldquoEETCrdquo see Enhanced Equipment Trust Certificate ldquoEnhanced Equipment Trust Certificaterdquo
also known as an EETC is a type of secured bond issued by a borrower in the capital markets The EETC is secured by the equipment being purchased with the proceeds of the bond issuance EETCs are used primarily for aircraft and since the late 1990s has been the dominant financing tool used by US airlines to purchase aircraft Section 1110 of the US Bankruptcy Codemdashwhich allows creditors of aircraft borrowers to obtain their collateral within 60 days if the payments on their debt is not current ndash has provided creditors of US airlines a level of comfort not available to creditors of foreign airlines until recently This generally provided US airlines with a significant financial advantage vis a vis their foreign competitors Recently the adoption of the Cape Town Convention and the related Aircraft Equipment Protocol has provided creditors of foreign airlines with protections similar to the protections provided by section 1110 of the US Bankruptcy Code Recently this has led to the beginnings of an international EETC market
ldquoEquipment Trust Certificaterdquo
also known as an ETC was the predecessor to the Enhanced Equipment Trust Certificate
ldquoETCrdquo see Equipment Trust Certificate ldquoEx‐Im Bankrdquo or ldquoBankrdquo See The Export‐Import Bank of the United States ldquoExport Credit Agenciesrdquo are agencies or ministries of government that have the official role of
providing loans guarantees or insurance in support of exports from their respective countries or in support of exports by sales of companies from their respective countries Ex‐Im Bank is the official Export Credit Agency of the United States of America
ldquoexportable goods screenrdquo is a screen or filter adopted by Ex‐Im Bank in its 2001 Economic Impact Procedures The exportable goods screen is utilized along with other screens to balance the Bankrsquos obligation to consider the adverse
27
economic effects of its transactions on US industries and US jobs with the Bankrsquos mandate to support US export transactions in a timely manner so as to fully support the exporterrsquos business opportunity The exportable goods screen filtered out transactions that supported exports which could only be used by a foreign buyer to provide services rather than produce goods
ldquoExport‐Import Bank of the is an independent agency of the Federal Government of the United United Statesrdquo States of America Also known as ldquoEx‐Im Bankrdquo Ex‐Im Bankrsquos mission
is to support US jobs by supporting US exports See 12 USC 635 et seq
ldquoExposure Feerdquo is the risk premium charged by Ex‐Im Bank in exchange for its guarantee in certain transactions The exposure fee must be at least equal to the minimum risk premium required by the terms of the Arrangement and the Aircraft Sector Understanding
ldquoForeign Sales Corporationrdquo is a company created under the terms of a former provision of the US Internal Revenue Code Foreign Sales Corporations received significant tax benefits
ldquoFSCrdquo see Foreign Sales Corporation ldquoInvestment Tax Creditrdquo is a credit permitted under the US Internal Revenue Code for the
purchase of certain types of equipment in certain circumstances See also Leveraged Leases
ldquoKFWrdquo the development bank for the Federal Republic of Germany KFW is an Export Credit Agency but it also operates through a ldquomarket windowrdquo which is not subject to the Home Market Rule Thus KFW provides support to Airbus for its sales of aircraft to US airlines The United States does not have an equivalent institution and Ex‐Im Bank does not have a ldquomarket windowrdquo
ldquoLarge Aircraft Sector also known as LASU was the predecessor to the Aircraft Sector Understandingrdquo Understanding The LASU governed the same general issues as are set
forth in the Aircraft Sector Understanding except that the minimum risk premium was lower than that required in the 2007 ASU and 2011 ASU When the 2007 ASU was enacted grandfathering provisions allowed ECA‐supported financing for a limited number of aircraft to be governed by LASU
ldquoLASUrdquo see Large Aircraft Sector Understanding ldquoLeveraged Leaserdquo is a lease of equipment and is designed to allow the lessor to take
advantage of certain tax code provisions such as the depreciation deduction and the investment tax credit while allowing the lessee to obtain the equipment involved at a significantly lower cost Leveraged Leases were a very popular means for US airlines to acquire aircraft throughout the 1980s and 1990s The value of the tax deductions to the lessor were significant so that the implicit interest rate in the lease payments by the US airline were extremely low Usually the US airline did not have sufficient profit to take advantage of the favorable tax code provisions By using a leveraged lease another company that could shelter income by using the tax code provisions would buy the equipment and lease the equipment to the US airline Usually at the end of the lease term the US airline would purchase the aircraft
28
ldquoLIBORrdquo is the London Inter‐bank Offering Rate It is commonly used as a reference rate in loan transactions that have floating or adjustable interest rates LIBOR reflects the rate at which banks will lend money to each other LIBOR is set for various loan terms (eg 3 months 6 months etc) and is widely published making it a convenient rate to use as a reference rate
ldquoNet pricerdquo is the price paid after all discounts have been deducted The net price is the actual price paid for a piece of equipment In aircraft transactions pursuant to the ASU Ex‐Im Bank will only support up to 85 of the net price of an aircraft EETC transactions on the other hand often support the nominal purchase price of an aircraft and thus result in a significantly higher amount financed
ldquoOECDrdquo see the Organization for Economic Cooperation and Development Open Skies Agreement Is a type of bilateral agreement between countries that govern the
rights of airlines from the two countries to fly into the other country Open Skies Agreements generally allow free access to fly as many routes to a country as an airline may choose but then usually restrict the ability to fly within the other country Generally it is a ldquofly in and outrdquo rule although there are exceptions
ldquoOrganization for Economic Cooperation and Developmentrdquo
also known as the OECD is an organization comprised of 34 member countries that work together to promote development The United States is a member With regard to Ex‐Im Bank the OECD is the organization through which the US Government negotiates an agreement among Export Credit Agencies known as the Arrangement and the ASU (and its predecessor the LASU)
ldquoPass Through Certificaterdquo also known as a PTC is a group of Equipment Trust Certificates pooled together to form the basis for a bond issuance
ldquoPTCrdquo See Pass Through Certificate ldquoRyanairrdquo is a low‐cost Irish airline that began business after European
deregulation of airlines in 1997 Ryanair rapidly expanded during the first decade of the 2000s creating significant competition for other airlines
ldquoScreensrdquo are a type of filter used by Ex‐Im Bank in its Economic Impact Procedures Screens are designed to identify those transactions which are not likely to cause an adverse economic impact to US industries or US jobs so that such transactions can be processed more quickly and efficiently as required by the Bank Act
ldquoSubstantial Injuryrdquo is a term defined in Ex‐Im Bankrsquos Charter to be applied in connection with the Bankrsquos economic impact procedures 12 USC sect635(e)(4) The Charter states ldquohellipthe extension of any credit or guarantee by the Bank will cause substantial injury if the amount of the capacity for production established or the amount of the increase in such capacity expanded by such credit or guarantee equals or exceeds 1 percent of United States productionrdquo
ldquoTPCCrdquo see Trade Promotion Coordinating Committee ldquoTrade Promotion Coordinating Committeerdquo
also known as the TPCC is an interagency committee of the US Government chaired by the Secretary of Commerce It was established under the Export Enhancement Act of 1992 to provide a
29
unifying framework to coordinate the export promotion and export financing activities of the US government and to develop a government‐wide strategic plan for carrying out such programs
ldquoTrade Sanctionsrdquo refers to any of a number of sanctions imposed by the US Government against companies countries industries or products usually as a result of an accusation of adjudication of a violation of an international trade agreement The Bank Act requires Ex‐Im Bank to take certain trade sanctions into account in its economic impact procedures
30
Table A ndash Congressional Actions and Ex-Im Bank Responses
Year Congressional Action Ex‐Im Bank Response
1968 Bank directed to take into account the possible adverse effect [of its loans and guarantees] upon the United States economy
Bank adds this transactions
factor to analysis of
1975 1 Standard refined to take into account any serious adverse effect of loans and guarantees on competitive position of US industry availability of scarce materials in US and employment in US
2 Bank directed to be competitive with rates terms and conditions offered by principal countries whose exporters compete with US exporters
3 Bank directed to submit semi‐annual report on competitiveness and conduct survey of US exporters and lenders to determine experience in meeting financing competition
Bank adds these of transactions
considerations to analysis
Year Congressional Action Ex‐Im Bank Response
1978 ‐ 1979
1 Bank directed to take into account any serious adverse effect of loans on competitive position of US industry and scarce materials Bank directed to emphasize strengthening competitive position of US exporters and expanding total US exports
2 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [From Appropriations Act Restated in Bank Charter in 1986]
3 Bank directed to implement regulations and procedures to insure full consideration of extent to which loan or guarantee is likely to have adverse effect on industries and employment in US either by reducing demand for US produced goods or increasing imports to the US
Bank develops framework and set of written economic impact procedures
1 Exclude exports the use of which remained localized in foreign country This
is first ldquoforeign localized goods and services screenrdquo
2 ldquoIntent and stimulus for projectrdquo examined to determine likelihood of substantial adverse economic impact Does transaction involve ldquorunaway industryrdquo
(leaving US for cheaper foreign labor)
3 Does export of capital equipment result in ldquobuy backrdquo of product being imported into the US
4 Is net impact on US economy and jobs positive or negative and to what degree
32
Year Congressional Action Ex‐Im Bank Response
1986 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [Originally from 1978 Appropriations incorporated into Bank Charter in 1986]
Senate Report recognizes knowledge and experience of Bank and need to respond to exportersrsquo requests for support in a timely and confidential fashion Economic impact procedures are to be practical and workable and not reduce Bankrsquos competitiveness and flexibility nor ignore positive aspects of export sale
Bank develops ldquoSummary of Adverse Economic Guidelinesrdquo to be applied to both
goods and services (a) is commodity to be produced surplus or likely to compete with US‐produced surplus (b) will Bankrsquos
assistance cause substantial injury to US producers of competing commodity (c)
will injury to US producers of competing commodity outweigh the short‐ and long‐
term benefits to US industry and employment If answer is no then no
further economic impact analysis
1988 Congress establishes test for ldquosubstantial injuryrdquo if the amount of capacity for production established or amount of increase in such capacity expanded by Bankrsquos credit or guarantee exceeds 1 of US production
Bankrsquos Board recognizes requirement to balance (a) possibility of substantial harm
to US production and employment with (b) being responsive competitive and efficient New economic impact procedures ask (a) will the project be in direct competition with US production (b) is the Bankrsquos support significantly associated with the project (c) will the output of the project
cause substantial injury to US producers of the same similar or competing
commodity If answer is no then no further economic impact analysis is required
33
Year Congressional Action Ex‐Im Bank Response
1998 Bank revised procedures involving countries against which trade sanctions were pending or imposed
2001
2006 ‐2007
1 Bank required to determine whether extension of credit or guarantee is likely to produce same or other commodities and whether the production may cause substantial injury to US producers
2 Bank prohibited from providing a loan or guarantee that will facilitate circumvention of trade law order or determination
3 Bank required to designate sensitive commercial sectors and products for which Bank financing deemed unlikely due to potential for adverse economic impact on US
4 Bank required to aggregate financial thresholds on rolling 24‐month basis
Bank develops ldquoexportable goods screenrdquo Does Ex‐Im Bank support result in production of exportable good from the foreign buyerrsquos country If not no further economic impact analysis is required Notice and request for comments were published in the Federal Register US airline industry did not respond
Bank issues 2007 Economic Impact Procedures ldquoExportable goods screenrdquo is modified Will the transaction (capital goods and services) result in either new or additional production capacity of an exportable good
34
9 2006 ndash Congress Further Amends the Charter
In 2006 Congress made several substantive changes to the Bankrsquos Charter Among these were
‐ A requirement to determine whether the extension of a credit or guarantee is likely to result in the production of the same or similar commodities and whether such production may cause substantial injury to US producers
‐ A prohibition against providing a loan or guarantee that will facilitate the circumvention of any trade law order or determination
‐ A requirement for the Bank to designate sensitive commercial sectors and products for which the Bank is not likely to provide financing due to strong potential for adverse economic impact on US industry and
‐ A requirement to aggregate financial thresholds for purposes of assessing economic impact or otherwise on a rolling 24‐month basis24
In addition Congress added certain notice‐and‐comment requirements that apply ldquoif the Bank intends to conduct a detailed economic impact analysis or similar studyrdquo25
10 2007 ndash The Bank Responds to New Congressional Requirements with the 2007 Economic Impact Procedures
In response to the 2006 changes to the Charter the Bank modified its economic impact procedures The ldquoexportable goodsrdquo screen was amended to read
ldquoThe first stage of the economic impact analysis is to determine if the exports involved in a transaction will result in the production of an exportable good Therefore only exports of capital goods and services (eg manufacturing equipment licensing agreements) that will result in the foreign production of an exportable good are subject to further economic impact analysis in Stage II of these procedures The capital goods and services exports may be associated with new foreign production capacity or existing production capacity (eg applicable exports include replacement equipment in an existing production facility to maintain existing production capacity)rdquo26
Thus beginning with its first set of Economic Impact Procedures in 1968 and continuing through to 2007 the Bank has consistently made use of various kinds of filters or screens to remove those categories of transactions that are unlikely to produce a substantial adverse impact on domestic industry from detailed economic impact analysis This approach has allowed unaffected transactions to proceed without delay so that the Bank may capture the export opportunity Finally use of the screens has enabled the Bank to concentrate its resources on transactions that are more likely to cause substantial adverse economic impact
24 PL 109‐438 120 Stat 3268 (2006) 25 Id 26 Memorandum to Board of Directors Policy Analysis Div ldquoRevisions to Economic Impact Proceduresrdquo P 9 April 4 2007
9
III Discussion How the Bankrsquos Economic Impact Procedures and Exportable Goods Screen Satisfy the Requirements of the Bankrsquos Charter
In remanding the matter to the Bank the Court of Appeals required the Bank to provide a reasonable explanation to justify its use of the ldquoexportable goods screenrdquo The use of the ldquoexportable goods screenrdquo properly satisfies the various requirements of the Bankrsquos Charter When the screen was adopted the Bank knew that US airlines the industry most likely to be affected generally had access to financing at costs that were significantly more favorable than the cost of aircraft financing provided by the Bank For this very reason the Bank had not heard any economic impact concerns from any US airlines in the 17 years prior to the adoption of the screen Indeed the screen was in place for almost a decade before any US airline raised any questions about it When a single US airline did raise questions about the Bankrsquos financing to foreign airlines the analysis it submitted to the Bank did not support its claim that the Bankrsquos financing provided a financing cost advantage to foreign airlines Moreover the complaint was raised at a time and in the context of negotiations by export credit agencies (ldquoECAsrdquo) regarding the Aircraft Sector Understanding discussed below The Bank understood that the negotiations regarding the Aircraft Sector Understanding would address any concerns by US airlines which were also involved in the negotiations Finally the Bank was also aware throughout the first decade of the 2000s that the major US airlines involved in international flights were not in a mode of purchasing new aircraft and thus that any financing advantage was theoretical only In short the Bankrsquos adoption and continued use of the ldquoexportable goods screenrdquo was eminently reasonable and based on the Bankrsquos considerable expertise with the financial dynamics of aircraft financing
Section III outlines the Bankrsquos responses to evolving Congressional requirements for the Bank to consider whether its actions would have a serious or significant adverse effect on US industry or employment The Bankrsquos responses were formulated with a view to also ensure that it remains competitive with other export credit agencies as requires by its Charter and fulfills its mission to support US jobs through exports
A The US Airline Industry Financing Dynamics 1985 to Early 2001
The Bankrsquos experience over the past 45 years since the first legislated economic impact provisions were enacted has shown that most transactions for which the Bank receives applications are not likely to result in substantial adverse economic impact on the US economy or US jobs For example most of the Bankrsquos transactions are simply too small or too localized to have any significant likelihood of having an adverse impact on US industries or jobs Other examples are transactions supporting sales of consumable goods such as pickle exports to China and transactions supporting exports to be used in a power plant in a foreign country where the power generated will never be sent to the United States to compete with domestic power producers Therefore consistent with the Bankrsquos Charter not every application is subjected to a full‐blown ldquodetailed economic impact analysisrdquo
A detailed economic impact analysis can substantially delay the processing of a transaction and jeopardize the ability of the US exporter to capture the export opportunity Given the number of transactions the Bank finances each year ndash approximately 3800 in Fiscal Year 2012 ndash the
10
Bank would not be able to accomplish its mission of promoting US exports if it were to perform a ldquodetailed economic impact analysisrdquo on every transaction or even for a significant percentage of the transactions
Recognizing the dilatory effects of conducting unnecessary detailed economic impact analyses the Bankrsquos categorical approach to the economic impact provisions of the Bankrsquos Charter has always been to screen out transactions that were not likely to have a substantial adverse effect on US industries or US jobs Ex‐Im Bankrsquos experience in this area over the decades indicates three critical determinants of whether a contemplated transaction has potential to cause substantial adverse impact
1) whether the transaction is too small to have a significant impact
2) whether the transaction involves exports that are to be used for the production of goods or provision of services which are only likely to be used locally in the foreign buyerrsquos country and
3) whether the transaction relates to an industry (eg aircraft) in which the available financing for US domestic sales indicates that Ex‐Im Bank financing for foreign sales generally would not disadvantage the US industry
In 2001 when the Bankrsquos ldquoexportable goodsrdquo screen was first adopted the Bank had substantial reason to believe that transactions resulting in services being exported by foreign countries would be unlikely to have a substantial adverse economic impact on the US services sector
The Bank had for several decades received input from trade groups industry stakeholders and other government agencies regarding the domestic adverse impact of Ex‐Im Bank financing In the Bankrsquos experience such representatives could be relied upon to notify the Bank if they were concerned that the Bankrsquos policies procedures or actions threatened to cause any harm or disruption to a specific industry or sector Concerns raised by industry representatives or the absence of any voiced concerns were a significant tool for the Bank to check the soundness of its categorical judgments as reflected in the screens
As of 2001 when the ldquoexportable goodsrdquo screen was put in place the Bank had heard no concerns about Ex‐Im Bank transactions from the US airline industry in 17 years In 1984 Pan American World Airways (Pan Am) had argued that Ex‐Im Bank support resulted in lower financing costs for foreign airlines than the US airlines could themselves obtain To assess these concerns the Bank analyzed the overall costs of financing for US domestic airlines as compared to the costs of financing to a foreign airline in an Ex‐Im Bank‐guaranteed transaction The analysis compared not just the interest rates charged by lenders in the two different scenarios but also incorporated other factors so as to produce a true ldquoapples‐to‐applesrdquo comparison of the relative financing costs
These other factors included the cost of the Ex‐Im Bank guarantee fee (which the Bank now calls the ldquoexposure feerdquo) as well as the costs of financing the portion of the purchase price that
11
was not supported by the Ex‐Im Bank guarantee The Bank analyzed all of these factors and concluded that in fact Ex‐Im Bank support did not generally result in financing terms for foreign airlines that were more favorable than the financing available to US airlines Pan Am did not contest the Bankrsquos analysis at that time or at any subsequent time Nor did any other US airline or trade group raise any concerns in the intervening 17 years leading up to the adoption of the ldquoexportable goods screenrdquo in 2001 or indeed thereafter until 2010
Between 1990 and 1999 the Bank financed 440 aircraft involving the export of US‐manufactured aircraft representing a total value of approximately $22 billion dollars Given this significant expertise in the aircraft financing sector Ex‐Im Bank had ample and consistent evidence that major US airlines flying international routes had access to more favorable financing relative to the financing available to foreign airlines through ECAs such as Ex‐Im Bank Annexed as Appendix B is a detailed history and explanation of the types of financing that were available to US airlines which in turn had led the Bank to conclude that Bank financing to foreign airlines did not pose any financial competitive harm to US airlines
In contrast to the commercial bank financing available through Ex‐Im Bank in the 1980s and 1990s the principal method used by US airlines to acquire aircraft was through a ldquoleveraged leaserdquo A leveraged lease provides significant tax benefits to an entity that wants to shelter income through additional tax deductions The entity purchases the aircraft and then leases it to the airline The purchaser continues to own the aircraft and thus can take the depreciation deductions and investment tax credits on its tax returns during the term of the lease Once the lease term is over title to the aircraft may be transferred to the airline through various mechanisms The leveraged lease was very beneficial to US airlines in several respects
a) The effective cost of a leveraged lease structure was very attractive as compared to aloan to purchase the aircraft The purchaserlessor passed a portion of the tax benefitsback to the airline by way of lower lease payments
b) In most instances the airline could finance up to 100 of the appraised or ldquomarketrdquovalue of the individual aircraft In contrast under ECA financing from Ex‐Im Bank aforeign airline could only finance up to 85 of the ldquonetrdquo or actual price In short theUS airline could finance a larger percentage of a larger amount as compared to aforeign airline purchasing the same aircraft This translated into a significant financialadvantage for the US airlines
c) Under the leveraged lease structure the repayment terms offered to US airlines wereoften 18 to 22 years In contrast Ex‐Im Bank offered much shorter 10 to 12 yearrepayment terms Longer repayment terms mean lower payments which are of coursea significant benefit
As of 2001 Ex‐Im Bank was also aware that US airlines could avail themselves of commercial market financing known originally as equipment trust certificates and later as enhanced equipment trust certificates (ldquoEETCsrdquo) An EETC is a structure whereby investors can provide financing directly through the capital markets as opposed to loan financing provided by banks The EETCs provided significant cost advantages to US airlines and were generally not available
12
to foreign airlines Even for the rare foreign EETC the terms were not as favorable as the terms available to US airlines
The EETC was premised on sect 1110 of the US Bankruptcy Code which only applied to US airlines27 Section 1110 protects a secured creditor of an airline in bankruptcy by either a)requiring the debtor airline within 60 days of the bankruptcy petition date to cure any payment defaults and stay current with loan payments or b) permitting the secured creditor to obtain possession of the creditorrsquos collateral (ie the aircraft) 60 days after the bankruptcy petition date notwithstanding the automatic stay provision that applies to creditors of other types of debtors This certainty of access to collateral ndash and thus to payment ndash provided and continues to provide decreased risk to creditors of US airlines This certainty in turn allows these creditors to provide more favorable financing terms than creditors of foreign airlines In the boom years of 2000 to 2001 US airlines raised $19 billion in the EETC market primarily to purchase new aircraft
Throughout the years leading up to the adoption of the exportable goods screen in 2001 Ex‐Im Bank aircraft financing was provided in accordance with the guidelines set forth in the Large Aircraft Sector Understanding (ldquoLASUrdquo) under the auspices of the Organization for Economic Cooperation and Development (ldquoOECDrdquo) The LASU was followed later by evolving versions of the Aircraft Sector Understanding (ldquoASUrdquo) The LASU and the ASU wereare agreements that set forth guidelines to be followed by ECAs in supporting exports of aircraft manufactured in the home country of the relevant ECA The LASUASU guidelines set forth the maximum repayment term for the financing the maximum advance rate of the financing as a percentage of the net price of the aircraft and the minimum fee that the ECA was required to charge to the airline for the ECA support These terms and conditions resulted in financing that was significantly more expensive than that which could be obtained by US airlines in the private market
In light of the foregoing the Bank reasonably believed that US airlines would not suffer any adverse economic impact from the Bankrsquos financing of foreign airlinesrsquo acquisition of US‐manufactured aircraft In other words when Ex‐Im Bank first adopted the ldquoexportable goodsrdquo screen in 2001 the Bank was confident that its use of the screen would provide efficiencies in transaction‐processing time by focusing the Bankrsquos resources on transactions that could reasonably be expected to raise substantial adverse economic impact concerns
B The US Airline Industry Financing Dynamics Late 2001 to Early 2007
The decade of the 2000s presented the global airline industry with new challenges and new
opportunities ndash both of which created problems for US airlines
27 11 USC sect1110 (2001)
13
The terrorist attacks of September 11 2001 resulted in a sudden and protracted reduction in
demand for airline passenger services This was particularly prolonged in the United States and
Europe As a result of that drop in demand as well as other financial pressures the major US
airlines began a decade‐long process of mergers28 During the 2000s the major US airlines also
were able to shed costs and debtmdasheg pensionsmdashin a way not available to foreign airlines
under the US Bankruptcy Code29
As a result of this downsizing and restructuring US airlines focused on consolidation and
survival not expansion of their fleets by purchasing new aircraft US airline purchases of new
passenger aircraft almost disappeared after 2001 reappeared briefly in 2007 and then
disappeared again until sometime in 2010 Instead of ordering new aircraft US airlines
primarily relied upon the aircraft that they had purchased with EETC financing in the 2001‐2002
period
Nonetheless the data that are available indicate that through 2007 the US airlines generally
had access to aircraft financing that was no less favorable than financing provided by ECAs such
as Ex‐Im Bank In the midst of these developments starting in 2005 the various countries and
constituencies that were involved with ECA aircraft financing began negotiating a new ASU
During negotiations of the new ASU European airlines alleged that ECA financing was more
favorable than the financing to which they had access In June 2007 a new ASU agreement was
reached The European airlines explicitly approved thus signaling that the new agreement
eliminated any ECA financing advantage At the same time none of the US airlines raised any
economic impact concerns about the new ASU As Ex‐Im Bank reviewed and revised its
Economic Impact Procedures in 2007 there were no complaints raised by US airlines or any
other parties regarding aircraft transactions Likewise the new 2007 ASU had explicitly quelled
similar concerns in Europe All of the other relevant factors that led to adoption of the
ldquoexportable goodsrdquo screen in 2001 remained true in 2007 As a result in slightly varied form
the ldquoexportable goodsrdquo screen was carried through the 2002 and 2007 economic impact
procedures
C The US Airline Industry Financing Dynamics Late 2007 to 2012
After the 2007 ASU took effect the worldwide financial crisis emerged in 2008 and had a major
impact on global financial markets including those for large aircraft purchases From mid‐2008
to the beginning of 2010 the financial markets experienced significant volatility and distress
28 These included TWA and American Airlines in 2001 America West and US Airways in 2005 Northwest Airlines and Delta Air Lines in 2008 Continental Airlines and United Airlines in 2010 and Air Tran and Southwest Airlines in 2010 American Airlines and US Air announced merger plans in 201229 Bankruptcies of the major US Airlines from 2001‐2010 included US Airways in 2002 and 2004 United Airlines in 2002 Northwest Airlines in 2005 Delta Air Lines in 2005 Frontier Airlines in 2008 Mesa Airlines in 2010 American Airlines later filed for bankruptcy protection in 2012
14
Then after a short calm in 2010 the European sovereign debt and related European banking
crises rattled financial markets from mid‐2011 to mid‐2012 The result was another period of
extreme interest rate volatility
During this period the global financial market for commercial jet aircraft had been
characterized by (a) extreme volatility in both interest rates and availability of financing and
(b) major growth in demand for aircraft by airlines in the emerging markets and resource‐rich
OECD countries At the same time (and until only recently) there was very little demand for
aircraft by US airlines
There was also a fundamental shift in the key financial tools used for aircraft purchasesmdashwith
commercial banks playing a much diminished role EETC financing from the capital markets
emerged and matured into the most favorable source of financing
As noted before in early 2010 one US airline raised concerns that the financing provided by
the Bank to Ryanair an up‐and‐coming and successful discount airline in Europe was more
favorable than the financing available to US airlines The complaining airline asserted that Ex‐
Im Bank financing to Ryanair was significantly more favorable than financing that the
complaining airline itself had received in a recent EETC offering
Ex‐Im Bank reviewed and analyzed the assertions and determined that they were flawed in that
the purported difference in financial costs ignored pertinent factors and thus did not indicate
that ECA financing would be more favorable in a true ldquoapples to applesrdquo comparison Some key
factors ignored in the analysis provided by the one US airline were
a The credit‐worthiness of the US airline in question was publically rated at B‐ which in
common investment terms puts it in the ldquojunkrdquo group of ratings Ryanair by comparison is rated as investment grade a significantly higher rating Naturally a difference in credit ratings is going to result in a difference in the cost of financing
b The US airline was re‐financing a group of 10 to 12 year old aircraft while Ryanair was
financing brand‐new aircraft In both cases the aircraft being financed formed the
collateral pool for the loan Older aircraft represent a higher risk due to the poorer
quality of collateral therefore resulting in higher costs of financing
At the same time that this US airline was raising its concerns with the Bank it was also raising
similar concerns in the context of new ASU negotiations By the end of 2010 the ECAs reached
agreement on a new ASU (the 2011 ASU) which went into effect on February 1 2011 This
agreement included a built‐in adjustment mechanism to reflect changes in the financial
markets as they occurred This was designed to ensure that ECA financing and commercial bank
financing were generally equivalent The Bank continues to monitor the 2011 ASU to ensure
that the adjustment mechanism built into that agreement does in fact generally work to
15
enforce an equilibrium between the cost of ECA aircraft financings and the financing available
to US airlines in the private market In addition this very issue continues to be a regular topic
of discussion among the ASU participant countries as well Based on the data that have been
developed and presented to date the Bank believes that the 2011 ASU properly serves its
intended function of ensuring that airlines using private market financing do not suffer a
competitive disadvantage when compared to ECA financing of aircraft under the ASU
IV Conclusion
Ex‐Im Bankrsquos exportable goods screen complied with the Bankrsquos statutory requirements to
assess the potential adverse effects of all transactions and to focus on those transactions that
were likely to result in a substantial adverse economic impact on US industry Historically
financing available to US airlines for the purchase of new wide‐body aircraft has been either
more favorable than or equally favorable as Ex‐Im Bank financing to foreign airlines for the
purchase of equivalent aircraft The exportable goods screen was an appropriate reasonable
and efficient response to the realities of aircraft financing It properly balanced the
Congressional directives to assess the likelihood of substantial economic impact on US
industry and US jobs with the need to finance transactions in an efficient manner so as to
support US exports and US jobs
November 22 2013
Export‐Import Bank of the United States 811 Vermont Ave NW Washington DC 20571
16
Appendix A
Excerpt from Staff Memorandum to Ex‐Im Bank Board of Directors Accompanying 1979
Economic Impact Procedures30
Thus Section 2(b)(1)(B) of the Act requires the Board of Directors to take into account ldquoany
serious adverse effectrdquo which loans or guarantees may have on US industry materials in short
supply and employment Section 1911 of the 1978 Amendments requires consideration by the
Bank of the extent to which a loan or financial guarantee ldquois likely to have an adverse
effecthellipeither by reducing demand for goods produced in the United States or by increasing
imports to the United Statesrdquo and Section 608 of the Appropriations Act requires a finding that
the commodity ultimately produced as a result of [Bank] financing will be in surplus when the
production comes on‐stream and that US producers of the same similar or competing
commodity will be substantially injured It is apparent that the latter two statutory provisions
are explications of the basic mandate of the Act and do not expand the Bankrsquos mandate to
examine domestic impact but rather suggest factors to be considered in that examination To
a great extent the 1978 Amendments language and the Appropriations Act provisions set forth
the same concept in different ways Thus the reference in Section 1911 of the 1978
Amendments to ldquoreducing demand for goods in the United Statesrdquo and ldquoincreasing imports to
the United Statesrdquo is no more than the inevitable consequence of a commodity being ldquoin
surplusrdquo as stated in Section 608 of the Appropriations Act
Section 2(b)(1)(B) is the broadest formulation of the basic concept since it contains the most
general language ie ldquoany serious impactrdquo and encompasses all types of exports Section
1911 is primarily procedural in nature directing the Bank not only to implement appropriate
regulations and procedures to ensure full consideration of adverse impact but also to request a
report from the International Trade Commission Section 1911 includes a more detailed
description of events which would constitute adverse impactmdashie a reduction in demand for
US produced goods or an increase in imports to the US Finally this section contains an
explicit reference to agriculture which was only implicitly covered by Section 2(b)(1)(B) It
should be noted that this is one of several references to agriculture which were added to the
Act by the 1978 Amendments
The Appropriations Act provision explicitly refers to a balancing by the Board of Directors of the
benefits of the [Bank]‐supported export against the injury to US [producers] of the commodity
in question At the same time the Act has always necessitated such a balancing by requiring
the Bank to take into account ldquoserious adverse effects upon the US economyrdquo at the same
time it carries out the Bankrsquos basic mandate to ldquofacilitate exportsrdquo and to ldquofoster expansion of
exportsrdquo Under either provision therefore the Board of Directors will be taking into
30 Memorandum ldquoProcedures Regarding Adverse Domestic Impact of Eximbank Financingrdquo Pp 7‐12 Jan 5 1979 17
consideration the results of the balancing as one of the many factors involved in making a
decision to provide financing It should be noted that Section 1911 of the 1978 Amendments is
consistent with both of these provisions since it only seeks to ensure that ldquofull considerationrdquo is
given to adverse effects upon the US economy
Section 2(b)(1)(B) of the Act refers to ldquoserious adverse effectrdquo upon the US economy as a
whole whereas Section 608 of the Appropriations Act imposes a more stringent test by
focusing on a single industry ndash the domestic producers of the commodity to be produced by the
project supported by [the Bank] ndash and requiring a determination of substantial injury for that
industry alone However a reading of the entire Section shows that such a determination
would have to be made only if the net effect upon the US economy of the project for which
support was requested from [the Bank] is negative and if the commodity is likely to be in
surplus on world markets at the time the project becomes operative In any event under
Section 2(b)(1)(B) the Board would have to take into account any serious adverse effects of the
transaction upon the US economy Only if the Board decides to proceed with the transaction
regardless of such effects would it be necessary to determine if there will be substantial injury
to US producers of the commodity and thus trigger the prohibition contained in Section 608
It should also be noted that Section 1911 of the 1978 Amendments speaks in terms only of ldquoany
adverse effectrdquo However the language of that provision clearly shows that it was not intended
to set up a substantive test but rather as was mentioned above to insure that formal
procedures to take into account impacts upon the US economy are established by [Ex‐Im
Bank] as well as to enable the Bank to obtain a report from the International Trade
Commissionrdquo PL 95‐630 92 Stat 3641 (1978)
18
Appendix B
Financial Tools Available to US Airlines
Generally over the past several decades US airlines have had access to a broad range of
aircraft financing options
Accordingly at different times during the past several decades US airlines took advantage of
whichever financing option provided the most attractive overall financing terms from such
airlinesrsquo perspective For instance a US airline would be able to maximize the amount of the
financing thereby minimizing the amount of its own money it had to invest in the aircraft (ie
the ldquodown paymentrdquo) It might also maximize the amount of money in excess of the actual cost
of the aircraft it could raise against the aircraft obtain the longest possible repayment term and
the slowest possible amortization schedule (ie the longest ldquoweighted average liferdquo) obtain
the lowest interest rate and risk premium obtain the least restrictive operational and financial
covenants provide the least amount of collateral or other security or obtain other benefits
Due to the fact that the United States is seen as not presenting any ldquocountry riskrdquo and has well‐
developed and well‐regarded legal and judicial systems that are seen as being protective of
creditorsrsquo rights US airlines have usually had access to secured aircraft financings from
commercial banks from around the world During the past several decades commercial banks
from different regions have been at the forefront of the aircraft finance industry and have
provided financing to US airlines on attractive financing terms Initially US‐based banks
provided most of the aircraft financing to US airlines but during the 1980s Japanese banks
became very significant lenders to the US airlines During the 1990s and 2000s the European
banks (German French British and Swiss banks) were the most significant source of
commercial bank funding for US airlines
In addition to commercial bank financing during the 1970s and 1980s US airlines obtained
long‐term financing from US‐based institutional investors (eg insurance companies and
pension funds) through the use of the Equipment Trust Certificate (ldquoETCrdquo) financing structure or
the Pass Through Certificate (ldquoPTCrdquo) financing structure The ETC is a financing provided by
institutional investors that is secured by one or more items of equipment (eg aircraft) The
PTC is a group of ETCs combined into a public debt security that is sold into the capital markets
to institutional investors
However during the 1980s the simplest and most prevalent form of aircraft financing for US
airlines was the US leveraged lease
The US leveraged lease allowed US airlines to take advantage of the US tax code which
generally provides for all types of capital assets to be depreciated and thereby reduces or
defers taxes due to the deductibility of tax depreciation Because US airlines generally did not 19
have sufficient income to fully take advantage of the benefit of the tax depreciation deductions
associated with acquiring aircraft the US airlines entered into US leveraged leases Under a
leveraged lease the benefits of the tax depreciation deductions related to the aircraft were
transferred to profitable companies that had income they wanted to shelter from tax In
return the company was willing to provide the equity in a US leverage lease (approximately
20 of the appraised value of the aircraft) and to ldquoleaserdquo the aircraft back to the airline for the
airlinersquos use A number of different entities entered into such leases including banks insurance
companies and other financial institutions such as Ford Motor Credit as well as finance
subsidiaries of other corporate entities including consumer product companies such as Phillip
Morris or entertainment companies such as Disney The fact that these were ldquoleveragedrdquo
leases (as opposed to ldquosingle investor leasesrdquo) also enabled the equity providers to deduct the
interest expense associated with the US leveraged lease
Through the use of a combination of lease equity and debt a US leveraged lease allowed US
airlines to arrange financing for up to 100 of the appraised value of an aircraft This was
particularly attractive to major US airlines because due to their size and relative importance
to the aircraft manufacturers every major US airline generally was able to negotiate aircraft
purchases with the aircraft manufacturers that enabled the airline to buy the aircraft for
amounts significantly less than the appraised value The result was that by using a US
leveraged lease to finance its aircraft a US airline was able to ldquoover‐financerdquo the aircraft (ie
finance the aircraft for more than the airline was paying for the aircraft) resulting in the airline
effectively having the ability each time the airline financed an aircraft to arrange 100
financing for its aircraft and at the same time arrange a long‐term working capital loan This is
the equivalent of a home buyer being able to buy a house with no money down (no down
payment) and also receiving a long‐term loan for non‐home expenses
In contrast Ex‐Im Bank‐supported aircraft financing is for only 85 (and sometimes less) of the
actual ldquonet pricerdquo that the airline is paying the US aircraft manufacturer (after deducting all
discounts and other concessions the airline has negotiated with the US aircraft manufacturer
which results in a net price that is almost always less than the appraised value) This requires
the foreign airline that is using Ex‐Im Bank support to come up with a down payment of at least
15 of the net price of the aircraft As a result US airlines were able to obtain more financing
under a US leveraged lease (without putting any money down) than foreign airlines could
under an Ex‐Im Bank supported aircraft financing (which required a down payment)
In addition US leveraged leases used by US airlines always had very long repayment terms
Generally speaking the longer the repayment the longer the tax deferral and the more
advantageous the terms of the US leveraged lease As a result it was not unusual for the US
leveraged leases used by US airlines to have a repayment term of between 18 and 22 years
and sometimes as long as 25 years The only constraint was that the lease term of the
20
leveraged lease should not exceed 80 of the economic useful life of the aircraft which in
some instances was more than 30 years
In contrast the repayment term in an Ex‐Im Bank‐supported aircraft financing is never longer
than 12 years which is the maximum repayment term Ex‐Im Bank is permitted to offer for an
aircraft financing under the guidelines for export credits promulgated by the Organization for
Economic Cooperation and Development (the ldquoOECDrdquo) with which guidelines the US
Government (including Ex‐Im Bank) has agreed to abide This difference in repayment terms is
significant it is similar to the difference in monthly payments under a 15 year home mortgage
versus a 30 year home mortgage As a result US airlines were able to obtain significantly
longer financing under a US leveraged lease (which generally resulted in a smaller periodic
principal repayment burden due to the longer repayment term) than foreign airlines could
under an Ex‐Im Bank‐supported financing
US leveraged leases used by US airlines also had a slower amortization profile with a very
long weighted average life (ie small amounts of debt amortization in the early years of the
financing) of at least 10 years In the same manner that a longer repayment term increased the
tax deferral a longer weighted average life also increased the tax deferral
In contrast the amortization profile in an Ex‐Im Bank supported aircraft financing for a foreign
airline is usually between 6 years and 65 years (at least 4 years shorter than the weighted
average life of the US leveraged leases historically used by US airlines) which imposes a
much greater cash flow burden on the foreign airline in comparison with the cash flows
required of a US airline under a US leveraged lease
Although the absolute interest rate on the debt in a US leveraged lease fluctuated over time
with the overall level of interest rates the providers of the debt into these US leveraged leases
(primarily insurance companies and other institutional investors) were generally willing to
accept an interest rate margin of less than 100 basis points31 over LIBOR32 on a fixed rate
equivalent basis (and sometimes significantly less than 100 basis points)
In contrast the interest rate margin on the debt on an Ex‐Im Bank‐supported aircraft financing
was generally between a few basis points over LIBOR to 50 basis points over LIBOR because the
interest on the Ex‐Im Bank‐guaranteed aircraft financing is guaranteed by Ex‐Im Bank and
reflects the low risk associated with a US Government guaranteed loan However the interest
rate margin on an Ex‐Im Bank‐guaranteed aircraft financing does not reflect the Ex‐Im Bank
exposure fee (or risk premium) that is paid to Ex‐Im Bank in view of the underlying risk of the
foreign airline The minimum exposure fee charged by Ex‐Im Bank was 2 during the 1980s
31 100 basis points equals 1 percent 32 LIBOR is the London Inter‐Bank Offering Rate and is a common reference rate such as ldquoPrimerdquo or ldquoTreasury Raterdquo used in adjustable interest rate transactions
21
and early 1990s and 3 until 2007 when the OECD promulgated a new set of guidelines for
export credits for aircraft (known as the ldquo2007 Aircraft Sector Understandingrdquo or the ldquo2007
ASUrdquo) This exposure fee was required to be paid ldquoup frontrdquo ndash ie at the inception of the loan
On a per annum basis this equates to between 30 basis points and 50 basis points which
should be added to the interest rate margin received by the guaranteed lender to obtain the
equivalent interest rate paid by a foreign airline under Ex‐Im Bank‐supported financing (for
purposes of comparing the overall financing cost to those incurred by US airlines) The Ex‐Im
Bank exposure fee is similar to a homeowner having to pay ldquopointsrdquo up front at the time he
obtains his mortgage The effect of paying points up front and paying an Ex‐Im Bank exposure
fee effectively increases the cost of the financing In comparing the overall cost of financing
through ECA support including the exposure fee to the overall cost of a leveraged lease for
borrowers with comparable credit profiles the overall cost of the US leveraged lease was
considerably more favorable than what could be achieved through an Ex‐Im Bank‐supported
aircraft financing
Although the US leveraged lease was itself a very attractive financing structure for US
airlines at different times the basic US leveraged lease was made even more attractive due to
other provisions of the US and foreign tax codes
For instance from the 1960s (during the Kennedy Administration) until its repeal under the Tax
Reform Act of 1986 the US tax code provided for an investment tax credit which was intended
to encourage investment in capital goods and therefore allowed airlines or the equity investor
in a US leveraged lease to get a credit against the taxes it would otherwise be required to pay
This credit was a permanent reduction in taxes paid as opposed to only the deferral of taxes
(postponement of when taxes had to be paid) that could be achieved through the use of the
US leveraged lease
Similarly from the 1980s to the mid‐1990s it was common for a US airline to combine a US
leveraged lease with a lease into a foreign jurisdiction that had a ldquoform over substancerdquo
approach to its tax code (as opposed to the United States which has a ldquosubstance over formrdquo
approach to its tax code) Taking advantage of the disparity a US airline could ldquosellrdquo the
aircraft to both (i) an equity investor in the United States and (ii) an equity investor in a foreign
country such as Japan Germany or Hong Kong and each equity investor could depreciate the
same aircraft and therefore shelter its respective income Over time due to changes in the
respective tax codes these more aggressive tax advantaged cross‐border leasing structures
(ldquoDouble Dipsrdquo and even on occasion ldquoTriple Dipsrdquo) were disallowed but not before US airlines
financed billions of dollars of aircraft using such tax advantaged leasing structures
During the 1990s the basic US leveraged lease was made even more attractive by taking
advantage of another provision of the US tax code that allowed additional US taxes to be
22
deferred if the equity investor in the transaction used an offshore subsidiary that qualified as a
Foreign Sales Corporation (ldquoFSCrdquo) under the US tax code and structured the deal as a
Commission FSC
In addition during the 1980s and 1990s US airlines had access to other sources of financing
with overall financing terms that were much more attractive than what was available to foreign
airlines via Ex‐Im Bank‐supported export credits For example during the late 1980s and 1990s
Airbus made its first significant sales to US airlines In order to do so Airbus arranged and
provided very attractive and flexible financing terms to US airlines to encourage them to
purchase European‐manufactured Airbus aircraft instead of US‐manufactured Boeing or
McDonnell Douglas aircraft The US airlines were more than willing to accept these incentives
During this period some US airlines entered into ldquowalk awayrdquo leases of Airbus aircraft
pursuant to which Airbus North America (backed by the joint and several guarantees of each of
the four countries that are members of Airbus SAS) entered into a US leveraged lease of the
Airbus aircraft and then subleased the aircraft to a US airline on terms that (i) passed along
most of the tax benefits to the US airline through lower lease rentals and (ii) permitted the
US airline to terminate the sublease and simply ldquowalk awayrdquo from the lease upon a relatively
short notice period
Under the ldquoHome Market Rulerdquo the European export credit agencies (including those of
France Germany and the United Kingdom) that usually support the financing of Airbus aircraft
could not provide such support to US airlines Therefore Airbus arranged for Kreditanstalt fur
Wiederaufbau the development bank of Germany to provide very attractive financing for the
Airbus aircraft being acquired by US airlines These financings occurred on terms much more
favorable (with 18‐ to 22‐year repayment terms) than what export credit agencies could
provide (with a maximum repayment term of 12‐years)
Similarly during the 1990s US airlines began to acquire a large number of 35 to 50 seat
regional jet aircraft manufactured by Bombardier of Canada and Embraer of Brazil Many of
these aircraft were acquired by the US airlines by using export credit support from Canada and
Brazil Some of the financing terms (ie the repayment terms) of these Brazilian and Canadian
government‐supported export credit financings were even more attractive (15‐ to 18‐year
repayment terms) than what was available from the export credit agencies of France Germany
and the United Kingdom with respect to Airbus aircraft or from Ex‐Im Bank with respect to
Boeing aircraft (10‐ to 12‐year repayment terms)
To make the financing of Canadian‐manufactured Bombardier regional jets even more
attractive to US airlines the province of Quebec (where Bombardier has its headquarters)
through Investment Quebec provided additional aircraft financing support to the US airlines
23
Finally to the extent even more attractive financing was needed to convince US airlines to
purchase Canadian or Brazilian‐manufactured regional aircraft the manufacturers themselves
provided residual value guarantees with respect to such aircraft to the airline or to the
financiers (ie to the equity investor in a US leveraged lease or the creditors financing the
aircraft)
The next major development in aircraft financing used by US airlines was the development in
the 1990s of the Enhanced Equipment Trust Certificate (ldquoEETCrdquo) which was an ETC with certain
structural enhancements The most important of these enhancements is a liquidity facility to
ensure that if there is a default the financiers would continue to receive current interest
during the period of time while the aircraft is being repossessed and remarketed A key
element in the development of the EETC was the existence of Section 1110 of the US
Bankruptcy Code which gives a type of ldquopreferred creditorrdquo status to financiers of aircraft for
US airlines This ldquopreferred creditorrdquo status exempts aircraft financiers of US airlines from
the automatic stay generally imposed following a bankruptcy filing by a borrower subject to the
protections of the US Bankruptcy Code Section 1110 of the US Bankruptcy Code
accomplishes this by requiring the airline within 60 days of such bankruptcy filing to either (i)
resume payments under the originally agreed aircraft financing or (ii) return the aircraft to the
financier
The first EETC was done in 1994 and the practice has now been successfully used by almost
every major US airline including Alaska Airlines America West Airlines American Airlines
Continental Airlines Delta Airlines Hawaiian Airlines Jet Blue Airlines Northwest Airlines
Southwest Airlines United Airlines and US Airways The overall financing cost of a US airline
acquiring an aircraft through the use of the EETC ndash which includes the amount of financing
repayment term amortization profile effective cost of the financing etc ndash has generally been
significantly more attractive than (i) what such US airline could have achieved under an export
credit‐supported aircraft financing for such airline and (ii) what a similarly rated foreign airline
could have achieved under an export credit‐supported aircraft financing
This is particularly true for the financing of new aircraft The development of the EETC market
provided enormous financing flexibility to US airlines for the financing of new aircraft the
EETC provided the airline with the option to finance on a simple secured mortgage basis or the
US airline could opt for a leveraged lease with all of the benefits associated with a leveraged
lease described above
Beginning in 1997 US airlines had the ability to raise money in the capital markets when the
overall financing terms were most attractive They were able to ldquolock‐inrdquo such favorable
financing terms to fund new aircraft that were scheduled to be delivered in the future by
issuing a ldquopre‐fundedrdquo EETC These pre‐funded EETCs were used to great success by US
24
airlines in the late 1990s through 2001 a period in which the US airlines were taking delivery
of a significant number of aircraft
As a result of the downturn in the US airline industry following the September 11 2001
terrorist attacks many US airlines deferred or cancelled their orders for new aircraft This
reduced the need for US airlines to finance new aircraft when the financing terms available to
such US airlines via the EETC were not as favorable due to (i) the perceived increased credit
risks of the US airline industry following the September 11 terrorist attacks and (ii) the
temporary disequilibrium in the credit markets following the 200820092010 credit crisis
Now that the US airlines have once again begun to take delivery of a significant number of
new aircraft the pre‐funded EETC continues to be the preferred source of financing for US
airlines as evidenced by the number and amount of EETC issuances during 2012 and 2013
Based on an analysis of the EETC transactions occurring during 2012 and 2013 EETCs are once
again generally considered to provide more attractive overall financing terms than what could
be achieved by an airline under an export credit‐supported financing done under the terms of
the 2011 Aircraft Sector Understanding
25
GLOSSARY
ldquoAdverse Economic Impactrdquo is the short‐hand term used to refer to any serious negative effects on US industries or US jobs as set forth in the Bankrsquos Charter that result from Ex‐Im Bank loans guarantees or insurance The Bankrsquos Charter contains three provisions that address adverse economic impact found at 12 USC sectsect 635(b)(1) 635a‐2 635(e)
ldquoAir Indiardquo is an airline owned by the Government of the Republic of India ldquoAir India Transactionsrdquo are the two final commitments approved by Ex‐Im Bank on September
30 2011 for loan guarantees for the purchase of a number of 787 ldquoDreamlinerrdquo aircraft from Boeing and to be financed by a commercial lender not identified at the time As of the date of this paper Ex‐Im Bank has not issued any of its loan guarantees but is expected to do so in the coming months Ten of the aircraft involved in these two final commitments have been delivered to Air India and are in use by Air India on routes outside the United States The deliveries of the ten aircraft were made using private short‐term financing as to which Ex‐Im Bank had no involvement
ldquoAirbusrdquo Airbus SAS is a Europe‐based manufacturer of large commercial aircraft Airbus is the only competitor to Boeing the US manufacturer Airbus sales are supported by the ECAs of Germany France and the UK
ldquoAircraft Sector also known as the ASU is an agreement among members of the OECD Understandingrdquo that manufacture aircraft and Brazil The ASU requires that Export
Credit Agencies that support the export of aircraft follow certain rules and restrictions that set forth the most favorable terms that can be provided These rules and restrictions include the Export Credit Agency must charge a minimum risk premium which is determined by the ASU the term of any loan made by or supported by the Export Credit Agency for the purchase of aircraft cannot exceed 12 years the Export Credit Agency today can lend or guarantee only up to 85 of the actual purchase price of the aircraft being exported and the use of risk mitigants The ASU was preceded by the Large Aircraft Sector Understanding which governed these issues until the enactment of the 2007 ASU The ASU was again updated and revised in 2011 (See also the Large Aircraft Sector Understanding)
ldquoArrangementrdquo is the agreement among Export Credit Agencies governing the terms by which they will provide loans guarantees or insurance in support of exports from their respective countries Among other things the Arrangement requires Export Credit Agencies to charge a minimum risk premium which is governed by the Arrangement See also Organization for Economic Cooperation and Development
ldquoASUrdquo see Aircraft Sector Understanding ldquoAverage Weighted Liferdquo for purposes of this paper refers to the average number of years that
each dollar of unpaid principal on a loan remains outstanding For example a loan with equal principal payments throughout the loan term will have an average weighted life close to the middle of the whole loan term
26
ldquoBank Actrdquo is the Export‐Import Bank Act of 1945 12 USC sect635 as amended ldquoBank Advisory Committeerdquo is the official Advisory Committee of the Bank appointed in accordance
with the Bank Act and the Advisory Committee Act The Bank Advisory Committee is comprised of representatives of various industry and market sectors as well as representatives of labor and international trade experts
ldquoBasis pointsrdquo are a numerical measure applied to interest rates One basis point equals 1100th of one percent or 100 basis points equals one percent
ldquoCapital Equipmentrdquo is equipment used to manufacture a product provide a service or sell store or deliver merchandise A wide‐body aircraft is a piece of capital equipment
ldquoCharterrdquo is the Bank Act as well the provisions of the Export Import Bank Reauthorization Act of 2012 (Public Law 112‐122) that are not codified in the Bank Act
ldquoDreamlinerrdquo is the name given to a Boeing 787 wide‐body commercial aircraft ldquoECArdquo see Export Credit Agencies ldquoEconomic Impact Proceduresrdquo
are procedures adopted by Ex‐Im Bank to assess whether transactions supported by the Bank cause a serious adverse economic impact to US industries and US jobs See also Adverse Economic Impact
ldquoEETCrdquo see Enhanced Equipment Trust Certificate ldquoEnhanced Equipment Trust Certificaterdquo
also known as an EETC is a type of secured bond issued by a borrower in the capital markets The EETC is secured by the equipment being purchased with the proceeds of the bond issuance EETCs are used primarily for aircraft and since the late 1990s has been the dominant financing tool used by US airlines to purchase aircraft Section 1110 of the US Bankruptcy Codemdashwhich allows creditors of aircraft borrowers to obtain their collateral within 60 days if the payments on their debt is not current ndash has provided creditors of US airlines a level of comfort not available to creditors of foreign airlines until recently This generally provided US airlines with a significant financial advantage vis a vis their foreign competitors Recently the adoption of the Cape Town Convention and the related Aircraft Equipment Protocol has provided creditors of foreign airlines with protections similar to the protections provided by section 1110 of the US Bankruptcy Code Recently this has led to the beginnings of an international EETC market
ldquoEquipment Trust Certificaterdquo
also known as an ETC was the predecessor to the Enhanced Equipment Trust Certificate
ldquoETCrdquo see Equipment Trust Certificate ldquoEx‐Im Bankrdquo or ldquoBankrdquo See The Export‐Import Bank of the United States ldquoExport Credit Agenciesrdquo are agencies or ministries of government that have the official role of
providing loans guarantees or insurance in support of exports from their respective countries or in support of exports by sales of companies from their respective countries Ex‐Im Bank is the official Export Credit Agency of the United States of America
ldquoexportable goods screenrdquo is a screen or filter adopted by Ex‐Im Bank in its 2001 Economic Impact Procedures The exportable goods screen is utilized along with other screens to balance the Bankrsquos obligation to consider the adverse
27
economic effects of its transactions on US industries and US jobs with the Bankrsquos mandate to support US export transactions in a timely manner so as to fully support the exporterrsquos business opportunity The exportable goods screen filtered out transactions that supported exports which could only be used by a foreign buyer to provide services rather than produce goods
ldquoExport‐Import Bank of the is an independent agency of the Federal Government of the United United Statesrdquo States of America Also known as ldquoEx‐Im Bankrdquo Ex‐Im Bankrsquos mission
is to support US jobs by supporting US exports See 12 USC 635 et seq
ldquoExposure Feerdquo is the risk premium charged by Ex‐Im Bank in exchange for its guarantee in certain transactions The exposure fee must be at least equal to the minimum risk premium required by the terms of the Arrangement and the Aircraft Sector Understanding
ldquoForeign Sales Corporationrdquo is a company created under the terms of a former provision of the US Internal Revenue Code Foreign Sales Corporations received significant tax benefits
ldquoFSCrdquo see Foreign Sales Corporation ldquoInvestment Tax Creditrdquo is a credit permitted under the US Internal Revenue Code for the
purchase of certain types of equipment in certain circumstances See also Leveraged Leases
ldquoKFWrdquo the development bank for the Federal Republic of Germany KFW is an Export Credit Agency but it also operates through a ldquomarket windowrdquo which is not subject to the Home Market Rule Thus KFW provides support to Airbus for its sales of aircraft to US airlines The United States does not have an equivalent institution and Ex‐Im Bank does not have a ldquomarket windowrdquo
ldquoLarge Aircraft Sector also known as LASU was the predecessor to the Aircraft Sector Understandingrdquo Understanding The LASU governed the same general issues as are set
forth in the Aircraft Sector Understanding except that the minimum risk premium was lower than that required in the 2007 ASU and 2011 ASU When the 2007 ASU was enacted grandfathering provisions allowed ECA‐supported financing for a limited number of aircraft to be governed by LASU
ldquoLASUrdquo see Large Aircraft Sector Understanding ldquoLeveraged Leaserdquo is a lease of equipment and is designed to allow the lessor to take
advantage of certain tax code provisions such as the depreciation deduction and the investment tax credit while allowing the lessee to obtain the equipment involved at a significantly lower cost Leveraged Leases were a very popular means for US airlines to acquire aircraft throughout the 1980s and 1990s The value of the tax deductions to the lessor were significant so that the implicit interest rate in the lease payments by the US airline were extremely low Usually the US airline did not have sufficient profit to take advantage of the favorable tax code provisions By using a leveraged lease another company that could shelter income by using the tax code provisions would buy the equipment and lease the equipment to the US airline Usually at the end of the lease term the US airline would purchase the aircraft
28
ldquoLIBORrdquo is the London Inter‐bank Offering Rate It is commonly used as a reference rate in loan transactions that have floating or adjustable interest rates LIBOR reflects the rate at which banks will lend money to each other LIBOR is set for various loan terms (eg 3 months 6 months etc) and is widely published making it a convenient rate to use as a reference rate
ldquoNet pricerdquo is the price paid after all discounts have been deducted The net price is the actual price paid for a piece of equipment In aircraft transactions pursuant to the ASU Ex‐Im Bank will only support up to 85 of the net price of an aircraft EETC transactions on the other hand often support the nominal purchase price of an aircraft and thus result in a significantly higher amount financed
ldquoOECDrdquo see the Organization for Economic Cooperation and Development Open Skies Agreement Is a type of bilateral agreement between countries that govern the
rights of airlines from the two countries to fly into the other country Open Skies Agreements generally allow free access to fly as many routes to a country as an airline may choose but then usually restrict the ability to fly within the other country Generally it is a ldquofly in and outrdquo rule although there are exceptions
ldquoOrganization for Economic Cooperation and Developmentrdquo
also known as the OECD is an organization comprised of 34 member countries that work together to promote development The United States is a member With regard to Ex‐Im Bank the OECD is the organization through which the US Government negotiates an agreement among Export Credit Agencies known as the Arrangement and the ASU (and its predecessor the LASU)
ldquoPass Through Certificaterdquo also known as a PTC is a group of Equipment Trust Certificates pooled together to form the basis for a bond issuance
ldquoPTCrdquo See Pass Through Certificate ldquoRyanairrdquo is a low‐cost Irish airline that began business after European
deregulation of airlines in 1997 Ryanair rapidly expanded during the first decade of the 2000s creating significant competition for other airlines
ldquoScreensrdquo are a type of filter used by Ex‐Im Bank in its Economic Impact Procedures Screens are designed to identify those transactions which are not likely to cause an adverse economic impact to US industries or US jobs so that such transactions can be processed more quickly and efficiently as required by the Bank Act
ldquoSubstantial Injuryrdquo is a term defined in Ex‐Im Bankrsquos Charter to be applied in connection with the Bankrsquos economic impact procedures 12 USC sect635(e)(4) The Charter states ldquohellipthe extension of any credit or guarantee by the Bank will cause substantial injury if the amount of the capacity for production established or the amount of the increase in such capacity expanded by such credit or guarantee equals or exceeds 1 percent of United States productionrdquo
ldquoTPCCrdquo see Trade Promotion Coordinating Committee ldquoTrade Promotion Coordinating Committeerdquo
also known as the TPCC is an interagency committee of the US Government chaired by the Secretary of Commerce It was established under the Export Enhancement Act of 1992 to provide a
29
unifying framework to coordinate the export promotion and export financing activities of the US government and to develop a government‐wide strategic plan for carrying out such programs
ldquoTrade Sanctionsrdquo refers to any of a number of sanctions imposed by the US Government against companies countries industries or products usually as a result of an accusation of adjudication of a violation of an international trade agreement The Bank Act requires Ex‐Im Bank to take certain trade sanctions into account in its economic impact procedures
30
Table A ndash Congressional Actions and Ex-Im Bank Responses
Year Congressional Action Ex‐Im Bank Response
1968 Bank directed to take into account the possible adverse effect [of its loans and guarantees] upon the United States economy
Bank adds this transactions
factor to analysis of
1975 1 Standard refined to take into account any serious adverse effect of loans and guarantees on competitive position of US industry availability of scarce materials in US and employment in US
2 Bank directed to be competitive with rates terms and conditions offered by principal countries whose exporters compete with US exporters
3 Bank directed to submit semi‐annual report on competitiveness and conduct survey of US exporters and lenders to determine experience in meeting financing competition
Bank adds these of transactions
considerations to analysis
Year Congressional Action Ex‐Im Bank Response
1978 ‐ 1979
1 Bank directed to take into account any serious adverse effect of loans on competitive position of US industry and scarce materials Bank directed to emphasize strengthening competitive position of US exporters and expanding total US exports
2 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [From Appropriations Act Restated in Bank Charter in 1986]
3 Bank directed to implement regulations and procedures to insure full consideration of extent to which loan or guarantee is likely to have adverse effect on industries and employment in US either by reducing demand for US produced goods or increasing imports to the US
Bank develops framework and set of written economic impact procedures
1 Exclude exports the use of which remained localized in foreign country This
is first ldquoforeign localized goods and services screenrdquo
2 ldquoIntent and stimulus for projectrdquo examined to determine likelihood of substantial adverse economic impact Does transaction involve ldquorunaway industryrdquo
(leaving US for cheaper foreign labor)
3 Does export of capital equipment result in ldquobuy backrdquo of product being imported into the US
4 Is net impact on US economy and jobs positive or negative and to what degree
32
Year Congressional Action Ex‐Im Bank Response
1986 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [Originally from 1978 Appropriations incorporated into Bank Charter in 1986]
Senate Report recognizes knowledge and experience of Bank and need to respond to exportersrsquo requests for support in a timely and confidential fashion Economic impact procedures are to be practical and workable and not reduce Bankrsquos competitiveness and flexibility nor ignore positive aspects of export sale
Bank develops ldquoSummary of Adverse Economic Guidelinesrdquo to be applied to both
goods and services (a) is commodity to be produced surplus or likely to compete with US‐produced surplus (b) will Bankrsquos
assistance cause substantial injury to US producers of competing commodity (c)
will injury to US producers of competing commodity outweigh the short‐ and long‐
term benefits to US industry and employment If answer is no then no
further economic impact analysis
1988 Congress establishes test for ldquosubstantial injuryrdquo if the amount of capacity for production established or amount of increase in such capacity expanded by Bankrsquos credit or guarantee exceeds 1 of US production
Bankrsquos Board recognizes requirement to balance (a) possibility of substantial harm
to US production and employment with (b) being responsive competitive and efficient New economic impact procedures ask (a) will the project be in direct competition with US production (b) is the Bankrsquos support significantly associated with the project (c) will the output of the project
cause substantial injury to US producers of the same similar or competing
commodity If answer is no then no further economic impact analysis is required
33
Year Congressional Action Ex‐Im Bank Response
1998 Bank revised procedures involving countries against which trade sanctions were pending or imposed
2001
2006 ‐2007
1 Bank required to determine whether extension of credit or guarantee is likely to produce same or other commodities and whether the production may cause substantial injury to US producers
2 Bank prohibited from providing a loan or guarantee that will facilitate circumvention of trade law order or determination
3 Bank required to designate sensitive commercial sectors and products for which Bank financing deemed unlikely due to potential for adverse economic impact on US
4 Bank required to aggregate financial thresholds on rolling 24‐month basis
Bank develops ldquoexportable goods screenrdquo Does Ex‐Im Bank support result in production of exportable good from the foreign buyerrsquos country If not no further economic impact analysis is required Notice and request for comments were published in the Federal Register US airline industry did not respond
Bank issues 2007 Economic Impact Procedures ldquoExportable goods screenrdquo is modified Will the transaction (capital goods and services) result in either new or additional production capacity of an exportable good
34
III Discussion How the Bankrsquos Economic Impact Procedures and Exportable Goods Screen Satisfy the Requirements of the Bankrsquos Charter
In remanding the matter to the Bank the Court of Appeals required the Bank to provide a reasonable explanation to justify its use of the ldquoexportable goods screenrdquo The use of the ldquoexportable goods screenrdquo properly satisfies the various requirements of the Bankrsquos Charter When the screen was adopted the Bank knew that US airlines the industry most likely to be affected generally had access to financing at costs that were significantly more favorable than the cost of aircraft financing provided by the Bank For this very reason the Bank had not heard any economic impact concerns from any US airlines in the 17 years prior to the adoption of the screen Indeed the screen was in place for almost a decade before any US airline raised any questions about it When a single US airline did raise questions about the Bankrsquos financing to foreign airlines the analysis it submitted to the Bank did not support its claim that the Bankrsquos financing provided a financing cost advantage to foreign airlines Moreover the complaint was raised at a time and in the context of negotiations by export credit agencies (ldquoECAsrdquo) regarding the Aircraft Sector Understanding discussed below The Bank understood that the negotiations regarding the Aircraft Sector Understanding would address any concerns by US airlines which were also involved in the negotiations Finally the Bank was also aware throughout the first decade of the 2000s that the major US airlines involved in international flights were not in a mode of purchasing new aircraft and thus that any financing advantage was theoretical only In short the Bankrsquos adoption and continued use of the ldquoexportable goods screenrdquo was eminently reasonable and based on the Bankrsquos considerable expertise with the financial dynamics of aircraft financing
Section III outlines the Bankrsquos responses to evolving Congressional requirements for the Bank to consider whether its actions would have a serious or significant adverse effect on US industry or employment The Bankrsquos responses were formulated with a view to also ensure that it remains competitive with other export credit agencies as requires by its Charter and fulfills its mission to support US jobs through exports
A The US Airline Industry Financing Dynamics 1985 to Early 2001
The Bankrsquos experience over the past 45 years since the first legislated economic impact provisions were enacted has shown that most transactions for which the Bank receives applications are not likely to result in substantial adverse economic impact on the US economy or US jobs For example most of the Bankrsquos transactions are simply too small or too localized to have any significant likelihood of having an adverse impact on US industries or jobs Other examples are transactions supporting sales of consumable goods such as pickle exports to China and transactions supporting exports to be used in a power plant in a foreign country where the power generated will never be sent to the United States to compete with domestic power producers Therefore consistent with the Bankrsquos Charter not every application is subjected to a full‐blown ldquodetailed economic impact analysisrdquo
A detailed economic impact analysis can substantially delay the processing of a transaction and jeopardize the ability of the US exporter to capture the export opportunity Given the number of transactions the Bank finances each year ndash approximately 3800 in Fiscal Year 2012 ndash the
10
Bank would not be able to accomplish its mission of promoting US exports if it were to perform a ldquodetailed economic impact analysisrdquo on every transaction or even for a significant percentage of the transactions
Recognizing the dilatory effects of conducting unnecessary detailed economic impact analyses the Bankrsquos categorical approach to the economic impact provisions of the Bankrsquos Charter has always been to screen out transactions that were not likely to have a substantial adverse effect on US industries or US jobs Ex‐Im Bankrsquos experience in this area over the decades indicates three critical determinants of whether a contemplated transaction has potential to cause substantial adverse impact
1) whether the transaction is too small to have a significant impact
2) whether the transaction involves exports that are to be used for the production of goods or provision of services which are only likely to be used locally in the foreign buyerrsquos country and
3) whether the transaction relates to an industry (eg aircraft) in which the available financing for US domestic sales indicates that Ex‐Im Bank financing for foreign sales generally would not disadvantage the US industry
In 2001 when the Bankrsquos ldquoexportable goodsrdquo screen was first adopted the Bank had substantial reason to believe that transactions resulting in services being exported by foreign countries would be unlikely to have a substantial adverse economic impact on the US services sector
The Bank had for several decades received input from trade groups industry stakeholders and other government agencies regarding the domestic adverse impact of Ex‐Im Bank financing In the Bankrsquos experience such representatives could be relied upon to notify the Bank if they were concerned that the Bankrsquos policies procedures or actions threatened to cause any harm or disruption to a specific industry or sector Concerns raised by industry representatives or the absence of any voiced concerns were a significant tool for the Bank to check the soundness of its categorical judgments as reflected in the screens
As of 2001 when the ldquoexportable goodsrdquo screen was put in place the Bank had heard no concerns about Ex‐Im Bank transactions from the US airline industry in 17 years In 1984 Pan American World Airways (Pan Am) had argued that Ex‐Im Bank support resulted in lower financing costs for foreign airlines than the US airlines could themselves obtain To assess these concerns the Bank analyzed the overall costs of financing for US domestic airlines as compared to the costs of financing to a foreign airline in an Ex‐Im Bank‐guaranteed transaction The analysis compared not just the interest rates charged by lenders in the two different scenarios but also incorporated other factors so as to produce a true ldquoapples‐to‐applesrdquo comparison of the relative financing costs
These other factors included the cost of the Ex‐Im Bank guarantee fee (which the Bank now calls the ldquoexposure feerdquo) as well as the costs of financing the portion of the purchase price that
11
was not supported by the Ex‐Im Bank guarantee The Bank analyzed all of these factors and concluded that in fact Ex‐Im Bank support did not generally result in financing terms for foreign airlines that were more favorable than the financing available to US airlines Pan Am did not contest the Bankrsquos analysis at that time or at any subsequent time Nor did any other US airline or trade group raise any concerns in the intervening 17 years leading up to the adoption of the ldquoexportable goods screenrdquo in 2001 or indeed thereafter until 2010
Between 1990 and 1999 the Bank financed 440 aircraft involving the export of US‐manufactured aircraft representing a total value of approximately $22 billion dollars Given this significant expertise in the aircraft financing sector Ex‐Im Bank had ample and consistent evidence that major US airlines flying international routes had access to more favorable financing relative to the financing available to foreign airlines through ECAs such as Ex‐Im Bank Annexed as Appendix B is a detailed history and explanation of the types of financing that were available to US airlines which in turn had led the Bank to conclude that Bank financing to foreign airlines did not pose any financial competitive harm to US airlines
In contrast to the commercial bank financing available through Ex‐Im Bank in the 1980s and 1990s the principal method used by US airlines to acquire aircraft was through a ldquoleveraged leaserdquo A leveraged lease provides significant tax benefits to an entity that wants to shelter income through additional tax deductions The entity purchases the aircraft and then leases it to the airline The purchaser continues to own the aircraft and thus can take the depreciation deductions and investment tax credits on its tax returns during the term of the lease Once the lease term is over title to the aircraft may be transferred to the airline through various mechanisms The leveraged lease was very beneficial to US airlines in several respects
a) The effective cost of a leveraged lease structure was very attractive as compared to aloan to purchase the aircraft The purchaserlessor passed a portion of the tax benefitsback to the airline by way of lower lease payments
b) In most instances the airline could finance up to 100 of the appraised or ldquomarketrdquovalue of the individual aircraft In contrast under ECA financing from Ex‐Im Bank aforeign airline could only finance up to 85 of the ldquonetrdquo or actual price In short theUS airline could finance a larger percentage of a larger amount as compared to aforeign airline purchasing the same aircraft This translated into a significant financialadvantage for the US airlines
c) Under the leveraged lease structure the repayment terms offered to US airlines wereoften 18 to 22 years In contrast Ex‐Im Bank offered much shorter 10 to 12 yearrepayment terms Longer repayment terms mean lower payments which are of coursea significant benefit
As of 2001 Ex‐Im Bank was also aware that US airlines could avail themselves of commercial market financing known originally as equipment trust certificates and later as enhanced equipment trust certificates (ldquoEETCsrdquo) An EETC is a structure whereby investors can provide financing directly through the capital markets as opposed to loan financing provided by banks The EETCs provided significant cost advantages to US airlines and were generally not available
12
to foreign airlines Even for the rare foreign EETC the terms were not as favorable as the terms available to US airlines
The EETC was premised on sect 1110 of the US Bankruptcy Code which only applied to US airlines27 Section 1110 protects a secured creditor of an airline in bankruptcy by either a)requiring the debtor airline within 60 days of the bankruptcy petition date to cure any payment defaults and stay current with loan payments or b) permitting the secured creditor to obtain possession of the creditorrsquos collateral (ie the aircraft) 60 days after the bankruptcy petition date notwithstanding the automatic stay provision that applies to creditors of other types of debtors This certainty of access to collateral ndash and thus to payment ndash provided and continues to provide decreased risk to creditors of US airlines This certainty in turn allows these creditors to provide more favorable financing terms than creditors of foreign airlines In the boom years of 2000 to 2001 US airlines raised $19 billion in the EETC market primarily to purchase new aircraft
Throughout the years leading up to the adoption of the exportable goods screen in 2001 Ex‐Im Bank aircraft financing was provided in accordance with the guidelines set forth in the Large Aircraft Sector Understanding (ldquoLASUrdquo) under the auspices of the Organization for Economic Cooperation and Development (ldquoOECDrdquo) The LASU was followed later by evolving versions of the Aircraft Sector Understanding (ldquoASUrdquo) The LASU and the ASU wereare agreements that set forth guidelines to be followed by ECAs in supporting exports of aircraft manufactured in the home country of the relevant ECA The LASUASU guidelines set forth the maximum repayment term for the financing the maximum advance rate of the financing as a percentage of the net price of the aircraft and the minimum fee that the ECA was required to charge to the airline for the ECA support These terms and conditions resulted in financing that was significantly more expensive than that which could be obtained by US airlines in the private market
In light of the foregoing the Bank reasonably believed that US airlines would not suffer any adverse economic impact from the Bankrsquos financing of foreign airlinesrsquo acquisition of US‐manufactured aircraft In other words when Ex‐Im Bank first adopted the ldquoexportable goodsrdquo screen in 2001 the Bank was confident that its use of the screen would provide efficiencies in transaction‐processing time by focusing the Bankrsquos resources on transactions that could reasonably be expected to raise substantial adverse economic impact concerns
B The US Airline Industry Financing Dynamics Late 2001 to Early 2007
The decade of the 2000s presented the global airline industry with new challenges and new
opportunities ndash both of which created problems for US airlines
27 11 USC sect1110 (2001)
13
The terrorist attacks of September 11 2001 resulted in a sudden and protracted reduction in
demand for airline passenger services This was particularly prolonged in the United States and
Europe As a result of that drop in demand as well as other financial pressures the major US
airlines began a decade‐long process of mergers28 During the 2000s the major US airlines also
were able to shed costs and debtmdasheg pensionsmdashin a way not available to foreign airlines
under the US Bankruptcy Code29
As a result of this downsizing and restructuring US airlines focused on consolidation and
survival not expansion of their fleets by purchasing new aircraft US airline purchases of new
passenger aircraft almost disappeared after 2001 reappeared briefly in 2007 and then
disappeared again until sometime in 2010 Instead of ordering new aircraft US airlines
primarily relied upon the aircraft that they had purchased with EETC financing in the 2001‐2002
period
Nonetheless the data that are available indicate that through 2007 the US airlines generally
had access to aircraft financing that was no less favorable than financing provided by ECAs such
as Ex‐Im Bank In the midst of these developments starting in 2005 the various countries and
constituencies that were involved with ECA aircraft financing began negotiating a new ASU
During negotiations of the new ASU European airlines alleged that ECA financing was more
favorable than the financing to which they had access In June 2007 a new ASU agreement was
reached The European airlines explicitly approved thus signaling that the new agreement
eliminated any ECA financing advantage At the same time none of the US airlines raised any
economic impact concerns about the new ASU As Ex‐Im Bank reviewed and revised its
Economic Impact Procedures in 2007 there were no complaints raised by US airlines or any
other parties regarding aircraft transactions Likewise the new 2007 ASU had explicitly quelled
similar concerns in Europe All of the other relevant factors that led to adoption of the
ldquoexportable goodsrdquo screen in 2001 remained true in 2007 As a result in slightly varied form
the ldquoexportable goodsrdquo screen was carried through the 2002 and 2007 economic impact
procedures
C The US Airline Industry Financing Dynamics Late 2007 to 2012
After the 2007 ASU took effect the worldwide financial crisis emerged in 2008 and had a major
impact on global financial markets including those for large aircraft purchases From mid‐2008
to the beginning of 2010 the financial markets experienced significant volatility and distress
28 These included TWA and American Airlines in 2001 America West and US Airways in 2005 Northwest Airlines and Delta Air Lines in 2008 Continental Airlines and United Airlines in 2010 and Air Tran and Southwest Airlines in 2010 American Airlines and US Air announced merger plans in 201229 Bankruptcies of the major US Airlines from 2001‐2010 included US Airways in 2002 and 2004 United Airlines in 2002 Northwest Airlines in 2005 Delta Air Lines in 2005 Frontier Airlines in 2008 Mesa Airlines in 2010 American Airlines later filed for bankruptcy protection in 2012
14
Then after a short calm in 2010 the European sovereign debt and related European banking
crises rattled financial markets from mid‐2011 to mid‐2012 The result was another period of
extreme interest rate volatility
During this period the global financial market for commercial jet aircraft had been
characterized by (a) extreme volatility in both interest rates and availability of financing and
(b) major growth in demand for aircraft by airlines in the emerging markets and resource‐rich
OECD countries At the same time (and until only recently) there was very little demand for
aircraft by US airlines
There was also a fundamental shift in the key financial tools used for aircraft purchasesmdashwith
commercial banks playing a much diminished role EETC financing from the capital markets
emerged and matured into the most favorable source of financing
As noted before in early 2010 one US airline raised concerns that the financing provided by
the Bank to Ryanair an up‐and‐coming and successful discount airline in Europe was more
favorable than the financing available to US airlines The complaining airline asserted that Ex‐
Im Bank financing to Ryanair was significantly more favorable than financing that the
complaining airline itself had received in a recent EETC offering
Ex‐Im Bank reviewed and analyzed the assertions and determined that they were flawed in that
the purported difference in financial costs ignored pertinent factors and thus did not indicate
that ECA financing would be more favorable in a true ldquoapples to applesrdquo comparison Some key
factors ignored in the analysis provided by the one US airline were
a The credit‐worthiness of the US airline in question was publically rated at B‐ which in
common investment terms puts it in the ldquojunkrdquo group of ratings Ryanair by comparison is rated as investment grade a significantly higher rating Naturally a difference in credit ratings is going to result in a difference in the cost of financing
b The US airline was re‐financing a group of 10 to 12 year old aircraft while Ryanair was
financing brand‐new aircraft In both cases the aircraft being financed formed the
collateral pool for the loan Older aircraft represent a higher risk due to the poorer
quality of collateral therefore resulting in higher costs of financing
At the same time that this US airline was raising its concerns with the Bank it was also raising
similar concerns in the context of new ASU negotiations By the end of 2010 the ECAs reached
agreement on a new ASU (the 2011 ASU) which went into effect on February 1 2011 This
agreement included a built‐in adjustment mechanism to reflect changes in the financial
markets as they occurred This was designed to ensure that ECA financing and commercial bank
financing were generally equivalent The Bank continues to monitor the 2011 ASU to ensure
that the adjustment mechanism built into that agreement does in fact generally work to
15
enforce an equilibrium between the cost of ECA aircraft financings and the financing available
to US airlines in the private market In addition this very issue continues to be a regular topic
of discussion among the ASU participant countries as well Based on the data that have been
developed and presented to date the Bank believes that the 2011 ASU properly serves its
intended function of ensuring that airlines using private market financing do not suffer a
competitive disadvantage when compared to ECA financing of aircraft under the ASU
IV Conclusion
Ex‐Im Bankrsquos exportable goods screen complied with the Bankrsquos statutory requirements to
assess the potential adverse effects of all transactions and to focus on those transactions that
were likely to result in a substantial adverse economic impact on US industry Historically
financing available to US airlines for the purchase of new wide‐body aircraft has been either
more favorable than or equally favorable as Ex‐Im Bank financing to foreign airlines for the
purchase of equivalent aircraft The exportable goods screen was an appropriate reasonable
and efficient response to the realities of aircraft financing It properly balanced the
Congressional directives to assess the likelihood of substantial economic impact on US
industry and US jobs with the need to finance transactions in an efficient manner so as to
support US exports and US jobs
November 22 2013
Export‐Import Bank of the United States 811 Vermont Ave NW Washington DC 20571
16
Appendix A
Excerpt from Staff Memorandum to Ex‐Im Bank Board of Directors Accompanying 1979
Economic Impact Procedures30
Thus Section 2(b)(1)(B) of the Act requires the Board of Directors to take into account ldquoany
serious adverse effectrdquo which loans or guarantees may have on US industry materials in short
supply and employment Section 1911 of the 1978 Amendments requires consideration by the
Bank of the extent to which a loan or financial guarantee ldquois likely to have an adverse
effecthellipeither by reducing demand for goods produced in the United States or by increasing
imports to the United Statesrdquo and Section 608 of the Appropriations Act requires a finding that
the commodity ultimately produced as a result of [Bank] financing will be in surplus when the
production comes on‐stream and that US producers of the same similar or competing
commodity will be substantially injured It is apparent that the latter two statutory provisions
are explications of the basic mandate of the Act and do not expand the Bankrsquos mandate to
examine domestic impact but rather suggest factors to be considered in that examination To
a great extent the 1978 Amendments language and the Appropriations Act provisions set forth
the same concept in different ways Thus the reference in Section 1911 of the 1978
Amendments to ldquoreducing demand for goods in the United Statesrdquo and ldquoincreasing imports to
the United Statesrdquo is no more than the inevitable consequence of a commodity being ldquoin
surplusrdquo as stated in Section 608 of the Appropriations Act
Section 2(b)(1)(B) is the broadest formulation of the basic concept since it contains the most
general language ie ldquoany serious impactrdquo and encompasses all types of exports Section
1911 is primarily procedural in nature directing the Bank not only to implement appropriate
regulations and procedures to ensure full consideration of adverse impact but also to request a
report from the International Trade Commission Section 1911 includes a more detailed
description of events which would constitute adverse impactmdashie a reduction in demand for
US produced goods or an increase in imports to the US Finally this section contains an
explicit reference to agriculture which was only implicitly covered by Section 2(b)(1)(B) It
should be noted that this is one of several references to agriculture which were added to the
Act by the 1978 Amendments
The Appropriations Act provision explicitly refers to a balancing by the Board of Directors of the
benefits of the [Bank]‐supported export against the injury to US [producers] of the commodity
in question At the same time the Act has always necessitated such a balancing by requiring
the Bank to take into account ldquoserious adverse effects upon the US economyrdquo at the same
time it carries out the Bankrsquos basic mandate to ldquofacilitate exportsrdquo and to ldquofoster expansion of
exportsrdquo Under either provision therefore the Board of Directors will be taking into
30 Memorandum ldquoProcedures Regarding Adverse Domestic Impact of Eximbank Financingrdquo Pp 7‐12 Jan 5 1979 17
consideration the results of the balancing as one of the many factors involved in making a
decision to provide financing It should be noted that Section 1911 of the 1978 Amendments is
consistent with both of these provisions since it only seeks to ensure that ldquofull considerationrdquo is
given to adverse effects upon the US economy
Section 2(b)(1)(B) of the Act refers to ldquoserious adverse effectrdquo upon the US economy as a
whole whereas Section 608 of the Appropriations Act imposes a more stringent test by
focusing on a single industry ndash the domestic producers of the commodity to be produced by the
project supported by [the Bank] ndash and requiring a determination of substantial injury for that
industry alone However a reading of the entire Section shows that such a determination
would have to be made only if the net effect upon the US economy of the project for which
support was requested from [the Bank] is negative and if the commodity is likely to be in
surplus on world markets at the time the project becomes operative In any event under
Section 2(b)(1)(B) the Board would have to take into account any serious adverse effects of the
transaction upon the US economy Only if the Board decides to proceed with the transaction
regardless of such effects would it be necessary to determine if there will be substantial injury
to US producers of the commodity and thus trigger the prohibition contained in Section 608
It should also be noted that Section 1911 of the 1978 Amendments speaks in terms only of ldquoany
adverse effectrdquo However the language of that provision clearly shows that it was not intended
to set up a substantive test but rather as was mentioned above to insure that formal
procedures to take into account impacts upon the US economy are established by [Ex‐Im
Bank] as well as to enable the Bank to obtain a report from the International Trade
Commissionrdquo PL 95‐630 92 Stat 3641 (1978)
18
Appendix B
Financial Tools Available to US Airlines
Generally over the past several decades US airlines have had access to a broad range of
aircraft financing options
Accordingly at different times during the past several decades US airlines took advantage of
whichever financing option provided the most attractive overall financing terms from such
airlinesrsquo perspective For instance a US airline would be able to maximize the amount of the
financing thereby minimizing the amount of its own money it had to invest in the aircraft (ie
the ldquodown paymentrdquo) It might also maximize the amount of money in excess of the actual cost
of the aircraft it could raise against the aircraft obtain the longest possible repayment term and
the slowest possible amortization schedule (ie the longest ldquoweighted average liferdquo) obtain
the lowest interest rate and risk premium obtain the least restrictive operational and financial
covenants provide the least amount of collateral or other security or obtain other benefits
Due to the fact that the United States is seen as not presenting any ldquocountry riskrdquo and has well‐
developed and well‐regarded legal and judicial systems that are seen as being protective of
creditorsrsquo rights US airlines have usually had access to secured aircraft financings from
commercial banks from around the world During the past several decades commercial banks
from different regions have been at the forefront of the aircraft finance industry and have
provided financing to US airlines on attractive financing terms Initially US‐based banks
provided most of the aircraft financing to US airlines but during the 1980s Japanese banks
became very significant lenders to the US airlines During the 1990s and 2000s the European
banks (German French British and Swiss banks) were the most significant source of
commercial bank funding for US airlines
In addition to commercial bank financing during the 1970s and 1980s US airlines obtained
long‐term financing from US‐based institutional investors (eg insurance companies and
pension funds) through the use of the Equipment Trust Certificate (ldquoETCrdquo) financing structure or
the Pass Through Certificate (ldquoPTCrdquo) financing structure The ETC is a financing provided by
institutional investors that is secured by one or more items of equipment (eg aircraft) The
PTC is a group of ETCs combined into a public debt security that is sold into the capital markets
to institutional investors
However during the 1980s the simplest and most prevalent form of aircraft financing for US
airlines was the US leveraged lease
The US leveraged lease allowed US airlines to take advantage of the US tax code which
generally provides for all types of capital assets to be depreciated and thereby reduces or
defers taxes due to the deductibility of tax depreciation Because US airlines generally did not 19
have sufficient income to fully take advantage of the benefit of the tax depreciation deductions
associated with acquiring aircraft the US airlines entered into US leveraged leases Under a
leveraged lease the benefits of the tax depreciation deductions related to the aircraft were
transferred to profitable companies that had income they wanted to shelter from tax In
return the company was willing to provide the equity in a US leverage lease (approximately
20 of the appraised value of the aircraft) and to ldquoleaserdquo the aircraft back to the airline for the
airlinersquos use A number of different entities entered into such leases including banks insurance
companies and other financial institutions such as Ford Motor Credit as well as finance
subsidiaries of other corporate entities including consumer product companies such as Phillip
Morris or entertainment companies such as Disney The fact that these were ldquoleveragedrdquo
leases (as opposed to ldquosingle investor leasesrdquo) also enabled the equity providers to deduct the
interest expense associated with the US leveraged lease
Through the use of a combination of lease equity and debt a US leveraged lease allowed US
airlines to arrange financing for up to 100 of the appraised value of an aircraft This was
particularly attractive to major US airlines because due to their size and relative importance
to the aircraft manufacturers every major US airline generally was able to negotiate aircraft
purchases with the aircraft manufacturers that enabled the airline to buy the aircraft for
amounts significantly less than the appraised value The result was that by using a US
leveraged lease to finance its aircraft a US airline was able to ldquoover‐financerdquo the aircraft (ie
finance the aircraft for more than the airline was paying for the aircraft) resulting in the airline
effectively having the ability each time the airline financed an aircraft to arrange 100
financing for its aircraft and at the same time arrange a long‐term working capital loan This is
the equivalent of a home buyer being able to buy a house with no money down (no down
payment) and also receiving a long‐term loan for non‐home expenses
In contrast Ex‐Im Bank‐supported aircraft financing is for only 85 (and sometimes less) of the
actual ldquonet pricerdquo that the airline is paying the US aircraft manufacturer (after deducting all
discounts and other concessions the airline has negotiated with the US aircraft manufacturer
which results in a net price that is almost always less than the appraised value) This requires
the foreign airline that is using Ex‐Im Bank support to come up with a down payment of at least
15 of the net price of the aircraft As a result US airlines were able to obtain more financing
under a US leveraged lease (without putting any money down) than foreign airlines could
under an Ex‐Im Bank supported aircraft financing (which required a down payment)
In addition US leveraged leases used by US airlines always had very long repayment terms
Generally speaking the longer the repayment the longer the tax deferral and the more
advantageous the terms of the US leveraged lease As a result it was not unusual for the US
leveraged leases used by US airlines to have a repayment term of between 18 and 22 years
and sometimes as long as 25 years The only constraint was that the lease term of the
20
leveraged lease should not exceed 80 of the economic useful life of the aircraft which in
some instances was more than 30 years
In contrast the repayment term in an Ex‐Im Bank‐supported aircraft financing is never longer
than 12 years which is the maximum repayment term Ex‐Im Bank is permitted to offer for an
aircraft financing under the guidelines for export credits promulgated by the Organization for
Economic Cooperation and Development (the ldquoOECDrdquo) with which guidelines the US
Government (including Ex‐Im Bank) has agreed to abide This difference in repayment terms is
significant it is similar to the difference in monthly payments under a 15 year home mortgage
versus a 30 year home mortgage As a result US airlines were able to obtain significantly
longer financing under a US leveraged lease (which generally resulted in a smaller periodic
principal repayment burden due to the longer repayment term) than foreign airlines could
under an Ex‐Im Bank‐supported financing
US leveraged leases used by US airlines also had a slower amortization profile with a very
long weighted average life (ie small amounts of debt amortization in the early years of the
financing) of at least 10 years In the same manner that a longer repayment term increased the
tax deferral a longer weighted average life also increased the tax deferral
In contrast the amortization profile in an Ex‐Im Bank supported aircraft financing for a foreign
airline is usually between 6 years and 65 years (at least 4 years shorter than the weighted
average life of the US leveraged leases historically used by US airlines) which imposes a
much greater cash flow burden on the foreign airline in comparison with the cash flows
required of a US airline under a US leveraged lease
Although the absolute interest rate on the debt in a US leveraged lease fluctuated over time
with the overall level of interest rates the providers of the debt into these US leveraged leases
(primarily insurance companies and other institutional investors) were generally willing to
accept an interest rate margin of less than 100 basis points31 over LIBOR32 on a fixed rate
equivalent basis (and sometimes significantly less than 100 basis points)
In contrast the interest rate margin on the debt on an Ex‐Im Bank‐supported aircraft financing
was generally between a few basis points over LIBOR to 50 basis points over LIBOR because the
interest on the Ex‐Im Bank‐guaranteed aircraft financing is guaranteed by Ex‐Im Bank and
reflects the low risk associated with a US Government guaranteed loan However the interest
rate margin on an Ex‐Im Bank‐guaranteed aircraft financing does not reflect the Ex‐Im Bank
exposure fee (or risk premium) that is paid to Ex‐Im Bank in view of the underlying risk of the
foreign airline The minimum exposure fee charged by Ex‐Im Bank was 2 during the 1980s
31 100 basis points equals 1 percent 32 LIBOR is the London Inter‐Bank Offering Rate and is a common reference rate such as ldquoPrimerdquo or ldquoTreasury Raterdquo used in adjustable interest rate transactions
21
and early 1990s and 3 until 2007 when the OECD promulgated a new set of guidelines for
export credits for aircraft (known as the ldquo2007 Aircraft Sector Understandingrdquo or the ldquo2007
ASUrdquo) This exposure fee was required to be paid ldquoup frontrdquo ndash ie at the inception of the loan
On a per annum basis this equates to between 30 basis points and 50 basis points which
should be added to the interest rate margin received by the guaranteed lender to obtain the
equivalent interest rate paid by a foreign airline under Ex‐Im Bank‐supported financing (for
purposes of comparing the overall financing cost to those incurred by US airlines) The Ex‐Im
Bank exposure fee is similar to a homeowner having to pay ldquopointsrdquo up front at the time he
obtains his mortgage The effect of paying points up front and paying an Ex‐Im Bank exposure
fee effectively increases the cost of the financing In comparing the overall cost of financing
through ECA support including the exposure fee to the overall cost of a leveraged lease for
borrowers with comparable credit profiles the overall cost of the US leveraged lease was
considerably more favorable than what could be achieved through an Ex‐Im Bank‐supported
aircraft financing
Although the US leveraged lease was itself a very attractive financing structure for US
airlines at different times the basic US leveraged lease was made even more attractive due to
other provisions of the US and foreign tax codes
For instance from the 1960s (during the Kennedy Administration) until its repeal under the Tax
Reform Act of 1986 the US tax code provided for an investment tax credit which was intended
to encourage investment in capital goods and therefore allowed airlines or the equity investor
in a US leveraged lease to get a credit against the taxes it would otherwise be required to pay
This credit was a permanent reduction in taxes paid as opposed to only the deferral of taxes
(postponement of when taxes had to be paid) that could be achieved through the use of the
US leveraged lease
Similarly from the 1980s to the mid‐1990s it was common for a US airline to combine a US
leveraged lease with a lease into a foreign jurisdiction that had a ldquoform over substancerdquo
approach to its tax code (as opposed to the United States which has a ldquosubstance over formrdquo
approach to its tax code) Taking advantage of the disparity a US airline could ldquosellrdquo the
aircraft to both (i) an equity investor in the United States and (ii) an equity investor in a foreign
country such as Japan Germany or Hong Kong and each equity investor could depreciate the
same aircraft and therefore shelter its respective income Over time due to changes in the
respective tax codes these more aggressive tax advantaged cross‐border leasing structures
(ldquoDouble Dipsrdquo and even on occasion ldquoTriple Dipsrdquo) were disallowed but not before US airlines
financed billions of dollars of aircraft using such tax advantaged leasing structures
During the 1990s the basic US leveraged lease was made even more attractive by taking
advantage of another provision of the US tax code that allowed additional US taxes to be
22
deferred if the equity investor in the transaction used an offshore subsidiary that qualified as a
Foreign Sales Corporation (ldquoFSCrdquo) under the US tax code and structured the deal as a
Commission FSC
In addition during the 1980s and 1990s US airlines had access to other sources of financing
with overall financing terms that were much more attractive than what was available to foreign
airlines via Ex‐Im Bank‐supported export credits For example during the late 1980s and 1990s
Airbus made its first significant sales to US airlines In order to do so Airbus arranged and
provided very attractive and flexible financing terms to US airlines to encourage them to
purchase European‐manufactured Airbus aircraft instead of US‐manufactured Boeing or
McDonnell Douglas aircraft The US airlines were more than willing to accept these incentives
During this period some US airlines entered into ldquowalk awayrdquo leases of Airbus aircraft
pursuant to which Airbus North America (backed by the joint and several guarantees of each of
the four countries that are members of Airbus SAS) entered into a US leveraged lease of the
Airbus aircraft and then subleased the aircraft to a US airline on terms that (i) passed along
most of the tax benefits to the US airline through lower lease rentals and (ii) permitted the
US airline to terminate the sublease and simply ldquowalk awayrdquo from the lease upon a relatively
short notice period
Under the ldquoHome Market Rulerdquo the European export credit agencies (including those of
France Germany and the United Kingdom) that usually support the financing of Airbus aircraft
could not provide such support to US airlines Therefore Airbus arranged for Kreditanstalt fur
Wiederaufbau the development bank of Germany to provide very attractive financing for the
Airbus aircraft being acquired by US airlines These financings occurred on terms much more
favorable (with 18‐ to 22‐year repayment terms) than what export credit agencies could
provide (with a maximum repayment term of 12‐years)
Similarly during the 1990s US airlines began to acquire a large number of 35 to 50 seat
regional jet aircraft manufactured by Bombardier of Canada and Embraer of Brazil Many of
these aircraft were acquired by the US airlines by using export credit support from Canada and
Brazil Some of the financing terms (ie the repayment terms) of these Brazilian and Canadian
government‐supported export credit financings were even more attractive (15‐ to 18‐year
repayment terms) than what was available from the export credit agencies of France Germany
and the United Kingdom with respect to Airbus aircraft or from Ex‐Im Bank with respect to
Boeing aircraft (10‐ to 12‐year repayment terms)
To make the financing of Canadian‐manufactured Bombardier regional jets even more
attractive to US airlines the province of Quebec (where Bombardier has its headquarters)
through Investment Quebec provided additional aircraft financing support to the US airlines
23
Finally to the extent even more attractive financing was needed to convince US airlines to
purchase Canadian or Brazilian‐manufactured regional aircraft the manufacturers themselves
provided residual value guarantees with respect to such aircraft to the airline or to the
financiers (ie to the equity investor in a US leveraged lease or the creditors financing the
aircraft)
The next major development in aircraft financing used by US airlines was the development in
the 1990s of the Enhanced Equipment Trust Certificate (ldquoEETCrdquo) which was an ETC with certain
structural enhancements The most important of these enhancements is a liquidity facility to
ensure that if there is a default the financiers would continue to receive current interest
during the period of time while the aircraft is being repossessed and remarketed A key
element in the development of the EETC was the existence of Section 1110 of the US
Bankruptcy Code which gives a type of ldquopreferred creditorrdquo status to financiers of aircraft for
US airlines This ldquopreferred creditorrdquo status exempts aircraft financiers of US airlines from
the automatic stay generally imposed following a bankruptcy filing by a borrower subject to the
protections of the US Bankruptcy Code Section 1110 of the US Bankruptcy Code
accomplishes this by requiring the airline within 60 days of such bankruptcy filing to either (i)
resume payments under the originally agreed aircraft financing or (ii) return the aircraft to the
financier
The first EETC was done in 1994 and the practice has now been successfully used by almost
every major US airline including Alaska Airlines America West Airlines American Airlines
Continental Airlines Delta Airlines Hawaiian Airlines Jet Blue Airlines Northwest Airlines
Southwest Airlines United Airlines and US Airways The overall financing cost of a US airline
acquiring an aircraft through the use of the EETC ndash which includes the amount of financing
repayment term amortization profile effective cost of the financing etc ndash has generally been
significantly more attractive than (i) what such US airline could have achieved under an export
credit‐supported aircraft financing for such airline and (ii) what a similarly rated foreign airline
could have achieved under an export credit‐supported aircraft financing
This is particularly true for the financing of new aircraft The development of the EETC market
provided enormous financing flexibility to US airlines for the financing of new aircraft the
EETC provided the airline with the option to finance on a simple secured mortgage basis or the
US airline could opt for a leveraged lease with all of the benefits associated with a leveraged
lease described above
Beginning in 1997 US airlines had the ability to raise money in the capital markets when the
overall financing terms were most attractive They were able to ldquolock‐inrdquo such favorable
financing terms to fund new aircraft that were scheduled to be delivered in the future by
issuing a ldquopre‐fundedrdquo EETC These pre‐funded EETCs were used to great success by US
24
airlines in the late 1990s through 2001 a period in which the US airlines were taking delivery
of a significant number of aircraft
As a result of the downturn in the US airline industry following the September 11 2001
terrorist attacks many US airlines deferred or cancelled their orders for new aircraft This
reduced the need for US airlines to finance new aircraft when the financing terms available to
such US airlines via the EETC were not as favorable due to (i) the perceived increased credit
risks of the US airline industry following the September 11 terrorist attacks and (ii) the
temporary disequilibrium in the credit markets following the 200820092010 credit crisis
Now that the US airlines have once again begun to take delivery of a significant number of
new aircraft the pre‐funded EETC continues to be the preferred source of financing for US
airlines as evidenced by the number and amount of EETC issuances during 2012 and 2013
Based on an analysis of the EETC transactions occurring during 2012 and 2013 EETCs are once
again generally considered to provide more attractive overall financing terms than what could
be achieved by an airline under an export credit‐supported financing done under the terms of
the 2011 Aircraft Sector Understanding
25
GLOSSARY
ldquoAdverse Economic Impactrdquo is the short‐hand term used to refer to any serious negative effects on US industries or US jobs as set forth in the Bankrsquos Charter that result from Ex‐Im Bank loans guarantees or insurance The Bankrsquos Charter contains three provisions that address adverse economic impact found at 12 USC sectsect 635(b)(1) 635a‐2 635(e)
ldquoAir Indiardquo is an airline owned by the Government of the Republic of India ldquoAir India Transactionsrdquo are the two final commitments approved by Ex‐Im Bank on September
30 2011 for loan guarantees for the purchase of a number of 787 ldquoDreamlinerrdquo aircraft from Boeing and to be financed by a commercial lender not identified at the time As of the date of this paper Ex‐Im Bank has not issued any of its loan guarantees but is expected to do so in the coming months Ten of the aircraft involved in these two final commitments have been delivered to Air India and are in use by Air India on routes outside the United States The deliveries of the ten aircraft were made using private short‐term financing as to which Ex‐Im Bank had no involvement
ldquoAirbusrdquo Airbus SAS is a Europe‐based manufacturer of large commercial aircraft Airbus is the only competitor to Boeing the US manufacturer Airbus sales are supported by the ECAs of Germany France and the UK
ldquoAircraft Sector also known as the ASU is an agreement among members of the OECD Understandingrdquo that manufacture aircraft and Brazil The ASU requires that Export
Credit Agencies that support the export of aircraft follow certain rules and restrictions that set forth the most favorable terms that can be provided These rules and restrictions include the Export Credit Agency must charge a minimum risk premium which is determined by the ASU the term of any loan made by or supported by the Export Credit Agency for the purchase of aircraft cannot exceed 12 years the Export Credit Agency today can lend or guarantee only up to 85 of the actual purchase price of the aircraft being exported and the use of risk mitigants The ASU was preceded by the Large Aircraft Sector Understanding which governed these issues until the enactment of the 2007 ASU The ASU was again updated and revised in 2011 (See also the Large Aircraft Sector Understanding)
ldquoArrangementrdquo is the agreement among Export Credit Agencies governing the terms by which they will provide loans guarantees or insurance in support of exports from their respective countries Among other things the Arrangement requires Export Credit Agencies to charge a minimum risk premium which is governed by the Arrangement See also Organization for Economic Cooperation and Development
ldquoASUrdquo see Aircraft Sector Understanding ldquoAverage Weighted Liferdquo for purposes of this paper refers to the average number of years that
each dollar of unpaid principal on a loan remains outstanding For example a loan with equal principal payments throughout the loan term will have an average weighted life close to the middle of the whole loan term
26
ldquoBank Actrdquo is the Export‐Import Bank Act of 1945 12 USC sect635 as amended ldquoBank Advisory Committeerdquo is the official Advisory Committee of the Bank appointed in accordance
with the Bank Act and the Advisory Committee Act The Bank Advisory Committee is comprised of representatives of various industry and market sectors as well as representatives of labor and international trade experts
ldquoBasis pointsrdquo are a numerical measure applied to interest rates One basis point equals 1100th of one percent or 100 basis points equals one percent
ldquoCapital Equipmentrdquo is equipment used to manufacture a product provide a service or sell store or deliver merchandise A wide‐body aircraft is a piece of capital equipment
ldquoCharterrdquo is the Bank Act as well the provisions of the Export Import Bank Reauthorization Act of 2012 (Public Law 112‐122) that are not codified in the Bank Act
ldquoDreamlinerrdquo is the name given to a Boeing 787 wide‐body commercial aircraft ldquoECArdquo see Export Credit Agencies ldquoEconomic Impact Proceduresrdquo
are procedures adopted by Ex‐Im Bank to assess whether transactions supported by the Bank cause a serious adverse economic impact to US industries and US jobs See also Adverse Economic Impact
ldquoEETCrdquo see Enhanced Equipment Trust Certificate ldquoEnhanced Equipment Trust Certificaterdquo
also known as an EETC is a type of secured bond issued by a borrower in the capital markets The EETC is secured by the equipment being purchased with the proceeds of the bond issuance EETCs are used primarily for aircraft and since the late 1990s has been the dominant financing tool used by US airlines to purchase aircraft Section 1110 of the US Bankruptcy Codemdashwhich allows creditors of aircraft borrowers to obtain their collateral within 60 days if the payments on their debt is not current ndash has provided creditors of US airlines a level of comfort not available to creditors of foreign airlines until recently This generally provided US airlines with a significant financial advantage vis a vis their foreign competitors Recently the adoption of the Cape Town Convention and the related Aircraft Equipment Protocol has provided creditors of foreign airlines with protections similar to the protections provided by section 1110 of the US Bankruptcy Code Recently this has led to the beginnings of an international EETC market
ldquoEquipment Trust Certificaterdquo
also known as an ETC was the predecessor to the Enhanced Equipment Trust Certificate
ldquoETCrdquo see Equipment Trust Certificate ldquoEx‐Im Bankrdquo or ldquoBankrdquo See The Export‐Import Bank of the United States ldquoExport Credit Agenciesrdquo are agencies or ministries of government that have the official role of
providing loans guarantees or insurance in support of exports from their respective countries or in support of exports by sales of companies from their respective countries Ex‐Im Bank is the official Export Credit Agency of the United States of America
ldquoexportable goods screenrdquo is a screen or filter adopted by Ex‐Im Bank in its 2001 Economic Impact Procedures The exportable goods screen is utilized along with other screens to balance the Bankrsquos obligation to consider the adverse
27
economic effects of its transactions on US industries and US jobs with the Bankrsquos mandate to support US export transactions in a timely manner so as to fully support the exporterrsquos business opportunity The exportable goods screen filtered out transactions that supported exports which could only be used by a foreign buyer to provide services rather than produce goods
ldquoExport‐Import Bank of the is an independent agency of the Federal Government of the United United Statesrdquo States of America Also known as ldquoEx‐Im Bankrdquo Ex‐Im Bankrsquos mission
is to support US jobs by supporting US exports See 12 USC 635 et seq
ldquoExposure Feerdquo is the risk premium charged by Ex‐Im Bank in exchange for its guarantee in certain transactions The exposure fee must be at least equal to the minimum risk premium required by the terms of the Arrangement and the Aircraft Sector Understanding
ldquoForeign Sales Corporationrdquo is a company created under the terms of a former provision of the US Internal Revenue Code Foreign Sales Corporations received significant tax benefits
ldquoFSCrdquo see Foreign Sales Corporation ldquoInvestment Tax Creditrdquo is a credit permitted under the US Internal Revenue Code for the
purchase of certain types of equipment in certain circumstances See also Leveraged Leases
ldquoKFWrdquo the development bank for the Federal Republic of Germany KFW is an Export Credit Agency but it also operates through a ldquomarket windowrdquo which is not subject to the Home Market Rule Thus KFW provides support to Airbus for its sales of aircraft to US airlines The United States does not have an equivalent institution and Ex‐Im Bank does not have a ldquomarket windowrdquo
ldquoLarge Aircraft Sector also known as LASU was the predecessor to the Aircraft Sector Understandingrdquo Understanding The LASU governed the same general issues as are set
forth in the Aircraft Sector Understanding except that the minimum risk premium was lower than that required in the 2007 ASU and 2011 ASU When the 2007 ASU was enacted grandfathering provisions allowed ECA‐supported financing for a limited number of aircraft to be governed by LASU
ldquoLASUrdquo see Large Aircraft Sector Understanding ldquoLeveraged Leaserdquo is a lease of equipment and is designed to allow the lessor to take
advantage of certain tax code provisions such as the depreciation deduction and the investment tax credit while allowing the lessee to obtain the equipment involved at a significantly lower cost Leveraged Leases were a very popular means for US airlines to acquire aircraft throughout the 1980s and 1990s The value of the tax deductions to the lessor were significant so that the implicit interest rate in the lease payments by the US airline were extremely low Usually the US airline did not have sufficient profit to take advantage of the favorable tax code provisions By using a leveraged lease another company that could shelter income by using the tax code provisions would buy the equipment and lease the equipment to the US airline Usually at the end of the lease term the US airline would purchase the aircraft
28
ldquoLIBORrdquo is the London Inter‐bank Offering Rate It is commonly used as a reference rate in loan transactions that have floating or adjustable interest rates LIBOR reflects the rate at which banks will lend money to each other LIBOR is set for various loan terms (eg 3 months 6 months etc) and is widely published making it a convenient rate to use as a reference rate
ldquoNet pricerdquo is the price paid after all discounts have been deducted The net price is the actual price paid for a piece of equipment In aircraft transactions pursuant to the ASU Ex‐Im Bank will only support up to 85 of the net price of an aircraft EETC transactions on the other hand often support the nominal purchase price of an aircraft and thus result in a significantly higher amount financed
ldquoOECDrdquo see the Organization for Economic Cooperation and Development Open Skies Agreement Is a type of bilateral agreement between countries that govern the
rights of airlines from the two countries to fly into the other country Open Skies Agreements generally allow free access to fly as many routes to a country as an airline may choose but then usually restrict the ability to fly within the other country Generally it is a ldquofly in and outrdquo rule although there are exceptions
ldquoOrganization for Economic Cooperation and Developmentrdquo
also known as the OECD is an organization comprised of 34 member countries that work together to promote development The United States is a member With regard to Ex‐Im Bank the OECD is the organization through which the US Government negotiates an agreement among Export Credit Agencies known as the Arrangement and the ASU (and its predecessor the LASU)
ldquoPass Through Certificaterdquo also known as a PTC is a group of Equipment Trust Certificates pooled together to form the basis for a bond issuance
ldquoPTCrdquo See Pass Through Certificate ldquoRyanairrdquo is a low‐cost Irish airline that began business after European
deregulation of airlines in 1997 Ryanair rapidly expanded during the first decade of the 2000s creating significant competition for other airlines
ldquoScreensrdquo are a type of filter used by Ex‐Im Bank in its Economic Impact Procedures Screens are designed to identify those transactions which are not likely to cause an adverse economic impact to US industries or US jobs so that such transactions can be processed more quickly and efficiently as required by the Bank Act
ldquoSubstantial Injuryrdquo is a term defined in Ex‐Im Bankrsquos Charter to be applied in connection with the Bankrsquos economic impact procedures 12 USC sect635(e)(4) The Charter states ldquohellipthe extension of any credit or guarantee by the Bank will cause substantial injury if the amount of the capacity for production established or the amount of the increase in such capacity expanded by such credit or guarantee equals or exceeds 1 percent of United States productionrdquo
ldquoTPCCrdquo see Trade Promotion Coordinating Committee ldquoTrade Promotion Coordinating Committeerdquo
also known as the TPCC is an interagency committee of the US Government chaired by the Secretary of Commerce It was established under the Export Enhancement Act of 1992 to provide a
29
unifying framework to coordinate the export promotion and export financing activities of the US government and to develop a government‐wide strategic plan for carrying out such programs
ldquoTrade Sanctionsrdquo refers to any of a number of sanctions imposed by the US Government against companies countries industries or products usually as a result of an accusation of adjudication of a violation of an international trade agreement The Bank Act requires Ex‐Im Bank to take certain trade sanctions into account in its economic impact procedures
30
Table A ndash Congressional Actions and Ex-Im Bank Responses
Year Congressional Action Ex‐Im Bank Response
1968 Bank directed to take into account the possible adverse effect [of its loans and guarantees] upon the United States economy
Bank adds this transactions
factor to analysis of
1975 1 Standard refined to take into account any serious adverse effect of loans and guarantees on competitive position of US industry availability of scarce materials in US and employment in US
2 Bank directed to be competitive with rates terms and conditions offered by principal countries whose exporters compete with US exporters
3 Bank directed to submit semi‐annual report on competitiveness and conduct survey of US exporters and lenders to determine experience in meeting financing competition
Bank adds these of transactions
considerations to analysis
Year Congressional Action Ex‐Im Bank Response
1978 ‐ 1979
1 Bank directed to take into account any serious adverse effect of loans on competitive position of US industry and scarce materials Bank directed to emphasize strengthening competitive position of US exporters and expanding total US exports
2 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [From Appropriations Act Restated in Bank Charter in 1986]
3 Bank directed to implement regulations and procedures to insure full consideration of extent to which loan or guarantee is likely to have adverse effect on industries and employment in US either by reducing demand for US produced goods or increasing imports to the US
Bank develops framework and set of written economic impact procedures
1 Exclude exports the use of which remained localized in foreign country This
is first ldquoforeign localized goods and services screenrdquo
2 ldquoIntent and stimulus for projectrdquo examined to determine likelihood of substantial adverse economic impact Does transaction involve ldquorunaway industryrdquo
(leaving US for cheaper foreign labor)
3 Does export of capital equipment result in ldquobuy backrdquo of product being imported into the US
4 Is net impact on US economy and jobs positive or negative and to what degree
32
Year Congressional Action Ex‐Im Bank Response
1986 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [Originally from 1978 Appropriations incorporated into Bank Charter in 1986]
Senate Report recognizes knowledge and experience of Bank and need to respond to exportersrsquo requests for support in a timely and confidential fashion Economic impact procedures are to be practical and workable and not reduce Bankrsquos competitiveness and flexibility nor ignore positive aspects of export sale
Bank develops ldquoSummary of Adverse Economic Guidelinesrdquo to be applied to both
goods and services (a) is commodity to be produced surplus or likely to compete with US‐produced surplus (b) will Bankrsquos
assistance cause substantial injury to US producers of competing commodity (c)
will injury to US producers of competing commodity outweigh the short‐ and long‐
term benefits to US industry and employment If answer is no then no
further economic impact analysis
1988 Congress establishes test for ldquosubstantial injuryrdquo if the amount of capacity for production established or amount of increase in such capacity expanded by Bankrsquos credit or guarantee exceeds 1 of US production
Bankrsquos Board recognizes requirement to balance (a) possibility of substantial harm
to US production and employment with (b) being responsive competitive and efficient New economic impact procedures ask (a) will the project be in direct competition with US production (b) is the Bankrsquos support significantly associated with the project (c) will the output of the project
cause substantial injury to US producers of the same similar or competing
commodity If answer is no then no further economic impact analysis is required
33
Year Congressional Action Ex‐Im Bank Response
1998 Bank revised procedures involving countries against which trade sanctions were pending or imposed
2001
2006 ‐2007
1 Bank required to determine whether extension of credit or guarantee is likely to produce same or other commodities and whether the production may cause substantial injury to US producers
2 Bank prohibited from providing a loan or guarantee that will facilitate circumvention of trade law order or determination
3 Bank required to designate sensitive commercial sectors and products for which Bank financing deemed unlikely due to potential for adverse economic impact on US
4 Bank required to aggregate financial thresholds on rolling 24‐month basis
Bank develops ldquoexportable goods screenrdquo Does Ex‐Im Bank support result in production of exportable good from the foreign buyerrsquos country If not no further economic impact analysis is required Notice and request for comments were published in the Federal Register US airline industry did not respond
Bank issues 2007 Economic Impact Procedures ldquoExportable goods screenrdquo is modified Will the transaction (capital goods and services) result in either new or additional production capacity of an exportable good
34
Bank would not be able to accomplish its mission of promoting US exports if it were to perform a ldquodetailed economic impact analysisrdquo on every transaction or even for a significant percentage of the transactions
Recognizing the dilatory effects of conducting unnecessary detailed economic impact analyses the Bankrsquos categorical approach to the economic impact provisions of the Bankrsquos Charter has always been to screen out transactions that were not likely to have a substantial adverse effect on US industries or US jobs Ex‐Im Bankrsquos experience in this area over the decades indicates three critical determinants of whether a contemplated transaction has potential to cause substantial adverse impact
1) whether the transaction is too small to have a significant impact
2) whether the transaction involves exports that are to be used for the production of goods or provision of services which are only likely to be used locally in the foreign buyerrsquos country and
3) whether the transaction relates to an industry (eg aircraft) in which the available financing for US domestic sales indicates that Ex‐Im Bank financing for foreign sales generally would not disadvantage the US industry
In 2001 when the Bankrsquos ldquoexportable goodsrdquo screen was first adopted the Bank had substantial reason to believe that transactions resulting in services being exported by foreign countries would be unlikely to have a substantial adverse economic impact on the US services sector
The Bank had for several decades received input from trade groups industry stakeholders and other government agencies regarding the domestic adverse impact of Ex‐Im Bank financing In the Bankrsquos experience such representatives could be relied upon to notify the Bank if they were concerned that the Bankrsquos policies procedures or actions threatened to cause any harm or disruption to a specific industry or sector Concerns raised by industry representatives or the absence of any voiced concerns were a significant tool for the Bank to check the soundness of its categorical judgments as reflected in the screens
As of 2001 when the ldquoexportable goodsrdquo screen was put in place the Bank had heard no concerns about Ex‐Im Bank transactions from the US airline industry in 17 years In 1984 Pan American World Airways (Pan Am) had argued that Ex‐Im Bank support resulted in lower financing costs for foreign airlines than the US airlines could themselves obtain To assess these concerns the Bank analyzed the overall costs of financing for US domestic airlines as compared to the costs of financing to a foreign airline in an Ex‐Im Bank‐guaranteed transaction The analysis compared not just the interest rates charged by lenders in the two different scenarios but also incorporated other factors so as to produce a true ldquoapples‐to‐applesrdquo comparison of the relative financing costs
These other factors included the cost of the Ex‐Im Bank guarantee fee (which the Bank now calls the ldquoexposure feerdquo) as well as the costs of financing the portion of the purchase price that
11
was not supported by the Ex‐Im Bank guarantee The Bank analyzed all of these factors and concluded that in fact Ex‐Im Bank support did not generally result in financing terms for foreign airlines that were more favorable than the financing available to US airlines Pan Am did not contest the Bankrsquos analysis at that time or at any subsequent time Nor did any other US airline or trade group raise any concerns in the intervening 17 years leading up to the adoption of the ldquoexportable goods screenrdquo in 2001 or indeed thereafter until 2010
Between 1990 and 1999 the Bank financed 440 aircraft involving the export of US‐manufactured aircraft representing a total value of approximately $22 billion dollars Given this significant expertise in the aircraft financing sector Ex‐Im Bank had ample and consistent evidence that major US airlines flying international routes had access to more favorable financing relative to the financing available to foreign airlines through ECAs such as Ex‐Im Bank Annexed as Appendix B is a detailed history and explanation of the types of financing that were available to US airlines which in turn had led the Bank to conclude that Bank financing to foreign airlines did not pose any financial competitive harm to US airlines
In contrast to the commercial bank financing available through Ex‐Im Bank in the 1980s and 1990s the principal method used by US airlines to acquire aircraft was through a ldquoleveraged leaserdquo A leveraged lease provides significant tax benefits to an entity that wants to shelter income through additional tax deductions The entity purchases the aircraft and then leases it to the airline The purchaser continues to own the aircraft and thus can take the depreciation deductions and investment tax credits on its tax returns during the term of the lease Once the lease term is over title to the aircraft may be transferred to the airline through various mechanisms The leveraged lease was very beneficial to US airlines in several respects
a) The effective cost of a leveraged lease structure was very attractive as compared to aloan to purchase the aircraft The purchaserlessor passed a portion of the tax benefitsback to the airline by way of lower lease payments
b) In most instances the airline could finance up to 100 of the appraised or ldquomarketrdquovalue of the individual aircraft In contrast under ECA financing from Ex‐Im Bank aforeign airline could only finance up to 85 of the ldquonetrdquo or actual price In short theUS airline could finance a larger percentage of a larger amount as compared to aforeign airline purchasing the same aircraft This translated into a significant financialadvantage for the US airlines
c) Under the leveraged lease structure the repayment terms offered to US airlines wereoften 18 to 22 years In contrast Ex‐Im Bank offered much shorter 10 to 12 yearrepayment terms Longer repayment terms mean lower payments which are of coursea significant benefit
As of 2001 Ex‐Im Bank was also aware that US airlines could avail themselves of commercial market financing known originally as equipment trust certificates and later as enhanced equipment trust certificates (ldquoEETCsrdquo) An EETC is a structure whereby investors can provide financing directly through the capital markets as opposed to loan financing provided by banks The EETCs provided significant cost advantages to US airlines and were generally not available
12
to foreign airlines Even for the rare foreign EETC the terms were not as favorable as the terms available to US airlines
The EETC was premised on sect 1110 of the US Bankruptcy Code which only applied to US airlines27 Section 1110 protects a secured creditor of an airline in bankruptcy by either a)requiring the debtor airline within 60 days of the bankruptcy petition date to cure any payment defaults and stay current with loan payments or b) permitting the secured creditor to obtain possession of the creditorrsquos collateral (ie the aircraft) 60 days after the bankruptcy petition date notwithstanding the automatic stay provision that applies to creditors of other types of debtors This certainty of access to collateral ndash and thus to payment ndash provided and continues to provide decreased risk to creditors of US airlines This certainty in turn allows these creditors to provide more favorable financing terms than creditors of foreign airlines In the boom years of 2000 to 2001 US airlines raised $19 billion in the EETC market primarily to purchase new aircraft
Throughout the years leading up to the adoption of the exportable goods screen in 2001 Ex‐Im Bank aircraft financing was provided in accordance with the guidelines set forth in the Large Aircraft Sector Understanding (ldquoLASUrdquo) under the auspices of the Organization for Economic Cooperation and Development (ldquoOECDrdquo) The LASU was followed later by evolving versions of the Aircraft Sector Understanding (ldquoASUrdquo) The LASU and the ASU wereare agreements that set forth guidelines to be followed by ECAs in supporting exports of aircraft manufactured in the home country of the relevant ECA The LASUASU guidelines set forth the maximum repayment term for the financing the maximum advance rate of the financing as a percentage of the net price of the aircraft and the minimum fee that the ECA was required to charge to the airline for the ECA support These terms and conditions resulted in financing that was significantly more expensive than that which could be obtained by US airlines in the private market
In light of the foregoing the Bank reasonably believed that US airlines would not suffer any adverse economic impact from the Bankrsquos financing of foreign airlinesrsquo acquisition of US‐manufactured aircraft In other words when Ex‐Im Bank first adopted the ldquoexportable goodsrdquo screen in 2001 the Bank was confident that its use of the screen would provide efficiencies in transaction‐processing time by focusing the Bankrsquos resources on transactions that could reasonably be expected to raise substantial adverse economic impact concerns
B The US Airline Industry Financing Dynamics Late 2001 to Early 2007
The decade of the 2000s presented the global airline industry with new challenges and new
opportunities ndash both of which created problems for US airlines
27 11 USC sect1110 (2001)
13
The terrorist attacks of September 11 2001 resulted in a sudden and protracted reduction in
demand for airline passenger services This was particularly prolonged in the United States and
Europe As a result of that drop in demand as well as other financial pressures the major US
airlines began a decade‐long process of mergers28 During the 2000s the major US airlines also
were able to shed costs and debtmdasheg pensionsmdashin a way not available to foreign airlines
under the US Bankruptcy Code29
As a result of this downsizing and restructuring US airlines focused on consolidation and
survival not expansion of their fleets by purchasing new aircraft US airline purchases of new
passenger aircraft almost disappeared after 2001 reappeared briefly in 2007 and then
disappeared again until sometime in 2010 Instead of ordering new aircraft US airlines
primarily relied upon the aircraft that they had purchased with EETC financing in the 2001‐2002
period
Nonetheless the data that are available indicate that through 2007 the US airlines generally
had access to aircraft financing that was no less favorable than financing provided by ECAs such
as Ex‐Im Bank In the midst of these developments starting in 2005 the various countries and
constituencies that were involved with ECA aircraft financing began negotiating a new ASU
During negotiations of the new ASU European airlines alleged that ECA financing was more
favorable than the financing to which they had access In June 2007 a new ASU agreement was
reached The European airlines explicitly approved thus signaling that the new agreement
eliminated any ECA financing advantage At the same time none of the US airlines raised any
economic impact concerns about the new ASU As Ex‐Im Bank reviewed and revised its
Economic Impact Procedures in 2007 there were no complaints raised by US airlines or any
other parties regarding aircraft transactions Likewise the new 2007 ASU had explicitly quelled
similar concerns in Europe All of the other relevant factors that led to adoption of the
ldquoexportable goodsrdquo screen in 2001 remained true in 2007 As a result in slightly varied form
the ldquoexportable goodsrdquo screen was carried through the 2002 and 2007 economic impact
procedures
C The US Airline Industry Financing Dynamics Late 2007 to 2012
After the 2007 ASU took effect the worldwide financial crisis emerged in 2008 and had a major
impact on global financial markets including those for large aircraft purchases From mid‐2008
to the beginning of 2010 the financial markets experienced significant volatility and distress
28 These included TWA and American Airlines in 2001 America West and US Airways in 2005 Northwest Airlines and Delta Air Lines in 2008 Continental Airlines and United Airlines in 2010 and Air Tran and Southwest Airlines in 2010 American Airlines and US Air announced merger plans in 201229 Bankruptcies of the major US Airlines from 2001‐2010 included US Airways in 2002 and 2004 United Airlines in 2002 Northwest Airlines in 2005 Delta Air Lines in 2005 Frontier Airlines in 2008 Mesa Airlines in 2010 American Airlines later filed for bankruptcy protection in 2012
14
Then after a short calm in 2010 the European sovereign debt and related European banking
crises rattled financial markets from mid‐2011 to mid‐2012 The result was another period of
extreme interest rate volatility
During this period the global financial market for commercial jet aircraft had been
characterized by (a) extreme volatility in both interest rates and availability of financing and
(b) major growth in demand for aircraft by airlines in the emerging markets and resource‐rich
OECD countries At the same time (and until only recently) there was very little demand for
aircraft by US airlines
There was also a fundamental shift in the key financial tools used for aircraft purchasesmdashwith
commercial banks playing a much diminished role EETC financing from the capital markets
emerged and matured into the most favorable source of financing
As noted before in early 2010 one US airline raised concerns that the financing provided by
the Bank to Ryanair an up‐and‐coming and successful discount airline in Europe was more
favorable than the financing available to US airlines The complaining airline asserted that Ex‐
Im Bank financing to Ryanair was significantly more favorable than financing that the
complaining airline itself had received in a recent EETC offering
Ex‐Im Bank reviewed and analyzed the assertions and determined that they were flawed in that
the purported difference in financial costs ignored pertinent factors and thus did not indicate
that ECA financing would be more favorable in a true ldquoapples to applesrdquo comparison Some key
factors ignored in the analysis provided by the one US airline were
a The credit‐worthiness of the US airline in question was publically rated at B‐ which in
common investment terms puts it in the ldquojunkrdquo group of ratings Ryanair by comparison is rated as investment grade a significantly higher rating Naturally a difference in credit ratings is going to result in a difference in the cost of financing
b The US airline was re‐financing a group of 10 to 12 year old aircraft while Ryanair was
financing brand‐new aircraft In both cases the aircraft being financed formed the
collateral pool for the loan Older aircraft represent a higher risk due to the poorer
quality of collateral therefore resulting in higher costs of financing
At the same time that this US airline was raising its concerns with the Bank it was also raising
similar concerns in the context of new ASU negotiations By the end of 2010 the ECAs reached
agreement on a new ASU (the 2011 ASU) which went into effect on February 1 2011 This
agreement included a built‐in adjustment mechanism to reflect changes in the financial
markets as they occurred This was designed to ensure that ECA financing and commercial bank
financing were generally equivalent The Bank continues to monitor the 2011 ASU to ensure
that the adjustment mechanism built into that agreement does in fact generally work to
15
enforce an equilibrium between the cost of ECA aircraft financings and the financing available
to US airlines in the private market In addition this very issue continues to be a regular topic
of discussion among the ASU participant countries as well Based on the data that have been
developed and presented to date the Bank believes that the 2011 ASU properly serves its
intended function of ensuring that airlines using private market financing do not suffer a
competitive disadvantage when compared to ECA financing of aircraft under the ASU
IV Conclusion
Ex‐Im Bankrsquos exportable goods screen complied with the Bankrsquos statutory requirements to
assess the potential adverse effects of all transactions and to focus on those transactions that
were likely to result in a substantial adverse economic impact on US industry Historically
financing available to US airlines for the purchase of new wide‐body aircraft has been either
more favorable than or equally favorable as Ex‐Im Bank financing to foreign airlines for the
purchase of equivalent aircraft The exportable goods screen was an appropriate reasonable
and efficient response to the realities of aircraft financing It properly balanced the
Congressional directives to assess the likelihood of substantial economic impact on US
industry and US jobs with the need to finance transactions in an efficient manner so as to
support US exports and US jobs
November 22 2013
Export‐Import Bank of the United States 811 Vermont Ave NW Washington DC 20571
16
Appendix A
Excerpt from Staff Memorandum to Ex‐Im Bank Board of Directors Accompanying 1979
Economic Impact Procedures30
Thus Section 2(b)(1)(B) of the Act requires the Board of Directors to take into account ldquoany
serious adverse effectrdquo which loans or guarantees may have on US industry materials in short
supply and employment Section 1911 of the 1978 Amendments requires consideration by the
Bank of the extent to which a loan or financial guarantee ldquois likely to have an adverse
effecthellipeither by reducing demand for goods produced in the United States or by increasing
imports to the United Statesrdquo and Section 608 of the Appropriations Act requires a finding that
the commodity ultimately produced as a result of [Bank] financing will be in surplus when the
production comes on‐stream and that US producers of the same similar or competing
commodity will be substantially injured It is apparent that the latter two statutory provisions
are explications of the basic mandate of the Act and do not expand the Bankrsquos mandate to
examine domestic impact but rather suggest factors to be considered in that examination To
a great extent the 1978 Amendments language and the Appropriations Act provisions set forth
the same concept in different ways Thus the reference in Section 1911 of the 1978
Amendments to ldquoreducing demand for goods in the United Statesrdquo and ldquoincreasing imports to
the United Statesrdquo is no more than the inevitable consequence of a commodity being ldquoin
surplusrdquo as stated in Section 608 of the Appropriations Act
Section 2(b)(1)(B) is the broadest formulation of the basic concept since it contains the most
general language ie ldquoany serious impactrdquo and encompasses all types of exports Section
1911 is primarily procedural in nature directing the Bank not only to implement appropriate
regulations and procedures to ensure full consideration of adverse impact but also to request a
report from the International Trade Commission Section 1911 includes a more detailed
description of events which would constitute adverse impactmdashie a reduction in demand for
US produced goods or an increase in imports to the US Finally this section contains an
explicit reference to agriculture which was only implicitly covered by Section 2(b)(1)(B) It
should be noted that this is one of several references to agriculture which were added to the
Act by the 1978 Amendments
The Appropriations Act provision explicitly refers to a balancing by the Board of Directors of the
benefits of the [Bank]‐supported export against the injury to US [producers] of the commodity
in question At the same time the Act has always necessitated such a balancing by requiring
the Bank to take into account ldquoserious adverse effects upon the US economyrdquo at the same
time it carries out the Bankrsquos basic mandate to ldquofacilitate exportsrdquo and to ldquofoster expansion of
exportsrdquo Under either provision therefore the Board of Directors will be taking into
30 Memorandum ldquoProcedures Regarding Adverse Domestic Impact of Eximbank Financingrdquo Pp 7‐12 Jan 5 1979 17
consideration the results of the balancing as one of the many factors involved in making a
decision to provide financing It should be noted that Section 1911 of the 1978 Amendments is
consistent with both of these provisions since it only seeks to ensure that ldquofull considerationrdquo is
given to adverse effects upon the US economy
Section 2(b)(1)(B) of the Act refers to ldquoserious adverse effectrdquo upon the US economy as a
whole whereas Section 608 of the Appropriations Act imposes a more stringent test by
focusing on a single industry ndash the domestic producers of the commodity to be produced by the
project supported by [the Bank] ndash and requiring a determination of substantial injury for that
industry alone However a reading of the entire Section shows that such a determination
would have to be made only if the net effect upon the US economy of the project for which
support was requested from [the Bank] is negative and if the commodity is likely to be in
surplus on world markets at the time the project becomes operative In any event under
Section 2(b)(1)(B) the Board would have to take into account any serious adverse effects of the
transaction upon the US economy Only if the Board decides to proceed with the transaction
regardless of such effects would it be necessary to determine if there will be substantial injury
to US producers of the commodity and thus trigger the prohibition contained in Section 608
It should also be noted that Section 1911 of the 1978 Amendments speaks in terms only of ldquoany
adverse effectrdquo However the language of that provision clearly shows that it was not intended
to set up a substantive test but rather as was mentioned above to insure that formal
procedures to take into account impacts upon the US economy are established by [Ex‐Im
Bank] as well as to enable the Bank to obtain a report from the International Trade
Commissionrdquo PL 95‐630 92 Stat 3641 (1978)
18
Appendix B
Financial Tools Available to US Airlines
Generally over the past several decades US airlines have had access to a broad range of
aircraft financing options
Accordingly at different times during the past several decades US airlines took advantage of
whichever financing option provided the most attractive overall financing terms from such
airlinesrsquo perspective For instance a US airline would be able to maximize the amount of the
financing thereby minimizing the amount of its own money it had to invest in the aircraft (ie
the ldquodown paymentrdquo) It might also maximize the amount of money in excess of the actual cost
of the aircraft it could raise against the aircraft obtain the longest possible repayment term and
the slowest possible amortization schedule (ie the longest ldquoweighted average liferdquo) obtain
the lowest interest rate and risk premium obtain the least restrictive operational and financial
covenants provide the least amount of collateral or other security or obtain other benefits
Due to the fact that the United States is seen as not presenting any ldquocountry riskrdquo and has well‐
developed and well‐regarded legal and judicial systems that are seen as being protective of
creditorsrsquo rights US airlines have usually had access to secured aircraft financings from
commercial banks from around the world During the past several decades commercial banks
from different regions have been at the forefront of the aircraft finance industry and have
provided financing to US airlines on attractive financing terms Initially US‐based banks
provided most of the aircraft financing to US airlines but during the 1980s Japanese banks
became very significant lenders to the US airlines During the 1990s and 2000s the European
banks (German French British and Swiss banks) were the most significant source of
commercial bank funding for US airlines
In addition to commercial bank financing during the 1970s and 1980s US airlines obtained
long‐term financing from US‐based institutional investors (eg insurance companies and
pension funds) through the use of the Equipment Trust Certificate (ldquoETCrdquo) financing structure or
the Pass Through Certificate (ldquoPTCrdquo) financing structure The ETC is a financing provided by
institutional investors that is secured by one or more items of equipment (eg aircraft) The
PTC is a group of ETCs combined into a public debt security that is sold into the capital markets
to institutional investors
However during the 1980s the simplest and most prevalent form of aircraft financing for US
airlines was the US leveraged lease
The US leveraged lease allowed US airlines to take advantage of the US tax code which
generally provides for all types of capital assets to be depreciated and thereby reduces or
defers taxes due to the deductibility of tax depreciation Because US airlines generally did not 19
have sufficient income to fully take advantage of the benefit of the tax depreciation deductions
associated with acquiring aircraft the US airlines entered into US leveraged leases Under a
leveraged lease the benefits of the tax depreciation deductions related to the aircraft were
transferred to profitable companies that had income they wanted to shelter from tax In
return the company was willing to provide the equity in a US leverage lease (approximately
20 of the appraised value of the aircraft) and to ldquoleaserdquo the aircraft back to the airline for the
airlinersquos use A number of different entities entered into such leases including banks insurance
companies and other financial institutions such as Ford Motor Credit as well as finance
subsidiaries of other corporate entities including consumer product companies such as Phillip
Morris or entertainment companies such as Disney The fact that these were ldquoleveragedrdquo
leases (as opposed to ldquosingle investor leasesrdquo) also enabled the equity providers to deduct the
interest expense associated with the US leveraged lease
Through the use of a combination of lease equity and debt a US leveraged lease allowed US
airlines to arrange financing for up to 100 of the appraised value of an aircraft This was
particularly attractive to major US airlines because due to their size and relative importance
to the aircraft manufacturers every major US airline generally was able to negotiate aircraft
purchases with the aircraft manufacturers that enabled the airline to buy the aircraft for
amounts significantly less than the appraised value The result was that by using a US
leveraged lease to finance its aircraft a US airline was able to ldquoover‐financerdquo the aircraft (ie
finance the aircraft for more than the airline was paying for the aircraft) resulting in the airline
effectively having the ability each time the airline financed an aircraft to arrange 100
financing for its aircraft and at the same time arrange a long‐term working capital loan This is
the equivalent of a home buyer being able to buy a house with no money down (no down
payment) and also receiving a long‐term loan for non‐home expenses
In contrast Ex‐Im Bank‐supported aircraft financing is for only 85 (and sometimes less) of the
actual ldquonet pricerdquo that the airline is paying the US aircraft manufacturer (after deducting all
discounts and other concessions the airline has negotiated with the US aircraft manufacturer
which results in a net price that is almost always less than the appraised value) This requires
the foreign airline that is using Ex‐Im Bank support to come up with a down payment of at least
15 of the net price of the aircraft As a result US airlines were able to obtain more financing
under a US leveraged lease (without putting any money down) than foreign airlines could
under an Ex‐Im Bank supported aircraft financing (which required a down payment)
In addition US leveraged leases used by US airlines always had very long repayment terms
Generally speaking the longer the repayment the longer the tax deferral and the more
advantageous the terms of the US leveraged lease As a result it was not unusual for the US
leveraged leases used by US airlines to have a repayment term of between 18 and 22 years
and sometimes as long as 25 years The only constraint was that the lease term of the
20
leveraged lease should not exceed 80 of the economic useful life of the aircraft which in
some instances was more than 30 years
In contrast the repayment term in an Ex‐Im Bank‐supported aircraft financing is never longer
than 12 years which is the maximum repayment term Ex‐Im Bank is permitted to offer for an
aircraft financing under the guidelines for export credits promulgated by the Organization for
Economic Cooperation and Development (the ldquoOECDrdquo) with which guidelines the US
Government (including Ex‐Im Bank) has agreed to abide This difference in repayment terms is
significant it is similar to the difference in monthly payments under a 15 year home mortgage
versus a 30 year home mortgage As a result US airlines were able to obtain significantly
longer financing under a US leveraged lease (which generally resulted in a smaller periodic
principal repayment burden due to the longer repayment term) than foreign airlines could
under an Ex‐Im Bank‐supported financing
US leveraged leases used by US airlines also had a slower amortization profile with a very
long weighted average life (ie small amounts of debt amortization in the early years of the
financing) of at least 10 years In the same manner that a longer repayment term increased the
tax deferral a longer weighted average life also increased the tax deferral
In contrast the amortization profile in an Ex‐Im Bank supported aircraft financing for a foreign
airline is usually between 6 years and 65 years (at least 4 years shorter than the weighted
average life of the US leveraged leases historically used by US airlines) which imposes a
much greater cash flow burden on the foreign airline in comparison with the cash flows
required of a US airline under a US leveraged lease
Although the absolute interest rate on the debt in a US leveraged lease fluctuated over time
with the overall level of interest rates the providers of the debt into these US leveraged leases
(primarily insurance companies and other institutional investors) were generally willing to
accept an interest rate margin of less than 100 basis points31 over LIBOR32 on a fixed rate
equivalent basis (and sometimes significantly less than 100 basis points)
In contrast the interest rate margin on the debt on an Ex‐Im Bank‐supported aircraft financing
was generally between a few basis points over LIBOR to 50 basis points over LIBOR because the
interest on the Ex‐Im Bank‐guaranteed aircraft financing is guaranteed by Ex‐Im Bank and
reflects the low risk associated with a US Government guaranteed loan However the interest
rate margin on an Ex‐Im Bank‐guaranteed aircraft financing does not reflect the Ex‐Im Bank
exposure fee (or risk premium) that is paid to Ex‐Im Bank in view of the underlying risk of the
foreign airline The minimum exposure fee charged by Ex‐Im Bank was 2 during the 1980s
31 100 basis points equals 1 percent 32 LIBOR is the London Inter‐Bank Offering Rate and is a common reference rate such as ldquoPrimerdquo or ldquoTreasury Raterdquo used in adjustable interest rate transactions
21
and early 1990s and 3 until 2007 when the OECD promulgated a new set of guidelines for
export credits for aircraft (known as the ldquo2007 Aircraft Sector Understandingrdquo or the ldquo2007
ASUrdquo) This exposure fee was required to be paid ldquoup frontrdquo ndash ie at the inception of the loan
On a per annum basis this equates to between 30 basis points and 50 basis points which
should be added to the interest rate margin received by the guaranteed lender to obtain the
equivalent interest rate paid by a foreign airline under Ex‐Im Bank‐supported financing (for
purposes of comparing the overall financing cost to those incurred by US airlines) The Ex‐Im
Bank exposure fee is similar to a homeowner having to pay ldquopointsrdquo up front at the time he
obtains his mortgage The effect of paying points up front and paying an Ex‐Im Bank exposure
fee effectively increases the cost of the financing In comparing the overall cost of financing
through ECA support including the exposure fee to the overall cost of a leveraged lease for
borrowers with comparable credit profiles the overall cost of the US leveraged lease was
considerably more favorable than what could be achieved through an Ex‐Im Bank‐supported
aircraft financing
Although the US leveraged lease was itself a very attractive financing structure for US
airlines at different times the basic US leveraged lease was made even more attractive due to
other provisions of the US and foreign tax codes
For instance from the 1960s (during the Kennedy Administration) until its repeal under the Tax
Reform Act of 1986 the US tax code provided for an investment tax credit which was intended
to encourage investment in capital goods and therefore allowed airlines or the equity investor
in a US leveraged lease to get a credit against the taxes it would otherwise be required to pay
This credit was a permanent reduction in taxes paid as opposed to only the deferral of taxes
(postponement of when taxes had to be paid) that could be achieved through the use of the
US leveraged lease
Similarly from the 1980s to the mid‐1990s it was common for a US airline to combine a US
leveraged lease with a lease into a foreign jurisdiction that had a ldquoform over substancerdquo
approach to its tax code (as opposed to the United States which has a ldquosubstance over formrdquo
approach to its tax code) Taking advantage of the disparity a US airline could ldquosellrdquo the
aircraft to both (i) an equity investor in the United States and (ii) an equity investor in a foreign
country such as Japan Germany or Hong Kong and each equity investor could depreciate the
same aircraft and therefore shelter its respective income Over time due to changes in the
respective tax codes these more aggressive tax advantaged cross‐border leasing structures
(ldquoDouble Dipsrdquo and even on occasion ldquoTriple Dipsrdquo) were disallowed but not before US airlines
financed billions of dollars of aircraft using such tax advantaged leasing structures
During the 1990s the basic US leveraged lease was made even more attractive by taking
advantage of another provision of the US tax code that allowed additional US taxes to be
22
deferred if the equity investor in the transaction used an offshore subsidiary that qualified as a
Foreign Sales Corporation (ldquoFSCrdquo) under the US tax code and structured the deal as a
Commission FSC
In addition during the 1980s and 1990s US airlines had access to other sources of financing
with overall financing terms that were much more attractive than what was available to foreign
airlines via Ex‐Im Bank‐supported export credits For example during the late 1980s and 1990s
Airbus made its first significant sales to US airlines In order to do so Airbus arranged and
provided very attractive and flexible financing terms to US airlines to encourage them to
purchase European‐manufactured Airbus aircraft instead of US‐manufactured Boeing or
McDonnell Douglas aircraft The US airlines were more than willing to accept these incentives
During this period some US airlines entered into ldquowalk awayrdquo leases of Airbus aircraft
pursuant to which Airbus North America (backed by the joint and several guarantees of each of
the four countries that are members of Airbus SAS) entered into a US leveraged lease of the
Airbus aircraft and then subleased the aircraft to a US airline on terms that (i) passed along
most of the tax benefits to the US airline through lower lease rentals and (ii) permitted the
US airline to terminate the sublease and simply ldquowalk awayrdquo from the lease upon a relatively
short notice period
Under the ldquoHome Market Rulerdquo the European export credit agencies (including those of
France Germany and the United Kingdom) that usually support the financing of Airbus aircraft
could not provide such support to US airlines Therefore Airbus arranged for Kreditanstalt fur
Wiederaufbau the development bank of Germany to provide very attractive financing for the
Airbus aircraft being acquired by US airlines These financings occurred on terms much more
favorable (with 18‐ to 22‐year repayment terms) than what export credit agencies could
provide (with a maximum repayment term of 12‐years)
Similarly during the 1990s US airlines began to acquire a large number of 35 to 50 seat
regional jet aircraft manufactured by Bombardier of Canada and Embraer of Brazil Many of
these aircraft were acquired by the US airlines by using export credit support from Canada and
Brazil Some of the financing terms (ie the repayment terms) of these Brazilian and Canadian
government‐supported export credit financings were even more attractive (15‐ to 18‐year
repayment terms) than what was available from the export credit agencies of France Germany
and the United Kingdom with respect to Airbus aircraft or from Ex‐Im Bank with respect to
Boeing aircraft (10‐ to 12‐year repayment terms)
To make the financing of Canadian‐manufactured Bombardier regional jets even more
attractive to US airlines the province of Quebec (where Bombardier has its headquarters)
through Investment Quebec provided additional aircraft financing support to the US airlines
23
Finally to the extent even more attractive financing was needed to convince US airlines to
purchase Canadian or Brazilian‐manufactured regional aircraft the manufacturers themselves
provided residual value guarantees with respect to such aircraft to the airline or to the
financiers (ie to the equity investor in a US leveraged lease or the creditors financing the
aircraft)
The next major development in aircraft financing used by US airlines was the development in
the 1990s of the Enhanced Equipment Trust Certificate (ldquoEETCrdquo) which was an ETC with certain
structural enhancements The most important of these enhancements is a liquidity facility to
ensure that if there is a default the financiers would continue to receive current interest
during the period of time while the aircraft is being repossessed and remarketed A key
element in the development of the EETC was the existence of Section 1110 of the US
Bankruptcy Code which gives a type of ldquopreferred creditorrdquo status to financiers of aircraft for
US airlines This ldquopreferred creditorrdquo status exempts aircraft financiers of US airlines from
the automatic stay generally imposed following a bankruptcy filing by a borrower subject to the
protections of the US Bankruptcy Code Section 1110 of the US Bankruptcy Code
accomplishes this by requiring the airline within 60 days of such bankruptcy filing to either (i)
resume payments under the originally agreed aircraft financing or (ii) return the aircraft to the
financier
The first EETC was done in 1994 and the practice has now been successfully used by almost
every major US airline including Alaska Airlines America West Airlines American Airlines
Continental Airlines Delta Airlines Hawaiian Airlines Jet Blue Airlines Northwest Airlines
Southwest Airlines United Airlines and US Airways The overall financing cost of a US airline
acquiring an aircraft through the use of the EETC ndash which includes the amount of financing
repayment term amortization profile effective cost of the financing etc ndash has generally been
significantly more attractive than (i) what such US airline could have achieved under an export
credit‐supported aircraft financing for such airline and (ii) what a similarly rated foreign airline
could have achieved under an export credit‐supported aircraft financing
This is particularly true for the financing of new aircraft The development of the EETC market
provided enormous financing flexibility to US airlines for the financing of new aircraft the
EETC provided the airline with the option to finance on a simple secured mortgage basis or the
US airline could opt for a leveraged lease with all of the benefits associated with a leveraged
lease described above
Beginning in 1997 US airlines had the ability to raise money in the capital markets when the
overall financing terms were most attractive They were able to ldquolock‐inrdquo such favorable
financing terms to fund new aircraft that were scheduled to be delivered in the future by
issuing a ldquopre‐fundedrdquo EETC These pre‐funded EETCs were used to great success by US
24
airlines in the late 1990s through 2001 a period in which the US airlines were taking delivery
of a significant number of aircraft
As a result of the downturn in the US airline industry following the September 11 2001
terrorist attacks many US airlines deferred or cancelled their orders for new aircraft This
reduced the need for US airlines to finance new aircraft when the financing terms available to
such US airlines via the EETC were not as favorable due to (i) the perceived increased credit
risks of the US airline industry following the September 11 terrorist attacks and (ii) the
temporary disequilibrium in the credit markets following the 200820092010 credit crisis
Now that the US airlines have once again begun to take delivery of a significant number of
new aircraft the pre‐funded EETC continues to be the preferred source of financing for US
airlines as evidenced by the number and amount of EETC issuances during 2012 and 2013
Based on an analysis of the EETC transactions occurring during 2012 and 2013 EETCs are once
again generally considered to provide more attractive overall financing terms than what could
be achieved by an airline under an export credit‐supported financing done under the terms of
the 2011 Aircraft Sector Understanding
25
GLOSSARY
ldquoAdverse Economic Impactrdquo is the short‐hand term used to refer to any serious negative effects on US industries or US jobs as set forth in the Bankrsquos Charter that result from Ex‐Im Bank loans guarantees or insurance The Bankrsquos Charter contains three provisions that address adverse economic impact found at 12 USC sectsect 635(b)(1) 635a‐2 635(e)
ldquoAir Indiardquo is an airline owned by the Government of the Republic of India ldquoAir India Transactionsrdquo are the two final commitments approved by Ex‐Im Bank on September
30 2011 for loan guarantees for the purchase of a number of 787 ldquoDreamlinerrdquo aircraft from Boeing and to be financed by a commercial lender not identified at the time As of the date of this paper Ex‐Im Bank has not issued any of its loan guarantees but is expected to do so in the coming months Ten of the aircraft involved in these two final commitments have been delivered to Air India and are in use by Air India on routes outside the United States The deliveries of the ten aircraft were made using private short‐term financing as to which Ex‐Im Bank had no involvement
ldquoAirbusrdquo Airbus SAS is a Europe‐based manufacturer of large commercial aircraft Airbus is the only competitor to Boeing the US manufacturer Airbus sales are supported by the ECAs of Germany France and the UK
ldquoAircraft Sector also known as the ASU is an agreement among members of the OECD Understandingrdquo that manufacture aircraft and Brazil The ASU requires that Export
Credit Agencies that support the export of aircraft follow certain rules and restrictions that set forth the most favorable terms that can be provided These rules and restrictions include the Export Credit Agency must charge a minimum risk premium which is determined by the ASU the term of any loan made by or supported by the Export Credit Agency for the purchase of aircraft cannot exceed 12 years the Export Credit Agency today can lend or guarantee only up to 85 of the actual purchase price of the aircraft being exported and the use of risk mitigants The ASU was preceded by the Large Aircraft Sector Understanding which governed these issues until the enactment of the 2007 ASU The ASU was again updated and revised in 2011 (See also the Large Aircraft Sector Understanding)
ldquoArrangementrdquo is the agreement among Export Credit Agencies governing the terms by which they will provide loans guarantees or insurance in support of exports from their respective countries Among other things the Arrangement requires Export Credit Agencies to charge a minimum risk premium which is governed by the Arrangement See also Organization for Economic Cooperation and Development
ldquoASUrdquo see Aircraft Sector Understanding ldquoAverage Weighted Liferdquo for purposes of this paper refers to the average number of years that
each dollar of unpaid principal on a loan remains outstanding For example a loan with equal principal payments throughout the loan term will have an average weighted life close to the middle of the whole loan term
26
ldquoBank Actrdquo is the Export‐Import Bank Act of 1945 12 USC sect635 as amended ldquoBank Advisory Committeerdquo is the official Advisory Committee of the Bank appointed in accordance
with the Bank Act and the Advisory Committee Act The Bank Advisory Committee is comprised of representatives of various industry and market sectors as well as representatives of labor and international trade experts
ldquoBasis pointsrdquo are a numerical measure applied to interest rates One basis point equals 1100th of one percent or 100 basis points equals one percent
ldquoCapital Equipmentrdquo is equipment used to manufacture a product provide a service or sell store or deliver merchandise A wide‐body aircraft is a piece of capital equipment
ldquoCharterrdquo is the Bank Act as well the provisions of the Export Import Bank Reauthorization Act of 2012 (Public Law 112‐122) that are not codified in the Bank Act
ldquoDreamlinerrdquo is the name given to a Boeing 787 wide‐body commercial aircraft ldquoECArdquo see Export Credit Agencies ldquoEconomic Impact Proceduresrdquo
are procedures adopted by Ex‐Im Bank to assess whether transactions supported by the Bank cause a serious adverse economic impact to US industries and US jobs See also Adverse Economic Impact
ldquoEETCrdquo see Enhanced Equipment Trust Certificate ldquoEnhanced Equipment Trust Certificaterdquo
also known as an EETC is a type of secured bond issued by a borrower in the capital markets The EETC is secured by the equipment being purchased with the proceeds of the bond issuance EETCs are used primarily for aircraft and since the late 1990s has been the dominant financing tool used by US airlines to purchase aircraft Section 1110 of the US Bankruptcy Codemdashwhich allows creditors of aircraft borrowers to obtain their collateral within 60 days if the payments on their debt is not current ndash has provided creditors of US airlines a level of comfort not available to creditors of foreign airlines until recently This generally provided US airlines with a significant financial advantage vis a vis their foreign competitors Recently the adoption of the Cape Town Convention and the related Aircraft Equipment Protocol has provided creditors of foreign airlines with protections similar to the protections provided by section 1110 of the US Bankruptcy Code Recently this has led to the beginnings of an international EETC market
ldquoEquipment Trust Certificaterdquo
also known as an ETC was the predecessor to the Enhanced Equipment Trust Certificate
ldquoETCrdquo see Equipment Trust Certificate ldquoEx‐Im Bankrdquo or ldquoBankrdquo See The Export‐Import Bank of the United States ldquoExport Credit Agenciesrdquo are agencies or ministries of government that have the official role of
providing loans guarantees or insurance in support of exports from their respective countries or in support of exports by sales of companies from their respective countries Ex‐Im Bank is the official Export Credit Agency of the United States of America
ldquoexportable goods screenrdquo is a screen or filter adopted by Ex‐Im Bank in its 2001 Economic Impact Procedures The exportable goods screen is utilized along with other screens to balance the Bankrsquos obligation to consider the adverse
27
economic effects of its transactions on US industries and US jobs with the Bankrsquos mandate to support US export transactions in a timely manner so as to fully support the exporterrsquos business opportunity The exportable goods screen filtered out transactions that supported exports which could only be used by a foreign buyer to provide services rather than produce goods
ldquoExport‐Import Bank of the is an independent agency of the Federal Government of the United United Statesrdquo States of America Also known as ldquoEx‐Im Bankrdquo Ex‐Im Bankrsquos mission
is to support US jobs by supporting US exports See 12 USC 635 et seq
ldquoExposure Feerdquo is the risk premium charged by Ex‐Im Bank in exchange for its guarantee in certain transactions The exposure fee must be at least equal to the minimum risk premium required by the terms of the Arrangement and the Aircraft Sector Understanding
ldquoForeign Sales Corporationrdquo is a company created under the terms of a former provision of the US Internal Revenue Code Foreign Sales Corporations received significant tax benefits
ldquoFSCrdquo see Foreign Sales Corporation ldquoInvestment Tax Creditrdquo is a credit permitted under the US Internal Revenue Code for the
purchase of certain types of equipment in certain circumstances See also Leveraged Leases
ldquoKFWrdquo the development bank for the Federal Republic of Germany KFW is an Export Credit Agency but it also operates through a ldquomarket windowrdquo which is not subject to the Home Market Rule Thus KFW provides support to Airbus for its sales of aircraft to US airlines The United States does not have an equivalent institution and Ex‐Im Bank does not have a ldquomarket windowrdquo
ldquoLarge Aircraft Sector also known as LASU was the predecessor to the Aircraft Sector Understandingrdquo Understanding The LASU governed the same general issues as are set
forth in the Aircraft Sector Understanding except that the minimum risk premium was lower than that required in the 2007 ASU and 2011 ASU When the 2007 ASU was enacted grandfathering provisions allowed ECA‐supported financing for a limited number of aircraft to be governed by LASU
ldquoLASUrdquo see Large Aircraft Sector Understanding ldquoLeveraged Leaserdquo is a lease of equipment and is designed to allow the lessor to take
advantage of certain tax code provisions such as the depreciation deduction and the investment tax credit while allowing the lessee to obtain the equipment involved at a significantly lower cost Leveraged Leases were a very popular means for US airlines to acquire aircraft throughout the 1980s and 1990s The value of the tax deductions to the lessor were significant so that the implicit interest rate in the lease payments by the US airline were extremely low Usually the US airline did not have sufficient profit to take advantage of the favorable tax code provisions By using a leveraged lease another company that could shelter income by using the tax code provisions would buy the equipment and lease the equipment to the US airline Usually at the end of the lease term the US airline would purchase the aircraft
28
ldquoLIBORrdquo is the London Inter‐bank Offering Rate It is commonly used as a reference rate in loan transactions that have floating or adjustable interest rates LIBOR reflects the rate at which banks will lend money to each other LIBOR is set for various loan terms (eg 3 months 6 months etc) and is widely published making it a convenient rate to use as a reference rate
ldquoNet pricerdquo is the price paid after all discounts have been deducted The net price is the actual price paid for a piece of equipment In aircraft transactions pursuant to the ASU Ex‐Im Bank will only support up to 85 of the net price of an aircraft EETC transactions on the other hand often support the nominal purchase price of an aircraft and thus result in a significantly higher amount financed
ldquoOECDrdquo see the Organization for Economic Cooperation and Development Open Skies Agreement Is a type of bilateral agreement between countries that govern the
rights of airlines from the two countries to fly into the other country Open Skies Agreements generally allow free access to fly as many routes to a country as an airline may choose but then usually restrict the ability to fly within the other country Generally it is a ldquofly in and outrdquo rule although there are exceptions
ldquoOrganization for Economic Cooperation and Developmentrdquo
also known as the OECD is an organization comprised of 34 member countries that work together to promote development The United States is a member With regard to Ex‐Im Bank the OECD is the organization through which the US Government negotiates an agreement among Export Credit Agencies known as the Arrangement and the ASU (and its predecessor the LASU)
ldquoPass Through Certificaterdquo also known as a PTC is a group of Equipment Trust Certificates pooled together to form the basis for a bond issuance
ldquoPTCrdquo See Pass Through Certificate ldquoRyanairrdquo is a low‐cost Irish airline that began business after European
deregulation of airlines in 1997 Ryanair rapidly expanded during the first decade of the 2000s creating significant competition for other airlines
ldquoScreensrdquo are a type of filter used by Ex‐Im Bank in its Economic Impact Procedures Screens are designed to identify those transactions which are not likely to cause an adverse economic impact to US industries or US jobs so that such transactions can be processed more quickly and efficiently as required by the Bank Act
ldquoSubstantial Injuryrdquo is a term defined in Ex‐Im Bankrsquos Charter to be applied in connection with the Bankrsquos economic impact procedures 12 USC sect635(e)(4) The Charter states ldquohellipthe extension of any credit or guarantee by the Bank will cause substantial injury if the amount of the capacity for production established or the amount of the increase in such capacity expanded by such credit or guarantee equals or exceeds 1 percent of United States productionrdquo
ldquoTPCCrdquo see Trade Promotion Coordinating Committee ldquoTrade Promotion Coordinating Committeerdquo
also known as the TPCC is an interagency committee of the US Government chaired by the Secretary of Commerce It was established under the Export Enhancement Act of 1992 to provide a
29
unifying framework to coordinate the export promotion and export financing activities of the US government and to develop a government‐wide strategic plan for carrying out such programs
ldquoTrade Sanctionsrdquo refers to any of a number of sanctions imposed by the US Government against companies countries industries or products usually as a result of an accusation of adjudication of a violation of an international trade agreement The Bank Act requires Ex‐Im Bank to take certain trade sanctions into account in its economic impact procedures
30
Table A ndash Congressional Actions and Ex-Im Bank Responses
Year Congressional Action Ex‐Im Bank Response
1968 Bank directed to take into account the possible adverse effect [of its loans and guarantees] upon the United States economy
Bank adds this transactions
factor to analysis of
1975 1 Standard refined to take into account any serious adverse effect of loans and guarantees on competitive position of US industry availability of scarce materials in US and employment in US
2 Bank directed to be competitive with rates terms and conditions offered by principal countries whose exporters compete with US exporters
3 Bank directed to submit semi‐annual report on competitiveness and conduct survey of US exporters and lenders to determine experience in meeting financing competition
Bank adds these of transactions
considerations to analysis
Year Congressional Action Ex‐Im Bank Response
1978 ‐ 1979
1 Bank directed to take into account any serious adverse effect of loans on competitive position of US industry and scarce materials Bank directed to emphasize strengthening competitive position of US exporters and expanding total US exports
2 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [From Appropriations Act Restated in Bank Charter in 1986]
3 Bank directed to implement regulations and procedures to insure full consideration of extent to which loan or guarantee is likely to have adverse effect on industries and employment in US either by reducing demand for US produced goods or increasing imports to the US
Bank develops framework and set of written economic impact procedures
1 Exclude exports the use of which remained localized in foreign country This
is first ldquoforeign localized goods and services screenrdquo
2 ldquoIntent and stimulus for projectrdquo examined to determine likelihood of substantial adverse economic impact Does transaction involve ldquorunaway industryrdquo
(leaving US for cheaper foreign labor)
3 Does export of capital equipment result in ldquobuy backrdquo of product being imported into the US
4 Is net impact on US economy and jobs positive or negative and to what degree
32
Year Congressional Action Ex‐Im Bank Response
1986 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [Originally from 1978 Appropriations incorporated into Bank Charter in 1986]
Senate Report recognizes knowledge and experience of Bank and need to respond to exportersrsquo requests for support in a timely and confidential fashion Economic impact procedures are to be practical and workable and not reduce Bankrsquos competitiveness and flexibility nor ignore positive aspects of export sale
Bank develops ldquoSummary of Adverse Economic Guidelinesrdquo to be applied to both
goods and services (a) is commodity to be produced surplus or likely to compete with US‐produced surplus (b) will Bankrsquos
assistance cause substantial injury to US producers of competing commodity (c)
will injury to US producers of competing commodity outweigh the short‐ and long‐
term benefits to US industry and employment If answer is no then no
further economic impact analysis
1988 Congress establishes test for ldquosubstantial injuryrdquo if the amount of capacity for production established or amount of increase in such capacity expanded by Bankrsquos credit or guarantee exceeds 1 of US production
Bankrsquos Board recognizes requirement to balance (a) possibility of substantial harm
to US production and employment with (b) being responsive competitive and efficient New economic impact procedures ask (a) will the project be in direct competition with US production (b) is the Bankrsquos support significantly associated with the project (c) will the output of the project
cause substantial injury to US producers of the same similar or competing
commodity If answer is no then no further economic impact analysis is required
33
Year Congressional Action Ex‐Im Bank Response
1998 Bank revised procedures involving countries against which trade sanctions were pending or imposed
2001
2006 ‐2007
1 Bank required to determine whether extension of credit or guarantee is likely to produce same or other commodities and whether the production may cause substantial injury to US producers
2 Bank prohibited from providing a loan or guarantee that will facilitate circumvention of trade law order or determination
3 Bank required to designate sensitive commercial sectors and products for which Bank financing deemed unlikely due to potential for adverse economic impact on US
4 Bank required to aggregate financial thresholds on rolling 24‐month basis
Bank develops ldquoexportable goods screenrdquo Does Ex‐Im Bank support result in production of exportable good from the foreign buyerrsquos country If not no further economic impact analysis is required Notice and request for comments were published in the Federal Register US airline industry did not respond
Bank issues 2007 Economic Impact Procedures ldquoExportable goods screenrdquo is modified Will the transaction (capital goods and services) result in either new or additional production capacity of an exportable good
34
was not supported by the Ex‐Im Bank guarantee The Bank analyzed all of these factors and concluded that in fact Ex‐Im Bank support did not generally result in financing terms for foreign airlines that were more favorable than the financing available to US airlines Pan Am did not contest the Bankrsquos analysis at that time or at any subsequent time Nor did any other US airline or trade group raise any concerns in the intervening 17 years leading up to the adoption of the ldquoexportable goods screenrdquo in 2001 or indeed thereafter until 2010
Between 1990 and 1999 the Bank financed 440 aircraft involving the export of US‐manufactured aircraft representing a total value of approximately $22 billion dollars Given this significant expertise in the aircraft financing sector Ex‐Im Bank had ample and consistent evidence that major US airlines flying international routes had access to more favorable financing relative to the financing available to foreign airlines through ECAs such as Ex‐Im Bank Annexed as Appendix B is a detailed history and explanation of the types of financing that were available to US airlines which in turn had led the Bank to conclude that Bank financing to foreign airlines did not pose any financial competitive harm to US airlines
In contrast to the commercial bank financing available through Ex‐Im Bank in the 1980s and 1990s the principal method used by US airlines to acquire aircraft was through a ldquoleveraged leaserdquo A leveraged lease provides significant tax benefits to an entity that wants to shelter income through additional tax deductions The entity purchases the aircraft and then leases it to the airline The purchaser continues to own the aircraft and thus can take the depreciation deductions and investment tax credits on its tax returns during the term of the lease Once the lease term is over title to the aircraft may be transferred to the airline through various mechanisms The leveraged lease was very beneficial to US airlines in several respects
a) The effective cost of a leveraged lease structure was very attractive as compared to aloan to purchase the aircraft The purchaserlessor passed a portion of the tax benefitsback to the airline by way of lower lease payments
b) In most instances the airline could finance up to 100 of the appraised or ldquomarketrdquovalue of the individual aircraft In contrast under ECA financing from Ex‐Im Bank aforeign airline could only finance up to 85 of the ldquonetrdquo or actual price In short theUS airline could finance a larger percentage of a larger amount as compared to aforeign airline purchasing the same aircraft This translated into a significant financialadvantage for the US airlines
c) Under the leveraged lease structure the repayment terms offered to US airlines wereoften 18 to 22 years In contrast Ex‐Im Bank offered much shorter 10 to 12 yearrepayment terms Longer repayment terms mean lower payments which are of coursea significant benefit
As of 2001 Ex‐Im Bank was also aware that US airlines could avail themselves of commercial market financing known originally as equipment trust certificates and later as enhanced equipment trust certificates (ldquoEETCsrdquo) An EETC is a structure whereby investors can provide financing directly through the capital markets as opposed to loan financing provided by banks The EETCs provided significant cost advantages to US airlines and were generally not available
12
to foreign airlines Even for the rare foreign EETC the terms were not as favorable as the terms available to US airlines
The EETC was premised on sect 1110 of the US Bankruptcy Code which only applied to US airlines27 Section 1110 protects a secured creditor of an airline in bankruptcy by either a)requiring the debtor airline within 60 days of the bankruptcy petition date to cure any payment defaults and stay current with loan payments or b) permitting the secured creditor to obtain possession of the creditorrsquos collateral (ie the aircraft) 60 days after the bankruptcy petition date notwithstanding the automatic stay provision that applies to creditors of other types of debtors This certainty of access to collateral ndash and thus to payment ndash provided and continues to provide decreased risk to creditors of US airlines This certainty in turn allows these creditors to provide more favorable financing terms than creditors of foreign airlines In the boom years of 2000 to 2001 US airlines raised $19 billion in the EETC market primarily to purchase new aircraft
Throughout the years leading up to the adoption of the exportable goods screen in 2001 Ex‐Im Bank aircraft financing was provided in accordance with the guidelines set forth in the Large Aircraft Sector Understanding (ldquoLASUrdquo) under the auspices of the Organization for Economic Cooperation and Development (ldquoOECDrdquo) The LASU was followed later by evolving versions of the Aircraft Sector Understanding (ldquoASUrdquo) The LASU and the ASU wereare agreements that set forth guidelines to be followed by ECAs in supporting exports of aircraft manufactured in the home country of the relevant ECA The LASUASU guidelines set forth the maximum repayment term for the financing the maximum advance rate of the financing as a percentage of the net price of the aircraft and the minimum fee that the ECA was required to charge to the airline for the ECA support These terms and conditions resulted in financing that was significantly more expensive than that which could be obtained by US airlines in the private market
In light of the foregoing the Bank reasonably believed that US airlines would not suffer any adverse economic impact from the Bankrsquos financing of foreign airlinesrsquo acquisition of US‐manufactured aircraft In other words when Ex‐Im Bank first adopted the ldquoexportable goodsrdquo screen in 2001 the Bank was confident that its use of the screen would provide efficiencies in transaction‐processing time by focusing the Bankrsquos resources on transactions that could reasonably be expected to raise substantial adverse economic impact concerns
B The US Airline Industry Financing Dynamics Late 2001 to Early 2007
The decade of the 2000s presented the global airline industry with new challenges and new
opportunities ndash both of which created problems for US airlines
27 11 USC sect1110 (2001)
13
The terrorist attacks of September 11 2001 resulted in a sudden and protracted reduction in
demand for airline passenger services This was particularly prolonged in the United States and
Europe As a result of that drop in demand as well as other financial pressures the major US
airlines began a decade‐long process of mergers28 During the 2000s the major US airlines also
were able to shed costs and debtmdasheg pensionsmdashin a way not available to foreign airlines
under the US Bankruptcy Code29
As a result of this downsizing and restructuring US airlines focused on consolidation and
survival not expansion of their fleets by purchasing new aircraft US airline purchases of new
passenger aircraft almost disappeared after 2001 reappeared briefly in 2007 and then
disappeared again until sometime in 2010 Instead of ordering new aircraft US airlines
primarily relied upon the aircraft that they had purchased with EETC financing in the 2001‐2002
period
Nonetheless the data that are available indicate that through 2007 the US airlines generally
had access to aircraft financing that was no less favorable than financing provided by ECAs such
as Ex‐Im Bank In the midst of these developments starting in 2005 the various countries and
constituencies that were involved with ECA aircraft financing began negotiating a new ASU
During negotiations of the new ASU European airlines alleged that ECA financing was more
favorable than the financing to which they had access In June 2007 a new ASU agreement was
reached The European airlines explicitly approved thus signaling that the new agreement
eliminated any ECA financing advantage At the same time none of the US airlines raised any
economic impact concerns about the new ASU As Ex‐Im Bank reviewed and revised its
Economic Impact Procedures in 2007 there were no complaints raised by US airlines or any
other parties regarding aircraft transactions Likewise the new 2007 ASU had explicitly quelled
similar concerns in Europe All of the other relevant factors that led to adoption of the
ldquoexportable goodsrdquo screen in 2001 remained true in 2007 As a result in slightly varied form
the ldquoexportable goodsrdquo screen was carried through the 2002 and 2007 economic impact
procedures
C The US Airline Industry Financing Dynamics Late 2007 to 2012
After the 2007 ASU took effect the worldwide financial crisis emerged in 2008 and had a major
impact on global financial markets including those for large aircraft purchases From mid‐2008
to the beginning of 2010 the financial markets experienced significant volatility and distress
28 These included TWA and American Airlines in 2001 America West and US Airways in 2005 Northwest Airlines and Delta Air Lines in 2008 Continental Airlines and United Airlines in 2010 and Air Tran and Southwest Airlines in 2010 American Airlines and US Air announced merger plans in 201229 Bankruptcies of the major US Airlines from 2001‐2010 included US Airways in 2002 and 2004 United Airlines in 2002 Northwest Airlines in 2005 Delta Air Lines in 2005 Frontier Airlines in 2008 Mesa Airlines in 2010 American Airlines later filed for bankruptcy protection in 2012
14
Then after a short calm in 2010 the European sovereign debt and related European banking
crises rattled financial markets from mid‐2011 to mid‐2012 The result was another period of
extreme interest rate volatility
During this period the global financial market for commercial jet aircraft had been
characterized by (a) extreme volatility in both interest rates and availability of financing and
(b) major growth in demand for aircraft by airlines in the emerging markets and resource‐rich
OECD countries At the same time (and until only recently) there was very little demand for
aircraft by US airlines
There was also a fundamental shift in the key financial tools used for aircraft purchasesmdashwith
commercial banks playing a much diminished role EETC financing from the capital markets
emerged and matured into the most favorable source of financing
As noted before in early 2010 one US airline raised concerns that the financing provided by
the Bank to Ryanair an up‐and‐coming and successful discount airline in Europe was more
favorable than the financing available to US airlines The complaining airline asserted that Ex‐
Im Bank financing to Ryanair was significantly more favorable than financing that the
complaining airline itself had received in a recent EETC offering
Ex‐Im Bank reviewed and analyzed the assertions and determined that they were flawed in that
the purported difference in financial costs ignored pertinent factors and thus did not indicate
that ECA financing would be more favorable in a true ldquoapples to applesrdquo comparison Some key
factors ignored in the analysis provided by the one US airline were
a The credit‐worthiness of the US airline in question was publically rated at B‐ which in
common investment terms puts it in the ldquojunkrdquo group of ratings Ryanair by comparison is rated as investment grade a significantly higher rating Naturally a difference in credit ratings is going to result in a difference in the cost of financing
b The US airline was re‐financing a group of 10 to 12 year old aircraft while Ryanair was
financing brand‐new aircraft In both cases the aircraft being financed formed the
collateral pool for the loan Older aircraft represent a higher risk due to the poorer
quality of collateral therefore resulting in higher costs of financing
At the same time that this US airline was raising its concerns with the Bank it was also raising
similar concerns in the context of new ASU negotiations By the end of 2010 the ECAs reached
agreement on a new ASU (the 2011 ASU) which went into effect on February 1 2011 This
agreement included a built‐in adjustment mechanism to reflect changes in the financial
markets as they occurred This was designed to ensure that ECA financing and commercial bank
financing were generally equivalent The Bank continues to monitor the 2011 ASU to ensure
that the adjustment mechanism built into that agreement does in fact generally work to
15
enforce an equilibrium between the cost of ECA aircraft financings and the financing available
to US airlines in the private market In addition this very issue continues to be a regular topic
of discussion among the ASU participant countries as well Based on the data that have been
developed and presented to date the Bank believes that the 2011 ASU properly serves its
intended function of ensuring that airlines using private market financing do not suffer a
competitive disadvantage when compared to ECA financing of aircraft under the ASU
IV Conclusion
Ex‐Im Bankrsquos exportable goods screen complied with the Bankrsquos statutory requirements to
assess the potential adverse effects of all transactions and to focus on those transactions that
were likely to result in a substantial adverse economic impact on US industry Historically
financing available to US airlines for the purchase of new wide‐body aircraft has been either
more favorable than or equally favorable as Ex‐Im Bank financing to foreign airlines for the
purchase of equivalent aircraft The exportable goods screen was an appropriate reasonable
and efficient response to the realities of aircraft financing It properly balanced the
Congressional directives to assess the likelihood of substantial economic impact on US
industry and US jobs with the need to finance transactions in an efficient manner so as to
support US exports and US jobs
November 22 2013
Export‐Import Bank of the United States 811 Vermont Ave NW Washington DC 20571
16
Appendix A
Excerpt from Staff Memorandum to Ex‐Im Bank Board of Directors Accompanying 1979
Economic Impact Procedures30
Thus Section 2(b)(1)(B) of the Act requires the Board of Directors to take into account ldquoany
serious adverse effectrdquo which loans or guarantees may have on US industry materials in short
supply and employment Section 1911 of the 1978 Amendments requires consideration by the
Bank of the extent to which a loan or financial guarantee ldquois likely to have an adverse
effecthellipeither by reducing demand for goods produced in the United States or by increasing
imports to the United Statesrdquo and Section 608 of the Appropriations Act requires a finding that
the commodity ultimately produced as a result of [Bank] financing will be in surplus when the
production comes on‐stream and that US producers of the same similar or competing
commodity will be substantially injured It is apparent that the latter two statutory provisions
are explications of the basic mandate of the Act and do not expand the Bankrsquos mandate to
examine domestic impact but rather suggest factors to be considered in that examination To
a great extent the 1978 Amendments language and the Appropriations Act provisions set forth
the same concept in different ways Thus the reference in Section 1911 of the 1978
Amendments to ldquoreducing demand for goods in the United Statesrdquo and ldquoincreasing imports to
the United Statesrdquo is no more than the inevitable consequence of a commodity being ldquoin
surplusrdquo as stated in Section 608 of the Appropriations Act
Section 2(b)(1)(B) is the broadest formulation of the basic concept since it contains the most
general language ie ldquoany serious impactrdquo and encompasses all types of exports Section
1911 is primarily procedural in nature directing the Bank not only to implement appropriate
regulations and procedures to ensure full consideration of adverse impact but also to request a
report from the International Trade Commission Section 1911 includes a more detailed
description of events which would constitute adverse impactmdashie a reduction in demand for
US produced goods or an increase in imports to the US Finally this section contains an
explicit reference to agriculture which was only implicitly covered by Section 2(b)(1)(B) It
should be noted that this is one of several references to agriculture which were added to the
Act by the 1978 Amendments
The Appropriations Act provision explicitly refers to a balancing by the Board of Directors of the
benefits of the [Bank]‐supported export against the injury to US [producers] of the commodity
in question At the same time the Act has always necessitated such a balancing by requiring
the Bank to take into account ldquoserious adverse effects upon the US economyrdquo at the same
time it carries out the Bankrsquos basic mandate to ldquofacilitate exportsrdquo and to ldquofoster expansion of
exportsrdquo Under either provision therefore the Board of Directors will be taking into
30 Memorandum ldquoProcedures Regarding Adverse Domestic Impact of Eximbank Financingrdquo Pp 7‐12 Jan 5 1979 17
consideration the results of the balancing as one of the many factors involved in making a
decision to provide financing It should be noted that Section 1911 of the 1978 Amendments is
consistent with both of these provisions since it only seeks to ensure that ldquofull considerationrdquo is
given to adverse effects upon the US economy
Section 2(b)(1)(B) of the Act refers to ldquoserious adverse effectrdquo upon the US economy as a
whole whereas Section 608 of the Appropriations Act imposes a more stringent test by
focusing on a single industry ndash the domestic producers of the commodity to be produced by the
project supported by [the Bank] ndash and requiring a determination of substantial injury for that
industry alone However a reading of the entire Section shows that such a determination
would have to be made only if the net effect upon the US economy of the project for which
support was requested from [the Bank] is negative and if the commodity is likely to be in
surplus on world markets at the time the project becomes operative In any event under
Section 2(b)(1)(B) the Board would have to take into account any serious adverse effects of the
transaction upon the US economy Only if the Board decides to proceed with the transaction
regardless of such effects would it be necessary to determine if there will be substantial injury
to US producers of the commodity and thus trigger the prohibition contained in Section 608
It should also be noted that Section 1911 of the 1978 Amendments speaks in terms only of ldquoany
adverse effectrdquo However the language of that provision clearly shows that it was not intended
to set up a substantive test but rather as was mentioned above to insure that formal
procedures to take into account impacts upon the US economy are established by [Ex‐Im
Bank] as well as to enable the Bank to obtain a report from the International Trade
Commissionrdquo PL 95‐630 92 Stat 3641 (1978)
18
Appendix B
Financial Tools Available to US Airlines
Generally over the past several decades US airlines have had access to a broad range of
aircraft financing options
Accordingly at different times during the past several decades US airlines took advantage of
whichever financing option provided the most attractive overall financing terms from such
airlinesrsquo perspective For instance a US airline would be able to maximize the amount of the
financing thereby minimizing the amount of its own money it had to invest in the aircraft (ie
the ldquodown paymentrdquo) It might also maximize the amount of money in excess of the actual cost
of the aircraft it could raise against the aircraft obtain the longest possible repayment term and
the slowest possible amortization schedule (ie the longest ldquoweighted average liferdquo) obtain
the lowest interest rate and risk premium obtain the least restrictive operational and financial
covenants provide the least amount of collateral or other security or obtain other benefits
Due to the fact that the United States is seen as not presenting any ldquocountry riskrdquo and has well‐
developed and well‐regarded legal and judicial systems that are seen as being protective of
creditorsrsquo rights US airlines have usually had access to secured aircraft financings from
commercial banks from around the world During the past several decades commercial banks
from different regions have been at the forefront of the aircraft finance industry and have
provided financing to US airlines on attractive financing terms Initially US‐based banks
provided most of the aircraft financing to US airlines but during the 1980s Japanese banks
became very significant lenders to the US airlines During the 1990s and 2000s the European
banks (German French British and Swiss banks) were the most significant source of
commercial bank funding for US airlines
In addition to commercial bank financing during the 1970s and 1980s US airlines obtained
long‐term financing from US‐based institutional investors (eg insurance companies and
pension funds) through the use of the Equipment Trust Certificate (ldquoETCrdquo) financing structure or
the Pass Through Certificate (ldquoPTCrdquo) financing structure The ETC is a financing provided by
institutional investors that is secured by one or more items of equipment (eg aircraft) The
PTC is a group of ETCs combined into a public debt security that is sold into the capital markets
to institutional investors
However during the 1980s the simplest and most prevalent form of aircraft financing for US
airlines was the US leveraged lease
The US leveraged lease allowed US airlines to take advantage of the US tax code which
generally provides for all types of capital assets to be depreciated and thereby reduces or
defers taxes due to the deductibility of tax depreciation Because US airlines generally did not 19
have sufficient income to fully take advantage of the benefit of the tax depreciation deductions
associated with acquiring aircraft the US airlines entered into US leveraged leases Under a
leveraged lease the benefits of the tax depreciation deductions related to the aircraft were
transferred to profitable companies that had income they wanted to shelter from tax In
return the company was willing to provide the equity in a US leverage lease (approximately
20 of the appraised value of the aircraft) and to ldquoleaserdquo the aircraft back to the airline for the
airlinersquos use A number of different entities entered into such leases including banks insurance
companies and other financial institutions such as Ford Motor Credit as well as finance
subsidiaries of other corporate entities including consumer product companies such as Phillip
Morris or entertainment companies such as Disney The fact that these were ldquoleveragedrdquo
leases (as opposed to ldquosingle investor leasesrdquo) also enabled the equity providers to deduct the
interest expense associated with the US leveraged lease
Through the use of a combination of lease equity and debt a US leveraged lease allowed US
airlines to arrange financing for up to 100 of the appraised value of an aircraft This was
particularly attractive to major US airlines because due to their size and relative importance
to the aircraft manufacturers every major US airline generally was able to negotiate aircraft
purchases with the aircraft manufacturers that enabled the airline to buy the aircraft for
amounts significantly less than the appraised value The result was that by using a US
leveraged lease to finance its aircraft a US airline was able to ldquoover‐financerdquo the aircraft (ie
finance the aircraft for more than the airline was paying for the aircraft) resulting in the airline
effectively having the ability each time the airline financed an aircraft to arrange 100
financing for its aircraft and at the same time arrange a long‐term working capital loan This is
the equivalent of a home buyer being able to buy a house with no money down (no down
payment) and also receiving a long‐term loan for non‐home expenses
In contrast Ex‐Im Bank‐supported aircraft financing is for only 85 (and sometimes less) of the
actual ldquonet pricerdquo that the airline is paying the US aircraft manufacturer (after deducting all
discounts and other concessions the airline has negotiated with the US aircraft manufacturer
which results in a net price that is almost always less than the appraised value) This requires
the foreign airline that is using Ex‐Im Bank support to come up with a down payment of at least
15 of the net price of the aircraft As a result US airlines were able to obtain more financing
under a US leveraged lease (without putting any money down) than foreign airlines could
under an Ex‐Im Bank supported aircraft financing (which required a down payment)
In addition US leveraged leases used by US airlines always had very long repayment terms
Generally speaking the longer the repayment the longer the tax deferral and the more
advantageous the terms of the US leveraged lease As a result it was not unusual for the US
leveraged leases used by US airlines to have a repayment term of between 18 and 22 years
and sometimes as long as 25 years The only constraint was that the lease term of the
20
leveraged lease should not exceed 80 of the economic useful life of the aircraft which in
some instances was more than 30 years
In contrast the repayment term in an Ex‐Im Bank‐supported aircraft financing is never longer
than 12 years which is the maximum repayment term Ex‐Im Bank is permitted to offer for an
aircraft financing under the guidelines for export credits promulgated by the Organization for
Economic Cooperation and Development (the ldquoOECDrdquo) with which guidelines the US
Government (including Ex‐Im Bank) has agreed to abide This difference in repayment terms is
significant it is similar to the difference in monthly payments under a 15 year home mortgage
versus a 30 year home mortgage As a result US airlines were able to obtain significantly
longer financing under a US leveraged lease (which generally resulted in a smaller periodic
principal repayment burden due to the longer repayment term) than foreign airlines could
under an Ex‐Im Bank‐supported financing
US leveraged leases used by US airlines also had a slower amortization profile with a very
long weighted average life (ie small amounts of debt amortization in the early years of the
financing) of at least 10 years In the same manner that a longer repayment term increased the
tax deferral a longer weighted average life also increased the tax deferral
In contrast the amortization profile in an Ex‐Im Bank supported aircraft financing for a foreign
airline is usually between 6 years and 65 years (at least 4 years shorter than the weighted
average life of the US leveraged leases historically used by US airlines) which imposes a
much greater cash flow burden on the foreign airline in comparison with the cash flows
required of a US airline under a US leveraged lease
Although the absolute interest rate on the debt in a US leveraged lease fluctuated over time
with the overall level of interest rates the providers of the debt into these US leveraged leases
(primarily insurance companies and other institutional investors) were generally willing to
accept an interest rate margin of less than 100 basis points31 over LIBOR32 on a fixed rate
equivalent basis (and sometimes significantly less than 100 basis points)
In contrast the interest rate margin on the debt on an Ex‐Im Bank‐supported aircraft financing
was generally between a few basis points over LIBOR to 50 basis points over LIBOR because the
interest on the Ex‐Im Bank‐guaranteed aircraft financing is guaranteed by Ex‐Im Bank and
reflects the low risk associated with a US Government guaranteed loan However the interest
rate margin on an Ex‐Im Bank‐guaranteed aircraft financing does not reflect the Ex‐Im Bank
exposure fee (or risk premium) that is paid to Ex‐Im Bank in view of the underlying risk of the
foreign airline The minimum exposure fee charged by Ex‐Im Bank was 2 during the 1980s
31 100 basis points equals 1 percent 32 LIBOR is the London Inter‐Bank Offering Rate and is a common reference rate such as ldquoPrimerdquo or ldquoTreasury Raterdquo used in adjustable interest rate transactions
21
and early 1990s and 3 until 2007 when the OECD promulgated a new set of guidelines for
export credits for aircraft (known as the ldquo2007 Aircraft Sector Understandingrdquo or the ldquo2007
ASUrdquo) This exposure fee was required to be paid ldquoup frontrdquo ndash ie at the inception of the loan
On a per annum basis this equates to between 30 basis points and 50 basis points which
should be added to the interest rate margin received by the guaranteed lender to obtain the
equivalent interest rate paid by a foreign airline under Ex‐Im Bank‐supported financing (for
purposes of comparing the overall financing cost to those incurred by US airlines) The Ex‐Im
Bank exposure fee is similar to a homeowner having to pay ldquopointsrdquo up front at the time he
obtains his mortgage The effect of paying points up front and paying an Ex‐Im Bank exposure
fee effectively increases the cost of the financing In comparing the overall cost of financing
through ECA support including the exposure fee to the overall cost of a leveraged lease for
borrowers with comparable credit profiles the overall cost of the US leveraged lease was
considerably more favorable than what could be achieved through an Ex‐Im Bank‐supported
aircraft financing
Although the US leveraged lease was itself a very attractive financing structure for US
airlines at different times the basic US leveraged lease was made even more attractive due to
other provisions of the US and foreign tax codes
For instance from the 1960s (during the Kennedy Administration) until its repeal under the Tax
Reform Act of 1986 the US tax code provided for an investment tax credit which was intended
to encourage investment in capital goods and therefore allowed airlines or the equity investor
in a US leveraged lease to get a credit against the taxes it would otherwise be required to pay
This credit was a permanent reduction in taxes paid as opposed to only the deferral of taxes
(postponement of when taxes had to be paid) that could be achieved through the use of the
US leveraged lease
Similarly from the 1980s to the mid‐1990s it was common for a US airline to combine a US
leveraged lease with a lease into a foreign jurisdiction that had a ldquoform over substancerdquo
approach to its tax code (as opposed to the United States which has a ldquosubstance over formrdquo
approach to its tax code) Taking advantage of the disparity a US airline could ldquosellrdquo the
aircraft to both (i) an equity investor in the United States and (ii) an equity investor in a foreign
country such as Japan Germany or Hong Kong and each equity investor could depreciate the
same aircraft and therefore shelter its respective income Over time due to changes in the
respective tax codes these more aggressive tax advantaged cross‐border leasing structures
(ldquoDouble Dipsrdquo and even on occasion ldquoTriple Dipsrdquo) were disallowed but not before US airlines
financed billions of dollars of aircraft using such tax advantaged leasing structures
During the 1990s the basic US leveraged lease was made even more attractive by taking
advantage of another provision of the US tax code that allowed additional US taxes to be
22
deferred if the equity investor in the transaction used an offshore subsidiary that qualified as a
Foreign Sales Corporation (ldquoFSCrdquo) under the US tax code and structured the deal as a
Commission FSC
In addition during the 1980s and 1990s US airlines had access to other sources of financing
with overall financing terms that were much more attractive than what was available to foreign
airlines via Ex‐Im Bank‐supported export credits For example during the late 1980s and 1990s
Airbus made its first significant sales to US airlines In order to do so Airbus arranged and
provided very attractive and flexible financing terms to US airlines to encourage them to
purchase European‐manufactured Airbus aircraft instead of US‐manufactured Boeing or
McDonnell Douglas aircraft The US airlines were more than willing to accept these incentives
During this period some US airlines entered into ldquowalk awayrdquo leases of Airbus aircraft
pursuant to which Airbus North America (backed by the joint and several guarantees of each of
the four countries that are members of Airbus SAS) entered into a US leveraged lease of the
Airbus aircraft and then subleased the aircraft to a US airline on terms that (i) passed along
most of the tax benefits to the US airline through lower lease rentals and (ii) permitted the
US airline to terminate the sublease and simply ldquowalk awayrdquo from the lease upon a relatively
short notice period
Under the ldquoHome Market Rulerdquo the European export credit agencies (including those of
France Germany and the United Kingdom) that usually support the financing of Airbus aircraft
could not provide such support to US airlines Therefore Airbus arranged for Kreditanstalt fur
Wiederaufbau the development bank of Germany to provide very attractive financing for the
Airbus aircraft being acquired by US airlines These financings occurred on terms much more
favorable (with 18‐ to 22‐year repayment terms) than what export credit agencies could
provide (with a maximum repayment term of 12‐years)
Similarly during the 1990s US airlines began to acquire a large number of 35 to 50 seat
regional jet aircraft manufactured by Bombardier of Canada and Embraer of Brazil Many of
these aircraft were acquired by the US airlines by using export credit support from Canada and
Brazil Some of the financing terms (ie the repayment terms) of these Brazilian and Canadian
government‐supported export credit financings were even more attractive (15‐ to 18‐year
repayment terms) than what was available from the export credit agencies of France Germany
and the United Kingdom with respect to Airbus aircraft or from Ex‐Im Bank with respect to
Boeing aircraft (10‐ to 12‐year repayment terms)
To make the financing of Canadian‐manufactured Bombardier regional jets even more
attractive to US airlines the province of Quebec (where Bombardier has its headquarters)
through Investment Quebec provided additional aircraft financing support to the US airlines
23
Finally to the extent even more attractive financing was needed to convince US airlines to
purchase Canadian or Brazilian‐manufactured regional aircraft the manufacturers themselves
provided residual value guarantees with respect to such aircraft to the airline or to the
financiers (ie to the equity investor in a US leveraged lease or the creditors financing the
aircraft)
The next major development in aircraft financing used by US airlines was the development in
the 1990s of the Enhanced Equipment Trust Certificate (ldquoEETCrdquo) which was an ETC with certain
structural enhancements The most important of these enhancements is a liquidity facility to
ensure that if there is a default the financiers would continue to receive current interest
during the period of time while the aircraft is being repossessed and remarketed A key
element in the development of the EETC was the existence of Section 1110 of the US
Bankruptcy Code which gives a type of ldquopreferred creditorrdquo status to financiers of aircraft for
US airlines This ldquopreferred creditorrdquo status exempts aircraft financiers of US airlines from
the automatic stay generally imposed following a bankruptcy filing by a borrower subject to the
protections of the US Bankruptcy Code Section 1110 of the US Bankruptcy Code
accomplishes this by requiring the airline within 60 days of such bankruptcy filing to either (i)
resume payments under the originally agreed aircraft financing or (ii) return the aircraft to the
financier
The first EETC was done in 1994 and the practice has now been successfully used by almost
every major US airline including Alaska Airlines America West Airlines American Airlines
Continental Airlines Delta Airlines Hawaiian Airlines Jet Blue Airlines Northwest Airlines
Southwest Airlines United Airlines and US Airways The overall financing cost of a US airline
acquiring an aircraft through the use of the EETC ndash which includes the amount of financing
repayment term amortization profile effective cost of the financing etc ndash has generally been
significantly more attractive than (i) what such US airline could have achieved under an export
credit‐supported aircraft financing for such airline and (ii) what a similarly rated foreign airline
could have achieved under an export credit‐supported aircraft financing
This is particularly true for the financing of new aircraft The development of the EETC market
provided enormous financing flexibility to US airlines for the financing of new aircraft the
EETC provided the airline with the option to finance on a simple secured mortgage basis or the
US airline could opt for a leveraged lease with all of the benefits associated with a leveraged
lease described above
Beginning in 1997 US airlines had the ability to raise money in the capital markets when the
overall financing terms were most attractive They were able to ldquolock‐inrdquo such favorable
financing terms to fund new aircraft that were scheduled to be delivered in the future by
issuing a ldquopre‐fundedrdquo EETC These pre‐funded EETCs were used to great success by US
24
airlines in the late 1990s through 2001 a period in which the US airlines were taking delivery
of a significant number of aircraft
As a result of the downturn in the US airline industry following the September 11 2001
terrorist attacks many US airlines deferred or cancelled their orders for new aircraft This
reduced the need for US airlines to finance new aircraft when the financing terms available to
such US airlines via the EETC were not as favorable due to (i) the perceived increased credit
risks of the US airline industry following the September 11 terrorist attacks and (ii) the
temporary disequilibrium in the credit markets following the 200820092010 credit crisis
Now that the US airlines have once again begun to take delivery of a significant number of
new aircraft the pre‐funded EETC continues to be the preferred source of financing for US
airlines as evidenced by the number and amount of EETC issuances during 2012 and 2013
Based on an analysis of the EETC transactions occurring during 2012 and 2013 EETCs are once
again generally considered to provide more attractive overall financing terms than what could
be achieved by an airline under an export credit‐supported financing done under the terms of
the 2011 Aircraft Sector Understanding
25
GLOSSARY
ldquoAdverse Economic Impactrdquo is the short‐hand term used to refer to any serious negative effects on US industries or US jobs as set forth in the Bankrsquos Charter that result from Ex‐Im Bank loans guarantees or insurance The Bankrsquos Charter contains three provisions that address adverse economic impact found at 12 USC sectsect 635(b)(1) 635a‐2 635(e)
ldquoAir Indiardquo is an airline owned by the Government of the Republic of India ldquoAir India Transactionsrdquo are the two final commitments approved by Ex‐Im Bank on September
30 2011 for loan guarantees for the purchase of a number of 787 ldquoDreamlinerrdquo aircraft from Boeing and to be financed by a commercial lender not identified at the time As of the date of this paper Ex‐Im Bank has not issued any of its loan guarantees but is expected to do so in the coming months Ten of the aircraft involved in these two final commitments have been delivered to Air India and are in use by Air India on routes outside the United States The deliveries of the ten aircraft were made using private short‐term financing as to which Ex‐Im Bank had no involvement
ldquoAirbusrdquo Airbus SAS is a Europe‐based manufacturer of large commercial aircraft Airbus is the only competitor to Boeing the US manufacturer Airbus sales are supported by the ECAs of Germany France and the UK
ldquoAircraft Sector also known as the ASU is an agreement among members of the OECD Understandingrdquo that manufacture aircraft and Brazil The ASU requires that Export
Credit Agencies that support the export of aircraft follow certain rules and restrictions that set forth the most favorable terms that can be provided These rules and restrictions include the Export Credit Agency must charge a minimum risk premium which is determined by the ASU the term of any loan made by or supported by the Export Credit Agency for the purchase of aircraft cannot exceed 12 years the Export Credit Agency today can lend or guarantee only up to 85 of the actual purchase price of the aircraft being exported and the use of risk mitigants The ASU was preceded by the Large Aircraft Sector Understanding which governed these issues until the enactment of the 2007 ASU The ASU was again updated and revised in 2011 (See also the Large Aircraft Sector Understanding)
ldquoArrangementrdquo is the agreement among Export Credit Agencies governing the terms by which they will provide loans guarantees or insurance in support of exports from their respective countries Among other things the Arrangement requires Export Credit Agencies to charge a minimum risk premium which is governed by the Arrangement See also Organization for Economic Cooperation and Development
ldquoASUrdquo see Aircraft Sector Understanding ldquoAverage Weighted Liferdquo for purposes of this paper refers to the average number of years that
each dollar of unpaid principal on a loan remains outstanding For example a loan with equal principal payments throughout the loan term will have an average weighted life close to the middle of the whole loan term
26
ldquoBank Actrdquo is the Export‐Import Bank Act of 1945 12 USC sect635 as amended ldquoBank Advisory Committeerdquo is the official Advisory Committee of the Bank appointed in accordance
with the Bank Act and the Advisory Committee Act The Bank Advisory Committee is comprised of representatives of various industry and market sectors as well as representatives of labor and international trade experts
ldquoBasis pointsrdquo are a numerical measure applied to interest rates One basis point equals 1100th of one percent or 100 basis points equals one percent
ldquoCapital Equipmentrdquo is equipment used to manufacture a product provide a service or sell store or deliver merchandise A wide‐body aircraft is a piece of capital equipment
ldquoCharterrdquo is the Bank Act as well the provisions of the Export Import Bank Reauthorization Act of 2012 (Public Law 112‐122) that are not codified in the Bank Act
ldquoDreamlinerrdquo is the name given to a Boeing 787 wide‐body commercial aircraft ldquoECArdquo see Export Credit Agencies ldquoEconomic Impact Proceduresrdquo
are procedures adopted by Ex‐Im Bank to assess whether transactions supported by the Bank cause a serious adverse economic impact to US industries and US jobs See also Adverse Economic Impact
ldquoEETCrdquo see Enhanced Equipment Trust Certificate ldquoEnhanced Equipment Trust Certificaterdquo
also known as an EETC is a type of secured bond issued by a borrower in the capital markets The EETC is secured by the equipment being purchased with the proceeds of the bond issuance EETCs are used primarily for aircraft and since the late 1990s has been the dominant financing tool used by US airlines to purchase aircraft Section 1110 of the US Bankruptcy Codemdashwhich allows creditors of aircraft borrowers to obtain their collateral within 60 days if the payments on their debt is not current ndash has provided creditors of US airlines a level of comfort not available to creditors of foreign airlines until recently This generally provided US airlines with a significant financial advantage vis a vis their foreign competitors Recently the adoption of the Cape Town Convention and the related Aircraft Equipment Protocol has provided creditors of foreign airlines with protections similar to the protections provided by section 1110 of the US Bankruptcy Code Recently this has led to the beginnings of an international EETC market
ldquoEquipment Trust Certificaterdquo
also known as an ETC was the predecessor to the Enhanced Equipment Trust Certificate
ldquoETCrdquo see Equipment Trust Certificate ldquoEx‐Im Bankrdquo or ldquoBankrdquo See The Export‐Import Bank of the United States ldquoExport Credit Agenciesrdquo are agencies or ministries of government that have the official role of
providing loans guarantees or insurance in support of exports from their respective countries or in support of exports by sales of companies from their respective countries Ex‐Im Bank is the official Export Credit Agency of the United States of America
ldquoexportable goods screenrdquo is a screen or filter adopted by Ex‐Im Bank in its 2001 Economic Impact Procedures The exportable goods screen is utilized along with other screens to balance the Bankrsquos obligation to consider the adverse
27
economic effects of its transactions on US industries and US jobs with the Bankrsquos mandate to support US export transactions in a timely manner so as to fully support the exporterrsquos business opportunity The exportable goods screen filtered out transactions that supported exports which could only be used by a foreign buyer to provide services rather than produce goods
ldquoExport‐Import Bank of the is an independent agency of the Federal Government of the United United Statesrdquo States of America Also known as ldquoEx‐Im Bankrdquo Ex‐Im Bankrsquos mission
is to support US jobs by supporting US exports See 12 USC 635 et seq
ldquoExposure Feerdquo is the risk premium charged by Ex‐Im Bank in exchange for its guarantee in certain transactions The exposure fee must be at least equal to the minimum risk premium required by the terms of the Arrangement and the Aircraft Sector Understanding
ldquoForeign Sales Corporationrdquo is a company created under the terms of a former provision of the US Internal Revenue Code Foreign Sales Corporations received significant tax benefits
ldquoFSCrdquo see Foreign Sales Corporation ldquoInvestment Tax Creditrdquo is a credit permitted under the US Internal Revenue Code for the
purchase of certain types of equipment in certain circumstances See also Leveraged Leases
ldquoKFWrdquo the development bank for the Federal Republic of Germany KFW is an Export Credit Agency but it also operates through a ldquomarket windowrdquo which is not subject to the Home Market Rule Thus KFW provides support to Airbus for its sales of aircraft to US airlines The United States does not have an equivalent institution and Ex‐Im Bank does not have a ldquomarket windowrdquo
ldquoLarge Aircraft Sector also known as LASU was the predecessor to the Aircraft Sector Understandingrdquo Understanding The LASU governed the same general issues as are set
forth in the Aircraft Sector Understanding except that the minimum risk premium was lower than that required in the 2007 ASU and 2011 ASU When the 2007 ASU was enacted grandfathering provisions allowed ECA‐supported financing for a limited number of aircraft to be governed by LASU
ldquoLASUrdquo see Large Aircraft Sector Understanding ldquoLeveraged Leaserdquo is a lease of equipment and is designed to allow the lessor to take
advantage of certain tax code provisions such as the depreciation deduction and the investment tax credit while allowing the lessee to obtain the equipment involved at a significantly lower cost Leveraged Leases were a very popular means for US airlines to acquire aircraft throughout the 1980s and 1990s The value of the tax deductions to the lessor were significant so that the implicit interest rate in the lease payments by the US airline were extremely low Usually the US airline did not have sufficient profit to take advantage of the favorable tax code provisions By using a leveraged lease another company that could shelter income by using the tax code provisions would buy the equipment and lease the equipment to the US airline Usually at the end of the lease term the US airline would purchase the aircraft
28
ldquoLIBORrdquo is the London Inter‐bank Offering Rate It is commonly used as a reference rate in loan transactions that have floating or adjustable interest rates LIBOR reflects the rate at which banks will lend money to each other LIBOR is set for various loan terms (eg 3 months 6 months etc) and is widely published making it a convenient rate to use as a reference rate
ldquoNet pricerdquo is the price paid after all discounts have been deducted The net price is the actual price paid for a piece of equipment In aircraft transactions pursuant to the ASU Ex‐Im Bank will only support up to 85 of the net price of an aircraft EETC transactions on the other hand often support the nominal purchase price of an aircraft and thus result in a significantly higher amount financed
ldquoOECDrdquo see the Organization for Economic Cooperation and Development Open Skies Agreement Is a type of bilateral agreement between countries that govern the
rights of airlines from the two countries to fly into the other country Open Skies Agreements generally allow free access to fly as many routes to a country as an airline may choose but then usually restrict the ability to fly within the other country Generally it is a ldquofly in and outrdquo rule although there are exceptions
ldquoOrganization for Economic Cooperation and Developmentrdquo
also known as the OECD is an organization comprised of 34 member countries that work together to promote development The United States is a member With regard to Ex‐Im Bank the OECD is the organization through which the US Government negotiates an agreement among Export Credit Agencies known as the Arrangement and the ASU (and its predecessor the LASU)
ldquoPass Through Certificaterdquo also known as a PTC is a group of Equipment Trust Certificates pooled together to form the basis for a bond issuance
ldquoPTCrdquo See Pass Through Certificate ldquoRyanairrdquo is a low‐cost Irish airline that began business after European
deregulation of airlines in 1997 Ryanair rapidly expanded during the first decade of the 2000s creating significant competition for other airlines
ldquoScreensrdquo are a type of filter used by Ex‐Im Bank in its Economic Impact Procedures Screens are designed to identify those transactions which are not likely to cause an adverse economic impact to US industries or US jobs so that such transactions can be processed more quickly and efficiently as required by the Bank Act
ldquoSubstantial Injuryrdquo is a term defined in Ex‐Im Bankrsquos Charter to be applied in connection with the Bankrsquos economic impact procedures 12 USC sect635(e)(4) The Charter states ldquohellipthe extension of any credit or guarantee by the Bank will cause substantial injury if the amount of the capacity for production established or the amount of the increase in such capacity expanded by such credit or guarantee equals or exceeds 1 percent of United States productionrdquo
ldquoTPCCrdquo see Trade Promotion Coordinating Committee ldquoTrade Promotion Coordinating Committeerdquo
also known as the TPCC is an interagency committee of the US Government chaired by the Secretary of Commerce It was established under the Export Enhancement Act of 1992 to provide a
29
unifying framework to coordinate the export promotion and export financing activities of the US government and to develop a government‐wide strategic plan for carrying out such programs
ldquoTrade Sanctionsrdquo refers to any of a number of sanctions imposed by the US Government against companies countries industries or products usually as a result of an accusation of adjudication of a violation of an international trade agreement The Bank Act requires Ex‐Im Bank to take certain trade sanctions into account in its economic impact procedures
30
Table A ndash Congressional Actions and Ex-Im Bank Responses
Year Congressional Action Ex‐Im Bank Response
1968 Bank directed to take into account the possible adverse effect [of its loans and guarantees] upon the United States economy
Bank adds this transactions
factor to analysis of
1975 1 Standard refined to take into account any serious adverse effect of loans and guarantees on competitive position of US industry availability of scarce materials in US and employment in US
2 Bank directed to be competitive with rates terms and conditions offered by principal countries whose exporters compete with US exporters
3 Bank directed to submit semi‐annual report on competitiveness and conduct survey of US exporters and lenders to determine experience in meeting financing competition
Bank adds these of transactions
considerations to analysis
Year Congressional Action Ex‐Im Bank Response
1978 ‐ 1979
1 Bank directed to take into account any serious adverse effect of loans on competitive position of US industry and scarce materials Bank directed to emphasize strengthening competitive position of US exporters and expanding total US exports
2 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [From Appropriations Act Restated in Bank Charter in 1986]
3 Bank directed to implement regulations and procedures to insure full consideration of extent to which loan or guarantee is likely to have adverse effect on industries and employment in US either by reducing demand for US produced goods or increasing imports to the US
Bank develops framework and set of written economic impact procedures
1 Exclude exports the use of which remained localized in foreign country This
is first ldquoforeign localized goods and services screenrdquo
2 ldquoIntent and stimulus for projectrdquo examined to determine likelihood of substantial adverse economic impact Does transaction involve ldquorunaway industryrdquo
(leaving US for cheaper foreign labor)
3 Does export of capital equipment result in ldquobuy backrdquo of product being imported into the US
4 Is net impact on US economy and jobs positive or negative and to what degree
32
Year Congressional Action Ex‐Im Bank Response
1986 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [Originally from 1978 Appropriations incorporated into Bank Charter in 1986]
Senate Report recognizes knowledge and experience of Bank and need to respond to exportersrsquo requests for support in a timely and confidential fashion Economic impact procedures are to be practical and workable and not reduce Bankrsquos competitiveness and flexibility nor ignore positive aspects of export sale
Bank develops ldquoSummary of Adverse Economic Guidelinesrdquo to be applied to both
goods and services (a) is commodity to be produced surplus or likely to compete with US‐produced surplus (b) will Bankrsquos
assistance cause substantial injury to US producers of competing commodity (c)
will injury to US producers of competing commodity outweigh the short‐ and long‐
term benefits to US industry and employment If answer is no then no
further economic impact analysis
1988 Congress establishes test for ldquosubstantial injuryrdquo if the amount of capacity for production established or amount of increase in such capacity expanded by Bankrsquos credit or guarantee exceeds 1 of US production
Bankrsquos Board recognizes requirement to balance (a) possibility of substantial harm
to US production and employment with (b) being responsive competitive and efficient New economic impact procedures ask (a) will the project be in direct competition with US production (b) is the Bankrsquos support significantly associated with the project (c) will the output of the project
cause substantial injury to US producers of the same similar or competing
commodity If answer is no then no further economic impact analysis is required
33
Year Congressional Action Ex‐Im Bank Response
1998 Bank revised procedures involving countries against which trade sanctions were pending or imposed
2001
2006 ‐2007
1 Bank required to determine whether extension of credit or guarantee is likely to produce same or other commodities and whether the production may cause substantial injury to US producers
2 Bank prohibited from providing a loan or guarantee that will facilitate circumvention of trade law order or determination
3 Bank required to designate sensitive commercial sectors and products for which Bank financing deemed unlikely due to potential for adverse economic impact on US
4 Bank required to aggregate financial thresholds on rolling 24‐month basis
Bank develops ldquoexportable goods screenrdquo Does Ex‐Im Bank support result in production of exportable good from the foreign buyerrsquos country If not no further economic impact analysis is required Notice and request for comments were published in the Federal Register US airline industry did not respond
Bank issues 2007 Economic Impact Procedures ldquoExportable goods screenrdquo is modified Will the transaction (capital goods and services) result in either new or additional production capacity of an exportable good
34
to foreign airlines Even for the rare foreign EETC the terms were not as favorable as the terms available to US airlines
The EETC was premised on sect 1110 of the US Bankruptcy Code which only applied to US airlines27 Section 1110 protects a secured creditor of an airline in bankruptcy by either a)requiring the debtor airline within 60 days of the bankruptcy petition date to cure any payment defaults and stay current with loan payments or b) permitting the secured creditor to obtain possession of the creditorrsquos collateral (ie the aircraft) 60 days after the bankruptcy petition date notwithstanding the automatic stay provision that applies to creditors of other types of debtors This certainty of access to collateral ndash and thus to payment ndash provided and continues to provide decreased risk to creditors of US airlines This certainty in turn allows these creditors to provide more favorable financing terms than creditors of foreign airlines In the boom years of 2000 to 2001 US airlines raised $19 billion in the EETC market primarily to purchase new aircraft
Throughout the years leading up to the adoption of the exportable goods screen in 2001 Ex‐Im Bank aircraft financing was provided in accordance with the guidelines set forth in the Large Aircraft Sector Understanding (ldquoLASUrdquo) under the auspices of the Organization for Economic Cooperation and Development (ldquoOECDrdquo) The LASU was followed later by evolving versions of the Aircraft Sector Understanding (ldquoASUrdquo) The LASU and the ASU wereare agreements that set forth guidelines to be followed by ECAs in supporting exports of aircraft manufactured in the home country of the relevant ECA The LASUASU guidelines set forth the maximum repayment term for the financing the maximum advance rate of the financing as a percentage of the net price of the aircraft and the minimum fee that the ECA was required to charge to the airline for the ECA support These terms and conditions resulted in financing that was significantly more expensive than that which could be obtained by US airlines in the private market
In light of the foregoing the Bank reasonably believed that US airlines would not suffer any adverse economic impact from the Bankrsquos financing of foreign airlinesrsquo acquisition of US‐manufactured aircraft In other words when Ex‐Im Bank first adopted the ldquoexportable goodsrdquo screen in 2001 the Bank was confident that its use of the screen would provide efficiencies in transaction‐processing time by focusing the Bankrsquos resources on transactions that could reasonably be expected to raise substantial adverse economic impact concerns
B The US Airline Industry Financing Dynamics Late 2001 to Early 2007
The decade of the 2000s presented the global airline industry with new challenges and new
opportunities ndash both of which created problems for US airlines
27 11 USC sect1110 (2001)
13
The terrorist attacks of September 11 2001 resulted in a sudden and protracted reduction in
demand for airline passenger services This was particularly prolonged in the United States and
Europe As a result of that drop in demand as well as other financial pressures the major US
airlines began a decade‐long process of mergers28 During the 2000s the major US airlines also
were able to shed costs and debtmdasheg pensionsmdashin a way not available to foreign airlines
under the US Bankruptcy Code29
As a result of this downsizing and restructuring US airlines focused on consolidation and
survival not expansion of their fleets by purchasing new aircraft US airline purchases of new
passenger aircraft almost disappeared after 2001 reappeared briefly in 2007 and then
disappeared again until sometime in 2010 Instead of ordering new aircraft US airlines
primarily relied upon the aircraft that they had purchased with EETC financing in the 2001‐2002
period
Nonetheless the data that are available indicate that through 2007 the US airlines generally
had access to aircraft financing that was no less favorable than financing provided by ECAs such
as Ex‐Im Bank In the midst of these developments starting in 2005 the various countries and
constituencies that were involved with ECA aircraft financing began negotiating a new ASU
During negotiations of the new ASU European airlines alleged that ECA financing was more
favorable than the financing to which they had access In June 2007 a new ASU agreement was
reached The European airlines explicitly approved thus signaling that the new agreement
eliminated any ECA financing advantage At the same time none of the US airlines raised any
economic impact concerns about the new ASU As Ex‐Im Bank reviewed and revised its
Economic Impact Procedures in 2007 there were no complaints raised by US airlines or any
other parties regarding aircraft transactions Likewise the new 2007 ASU had explicitly quelled
similar concerns in Europe All of the other relevant factors that led to adoption of the
ldquoexportable goodsrdquo screen in 2001 remained true in 2007 As a result in slightly varied form
the ldquoexportable goodsrdquo screen was carried through the 2002 and 2007 economic impact
procedures
C The US Airline Industry Financing Dynamics Late 2007 to 2012
After the 2007 ASU took effect the worldwide financial crisis emerged in 2008 and had a major
impact on global financial markets including those for large aircraft purchases From mid‐2008
to the beginning of 2010 the financial markets experienced significant volatility and distress
28 These included TWA and American Airlines in 2001 America West and US Airways in 2005 Northwest Airlines and Delta Air Lines in 2008 Continental Airlines and United Airlines in 2010 and Air Tran and Southwest Airlines in 2010 American Airlines and US Air announced merger plans in 201229 Bankruptcies of the major US Airlines from 2001‐2010 included US Airways in 2002 and 2004 United Airlines in 2002 Northwest Airlines in 2005 Delta Air Lines in 2005 Frontier Airlines in 2008 Mesa Airlines in 2010 American Airlines later filed for bankruptcy protection in 2012
14
Then after a short calm in 2010 the European sovereign debt and related European banking
crises rattled financial markets from mid‐2011 to mid‐2012 The result was another period of
extreme interest rate volatility
During this period the global financial market for commercial jet aircraft had been
characterized by (a) extreme volatility in both interest rates and availability of financing and
(b) major growth in demand for aircraft by airlines in the emerging markets and resource‐rich
OECD countries At the same time (and until only recently) there was very little demand for
aircraft by US airlines
There was also a fundamental shift in the key financial tools used for aircraft purchasesmdashwith
commercial banks playing a much diminished role EETC financing from the capital markets
emerged and matured into the most favorable source of financing
As noted before in early 2010 one US airline raised concerns that the financing provided by
the Bank to Ryanair an up‐and‐coming and successful discount airline in Europe was more
favorable than the financing available to US airlines The complaining airline asserted that Ex‐
Im Bank financing to Ryanair was significantly more favorable than financing that the
complaining airline itself had received in a recent EETC offering
Ex‐Im Bank reviewed and analyzed the assertions and determined that they were flawed in that
the purported difference in financial costs ignored pertinent factors and thus did not indicate
that ECA financing would be more favorable in a true ldquoapples to applesrdquo comparison Some key
factors ignored in the analysis provided by the one US airline were
a The credit‐worthiness of the US airline in question was publically rated at B‐ which in
common investment terms puts it in the ldquojunkrdquo group of ratings Ryanair by comparison is rated as investment grade a significantly higher rating Naturally a difference in credit ratings is going to result in a difference in the cost of financing
b The US airline was re‐financing a group of 10 to 12 year old aircraft while Ryanair was
financing brand‐new aircraft In both cases the aircraft being financed formed the
collateral pool for the loan Older aircraft represent a higher risk due to the poorer
quality of collateral therefore resulting in higher costs of financing
At the same time that this US airline was raising its concerns with the Bank it was also raising
similar concerns in the context of new ASU negotiations By the end of 2010 the ECAs reached
agreement on a new ASU (the 2011 ASU) which went into effect on February 1 2011 This
agreement included a built‐in adjustment mechanism to reflect changes in the financial
markets as they occurred This was designed to ensure that ECA financing and commercial bank
financing were generally equivalent The Bank continues to monitor the 2011 ASU to ensure
that the adjustment mechanism built into that agreement does in fact generally work to
15
enforce an equilibrium between the cost of ECA aircraft financings and the financing available
to US airlines in the private market In addition this very issue continues to be a regular topic
of discussion among the ASU participant countries as well Based on the data that have been
developed and presented to date the Bank believes that the 2011 ASU properly serves its
intended function of ensuring that airlines using private market financing do not suffer a
competitive disadvantage when compared to ECA financing of aircraft under the ASU
IV Conclusion
Ex‐Im Bankrsquos exportable goods screen complied with the Bankrsquos statutory requirements to
assess the potential adverse effects of all transactions and to focus on those transactions that
were likely to result in a substantial adverse economic impact on US industry Historically
financing available to US airlines for the purchase of new wide‐body aircraft has been either
more favorable than or equally favorable as Ex‐Im Bank financing to foreign airlines for the
purchase of equivalent aircraft The exportable goods screen was an appropriate reasonable
and efficient response to the realities of aircraft financing It properly balanced the
Congressional directives to assess the likelihood of substantial economic impact on US
industry and US jobs with the need to finance transactions in an efficient manner so as to
support US exports and US jobs
November 22 2013
Export‐Import Bank of the United States 811 Vermont Ave NW Washington DC 20571
16
Appendix A
Excerpt from Staff Memorandum to Ex‐Im Bank Board of Directors Accompanying 1979
Economic Impact Procedures30
Thus Section 2(b)(1)(B) of the Act requires the Board of Directors to take into account ldquoany
serious adverse effectrdquo which loans or guarantees may have on US industry materials in short
supply and employment Section 1911 of the 1978 Amendments requires consideration by the
Bank of the extent to which a loan or financial guarantee ldquois likely to have an adverse
effecthellipeither by reducing demand for goods produced in the United States or by increasing
imports to the United Statesrdquo and Section 608 of the Appropriations Act requires a finding that
the commodity ultimately produced as a result of [Bank] financing will be in surplus when the
production comes on‐stream and that US producers of the same similar or competing
commodity will be substantially injured It is apparent that the latter two statutory provisions
are explications of the basic mandate of the Act and do not expand the Bankrsquos mandate to
examine domestic impact but rather suggest factors to be considered in that examination To
a great extent the 1978 Amendments language and the Appropriations Act provisions set forth
the same concept in different ways Thus the reference in Section 1911 of the 1978
Amendments to ldquoreducing demand for goods in the United Statesrdquo and ldquoincreasing imports to
the United Statesrdquo is no more than the inevitable consequence of a commodity being ldquoin
surplusrdquo as stated in Section 608 of the Appropriations Act
Section 2(b)(1)(B) is the broadest formulation of the basic concept since it contains the most
general language ie ldquoany serious impactrdquo and encompasses all types of exports Section
1911 is primarily procedural in nature directing the Bank not only to implement appropriate
regulations and procedures to ensure full consideration of adverse impact but also to request a
report from the International Trade Commission Section 1911 includes a more detailed
description of events which would constitute adverse impactmdashie a reduction in demand for
US produced goods or an increase in imports to the US Finally this section contains an
explicit reference to agriculture which was only implicitly covered by Section 2(b)(1)(B) It
should be noted that this is one of several references to agriculture which were added to the
Act by the 1978 Amendments
The Appropriations Act provision explicitly refers to a balancing by the Board of Directors of the
benefits of the [Bank]‐supported export against the injury to US [producers] of the commodity
in question At the same time the Act has always necessitated such a balancing by requiring
the Bank to take into account ldquoserious adverse effects upon the US economyrdquo at the same
time it carries out the Bankrsquos basic mandate to ldquofacilitate exportsrdquo and to ldquofoster expansion of
exportsrdquo Under either provision therefore the Board of Directors will be taking into
30 Memorandum ldquoProcedures Regarding Adverse Domestic Impact of Eximbank Financingrdquo Pp 7‐12 Jan 5 1979 17
consideration the results of the balancing as one of the many factors involved in making a
decision to provide financing It should be noted that Section 1911 of the 1978 Amendments is
consistent with both of these provisions since it only seeks to ensure that ldquofull considerationrdquo is
given to adverse effects upon the US economy
Section 2(b)(1)(B) of the Act refers to ldquoserious adverse effectrdquo upon the US economy as a
whole whereas Section 608 of the Appropriations Act imposes a more stringent test by
focusing on a single industry ndash the domestic producers of the commodity to be produced by the
project supported by [the Bank] ndash and requiring a determination of substantial injury for that
industry alone However a reading of the entire Section shows that such a determination
would have to be made only if the net effect upon the US economy of the project for which
support was requested from [the Bank] is negative and if the commodity is likely to be in
surplus on world markets at the time the project becomes operative In any event under
Section 2(b)(1)(B) the Board would have to take into account any serious adverse effects of the
transaction upon the US economy Only if the Board decides to proceed with the transaction
regardless of such effects would it be necessary to determine if there will be substantial injury
to US producers of the commodity and thus trigger the prohibition contained in Section 608
It should also be noted that Section 1911 of the 1978 Amendments speaks in terms only of ldquoany
adverse effectrdquo However the language of that provision clearly shows that it was not intended
to set up a substantive test but rather as was mentioned above to insure that formal
procedures to take into account impacts upon the US economy are established by [Ex‐Im
Bank] as well as to enable the Bank to obtain a report from the International Trade
Commissionrdquo PL 95‐630 92 Stat 3641 (1978)
18
Appendix B
Financial Tools Available to US Airlines
Generally over the past several decades US airlines have had access to a broad range of
aircraft financing options
Accordingly at different times during the past several decades US airlines took advantage of
whichever financing option provided the most attractive overall financing terms from such
airlinesrsquo perspective For instance a US airline would be able to maximize the amount of the
financing thereby minimizing the amount of its own money it had to invest in the aircraft (ie
the ldquodown paymentrdquo) It might also maximize the amount of money in excess of the actual cost
of the aircraft it could raise against the aircraft obtain the longest possible repayment term and
the slowest possible amortization schedule (ie the longest ldquoweighted average liferdquo) obtain
the lowest interest rate and risk premium obtain the least restrictive operational and financial
covenants provide the least amount of collateral or other security or obtain other benefits
Due to the fact that the United States is seen as not presenting any ldquocountry riskrdquo and has well‐
developed and well‐regarded legal and judicial systems that are seen as being protective of
creditorsrsquo rights US airlines have usually had access to secured aircraft financings from
commercial banks from around the world During the past several decades commercial banks
from different regions have been at the forefront of the aircraft finance industry and have
provided financing to US airlines on attractive financing terms Initially US‐based banks
provided most of the aircraft financing to US airlines but during the 1980s Japanese banks
became very significant lenders to the US airlines During the 1990s and 2000s the European
banks (German French British and Swiss banks) were the most significant source of
commercial bank funding for US airlines
In addition to commercial bank financing during the 1970s and 1980s US airlines obtained
long‐term financing from US‐based institutional investors (eg insurance companies and
pension funds) through the use of the Equipment Trust Certificate (ldquoETCrdquo) financing structure or
the Pass Through Certificate (ldquoPTCrdquo) financing structure The ETC is a financing provided by
institutional investors that is secured by one or more items of equipment (eg aircraft) The
PTC is a group of ETCs combined into a public debt security that is sold into the capital markets
to institutional investors
However during the 1980s the simplest and most prevalent form of aircraft financing for US
airlines was the US leveraged lease
The US leveraged lease allowed US airlines to take advantage of the US tax code which
generally provides for all types of capital assets to be depreciated and thereby reduces or
defers taxes due to the deductibility of tax depreciation Because US airlines generally did not 19
have sufficient income to fully take advantage of the benefit of the tax depreciation deductions
associated with acquiring aircraft the US airlines entered into US leveraged leases Under a
leveraged lease the benefits of the tax depreciation deductions related to the aircraft were
transferred to profitable companies that had income they wanted to shelter from tax In
return the company was willing to provide the equity in a US leverage lease (approximately
20 of the appraised value of the aircraft) and to ldquoleaserdquo the aircraft back to the airline for the
airlinersquos use A number of different entities entered into such leases including banks insurance
companies and other financial institutions such as Ford Motor Credit as well as finance
subsidiaries of other corporate entities including consumer product companies such as Phillip
Morris or entertainment companies such as Disney The fact that these were ldquoleveragedrdquo
leases (as opposed to ldquosingle investor leasesrdquo) also enabled the equity providers to deduct the
interest expense associated with the US leveraged lease
Through the use of a combination of lease equity and debt a US leveraged lease allowed US
airlines to arrange financing for up to 100 of the appraised value of an aircraft This was
particularly attractive to major US airlines because due to their size and relative importance
to the aircraft manufacturers every major US airline generally was able to negotiate aircraft
purchases with the aircraft manufacturers that enabled the airline to buy the aircraft for
amounts significantly less than the appraised value The result was that by using a US
leveraged lease to finance its aircraft a US airline was able to ldquoover‐financerdquo the aircraft (ie
finance the aircraft for more than the airline was paying for the aircraft) resulting in the airline
effectively having the ability each time the airline financed an aircraft to arrange 100
financing for its aircraft and at the same time arrange a long‐term working capital loan This is
the equivalent of a home buyer being able to buy a house with no money down (no down
payment) and also receiving a long‐term loan for non‐home expenses
In contrast Ex‐Im Bank‐supported aircraft financing is for only 85 (and sometimes less) of the
actual ldquonet pricerdquo that the airline is paying the US aircraft manufacturer (after deducting all
discounts and other concessions the airline has negotiated with the US aircraft manufacturer
which results in a net price that is almost always less than the appraised value) This requires
the foreign airline that is using Ex‐Im Bank support to come up with a down payment of at least
15 of the net price of the aircraft As a result US airlines were able to obtain more financing
under a US leveraged lease (without putting any money down) than foreign airlines could
under an Ex‐Im Bank supported aircraft financing (which required a down payment)
In addition US leveraged leases used by US airlines always had very long repayment terms
Generally speaking the longer the repayment the longer the tax deferral and the more
advantageous the terms of the US leveraged lease As a result it was not unusual for the US
leveraged leases used by US airlines to have a repayment term of between 18 and 22 years
and sometimes as long as 25 years The only constraint was that the lease term of the
20
leveraged lease should not exceed 80 of the economic useful life of the aircraft which in
some instances was more than 30 years
In contrast the repayment term in an Ex‐Im Bank‐supported aircraft financing is never longer
than 12 years which is the maximum repayment term Ex‐Im Bank is permitted to offer for an
aircraft financing under the guidelines for export credits promulgated by the Organization for
Economic Cooperation and Development (the ldquoOECDrdquo) with which guidelines the US
Government (including Ex‐Im Bank) has agreed to abide This difference in repayment terms is
significant it is similar to the difference in monthly payments under a 15 year home mortgage
versus a 30 year home mortgage As a result US airlines were able to obtain significantly
longer financing under a US leveraged lease (which generally resulted in a smaller periodic
principal repayment burden due to the longer repayment term) than foreign airlines could
under an Ex‐Im Bank‐supported financing
US leveraged leases used by US airlines also had a slower amortization profile with a very
long weighted average life (ie small amounts of debt amortization in the early years of the
financing) of at least 10 years In the same manner that a longer repayment term increased the
tax deferral a longer weighted average life also increased the tax deferral
In contrast the amortization profile in an Ex‐Im Bank supported aircraft financing for a foreign
airline is usually between 6 years and 65 years (at least 4 years shorter than the weighted
average life of the US leveraged leases historically used by US airlines) which imposes a
much greater cash flow burden on the foreign airline in comparison with the cash flows
required of a US airline under a US leveraged lease
Although the absolute interest rate on the debt in a US leveraged lease fluctuated over time
with the overall level of interest rates the providers of the debt into these US leveraged leases
(primarily insurance companies and other institutional investors) were generally willing to
accept an interest rate margin of less than 100 basis points31 over LIBOR32 on a fixed rate
equivalent basis (and sometimes significantly less than 100 basis points)
In contrast the interest rate margin on the debt on an Ex‐Im Bank‐supported aircraft financing
was generally between a few basis points over LIBOR to 50 basis points over LIBOR because the
interest on the Ex‐Im Bank‐guaranteed aircraft financing is guaranteed by Ex‐Im Bank and
reflects the low risk associated with a US Government guaranteed loan However the interest
rate margin on an Ex‐Im Bank‐guaranteed aircraft financing does not reflect the Ex‐Im Bank
exposure fee (or risk premium) that is paid to Ex‐Im Bank in view of the underlying risk of the
foreign airline The minimum exposure fee charged by Ex‐Im Bank was 2 during the 1980s
31 100 basis points equals 1 percent 32 LIBOR is the London Inter‐Bank Offering Rate and is a common reference rate such as ldquoPrimerdquo or ldquoTreasury Raterdquo used in adjustable interest rate transactions
21
and early 1990s and 3 until 2007 when the OECD promulgated a new set of guidelines for
export credits for aircraft (known as the ldquo2007 Aircraft Sector Understandingrdquo or the ldquo2007
ASUrdquo) This exposure fee was required to be paid ldquoup frontrdquo ndash ie at the inception of the loan
On a per annum basis this equates to between 30 basis points and 50 basis points which
should be added to the interest rate margin received by the guaranteed lender to obtain the
equivalent interest rate paid by a foreign airline under Ex‐Im Bank‐supported financing (for
purposes of comparing the overall financing cost to those incurred by US airlines) The Ex‐Im
Bank exposure fee is similar to a homeowner having to pay ldquopointsrdquo up front at the time he
obtains his mortgage The effect of paying points up front and paying an Ex‐Im Bank exposure
fee effectively increases the cost of the financing In comparing the overall cost of financing
through ECA support including the exposure fee to the overall cost of a leveraged lease for
borrowers with comparable credit profiles the overall cost of the US leveraged lease was
considerably more favorable than what could be achieved through an Ex‐Im Bank‐supported
aircraft financing
Although the US leveraged lease was itself a very attractive financing structure for US
airlines at different times the basic US leveraged lease was made even more attractive due to
other provisions of the US and foreign tax codes
For instance from the 1960s (during the Kennedy Administration) until its repeal under the Tax
Reform Act of 1986 the US tax code provided for an investment tax credit which was intended
to encourage investment in capital goods and therefore allowed airlines or the equity investor
in a US leveraged lease to get a credit against the taxes it would otherwise be required to pay
This credit was a permanent reduction in taxes paid as opposed to only the deferral of taxes
(postponement of when taxes had to be paid) that could be achieved through the use of the
US leveraged lease
Similarly from the 1980s to the mid‐1990s it was common for a US airline to combine a US
leveraged lease with a lease into a foreign jurisdiction that had a ldquoform over substancerdquo
approach to its tax code (as opposed to the United States which has a ldquosubstance over formrdquo
approach to its tax code) Taking advantage of the disparity a US airline could ldquosellrdquo the
aircraft to both (i) an equity investor in the United States and (ii) an equity investor in a foreign
country such as Japan Germany or Hong Kong and each equity investor could depreciate the
same aircraft and therefore shelter its respective income Over time due to changes in the
respective tax codes these more aggressive tax advantaged cross‐border leasing structures
(ldquoDouble Dipsrdquo and even on occasion ldquoTriple Dipsrdquo) were disallowed but not before US airlines
financed billions of dollars of aircraft using such tax advantaged leasing structures
During the 1990s the basic US leveraged lease was made even more attractive by taking
advantage of another provision of the US tax code that allowed additional US taxes to be
22
deferred if the equity investor in the transaction used an offshore subsidiary that qualified as a
Foreign Sales Corporation (ldquoFSCrdquo) under the US tax code and structured the deal as a
Commission FSC
In addition during the 1980s and 1990s US airlines had access to other sources of financing
with overall financing terms that were much more attractive than what was available to foreign
airlines via Ex‐Im Bank‐supported export credits For example during the late 1980s and 1990s
Airbus made its first significant sales to US airlines In order to do so Airbus arranged and
provided very attractive and flexible financing terms to US airlines to encourage them to
purchase European‐manufactured Airbus aircraft instead of US‐manufactured Boeing or
McDonnell Douglas aircraft The US airlines were more than willing to accept these incentives
During this period some US airlines entered into ldquowalk awayrdquo leases of Airbus aircraft
pursuant to which Airbus North America (backed by the joint and several guarantees of each of
the four countries that are members of Airbus SAS) entered into a US leveraged lease of the
Airbus aircraft and then subleased the aircraft to a US airline on terms that (i) passed along
most of the tax benefits to the US airline through lower lease rentals and (ii) permitted the
US airline to terminate the sublease and simply ldquowalk awayrdquo from the lease upon a relatively
short notice period
Under the ldquoHome Market Rulerdquo the European export credit agencies (including those of
France Germany and the United Kingdom) that usually support the financing of Airbus aircraft
could not provide such support to US airlines Therefore Airbus arranged for Kreditanstalt fur
Wiederaufbau the development bank of Germany to provide very attractive financing for the
Airbus aircraft being acquired by US airlines These financings occurred on terms much more
favorable (with 18‐ to 22‐year repayment terms) than what export credit agencies could
provide (with a maximum repayment term of 12‐years)
Similarly during the 1990s US airlines began to acquire a large number of 35 to 50 seat
regional jet aircraft manufactured by Bombardier of Canada and Embraer of Brazil Many of
these aircraft were acquired by the US airlines by using export credit support from Canada and
Brazil Some of the financing terms (ie the repayment terms) of these Brazilian and Canadian
government‐supported export credit financings were even more attractive (15‐ to 18‐year
repayment terms) than what was available from the export credit agencies of France Germany
and the United Kingdom with respect to Airbus aircraft or from Ex‐Im Bank with respect to
Boeing aircraft (10‐ to 12‐year repayment terms)
To make the financing of Canadian‐manufactured Bombardier regional jets even more
attractive to US airlines the province of Quebec (where Bombardier has its headquarters)
through Investment Quebec provided additional aircraft financing support to the US airlines
23
Finally to the extent even more attractive financing was needed to convince US airlines to
purchase Canadian or Brazilian‐manufactured regional aircraft the manufacturers themselves
provided residual value guarantees with respect to such aircraft to the airline or to the
financiers (ie to the equity investor in a US leveraged lease or the creditors financing the
aircraft)
The next major development in aircraft financing used by US airlines was the development in
the 1990s of the Enhanced Equipment Trust Certificate (ldquoEETCrdquo) which was an ETC with certain
structural enhancements The most important of these enhancements is a liquidity facility to
ensure that if there is a default the financiers would continue to receive current interest
during the period of time while the aircraft is being repossessed and remarketed A key
element in the development of the EETC was the existence of Section 1110 of the US
Bankruptcy Code which gives a type of ldquopreferred creditorrdquo status to financiers of aircraft for
US airlines This ldquopreferred creditorrdquo status exempts aircraft financiers of US airlines from
the automatic stay generally imposed following a bankruptcy filing by a borrower subject to the
protections of the US Bankruptcy Code Section 1110 of the US Bankruptcy Code
accomplishes this by requiring the airline within 60 days of such bankruptcy filing to either (i)
resume payments under the originally agreed aircraft financing or (ii) return the aircraft to the
financier
The first EETC was done in 1994 and the practice has now been successfully used by almost
every major US airline including Alaska Airlines America West Airlines American Airlines
Continental Airlines Delta Airlines Hawaiian Airlines Jet Blue Airlines Northwest Airlines
Southwest Airlines United Airlines and US Airways The overall financing cost of a US airline
acquiring an aircraft through the use of the EETC ndash which includes the amount of financing
repayment term amortization profile effective cost of the financing etc ndash has generally been
significantly more attractive than (i) what such US airline could have achieved under an export
credit‐supported aircraft financing for such airline and (ii) what a similarly rated foreign airline
could have achieved under an export credit‐supported aircraft financing
This is particularly true for the financing of new aircraft The development of the EETC market
provided enormous financing flexibility to US airlines for the financing of new aircraft the
EETC provided the airline with the option to finance on a simple secured mortgage basis or the
US airline could opt for a leveraged lease with all of the benefits associated with a leveraged
lease described above
Beginning in 1997 US airlines had the ability to raise money in the capital markets when the
overall financing terms were most attractive They were able to ldquolock‐inrdquo such favorable
financing terms to fund new aircraft that were scheduled to be delivered in the future by
issuing a ldquopre‐fundedrdquo EETC These pre‐funded EETCs were used to great success by US
24
airlines in the late 1990s through 2001 a period in which the US airlines were taking delivery
of a significant number of aircraft
As a result of the downturn in the US airline industry following the September 11 2001
terrorist attacks many US airlines deferred or cancelled their orders for new aircraft This
reduced the need for US airlines to finance new aircraft when the financing terms available to
such US airlines via the EETC were not as favorable due to (i) the perceived increased credit
risks of the US airline industry following the September 11 terrorist attacks and (ii) the
temporary disequilibrium in the credit markets following the 200820092010 credit crisis
Now that the US airlines have once again begun to take delivery of a significant number of
new aircraft the pre‐funded EETC continues to be the preferred source of financing for US
airlines as evidenced by the number and amount of EETC issuances during 2012 and 2013
Based on an analysis of the EETC transactions occurring during 2012 and 2013 EETCs are once
again generally considered to provide more attractive overall financing terms than what could
be achieved by an airline under an export credit‐supported financing done under the terms of
the 2011 Aircraft Sector Understanding
25
GLOSSARY
ldquoAdverse Economic Impactrdquo is the short‐hand term used to refer to any serious negative effects on US industries or US jobs as set forth in the Bankrsquos Charter that result from Ex‐Im Bank loans guarantees or insurance The Bankrsquos Charter contains three provisions that address adverse economic impact found at 12 USC sectsect 635(b)(1) 635a‐2 635(e)
ldquoAir Indiardquo is an airline owned by the Government of the Republic of India ldquoAir India Transactionsrdquo are the two final commitments approved by Ex‐Im Bank on September
30 2011 for loan guarantees for the purchase of a number of 787 ldquoDreamlinerrdquo aircraft from Boeing and to be financed by a commercial lender not identified at the time As of the date of this paper Ex‐Im Bank has not issued any of its loan guarantees but is expected to do so in the coming months Ten of the aircraft involved in these two final commitments have been delivered to Air India and are in use by Air India on routes outside the United States The deliveries of the ten aircraft were made using private short‐term financing as to which Ex‐Im Bank had no involvement
ldquoAirbusrdquo Airbus SAS is a Europe‐based manufacturer of large commercial aircraft Airbus is the only competitor to Boeing the US manufacturer Airbus sales are supported by the ECAs of Germany France and the UK
ldquoAircraft Sector also known as the ASU is an agreement among members of the OECD Understandingrdquo that manufacture aircraft and Brazil The ASU requires that Export
Credit Agencies that support the export of aircraft follow certain rules and restrictions that set forth the most favorable terms that can be provided These rules and restrictions include the Export Credit Agency must charge a minimum risk premium which is determined by the ASU the term of any loan made by or supported by the Export Credit Agency for the purchase of aircraft cannot exceed 12 years the Export Credit Agency today can lend or guarantee only up to 85 of the actual purchase price of the aircraft being exported and the use of risk mitigants The ASU was preceded by the Large Aircraft Sector Understanding which governed these issues until the enactment of the 2007 ASU The ASU was again updated and revised in 2011 (See also the Large Aircraft Sector Understanding)
ldquoArrangementrdquo is the agreement among Export Credit Agencies governing the terms by which they will provide loans guarantees or insurance in support of exports from their respective countries Among other things the Arrangement requires Export Credit Agencies to charge a minimum risk premium which is governed by the Arrangement See also Organization for Economic Cooperation and Development
ldquoASUrdquo see Aircraft Sector Understanding ldquoAverage Weighted Liferdquo for purposes of this paper refers to the average number of years that
each dollar of unpaid principal on a loan remains outstanding For example a loan with equal principal payments throughout the loan term will have an average weighted life close to the middle of the whole loan term
26
ldquoBank Actrdquo is the Export‐Import Bank Act of 1945 12 USC sect635 as amended ldquoBank Advisory Committeerdquo is the official Advisory Committee of the Bank appointed in accordance
with the Bank Act and the Advisory Committee Act The Bank Advisory Committee is comprised of representatives of various industry and market sectors as well as representatives of labor and international trade experts
ldquoBasis pointsrdquo are a numerical measure applied to interest rates One basis point equals 1100th of one percent or 100 basis points equals one percent
ldquoCapital Equipmentrdquo is equipment used to manufacture a product provide a service or sell store or deliver merchandise A wide‐body aircraft is a piece of capital equipment
ldquoCharterrdquo is the Bank Act as well the provisions of the Export Import Bank Reauthorization Act of 2012 (Public Law 112‐122) that are not codified in the Bank Act
ldquoDreamlinerrdquo is the name given to a Boeing 787 wide‐body commercial aircraft ldquoECArdquo see Export Credit Agencies ldquoEconomic Impact Proceduresrdquo
are procedures adopted by Ex‐Im Bank to assess whether transactions supported by the Bank cause a serious adverse economic impact to US industries and US jobs See also Adverse Economic Impact
ldquoEETCrdquo see Enhanced Equipment Trust Certificate ldquoEnhanced Equipment Trust Certificaterdquo
also known as an EETC is a type of secured bond issued by a borrower in the capital markets The EETC is secured by the equipment being purchased with the proceeds of the bond issuance EETCs are used primarily for aircraft and since the late 1990s has been the dominant financing tool used by US airlines to purchase aircraft Section 1110 of the US Bankruptcy Codemdashwhich allows creditors of aircraft borrowers to obtain their collateral within 60 days if the payments on their debt is not current ndash has provided creditors of US airlines a level of comfort not available to creditors of foreign airlines until recently This generally provided US airlines with a significant financial advantage vis a vis their foreign competitors Recently the adoption of the Cape Town Convention and the related Aircraft Equipment Protocol has provided creditors of foreign airlines with protections similar to the protections provided by section 1110 of the US Bankruptcy Code Recently this has led to the beginnings of an international EETC market
ldquoEquipment Trust Certificaterdquo
also known as an ETC was the predecessor to the Enhanced Equipment Trust Certificate
ldquoETCrdquo see Equipment Trust Certificate ldquoEx‐Im Bankrdquo or ldquoBankrdquo See The Export‐Import Bank of the United States ldquoExport Credit Agenciesrdquo are agencies or ministries of government that have the official role of
providing loans guarantees or insurance in support of exports from their respective countries or in support of exports by sales of companies from their respective countries Ex‐Im Bank is the official Export Credit Agency of the United States of America
ldquoexportable goods screenrdquo is a screen or filter adopted by Ex‐Im Bank in its 2001 Economic Impact Procedures The exportable goods screen is utilized along with other screens to balance the Bankrsquos obligation to consider the adverse
27
economic effects of its transactions on US industries and US jobs with the Bankrsquos mandate to support US export transactions in a timely manner so as to fully support the exporterrsquos business opportunity The exportable goods screen filtered out transactions that supported exports which could only be used by a foreign buyer to provide services rather than produce goods
ldquoExport‐Import Bank of the is an independent agency of the Federal Government of the United United Statesrdquo States of America Also known as ldquoEx‐Im Bankrdquo Ex‐Im Bankrsquos mission
is to support US jobs by supporting US exports See 12 USC 635 et seq
ldquoExposure Feerdquo is the risk premium charged by Ex‐Im Bank in exchange for its guarantee in certain transactions The exposure fee must be at least equal to the minimum risk premium required by the terms of the Arrangement and the Aircraft Sector Understanding
ldquoForeign Sales Corporationrdquo is a company created under the terms of a former provision of the US Internal Revenue Code Foreign Sales Corporations received significant tax benefits
ldquoFSCrdquo see Foreign Sales Corporation ldquoInvestment Tax Creditrdquo is a credit permitted under the US Internal Revenue Code for the
purchase of certain types of equipment in certain circumstances See also Leveraged Leases
ldquoKFWrdquo the development bank for the Federal Republic of Germany KFW is an Export Credit Agency but it also operates through a ldquomarket windowrdquo which is not subject to the Home Market Rule Thus KFW provides support to Airbus for its sales of aircraft to US airlines The United States does not have an equivalent institution and Ex‐Im Bank does not have a ldquomarket windowrdquo
ldquoLarge Aircraft Sector also known as LASU was the predecessor to the Aircraft Sector Understandingrdquo Understanding The LASU governed the same general issues as are set
forth in the Aircraft Sector Understanding except that the minimum risk premium was lower than that required in the 2007 ASU and 2011 ASU When the 2007 ASU was enacted grandfathering provisions allowed ECA‐supported financing for a limited number of aircraft to be governed by LASU
ldquoLASUrdquo see Large Aircraft Sector Understanding ldquoLeveraged Leaserdquo is a lease of equipment and is designed to allow the lessor to take
advantage of certain tax code provisions such as the depreciation deduction and the investment tax credit while allowing the lessee to obtain the equipment involved at a significantly lower cost Leveraged Leases were a very popular means for US airlines to acquire aircraft throughout the 1980s and 1990s The value of the tax deductions to the lessor were significant so that the implicit interest rate in the lease payments by the US airline were extremely low Usually the US airline did not have sufficient profit to take advantage of the favorable tax code provisions By using a leveraged lease another company that could shelter income by using the tax code provisions would buy the equipment and lease the equipment to the US airline Usually at the end of the lease term the US airline would purchase the aircraft
28
ldquoLIBORrdquo is the London Inter‐bank Offering Rate It is commonly used as a reference rate in loan transactions that have floating or adjustable interest rates LIBOR reflects the rate at which banks will lend money to each other LIBOR is set for various loan terms (eg 3 months 6 months etc) and is widely published making it a convenient rate to use as a reference rate
ldquoNet pricerdquo is the price paid after all discounts have been deducted The net price is the actual price paid for a piece of equipment In aircraft transactions pursuant to the ASU Ex‐Im Bank will only support up to 85 of the net price of an aircraft EETC transactions on the other hand often support the nominal purchase price of an aircraft and thus result in a significantly higher amount financed
ldquoOECDrdquo see the Organization for Economic Cooperation and Development Open Skies Agreement Is a type of bilateral agreement between countries that govern the
rights of airlines from the two countries to fly into the other country Open Skies Agreements generally allow free access to fly as many routes to a country as an airline may choose but then usually restrict the ability to fly within the other country Generally it is a ldquofly in and outrdquo rule although there are exceptions
ldquoOrganization for Economic Cooperation and Developmentrdquo
also known as the OECD is an organization comprised of 34 member countries that work together to promote development The United States is a member With regard to Ex‐Im Bank the OECD is the organization through which the US Government negotiates an agreement among Export Credit Agencies known as the Arrangement and the ASU (and its predecessor the LASU)
ldquoPass Through Certificaterdquo also known as a PTC is a group of Equipment Trust Certificates pooled together to form the basis for a bond issuance
ldquoPTCrdquo See Pass Through Certificate ldquoRyanairrdquo is a low‐cost Irish airline that began business after European
deregulation of airlines in 1997 Ryanair rapidly expanded during the first decade of the 2000s creating significant competition for other airlines
ldquoScreensrdquo are a type of filter used by Ex‐Im Bank in its Economic Impact Procedures Screens are designed to identify those transactions which are not likely to cause an adverse economic impact to US industries or US jobs so that such transactions can be processed more quickly and efficiently as required by the Bank Act
ldquoSubstantial Injuryrdquo is a term defined in Ex‐Im Bankrsquos Charter to be applied in connection with the Bankrsquos economic impact procedures 12 USC sect635(e)(4) The Charter states ldquohellipthe extension of any credit or guarantee by the Bank will cause substantial injury if the amount of the capacity for production established or the amount of the increase in such capacity expanded by such credit or guarantee equals or exceeds 1 percent of United States productionrdquo
ldquoTPCCrdquo see Trade Promotion Coordinating Committee ldquoTrade Promotion Coordinating Committeerdquo
also known as the TPCC is an interagency committee of the US Government chaired by the Secretary of Commerce It was established under the Export Enhancement Act of 1992 to provide a
29
unifying framework to coordinate the export promotion and export financing activities of the US government and to develop a government‐wide strategic plan for carrying out such programs
ldquoTrade Sanctionsrdquo refers to any of a number of sanctions imposed by the US Government against companies countries industries or products usually as a result of an accusation of adjudication of a violation of an international trade agreement The Bank Act requires Ex‐Im Bank to take certain trade sanctions into account in its economic impact procedures
30
Table A ndash Congressional Actions and Ex-Im Bank Responses
Year Congressional Action Ex‐Im Bank Response
1968 Bank directed to take into account the possible adverse effect [of its loans and guarantees] upon the United States economy
Bank adds this transactions
factor to analysis of
1975 1 Standard refined to take into account any serious adverse effect of loans and guarantees on competitive position of US industry availability of scarce materials in US and employment in US
2 Bank directed to be competitive with rates terms and conditions offered by principal countries whose exporters compete with US exporters
3 Bank directed to submit semi‐annual report on competitiveness and conduct survey of US exporters and lenders to determine experience in meeting financing competition
Bank adds these of transactions
considerations to analysis
Year Congressional Action Ex‐Im Bank Response
1978 ‐ 1979
1 Bank directed to take into account any serious adverse effect of loans on competitive position of US industry and scarce materials Bank directed to emphasize strengthening competitive position of US exporters and expanding total US exports
2 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [From Appropriations Act Restated in Bank Charter in 1986]
3 Bank directed to implement regulations and procedures to insure full consideration of extent to which loan or guarantee is likely to have adverse effect on industries and employment in US either by reducing demand for US produced goods or increasing imports to the US
Bank develops framework and set of written economic impact procedures
1 Exclude exports the use of which remained localized in foreign country This
is first ldquoforeign localized goods and services screenrdquo
2 ldquoIntent and stimulus for projectrdquo examined to determine likelihood of substantial adverse economic impact Does transaction involve ldquorunaway industryrdquo
(leaving US for cheaper foreign labor)
3 Does export of capital equipment result in ldquobuy backrdquo of product being imported into the US
4 Is net impact on US economy and jobs positive or negative and to what degree
32
Year Congressional Action Ex‐Im Bank Response
1986 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [Originally from 1978 Appropriations incorporated into Bank Charter in 1986]
Senate Report recognizes knowledge and experience of Bank and need to respond to exportersrsquo requests for support in a timely and confidential fashion Economic impact procedures are to be practical and workable and not reduce Bankrsquos competitiveness and flexibility nor ignore positive aspects of export sale
Bank develops ldquoSummary of Adverse Economic Guidelinesrdquo to be applied to both
goods and services (a) is commodity to be produced surplus or likely to compete with US‐produced surplus (b) will Bankrsquos
assistance cause substantial injury to US producers of competing commodity (c)
will injury to US producers of competing commodity outweigh the short‐ and long‐
term benefits to US industry and employment If answer is no then no
further economic impact analysis
1988 Congress establishes test for ldquosubstantial injuryrdquo if the amount of capacity for production established or amount of increase in such capacity expanded by Bankrsquos credit or guarantee exceeds 1 of US production
Bankrsquos Board recognizes requirement to balance (a) possibility of substantial harm
to US production and employment with (b) being responsive competitive and efficient New economic impact procedures ask (a) will the project be in direct competition with US production (b) is the Bankrsquos support significantly associated with the project (c) will the output of the project
cause substantial injury to US producers of the same similar or competing
commodity If answer is no then no further economic impact analysis is required
33
Year Congressional Action Ex‐Im Bank Response
1998 Bank revised procedures involving countries against which trade sanctions were pending or imposed
2001
2006 ‐2007
1 Bank required to determine whether extension of credit or guarantee is likely to produce same or other commodities and whether the production may cause substantial injury to US producers
2 Bank prohibited from providing a loan or guarantee that will facilitate circumvention of trade law order or determination
3 Bank required to designate sensitive commercial sectors and products for which Bank financing deemed unlikely due to potential for adverse economic impact on US
4 Bank required to aggregate financial thresholds on rolling 24‐month basis
Bank develops ldquoexportable goods screenrdquo Does Ex‐Im Bank support result in production of exportable good from the foreign buyerrsquos country If not no further economic impact analysis is required Notice and request for comments were published in the Federal Register US airline industry did not respond
Bank issues 2007 Economic Impact Procedures ldquoExportable goods screenrdquo is modified Will the transaction (capital goods and services) result in either new or additional production capacity of an exportable good
34
The terrorist attacks of September 11 2001 resulted in a sudden and protracted reduction in
demand for airline passenger services This was particularly prolonged in the United States and
Europe As a result of that drop in demand as well as other financial pressures the major US
airlines began a decade‐long process of mergers28 During the 2000s the major US airlines also
were able to shed costs and debtmdasheg pensionsmdashin a way not available to foreign airlines
under the US Bankruptcy Code29
As a result of this downsizing and restructuring US airlines focused on consolidation and
survival not expansion of their fleets by purchasing new aircraft US airline purchases of new
passenger aircraft almost disappeared after 2001 reappeared briefly in 2007 and then
disappeared again until sometime in 2010 Instead of ordering new aircraft US airlines
primarily relied upon the aircraft that they had purchased with EETC financing in the 2001‐2002
period
Nonetheless the data that are available indicate that through 2007 the US airlines generally
had access to aircraft financing that was no less favorable than financing provided by ECAs such
as Ex‐Im Bank In the midst of these developments starting in 2005 the various countries and
constituencies that were involved with ECA aircraft financing began negotiating a new ASU
During negotiations of the new ASU European airlines alleged that ECA financing was more
favorable than the financing to which they had access In June 2007 a new ASU agreement was
reached The European airlines explicitly approved thus signaling that the new agreement
eliminated any ECA financing advantage At the same time none of the US airlines raised any
economic impact concerns about the new ASU As Ex‐Im Bank reviewed and revised its
Economic Impact Procedures in 2007 there were no complaints raised by US airlines or any
other parties regarding aircraft transactions Likewise the new 2007 ASU had explicitly quelled
similar concerns in Europe All of the other relevant factors that led to adoption of the
ldquoexportable goodsrdquo screen in 2001 remained true in 2007 As a result in slightly varied form
the ldquoexportable goodsrdquo screen was carried through the 2002 and 2007 economic impact
procedures
C The US Airline Industry Financing Dynamics Late 2007 to 2012
After the 2007 ASU took effect the worldwide financial crisis emerged in 2008 and had a major
impact on global financial markets including those for large aircraft purchases From mid‐2008
to the beginning of 2010 the financial markets experienced significant volatility and distress
28 These included TWA and American Airlines in 2001 America West and US Airways in 2005 Northwest Airlines and Delta Air Lines in 2008 Continental Airlines and United Airlines in 2010 and Air Tran and Southwest Airlines in 2010 American Airlines and US Air announced merger plans in 201229 Bankruptcies of the major US Airlines from 2001‐2010 included US Airways in 2002 and 2004 United Airlines in 2002 Northwest Airlines in 2005 Delta Air Lines in 2005 Frontier Airlines in 2008 Mesa Airlines in 2010 American Airlines later filed for bankruptcy protection in 2012
14
Then after a short calm in 2010 the European sovereign debt and related European banking
crises rattled financial markets from mid‐2011 to mid‐2012 The result was another period of
extreme interest rate volatility
During this period the global financial market for commercial jet aircraft had been
characterized by (a) extreme volatility in both interest rates and availability of financing and
(b) major growth in demand for aircraft by airlines in the emerging markets and resource‐rich
OECD countries At the same time (and until only recently) there was very little demand for
aircraft by US airlines
There was also a fundamental shift in the key financial tools used for aircraft purchasesmdashwith
commercial banks playing a much diminished role EETC financing from the capital markets
emerged and matured into the most favorable source of financing
As noted before in early 2010 one US airline raised concerns that the financing provided by
the Bank to Ryanair an up‐and‐coming and successful discount airline in Europe was more
favorable than the financing available to US airlines The complaining airline asserted that Ex‐
Im Bank financing to Ryanair was significantly more favorable than financing that the
complaining airline itself had received in a recent EETC offering
Ex‐Im Bank reviewed and analyzed the assertions and determined that they were flawed in that
the purported difference in financial costs ignored pertinent factors and thus did not indicate
that ECA financing would be more favorable in a true ldquoapples to applesrdquo comparison Some key
factors ignored in the analysis provided by the one US airline were
a The credit‐worthiness of the US airline in question was publically rated at B‐ which in
common investment terms puts it in the ldquojunkrdquo group of ratings Ryanair by comparison is rated as investment grade a significantly higher rating Naturally a difference in credit ratings is going to result in a difference in the cost of financing
b The US airline was re‐financing a group of 10 to 12 year old aircraft while Ryanair was
financing brand‐new aircraft In both cases the aircraft being financed formed the
collateral pool for the loan Older aircraft represent a higher risk due to the poorer
quality of collateral therefore resulting in higher costs of financing
At the same time that this US airline was raising its concerns with the Bank it was also raising
similar concerns in the context of new ASU negotiations By the end of 2010 the ECAs reached
agreement on a new ASU (the 2011 ASU) which went into effect on February 1 2011 This
agreement included a built‐in adjustment mechanism to reflect changes in the financial
markets as they occurred This was designed to ensure that ECA financing and commercial bank
financing were generally equivalent The Bank continues to monitor the 2011 ASU to ensure
that the adjustment mechanism built into that agreement does in fact generally work to
15
enforce an equilibrium between the cost of ECA aircraft financings and the financing available
to US airlines in the private market In addition this very issue continues to be a regular topic
of discussion among the ASU participant countries as well Based on the data that have been
developed and presented to date the Bank believes that the 2011 ASU properly serves its
intended function of ensuring that airlines using private market financing do not suffer a
competitive disadvantage when compared to ECA financing of aircraft under the ASU
IV Conclusion
Ex‐Im Bankrsquos exportable goods screen complied with the Bankrsquos statutory requirements to
assess the potential adverse effects of all transactions and to focus on those transactions that
were likely to result in a substantial adverse economic impact on US industry Historically
financing available to US airlines for the purchase of new wide‐body aircraft has been either
more favorable than or equally favorable as Ex‐Im Bank financing to foreign airlines for the
purchase of equivalent aircraft The exportable goods screen was an appropriate reasonable
and efficient response to the realities of aircraft financing It properly balanced the
Congressional directives to assess the likelihood of substantial economic impact on US
industry and US jobs with the need to finance transactions in an efficient manner so as to
support US exports and US jobs
November 22 2013
Export‐Import Bank of the United States 811 Vermont Ave NW Washington DC 20571
16
Appendix A
Excerpt from Staff Memorandum to Ex‐Im Bank Board of Directors Accompanying 1979
Economic Impact Procedures30
Thus Section 2(b)(1)(B) of the Act requires the Board of Directors to take into account ldquoany
serious adverse effectrdquo which loans or guarantees may have on US industry materials in short
supply and employment Section 1911 of the 1978 Amendments requires consideration by the
Bank of the extent to which a loan or financial guarantee ldquois likely to have an adverse
effecthellipeither by reducing demand for goods produced in the United States or by increasing
imports to the United Statesrdquo and Section 608 of the Appropriations Act requires a finding that
the commodity ultimately produced as a result of [Bank] financing will be in surplus when the
production comes on‐stream and that US producers of the same similar or competing
commodity will be substantially injured It is apparent that the latter two statutory provisions
are explications of the basic mandate of the Act and do not expand the Bankrsquos mandate to
examine domestic impact but rather suggest factors to be considered in that examination To
a great extent the 1978 Amendments language and the Appropriations Act provisions set forth
the same concept in different ways Thus the reference in Section 1911 of the 1978
Amendments to ldquoreducing demand for goods in the United Statesrdquo and ldquoincreasing imports to
the United Statesrdquo is no more than the inevitable consequence of a commodity being ldquoin
surplusrdquo as stated in Section 608 of the Appropriations Act
Section 2(b)(1)(B) is the broadest formulation of the basic concept since it contains the most
general language ie ldquoany serious impactrdquo and encompasses all types of exports Section
1911 is primarily procedural in nature directing the Bank not only to implement appropriate
regulations and procedures to ensure full consideration of adverse impact but also to request a
report from the International Trade Commission Section 1911 includes a more detailed
description of events which would constitute adverse impactmdashie a reduction in demand for
US produced goods or an increase in imports to the US Finally this section contains an
explicit reference to agriculture which was only implicitly covered by Section 2(b)(1)(B) It
should be noted that this is one of several references to agriculture which were added to the
Act by the 1978 Amendments
The Appropriations Act provision explicitly refers to a balancing by the Board of Directors of the
benefits of the [Bank]‐supported export against the injury to US [producers] of the commodity
in question At the same time the Act has always necessitated such a balancing by requiring
the Bank to take into account ldquoserious adverse effects upon the US economyrdquo at the same
time it carries out the Bankrsquos basic mandate to ldquofacilitate exportsrdquo and to ldquofoster expansion of
exportsrdquo Under either provision therefore the Board of Directors will be taking into
30 Memorandum ldquoProcedures Regarding Adverse Domestic Impact of Eximbank Financingrdquo Pp 7‐12 Jan 5 1979 17
consideration the results of the balancing as one of the many factors involved in making a
decision to provide financing It should be noted that Section 1911 of the 1978 Amendments is
consistent with both of these provisions since it only seeks to ensure that ldquofull considerationrdquo is
given to adverse effects upon the US economy
Section 2(b)(1)(B) of the Act refers to ldquoserious adverse effectrdquo upon the US economy as a
whole whereas Section 608 of the Appropriations Act imposes a more stringent test by
focusing on a single industry ndash the domestic producers of the commodity to be produced by the
project supported by [the Bank] ndash and requiring a determination of substantial injury for that
industry alone However a reading of the entire Section shows that such a determination
would have to be made only if the net effect upon the US economy of the project for which
support was requested from [the Bank] is negative and if the commodity is likely to be in
surplus on world markets at the time the project becomes operative In any event under
Section 2(b)(1)(B) the Board would have to take into account any serious adverse effects of the
transaction upon the US economy Only if the Board decides to proceed with the transaction
regardless of such effects would it be necessary to determine if there will be substantial injury
to US producers of the commodity and thus trigger the prohibition contained in Section 608
It should also be noted that Section 1911 of the 1978 Amendments speaks in terms only of ldquoany
adverse effectrdquo However the language of that provision clearly shows that it was not intended
to set up a substantive test but rather as was mentioned above to insure that formal
procedures to take into account impacts upon the US economy are established by [Ex‐Im
Bank] as well as to enable the Bank to obtain a report from the International Trade
Commissionrdquo PL 95‐630 92 Stat 3641 (1978)
18
Appendix B
Financial Tools Available to US Airlines
Generally over the past several decades US airlines have had access to a broad range of
aircraft financing options
Accordingly at different times during the past several decades US airlines took advantage of
whichever financing option provided the most attractive overall financing terms from such
airlinesrsquo perspective For instance a US airline would be able to maximize the amount of the
financing thereby minimizing the amount of its own money it had to invest in the aircraft (ie
the ldquodown paymentrdquo) It might also maximize the amount of money in excess of the actual cost
of the aircraft it could raise against the aircraft obtain the longest possible repayment term and
the slowest possible amortization schedule (ie the longest ldquoweighted average liferdquo) obtain
the lowest interest rate and risk premium obtain the least restrictive operational and financial
covenants provide the least amount of collateral or other security or obtain other benefits
Due to the fact that the United States is seen as not presenting any ldquocountry riskrdquo and has well‐
developed and well‐regarded legal and judicial systems that are seen as being protective of
creditorsrsquo rights US airlines have usually had access to secured aircraft financings from
commercial banks from around the world During the past several decades commercial banks
from different regions have been at the forefront of the aircraft finance industry and have
provided financing to US airlines on attractive financing terms Initially US‐based banks
provided most of the aircraft financing to US airlines but during the 1980s Japanese banks
became very significant lenders to the US airlines During the 1990s and 2000s the European
banks (German French British and Swiss banks) were the most significant source of
commercial bank funding for US airlines
In addition to commercial bank financing during the 1970s and 1980s US airlines obtained
long‐term financing from US‐based institutional investors (eg insurance companies and
pension funds) through the use of the Equipment Trust Certificate (ldquoETCrdquo) financing structure or
the Pass Through Certificate (ldquoPTCrdquo) financing structure The ETC is a financing provided by
institutional investors that is secured by one or more items of equipment (eg aircraft) The
PTC is a group of ETCs combined into a public debt security that is sold into the capital markets
to institutional investors
However during the 1980s the simplest and most prevalent form of aircraft financing for US
airlines was the US leveraged lease
The US leveraged lease allowed US airlines to take advantage of the US tax code which
generally provides for all types of capital assets to be depreciated and thereby reduces or
defers taxes due to the deductibility of tax depreciation Because US airlines generally did not 19
have sufficient income to fully take advantage of the benefit of the tax depreciation deductions
associated with acquiring aircraft the US airlines entered into US leveraged leases Under a
leveraged lease the benefits of the tax depreciation deductions related to the aircraft were
transferred to profitable companies that had income they wanted to shelter from tax In
return the company was willing to provide the equity in a US leverage lease (approximately
20 of the appraised value of the aircraft) and to ldquoleaserdquo the aircraft back to the airline for the
airlinersquos use A number of different entities entered into such leases including banks insurance
companies and other financial institutions such as Ford Motor Credit as well as finance
subsidiaries of other corporate entities including consumer product companies such as Phillip
Morris or entertainment companies such as Disney The fact that these were ldquoleveragedrdquo
leases (as opposed to ldquosingle investor leasesrdquo) also enabled the equity providers to deduct the
interest expense associated with the US leveraged lease
Through the use of a combination of lease equity and debt a US leveraged lease allowed US
airlines to arrange financing for up to 100 of the appraised value of an aircraft This was
particularly attractive to major US airlines because due to their size and relative importance
to the aircraft manufacturers every major US airline generally was able to negotiate aircraft
purchases with the aircraft manufacturers that enabled the airline to buy the aircraft for
amounts significantly less than the appraised value The result was that by using a US
leveraged lease to finance its aircraft a US airline was able to ldquoover‐financerdquo the aircraft (ie
finance the aircraft for more than the airline was paying for the aircraft) resulting in the airline
effectively having the ability each time the airline financed an aircraft to arrange 100
financing for its aircraft and at the same time arrange a long‐term working capital loan This is
the equivalent of a home buyer being able to buy a house with no money down (no down
payment) and also receiving a long‐term loan for non‐home expenses
In contrast Ex‐Im Bank‐supported aircraft financing is for only 85 (and sometimes less) of the
actual ldquonet pricerdquo that the airline is paying the US aircraft manufacturer (after deducting all
discounts and other concessions the airline has negotiated with the US aircraft manufacturer
which results in a net price that is almost always less than the appraised value) This requires
the foreign airline that is using Ex‐Im Bank support to come up with a down payment of at least
15 of the net price of the aircraft As a result US airlines were able to obtain more financing
under a US leveraged lease (without putting any money down) than foreign airlines could
under an Ex‐Im Bank supported aircraft financing (which required a down payment)
In addition US leveraged leases used by US airlines always had very long repayment terms
Generally speaking the longer the repayment the longer the tax deferral and the more
advantageous the terms of the US leveraged lease As a result it was not unusual for the US
leveraged leases used by US airlines to have a repayment term of between 18 and 22 years
and sometimes as long as 25 years The only constraint was that the lease term of the
20
leveraged lease should not exceed 80 of the economic useful life of the aircraft which in
some instances was more than 30 years
In contrast the repayment term in an Ex‐Im Bank‐supported aircraft financing is never longer
than 12 years which is the maximum repayment term Ex‐Im Bank is permitted to offer for an
aircraft financing under the guidelines for export credits promulgated by the Organization for
Economic Cooperation and Development (the ldquoOECDrdquo) with which guidelines the US
Government (including Ex‐Im Bank) has agreed to abide This difference in repayment terms is
significant it is similar to the difference in monthly payments under a 15 year home mortgage
versus a 30 year home mortgage As a result US airlines were able to obtain significantly
longer financing under a US leveraged lease (which generally resulted in a smaller periodic
principal repayment burden due to the longer repayment term) than foreign airlines could
under an Ex‐Im Bank‐supported financing
US leveraged leases used by US airlines also had a slower amortization profile with a very
long weighted average life (ie small amounts of debt amortization in the early years of the
financing) of at least 10 years In the same manner that a longer repayment term increased the
tax deferral a longer weighted average life also increased the tax deferral
In contrast the amortization profile in an Ex‐Im Bank supported aircraft financing for a foreign
airline is usually between 6 years and 65 years (at least 4 years shorter than the weighted
average life of the US leveraged leases historically used by US airlines) which imposes a
much greater cash flow burden on the foreign airline in comparison with the cash flows
required of a US airline under a US leveraged lease
Although the absolute interest rate on the debt in a US leveraged lease fluctuated over time
with the overall level of interest rates the providers of the debt into these US leveraged leases
(primarily insurance companies and other institutional investors) were generally willing to
accept an interest rate margin of less than 100 basis points31 over LIBOR32 on a fixed rate
equivalent basis (and sometimes significantly less than 100 basis points)
In contrast the interest rate margin on the debt on an Ex‐Im Bank‐supported aircraft financing
was generally between a few basis points over LIBOR to 50 basis points over LIBOR because the
interest on the Ex‐Im Bank‐guaranteed aircraft financing is guaranteed by Ex‐Im Bank and
reflects the low risk associated with a US Government guaranteed loan However the interest
rate margin on an Ex‐Im Bank‐guaranteed aircraft financing does not reflect the Ex‐Im Bank
exposure fee (or risk premium) that is paid to Ex‐Im Bank in view of the underlying risk of the
foreign airline The minimum exposure fee charged by Ex‐Im Bank was 2 during the 1980s
31 100 basis points equals 1 percent 32 LIBOR is the London Inter‐Bank Offering Rate and is a common reference rate such as ldquoPrimerdquo or ldquoTreasury Raterdquo used in adjustable interest rate transactions
21
and early 1990s and 3 until 2007 when the OECD promulgated a new set of guidelines for
export credits for aircraft (known as the ldquo2007 Aircraft Sector Understandingrdquo or the ldquo2007
ASUrdquo) This exposure fee was required to be paid ldquoup frontrdquo ndash ie at the inception of the loan
On a per annum basis this equates to between 30 basis points and 50 basis points which
should be added to the interest rate margin received by the guaranteed lender to obtain the
equivalent interest rate paid by a foreign airline under Ex‐Im Bank‐supported financing (for
purposes of comparing the overall financing cost to those incurred by US airlines) The Ex‐Im
Bank exposure fee is similar to a homeowner having to pay ldquopointsrdquo up front at the time he
obtains his mortgage The effect of paying points up front and paying an Ex‐Im Bank exposure
fee effectively increases the cost of the financing In comparing the overall cost of financing
through ECA support including the exposure fee to the overall cost of a leveraged lease for
borrowers with comparable credit profiles the overall cost of the US leveraged lease was
considerably more favorable than what could be achieved through an Ex‐Im Bank‐supported
aircraft financing
Although the US leveraged lease was itself a very attractive financing structure for US
airlines at different times the basic US leveraged lease was made even more attractive due to
other provisions of the US and foreign tax codes
For instance from the 1960s (during the Kennedy Administration) until its repeal under the Tax
Reform Act of 1986 the US tax code provided for an investment tax credit which was intended
to encourage investment in capital goods and therefore allowed airlines or the equity investor
in a US leveraged lease to get a credit against the taxes it would otherwise be required to pay
This credit was a permanent reduction in taxes paid as opposed to only the deferral of taxes
(postponement of when taxes had to be paid) that could be achieved through the use of the
US leveraged lease
Similarly from the 1980s to the mid‐1990s it was common for a US airline to combine a US
leveraged lease with a lease into a foreign jurisdiction that had a ldquoform over substancerdquo
approach to its tax code (as opposed to the United States which has a ldquosubstance over formrdquo
approach to its tax code) Taking advantage of the disparity a US airline could ldquosellrdquo the
aircraft to both (i) an equity investor in the United States and (ii) an equity investor in a foreign
country such as Japan Germany or Hong Kong and each equity investor could depreciate the
same aircraft and therefore shelter its respective income Over time due to changes in the
respective tax codes these more aggressive tax advantaged cross‐border leasing structures
(ldquoDouble Dipsrdquo and even on occasion ldquoTriple Dipsrdquo) were disallowed but not before US airlines
financed billions of dollars of aircraft using such tax advantaged leasing structures
During the 1990s the basic US leveraged lease was made even more attractive by taking
advantage of another provision of the US tax code that allowed additional US taxes to be
22
deferred if the equity investor in the transaction used an offshore subsidiary that qualified as a
Foreign Sales Corporation (ldquoFSCrdquo) under the US tax code and structured the deal as a
Commission FSC
In addition during the 1980s and 1990s US airlines had access to other sources of financing
with overall financing terms that were much more attractive than what was available to foreign
airlines via Ex‐Im Bank‐supported export credits For example during the late 1980s and 1990s
Airbus made its first significant sales to US airlines In order to do so Airbus arranged and
provided very attractive and flexible financing terms to US airlines to encourage them to
purchase European‐manufactured Airbus aircraft instead of US‐manufactured Boeing or
McDonnell Douglas aircraft The US airlines were more than willing to accept these incentives
During this period some US airlines entered into ldquowalk awayrdquo leases of Airbus aircraft
pursuant to which Airbus North America (backed by the joint and several guarantees of each of
the four countries that are members of Airbus SAS) entered into a US leveraged lease of the
Airbus aircraft and then subleased the aircraft to a US airline on terms that (i) passed along
most of the tax benefits to the US airline through lower lease rentals and (ii) permitted the
US airline to terminate the sublease and simply ldquowalk awayrdquo from the lease upon a relatively
short notice period
Under the ldquoHome Market Rulerdquo the European export credit agencies (including those of
France Germany and the United Kingdom) that usually support the financing of Airbus aircraft
could not provide such support to US airlines Therefore Airbus arranged for Kreditanstalt fur
Wiederaufbau the development bank of Germany to provide very attractive financing for the
Airbus aircraft being acquired by US airlines These financings occurred on terms much more
favorable (with 18‐ to 22‐year repayment terms) than what export credit agencies could
provide (with a maximum repayment term of 12‐years)
Similarly during the 1990s US airlines began to acquire a large number of 35 to 50 seat
regional jet aircraft manufactured by Bombardier of Canada and Embraer of Brazil Many of
these aircraft were acquired by the US airlines by using export credit support from Canada and
Brazil Some of the financing terms (ie the repayment terms) of these Brazilian and Canadian
government‐supported export credit financings were even more attractive (15‐ to 18‐year
repayment terms) than what was available from the export credit agencies of France Germany
and the United Kingdom with respect to Airbus aircraft or from Ex‐Im Bank with respect to
Boeing aircraft (10‐ to 12‐year repayment terms)
To make the financing of Canadian‐manufactured Bombardier regional jets even more
attractive to US airlines the province of Quebec (where Bombardier has its headquarters)
through Investment Quebec provided additional aircraft financing support to the US airlines
23
Finally to the extent even more attractive financing was needed to convince US airlines to
purchase Canadian or Brazilian‐manufactured regional aircraft the manufacturers themselves
provided residual value guarantees with respect to such aircraft to the airline or to the
financiers (ie to the equity investor in a US leveraged lease or the creditors financing the
aircraft)
The next major development in aircraft financing used by US airlines was the development in
the 1990s of the Enhanced Equipment Trust Certificate (ldquoEETCrdquo) which was an ETC with certain
structural enhancements The most important of these enhancements is a liquidity facility to
ensure that if there is a default the financiers would continue to receive current interest
during the period of time while the aircraft is being repossessed and remarketed A key
element in the development of the EETC was the existence of Section 1110 of the US
Bankruptcy Code which gives a type of ldquopreferred creditorrdquo status to financiers of aircraft for
US airlines This ldquopreferred creditorrdquo status exempts aircraft financiers of US airlines from
the automatic stay generally imposed following a bankruptcy filing by a borrower subject to the
protections of the US Bankruptcy Code Section 1110 of the US Bankruptcy Code
accomplishes this by requiring the airline within 60 days of such bankruptcy filing to either (i)
resume payments under the originally agreed aircraft financing or (ii) return the aircraft to the
financier
The first EETC was done in 1994 and the practice has now been successfully used by almost
every major US airline including Alaska Airlines America West Airlines American Airlines
Continental Airlines Delta Airlines Hawaiian Airlines Jet Blue Airlines Northwest Airlines
Southwest Airlines United Airlines and US Airways The overall financing cost of a US airline
acquiring an aircraft through the use of the EETC ndash which includes the amount of financing
repayment term amortization profile effective cost of the financing etc ndash has generally been
significantly more attractive than (i) what such US airline could have achieved under an export
credit‐supported aircraft financing for such airline and (ii) what a similarly rated foreign airline
could have achieved under an export credit‐supported aircraft financing
This is particularly true for the financing of new aircraft The development of the EETC market
provided enormous financing flexibility to US airlines for the financing of new aircraft the
EETC provided the airline with the option to finance on a simple secured mortgage basis or the
US airline could opt for a leveraged lease with all of the benefits associated with a leveraged
lease described above
Beginning in 1997 US airlines had the ability to raise money in the capital markets when the
overall financing terms were most attractive They were able to ldquolock‐inrdquo such favorable
financing terms to fund new aircraft that were scheduled to be delivered in the future by
issuing a ldquopre‐fundedrdquo EETC These pre‐funded EETCs were used to great success by US
24
airlines in the late 1990s through 2001 a period in which the US airlines were taking delivery
of a significant number of aircraft
As a result of the downturn in the US airline industry following the September 11 2001
terrorist attacks many US airlines deferred or cancelled their orders for new aircraft This
reduced the need for US airlines to finance new aircraft when the financing terms available to
such US airlines via the EETC were not as favorable due to (i) the perceived increased credit
risks of the US airline industry following the September 11 terrorist attacks and (ii) the
temporary disequilibrium in the credit markets following the 200820092010 credit crisis
Now that the US airlines have once again begun to take delivery of a significant number of
new aircraft the pre‐funded EETC continues to be the preferred source of financing for US
airlines as evidenced by the number and amount of EETC issuances during 2012 and 2013
Based on an analysis of the EETC transactions occurring during 2012 and 2013 EETCs are once
again generally considered to provide more attractive overall financing terms than what could
be achieved by an airline under an export credit‐supported financing done under the terms of
the 2011 Aircraft Sector Understanding
25
GLOSSARY
ldquoAdverse Economic Impactrdquo is the short‐hand term used to refer to any serious negative effects on US industries or US jobs as set forth in the Bankrsquos Charter that result from Ex‐Im Bank loans guarantees or insurance The Bankrsquos Charter contains three provisions that address adverse economic impact found at 12 USC sectsect 635(b)(1) 635a‐2 635(e)
ldquoAir Indiardquo is an airline owned by the Government of the Republic of India ldquoAir India Transactionsrdquo are the two final commitments approved by Ex‐Im Bank on September
30 2011 for loan guarantees for the purchase of a number of 787 ldquoDreamlinerrdquo aircraft from Boeing and to be financed by a commercial lender not identified at the time As of the date of this paper Ex‐Im Bank has not issued any of its loan guarantees but is expected to do so in the coming months Ten of the aircraft involved in these two final commitments have been delivered to Air India and are in use by Air India on routes outside the United States The deliveries of the ten aircraft were made using private short‐term financing as to which Ex‐Im Bank had no involvement
ldquoAirbusrdquo Airbus SAS is a Europe‐based manufacturer of large commercial aircraft Airbus is the only competitor to Boeing the US manufacturer Airbus sales are supported by the ECAs of Germany France and the UK
ldquoAircraft Sector also known as the ASU is an agreement among members of the OECD Understandingrdquo that manufacture aircraft and Brazil The ASU requires that Export
Credit Agencies that support the export of aircraft follow certain rules and restrictions that set forth the most favorable terms that can be provided These rules and restrictions include the Export Credit Agency must charge a minimum risk premium which is determined by the ASU the term of any loan made by or supported by the Export Credit Agency for the purchase of aircraft cannot exceed 12 years the Export Credit Agency today can lend or guarantee only up to 85 of the actual purchase price of the aircraft being exported and the use of risk mitigants The ASU was preceded by the Large Aircraft Sector Understanding which governed these issues until the enactment of the 2007 ASU The ASU was again updated and revised in 2011 (See also the Large Aircraft Sector Understanding)
ldquoArrangementrdquo is the agreement among Export Credit Agencies governing the terms by which they will provide loans guarantees or insurance in support of exports from their respective countries Among other things the Arrangement requires Export Credit Agencies to charge a minimum risk premium which is governed by the Arrangement See also Organization for Economic Cooperation and Development
ldquoASUrdquo see Aircraft Sector Understanding ldquoAverage Weighted Liferdquo for purposes of this paper refers to the average number of years that
each dollar of unpaid principal on a loan remains outstanding For example a loan with equal principal payments throughout the loan term will have an average weighted life close to the middle of the whole loan term
26
ldquoBank Actrdquo is the Export‐Import Bank Act of 1945 12 USC sect635 as amended ldquoBank Advisory Committeerdquo is the official Advisory Committee of the Bank appointed in accordance
with the Bank Act and the Advisory Committee Act The Bank Advisory Committee is comprised of representatives of various industry and market sectors as well as representatives of labor and international trade experts
ldquoBasis pointsrdquo are a numerical measure applied to interest rates One basis point equals 1100th of one percent or 100 basis points equals one percent
ldquoCapital Equipmentrdquo is equipment used to manufacture a product provide a service or sell store or deliver merchandise A wide‐body aircraft is a piece of capital equipment
ldquoCharterrdquo is the Bank Act as well the provisions of the Export Import Bank Reauthorization Act of 2012 (Public Law 112‐122) that are not codified in the Bank Act
ldquoDreamlinerrdquo is the name given to a Boeing 787 wide‐body commercial aircraft ldquoECArdquo see Export Credit Agencies ldquoEconomic Impact Proceduresrdquo
are procedures adopted by Ex‐Im Bank to assess whether transactions supported by the Bank cause a serious adverse economic impact to US industries and US jobs See also Adverse Economic Impact
ldquoEETCrdquo see Enhanced Equipment Trust Certificate ldquoEnhanced Equipment Trust Certificaterdquo
also known as an EETC is a type of secured bond issued by a borrower in the capital markets The EETC is secured by the equipment being purchased with the proceeds of the bond issuance EETCs are used primarily for aircraft and since the late 1990s has been the dominant financing tool used by US airlines to purchase aircraft Section 1110 of the US Bankruptcy Codemdashwhich allows creditors of aircraft borrowers to obtain their collateral within 60 days if the payments on their debt is not current ndash has provided creditors of US airlines a level of comfort not available to creditors of foreign airlines until recently This generally provided US airlines with a significant financial advantage vis a vis their foreign competitors Recently the adoption of the Cape Town Convention and the related Aircraft Equipment Protocol has provided creditors of foreign airlines with protections similar to the protections provided by section 1110 of the US Bankruptcy Code Recently this has led to the beginnings of an international EETC market
ldquoEquipment Trust Certificaterdquo
also known as an ETC was the predecessor to the Enhanced Equipment Trust Certificate
ldquoETCrdquo see Equipment Trust Certificate ldquoEx‐Im Bankrdquo or ldquoBankrdquo See The Export‐Import Bank of the United States ldquoExport Credit Agenciesrdquo are agencies or ministries of government that have the official role of
providing loans guarantees or insurance in support of exports from their respective countries or in support of exports by sales of companies from their respective countries Ex‐Im Bank is the official Export Credit Agency of the United States of America
ldquoexportable goods screenrdquo is a screen or filter adopted by Ex‐Im Bank in its 2001 Economic Impact Procedures The exportable goods screen is utilized along with other screens to balance the Bankrsquos obligation to consider the adverse
27
economic effects of its transactions on US industries and US jobs with the Bankrsquos mandate to support US export transactions in a timely manner so as to fully support the exporterrsquos business opportunity The exportable goods screen filtered out transactions that supported exports which could only be used by a foreign buyer to provide services rather than produce goods
ldquoExport‐Import Bank of the is an independent agency of the Federal Government of the United United Statesrdquo States of America Also known as ldquoEx‐Im Bankrdquo Ex‐Im Bankrsquos mission
is to support US jobs by supporting US exports See 12 USC 635 et seq
ldquoExposure Feerdquo is the risk premium charged by Ex‐Im Bank in exchange for its guarantee in certain transactions The exposure fee must be at least equal to the minimum risk premium required by the terms of the Arrangement and the Aircraft Sector Understanding
ldquoForeign Sales Corporationrdquo is a company created under the terms of a former provision of the US Internal Revenue Code Foreign Sales Corporations received significant tax benefits
ldquoFSCrdquo see Foreign Sales Corporation ldquoInvestment Tax Creditrdquo is a credit permitted under the US Internal Revenue Code for the
purchase of certain types of equipment in certain circumstances See also Leveraged Leases
ldquoKFWrdquo the development bank for the Federal Republic of Germany KFW is an Export Credit Agency but it also operates through a ldquomarket windowrdquo which is not subject to the Home Market Rule Thus KFW provides support to Airbus for its sales of aircraft to US airlines The United States does not have an equivalent institution and Ex‐Im Bank does not have a ldquomarket windowrdquo
ldquoLarge Aircraft Sector also known as LASU was the predecessor to the Aircraft Sector Understandingrdquo Understanding The LASU governed the same general issues as are set
forth in the Aircraft Sector Understanding except that the minimum risk premium was lower than that required in the 2007 ASU and 2011 ASU When the 2007 ASU was enacted grandfathering provisions allowed ECA‐supported financing for a limited number of aircraft to be governed by LASU
ldquoLASUrdquo see Large Aircraft Sector Understanding ldquoLeveraged Leaserdquo is a lease of equipment and is designed to allow the lessor to take
advantage of certain tax code provisions such as the depreciation deduction and the investment tax credit while allowing the lessee to obtain the equipment involved at a significantly lower cost Leveraged Leases were a very popular means for US airlines to acquire aircraft throughout the 1980s and 1990s The value of the tax deductions to the lessor were significant so that the implicit interest rate in the lease payments by the US airline were extremely low Usually the US airline did not have sufficient profit to take advantage of the favorable tax code provisions By using a leveraged lease another company that could shelter income by using the tax code provisions would buy the equipment and lease the equipment to the US airline Usually at the end of the lease term the US airline would purchase the aircraft
28
ldquoLIBORrdquo is the London Inter‐bank Offering Rate It is commonly used as a reference rate in loan transactions that have floating or adjustable interest rates LIBOR reflects the rate at which banks will lend money to each other LIBOR is set for various loan terms (eg 3 months 6 months etc) and is widely published making it a convenient rate to use as a reference rate
ldquoNet pricerdquo is the price paid after all discounts have been deducted The net price is the actual price paid for a piece of equipment In aircraft transactions pursuant to the ASU Ex‐Im Bank will only support up to 85 of the net price of an aircraft EETC transactions on the other hand often support the nominal purchase price of an aircraft and thus result in a significantly higher amount financed
ldquoOECDrdquo see the Organization for Economic Cooperation and Development Open Skies Agreement Is a type of bilateral agreement between countries that govern the
rights of airlines from the two countries to fly into the other country Open Skies Agreements generally allow free access to fly as many routes to a country as an airline may choose but then usually restrict the ability to fly within the other country Generally it is a ldquofly in and outrdquo rule although there are exceptions
ldquoOrganization for Economic Cooperation and Developmentrdquo
also known as the OECD is an organization comprised of 34 member countries that work together to promote development The United States is a member With regard to Ex‐Im Bank the OECD is the organization through which the US Government negotiates an agreement among Export Credit Agencies known as the Arrangement and the ASU (and its predecessor the LASU)
ldquoPass Through Certificaterdquo also known as a PTC is a group of Equipment Trust Certificates pooled together to form the basis for a bond issuance
ldquoPTCrdquo See Pass Through Certificate ldquoRyanairrdquo is a low‐cost Irish airline that began business after European
deregulation of airlines in 1997 Ryanair rapidly expanded during the first decade of the 2000s creating significant competition for other airlines
ldquoScreensrdquo are a type of filter used by Ex‐Im Bank in its Economic Impact Procedures Screens are designed to identify those transactions which are not likely to cause an adverse economic impact to US industries or US jobs so that such transactions can be processed more quickly and efficiently as required by the Bank Act
ldquoSubstantial Injuryrdquo is a term defined in Ex‐Im Bankrsquos Charter to be applied in connection with the Bankrsquos economic impact procedures 12 USC sect635(e)(4) The Charter states ldquohellipthe extension of any credit or guarantee by the Bank will cause substantial injury if the amount of the capacity for production established or the amount of the increase in such capacity expanded by such credit or guarantee equals or exceeds 1 percent of United States productionrdquo
ldquoTPCCrdquo see Trade Promotion Coordinating Committee ldquoTrade Promotion Coordinating Committeerdquo
also known as the TPCC is an interagency committee of the US Government chaired by the Secretary of Commerce It was established under the Export Enhancement Act of 1992 to provide a
29
unifying framework to coordinate the export promotion and export financing activities of the US government and to develop a government‐wide strategic plan for carrying out such programs
ldquoTrade Sanctionsrdquo refers to any of a number of sanctions imposed by the US Government against companies countries industries or products usually as a result of an accusation of adjudication of a violation of an international trade agreement The Bank Act requires Ex‐Im Bank to take certain trade sanctions into account in its economic impact procedures
30
Table A ndash Congressional Actions and Ex-Im Bank Responses
Year Congressional Action Ex‐Im Bank Response
1968 Bank directed to take into account the possible adverse effect [of its loans and guarantees] upon the United States economy
Bank adds this transactions
factor to analysis of
1975 1 Standard refined to take into account any serious adverse effect of loans and guarantees on competitive position of US industry availability of scarce materials in US and employment in US
2 Bank directed to be competitive with rates terms and conditions offered by principal countries whose exporters compete with US exporters
3 Bank directed to submit semi‐annual report on competitiveness and conduct survey of US exporters and lenders to determine experience in meeting financing competition
Bank adds these of transactions
considerations to analysis
Year Congressional Action Ex‐Im Bank Response
1978 ‐ 1979
1 Bank directed to take into account any serious adverse effect of loans on competitive position of US industry and scarce materials Bank directed to emphasize strengthening competitive position of US exporters and expanding total US exports
2 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [From Appropriations Act Restated in Bank Charter in 1986]
3 Bank directed to implement regulations and procedures to insure full consideration of extent to which loan or guarantee is likely to have adverse effect on industries and employment in US either by reducing demand for US produced goods or increasing imports to the US
Bank develops framework and set of written economic impact procedures
1 Exclude exports the use of which remained localized in foreign country This
is first ldquoforeign localized goods and services screenrdquo
2 ldquoIntent and stimulus for projectrdquo examined to determine likelihood of substantial adverse economic impact Does transaction involve ldquorunaway industryrdquo
(leaving US for cheaper foreign labor)
3 Does export of capital equipment result in ldquobuy backrdquo of product being imported into the US
4 Is net impact on US economy and jobs positive or negative and to what degree
32
Year Congressional Action Ex‐Im Bank Response
1986 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [Originally from 1978 Appropriations incorporated into Bank Charter in 1986]
Senate Report recognizes knowledge and experience of Bank and need to respond to exportersrsquo requests for support in a timely and confidential fashion Economic impact procedures are to be practical and workable and not reduce Bankrsquos competitiveness and flexibility nor ignore positive aspects of export sale
Bank develops ldquoSummary of Adverse Economic Guidelinesrdquo to be applied to both
goods and services (a) is commodity to be produced surplus or likely to compete with US‐produced surplus (b) will Bankrsquos
assistance cause substantial injury to US producers of competing commodity (c)
will injury to US producers of competing commodity outweigh the short‐ and long‐
term benefits to US industry and employment If answer is no then no
further economic impact analysis
1988 Congress establishes test for ldquosubstantial injuryrdquo if the amount of capacity for production established or amount of increase in such capacity expanded by Bankrsquos credit or guarantee exceeds 1 of US production
Bankrsquos Board recognizes requirement to balance (a) possibility of substantial harm
to US production and employment with (b) being responsive competitive and efficient New economic impact procedures ask (a) will the project be in direct competition with US production (b) is the Bankrsquos support significantly associated with the project (c) will the output of the project
cause substantial injury to US producers of the same similar or competing
commodity If answer is no then no further economic impact analysis is required
33
Year Congressional Action Ex‐Im Bank Response
1998 Bank revised procedures involving countries against which trade sanctions were pending or imposed
2001
2006 ‐2007
1 Bank required to determine whether extension of credit or guarantee is likely to produce same or other commodities and whether the production may cause substantial injury to US producers
2 Bank prohibited from providing a loan or guarantee that will facilitate circumvention of trade law order or determination
3 Bank required to designate sensitive commercial sectors and products for which Bank financing deemed unlikely due to potential for adverse economic impact on US
4 Bank required to aggregate financial thresholds on rolling 24‐month basis
Bank develops ldquoexportable goods screenrdquo Does Ex‐Im Bank support result in production of exportable good from the foreign buyerrsquos country If not no further economic impact analysis is required Notice and request for comments were published in the Federal Register US airline industry did not respond
Bank issues 2007 Economic Impact Procedures ldquoExportable goods screenrdquo is modified Will the transaction (capital goods and services) result in either new or additional production capacity of an exportable good
34
Then after a short calm in 2010 the European sovereign debt and related European banking
crises rattled financial markets from mid‐2011 to mid‐2012 The result was another period of
extreme interest rate volatility
During this period the global financial market for commercial jet aircraft had been
characterized by (a) extreme volatility in both interest rates and availability of financing and
(b) major growth in demand for aircraft by airlines in the emerging markets and resource‐rich
OECD countries At the same time (and until only recently) there was very little demand for
aircraft by US airlines
There was also a fundamental shift in the key financial tools used for aircraft purchasesmdashwith
commercial banks playing a much diminished role EETC financing from the capital markets
emerged and matured into the most favorable source of financing
As noted before in early 2010 one US airline raised concerns that the financing provided by
the Bank to Ryanair an up‐and‐coming and successful discount airline in Europe was more
favorable than the financing available to US airlines The complaining airline asserted that Ex‐
Im Bank financing to Ryanair was significantly more favorable than financing that the
complaining airline itself had received in a recent EETC offering
Ex‐Im Bank reviewed and analyzed the assertions and determined that they were flawed in that
the purported difference in financial costs ignored pertinent factors and thus did not indicate
that ECA financing would be more favorable in a true ldquoapples to applesrdquo comparison Some key
factors ignored in the analysis provided by the one US airline were
a The credit‐worthiness of the US airline in question was publically rated at B‐ which in
common investment terms puts it in the ldquojunkrdquo group of ratings Ryanair by comparison is rated as investment grade a significantly higher rating Naturally a difference in credit ratings is going to result in a difference in the cost of financing
b The US airline was re‐financing a group of 10 to 12 year old aircraft while Ryanair was
financing brand‐new aircraft In both cases the aircraft being financed formed the
collateral pool for the loan Older aircraft represent a higher risk due to the poorer
quality of collateral therefore resulting in higher costs of financing
At the same time that this US airline was raising its concerns with the Bank it was also raising
similar concerns in the context of new ASU negotiations By the end of 2010 the ECAs reached
agreement on a new ASU (the 2011 ASU) which went into effect on February 1 2011 This
agreement included a built‐in adjustment mechanism to reflect changes in the financial
markets as they occurred This was designed to ensure that ECA financing and commercial bank
financing were generally equivalent The Bank continues to monitor the 2011 ASU to ensure
that the adjustment mechanism built into that agreement does in fact generally work to
15
enforce an equilibrium between the cost of ECA aircraft financings and the financing available
to US airlines in the private market In addition this very issue continues to be a regular topic
of discussion among the ASU participant countries as well Based on the data that have been
developed and presented to date the Bank believes that the 2011 ASU properly serves its
intended function of ensuring that airlines using private market financing do not suffer a
competitive disadvantage when compared to ECA financing of aircraft under the ASU
IV Conclusion
Ex‐Im Bankrsquos exportable goods screen complied with the Bankrsquos statutory requirements to
assess the potential adverse effects of all transactions and to focus on those transactions that
were likely to result in a substantial adverse economic impact on US industry Historically
financing available to US airlines for the purchase of new wide‐body aircraft has been either
more favorable than or equally favorable as Ex‐Im Bank financing to foreign airlines for the
purchase of equivalent aircraft The exportable goods screen was an appropriate reasonable
and efficient response to the realities of aircraft financing It properly balanced the
Congressional directives to assess the likelihood of substantial economic impact on US
industry and US jobs with the need to finance transactions in an efficient manner so as to
support US exports and US jobs
November 22 2013
Export‐Import Bank of the United States 811 Vermont Ave NW Washington DC 20571
16
Appendix A
Excerpt from Staff Memorandum to Ex‐Im Bank Board of Directors Accompanying 1979
Economic Impact Procedures30
Thus Section 2(b)(1)(B) of the Act requires the Board of Directors to take into account ldquoany
serious adverse effectrdquo which loans or guarantees may have on US industry materials in short
supply and employment Section 1911 of the 1978 Amendments requires consideration by the
Bank of the extent to which a loan or financial guarantee ldquois likely to have an adverse
effecthellipeither by reducing demand for goods produced in the United States or by increasing
imports to the United Statesrdquo and Section 608 of the Appropriations Act requires a finding that
the commodity ultimately produced as a result of [Bank] financing will be in surplus when the
production comes on‐stream and that US producers of the same similar or competing
commodity will be substantially injured It is apparent that the latter two statutory provisions
are explications of the basic mandate of the Act and do not expand the Bankrsquos mandate to
examine domestic impact but rather suggest factors to be considered in that examination To
a great extent the 1978 Amendments language and the Appropriations Act provisions set forth
the same concept in different ways Thus the reference in Section 1911 of the 1978
Amendments to ldquoreducing demand for goods in the United Statesrdquo and ldquoincreasing imports to
the United Statesrdquo is no more than the inevitable consequence of a commodity being ldquoin
surplusrdquo as stated in Section 608 of the Appropriations Act
Section 2(b)(1)(B) is the broadest formulation of the basic concept since it contains the most
general language ie ldquoany serious impactrdquo and encompasses all types of exports Section
1911 is primarily procedural in nature directing the Bank not only to implement appropriate
regulations and procedures to ensure full consideration of adverse impact but also to request a
report from the International Trade Commission Section 1911 includes a more detailed
description of events which would constitute adverse impactmdashie a reduction in demand for
US produced goods or an increase in imports to the US Finally this section contains an
explicit reference to agriculture which was only implicitly covered by Section 2(b)(1)(B) It
should be noted that this is one of several references to agriculture which were added to the
Act by the 1978 Amendments
The Appropriations Act provision explicitly refers to a balancing by the Board of Directors of the
benefits of the [Bank]‐supported export against the injury to US [producers] of the commodity
in question At the same time the Act has always necessitated such a balancing by requiring
the Bank to take into account ldquoserious adverse effects upon the US economyrdquo at the same
time it carries out the Bankrsquos basic mandate to ldquofacilitate exportsrdquo and to ldquofoster expansion of
exportsrdquo Under either provision therefore the Board of Directors will be taking into
30 Memorandum ldquoProcedures Regarding Adverse Domestic Impact of Eximbank Financingrdquo Pp 7‐12 Jan 5 1979 17
consideration the results of the balancing as one of the many factors involved in making a
decision to provide financing It should be noted that Section 1911 of the 1978 Amendments is
consistent with both of these provisions since it only seeks to ensure that ldquofull considerationrdquo is
given to adverse effects upon the US economy
Section 2(b)(1)(B) of the Act refers to ldquoserious adverse effectrdquo upon the US economy as a
whole whereas Section 608 of the Appropriations Act imposes a more stringent test by
focusing on a single industry ndash the domestic producers of the commodity to be produced by the
project supported by [the Bank] ndash and requiring a determination of substantial injury for that
industry alone However a reading of the entire Section shows that such a determination
would have to be made only if the net effect upon the US economy of the project for which
support was requested from [the Bank] is negative and if the commodity is likely to be in
surplus on world markets at the time the project becomes operative In any event under
Section 2(b)(1)(B) the Board would have to take into account any serious adverse effects of the
transaction upon the US economy Only if the Board decides to proceed with the transaction
regardless of such effects would it be necessary to determine if there will be substantial injury
to US producers of the commodity and thus trigger the prohibition contained in Section 608
It should also be noted that Section 1911 of the 1978 Amendments speaks in terms only of ldquoany
adverse effectrdquo However the language of that provision clearly shows that it was not intended
to set up a substantive test but rather as was mentioned above to insure that formal
procedures to take into account impacts upon the US economy are established by [Ex‐Im
Bank] as well as to enable the Bank to obtain a report from the International Trade
Commissionrdquo PL 95‐630 92 Stat 3641 (1978)
18
Appendix B
Financial Tools Available to US Airlines
Generally over the past several decades US airlines have had access to a broad range of
aircraft financing options
Accordingly at different times during the past several decades US airlines took advantage of
whichever financing option provided the most attractive overall financing terms from such
airlinesrsquo perspective For instance a US airline would be able to maximize the amount of the
financing thereby minimizing the amount of its own money it had to invest in the aircraft (ie
the ldquodown paymentrdquo) It might also maximize the amount of money in excess of the actual cost
of the aircraft it could raise against the aircraft obtain the longest possible repayment term and
the slowest possible amortization schedule (ie the longest ldquoweighted average liferdquo) obtain
the lowest interest rate and risk premium obtain the least restrictive operational and financial
covenants provide the least amount of collateral or other security or obtain other benefits
Due to the fact that the United States is seen as not presenting any ldquocountry riskrdquo and has well‐
developed and well‐regarded legal and judicial systems that are seen as being protective of
creditorsrsquo rights US airlines have usually had access to secured aircraft financings from
commercial banks from around the world During the past several decades commercial banks
from different regions have been at the forefront of the aircraft finance industry and have
provided financing to US airlines on attractive financing terms Initially US‐based banks
provided most of the aircraft financing to US airlines but during the 1980s Japanese banks
became very significant lenders to the US airlines During the 1990s and 2000s the European
banks (German French British and Swiss banks) were the most significant source of
commercial bank funding for US airlines
In addition to commercial bank financing during the 1970s and 1980s US airlines obtained
long‐term financing from US‐based institutional investors (eg insurance companies and
pension funds) through the use of the Equipment Trust Certificate (ldquoETCrdquo) financing structure or
the Pass Through Certificate (ldquoPTCrdquo) financing structure The ETC is a financing provided by
institutional investors that is secured by one or more items of equipment (eg aircraft) The
PTC is a group of ETCs combined into a public debt security that is sold into the capital markets
to institutional investors
However during the 1980s the simplest and most prevalent form of aircraft financing for US
airlines was the US leveraged lease
The US leveraged lease allowed US airlines to take advantage of the US tax code which
generally provides for all types of capital assets to be depreciated and thereby reduces or
defers taxes due to the deductibility of tax depreciation Because US airlines generally did not 19
have sufficient income to fully take advantage of the benefit of the tax depreciation deductions
associated with acquiring aircraft the US airlines entered into US leveraged leases Under a
leveraged lease the benefits of the tax depreciation deductions related to the aircraft were
transferred to profitable companies that had income they wanted to shelter from tax In
return the company was willing to provide the equity in a US leverage lease (approximately
20 of the appraised value of the aircraft) and to ldquoleaserdquo the aircraft back to the airline for the
airlinersquos use A number of different entities entered into such leases including banks insurance
companies and other financial institutions such as Ford Motor Credit as well as finance
subsidiaries of other corporate entities including consumer product companies such as Phillip
Morris or entertainment companies such as Disney The fact that these were ldquoleveragedrdquo
leases (as opposed to ldquosingle investor leasesrdquo) also enabled the equity providers to deduct the
interest expense associated with the US leveraged lease
Through the use of a combination of lease equity and debt a US leveraged lease allowed US
airlines to arrange financing for up to 100 of the appraised value of an aircraft This was
particularly attractive to major US airlines because due to their size and relative importance
to the aircraft manufacturers every major US airline generally was able to negotiate aircraft
purchases with the aircraft manufacturers that enabled the airline to buy the aircraft for
amounts significantly less than the appraised value The result was that by using a US
leveraged lease to finance its aircraft a US airline was able to ldquoover‐financerdquo the aircraft (ie
finance the aircraft for more than the airline was paying for the aircraft) resulting in the airline
effectively having the ability each time the airline financed an aircraft to arrange 100
financing for its aircraft and at the same time arrange a long‐term working capital loan This is
the equivalent of a home buyer being able to buy a house with no money down (no down
payment) and also receiving a long‐term loan for non‐home expenses
In contrast Ex‐Im Bank‐supported aircraft financing is for only 85 (and sometimes less) of the
actual ldquonet pricerdquo that the airline is paying the US aircraft manufacturer (after deducting all
discounts and other concessions the airline has negotiated with the US aircraft manufacturer
which results in a net price that is almost always less than the appraised value) This requires
the foreign airline that is using Ex‐Im Bank support to come up with a down payment of at least
15 of the net price of the aircraft As a result US airlines were able to obtain more financing
under a US leveraged lease (without putting any money down) than foreign airlines could
under an Ex‐Im Bank supported aircraft financing (which required a down payment)
In addition US leveraged leases used by US airlines always had very long repayment terms
Generally speaking the longer the repayment the longer the tax deferral and the more
advantageous the terms of the US leveraged lease As a result it was not unusual for the US
leveraged leases used by US airlines to have a repayment term of between 18 and 22 years
and sometimes as long as 25 years The only constraint was that the lease term of the
20
leveraged lease should not exceed 80 of the economic useful life of the aircraft which in
some instances was more than 30 years
In contrast the repayment term in an Ex‐Im Bank‐supported aircraft financing is never longer
than 12 years which is the maximum repayment term Ex‐Im Bank is permitted to offer for an
aircraft financing under the guidelines for export credits promulgated by the Organization for
Economic Cooperation and Development (the ldquoOECDrdquo) with which guidelines the US
Government (including Ex‐Im Bank) has agreed to abide This difference in repayment terms is
significant it is similar to the difference in monthly payments under a 15 year home mortgage
versus a 30 year home mortgage As a result US airlines were able to obtain significantly
longer financing under a US leveraged lease (which generally resulted in a smaller periodic
principal repayment burden due to the longer repayment term) than foreign airlines could
under an Ex‐Im Bank‐supported financing
US leveraged leases used by US airlines also had a slower amortization profile with a very
long weighted average life (ie small amounts of debt amortization in the early years of the
financing) of at least 10 years In the same manner that a longer repayment term increased the
tax deferral a longer weighted average life also increased the tax deferral
In contrast the amortization profile in an Ex‐Im Bank supported aircraft financing for a foreign
airline is usually between 6 years and 65 years (at least 4 years shorter than the weighted
average life of the US leveraged leases historically used by US airlines) which imposes a
much greater cash flow burden on the foreign airline in comparison with the cash flows
required of a US airline under a US leveraged lease
Although the absolute interest rate on the debt in a US leveraged lease fluctuated over time
with the overall level of interest rates the providers of the debt into these US leveraged leases
(primarily insurance companies and other institutional investors) were generally willing to
accept an interest rate margin of less than 100 basis points31 over LIBOR32 on a fixed rate
equivalent basis (and sometimes significantly less than 100 basis points)
In contrast the interest rate margin on the debt on an Ex‐Im Bank‐supported aircraft financing
was generally between a few basis points over LIBOR to 50 basis points over LIBOR because the
interest on the Ex‐Im Bank‐guaranteed aircraft financing is guaranteed by Ex‐Im Bank and
reflects the low risk associated with a US Government guaranteed loan However the interest
rate margin on an Ex‐Im Bank‐guaranteed aircraft financing does not reflect the Ex‐Im Bank
exposure fee (or risk premium) that is paid to Ex‐Im Bank in view of the underlying risk of the
foreign airline The minimum exposure fee charged by Ex‐Im Bank was 2 during the 1980s
31 100 basis points equals 1 percent 32 LIBOR is the London Inter‐Bank Offering Rate and is a common reference rate such as ldquoPrimerdquo or ldquoTreasury Raterdquo used in adjustable interest rate transactions
21
and early 1990s and 3 until 2007 when the OECD promulgated a new set of guidelines for
export credits for aircraft (known as the ldquo2007 Aircraft Sector Understandingrdquo or the ldquo2007
ASUrdquo) This exposure fee was required to be paid ldquoup frontrdquo ndash ie at the inception of the loan
On a per annum basis this equates to between 30 basis points and 50 basis points which
should be added to the interest rate margin received by the guaranteed lender to obtain the
equivalent interest rate paid by a foreign airline under Ex‐Im Bank‐supported financing (for
purposes of comparing the overall financing cost to those incurred by US airlines) The Ex‐Im
Bank exposure fee is similar to a homeowner having to pay ldquopointsrdquo up front at the time he
obtains his mortgage The effect of paying points up front and paying an Ex‐Im Bank exposure
fee effectively increases the cost of the financing In comparing the overall cost of financing
through ECA support including the exposure fee to the overall cost of a leveraged lease for
borrowers with comparable credit profiles the overall cost of the US leveraged lease was
considerably more favorable than what could be achieved through an Ex‐Im Bank‐supported
aircraft financing
Although the US leveraged lease was itself a very attractive financing structure for US
airlines at different times the basic US leveraged lease was made even more attractive due to
other provisions of the US and foreign tax codes
For instance from the 1960s (during the Kennedy Administration) until its repeal under the Tax
Reform Act of 1986 the US tax code provided for an investment tax credit which was intended
to encourage investment in capital goods and therefore allowed airlines or the equity investor
in a US leveraged lease to get a credit against the taxes it would otherwise be required to pay
This credit was a permanent reduction in taxes paid as opposed to only the deferral of taxes
(postponement of when taxes had to be paid) that could be achieved through the use of the
US leveraged lease
Similarly from the 1980s to the mid‐1990s it was common for a US airline to combine a US
leveraged lease with a lease into a foreign jurisdiction that had a ldquoform over substancerdquo
approach to its tax code (as opposed to the United States which has a ldquosubstance over formrdquo
approach to its tax code) Taking advantage of the disparity a US airline could ldquosellrdquo the
aircraft to both (i) an equity investor in the United States and (ii) an equity investor in a foreign
country such as Japan Germany or Hong Kong and each equity investor could depreciate the
same aircraft and therefore shelter its respective income Over time due to changes in the
respective tax codes these more aggressive tax advantaged cross‐border leasing structures
(ldquoDouble Dipsrdquo and even on occasion ldquoTriple Dipsrdquo) were disallowed but not before US airlines
financed billions of dollars of aircraft using such tax advantaged leasing structures
During the 1990s the basic US leveraged lease was made even more attractive by taking
advantage of another provision of the US tax code that allowed additional US taxes to be
22
deferred if the equity investor in the transaction used an offshore subsidiary that qualified as a
Foreign Sales Corporation (ldquoFSCrdquo) under the US tax code and structured the deal as a
Commission FSC
In addition during the 1980s and 1990s US airlines had access to other sources of financing
with overall financing terms that were much more attractive than what was available to foreign
airlines via Ex‐Im Bank‐supported export credits For example during the late 1980s and 1990s
Airbus made its first significant sales to US airlines In order to do so Airbus arranged and
provided very attractive and flexible financing terms to US airlines to encourage them to
purchase European‐manufactured Airbus aircraft instead of US‐manufactured Boeing or
McDonnell Douglas aircraft The US airlines were more than willing to accept these incentives
During this period some US airlines entered into ldquowalk awayrdquo leases of Airbus aircraft
pursuant to which Airbus North America (backed by the joint and several guarantees of each of
the four countries that are members of Airbus SAS) entered into a US leveraged lease of the
Airbus aircraft and then subleased the aircraft to a US airline on terms that (i) passed along
most of the tax benefits to the US airline through lower lease rentals and (ii) permitted the
US airline to terminate the sublease and simply ldquowalk awayrdquo from the lease upon a relatively
short notice period
Under the ldquoHome Market Rulerdquo the European export credit agencies (including those of
France Germany and the United Kingdom) that usually support the financing of Airbus aircraft
could not provide such support to US airlines Therefore Airbus arranged for Kreditanstalt fur
Wiederaufbau the development bank of Germany to provide very attractive financing for the
Airbus aircraft being acquired by US airlines These financings occurred on terms much more
favorable (with 18‐ to 22‐year repayment terms) than what export credit agencies could
provide (with a maximum repayment term of 12‐years)
Similarly during the 1990s US airlines began to acquire a large number of 35 to 50 seat
regional jet aircraft manufactured by Bombardier of Canada and Embraer of Brazil Many of
these aircraft were acquired by the US airlines by using export credit support from Canada and
Brazil Some of the financing terms (ie the repayment terms) of these Brazilian and Canadian
government‐supported export credit financings were even more attractive (15‐ to 18‐year
repayment terms) than what was available from the export credit agencies of France Germany
and the United Kingdom with respect to Airbus aircraft or from Ex‐Im Bank with respect to
Boeing aircraft (10‐ to 12‐year repayment terms)
To make the financing of Canadian‐manufactured Bombardier regional jets even more
attractive to US airlines the province of Quebec (where Bombardier has its headquarters)
through Investment Quebec provided additional aircraft financing support to the US airlines
23
Finally to the extent even more attractive financing was needed to convince US airlines to
purchase Canadian or Brazilian‐manufactured regional aircraft the manufacturers themselves
provided residual value guarantees with respect to such aircraft to the airline or to the
financiers (ie to the equity investor in a US leveraged lease or the creditors financing the
aircraft)
The next major development in aircraft financing used by US airlines was the development in
the 1990s of the Enhanced Equipment Trust Certificate (ldquoEETCrdquo) which was an ETC with certain
structural enhancements The most important of these enhancements is a liquidity facility to
ensure that if there is a default the financiers would continue to receive current interest
during the period of time while the aircraft is being repossessed and remarketed A key
element in the development of the EETC was the existence of Section 1110 of the US
Bankruptcy Code which gives a type of ldquopreferred creditorrdquo status to financiers of aircraft for
US airlines This ldquopreferred creditorrdquo status exempts aircraft financiers of US airlines from
the automatic stay generally imposed following a bankruptcy filing by a borrower subject to the
protections of the US Bankruptcy Code Section 1110 of the US Bankruptcy Code
accomplishes this by requiring the airline within 60 days of such bankruptcy filing to either (i)
resume payments under the originally agreed aircraft financing or (ii) return the aircraft to the
financier
The first EETC was done in 1994 and the practice has now been successfully used by almost
every major US airline including Alaska Airlines America West Airlines American Airlines
Continental Airlines Delta Airlines Hawaiian Airlines Jet Blue Airlines Northwest Airlines
Southwest Airlines United Airlines and US Airways The overall financing cost of a US airline
acquiring an aircraft through the use of the EETC ndash which includes the amount of financing
repayment term amortization profile effective cost of the financing etc ndash has generally been
significantly more attractive than (i) what such US airline could have achieved under an export
credit‐supported aircraft financing for such airline and (ii) what a similarly rated foreign airline
could have achieved under an export credit‐supported aircraft financing
This is particularly true for the financing of new aircraft The development of the EETC market
provided enormous financing flexibility to US airlines for the financing of new aircraft the
EETC provided the airline with the option to finance on a simple secured mortgage basis or the
US airline could opt for a leveraged lease with all of the benefits associated with a leveraged
lease described above
Beginning in 1997 US airlines had the ability to raise money in the capital markets when the
overall financing terms were most attractive They were able to ldquolock‐inrdquo such favorable
financing terms to fund new aircraft that were scheduled to be delivered in the future by
issuing a ldquopre‐fundedrdquo EETC These pre‐funded EETCs were used to great success by US
24
airlines in the late 1990s through 2001 a period in which the US airlines were taking delivery
of a significant number of aircraft
As a result of the downturn in the US airline industry following the September 11 2001
terrorist attacks many US airlines deferred or cancelled their orders for new aircraft This
reduced the need for US airlines to finance new aircraft when the financing terms available to
such US airlines via the EETC were not as favorable due to (i) the perceived increased credit
risks of the US airline industry following the September 11 terrorist attacks and (ii) the
temporary disequilibrium in the credit markets following the 200820092010 credit crisis
Now that the US airlines have once again begun to take delivery of a significant number of
new aircraft the pre‐funded EETC continues to be the preferred source of financing for US
airlines as evidenced by the number and amount of EETC issuances during 2012 and 2013
Based on an analysis of the EETC transactions occurring during 2012 and 2013 EETCs are once
again generally considered to provide more attractive overall financing terms than what could
be achieved by an airline under an export credit‐supported financing done under the terms of
the 2011 Aircraft Sector Understanding
25
GLOSSARY
ldquoAdverse Economic Impactrdquo is the short‐hand term used to refer to any serious negative effects on US industries or US jobs as set forth in the Bankrsquos Charter that result from Ex‐Im Bank loans guarantees or insurance The Bankrsquos Charter contains three provisions that address adverse economic impact found at 12 USC sectsect 635(b)(1) 635a‐2 635(e)
ldquoAir Indiardquo is an airline owned by the Government of the Republic of India ldquoAir India Transactionsrdquo are the two final commitments approved by Ex‐Im Bank on September
30 2011 for loan guarantees for the purchase of a number of 787 ldquoDreamlinerrdquo aircraft from Boeing and to be financed by a commercial lender not identified at the time As of the date of this paper Ex‐Im Bank has not issued any of its loan guarantees but is expected to do so in the coming months Ten of the aircraft involved in these two final commitments have been delivered to Air India and are in use by Air India on routes outside the United States The deliveries of the ten aircraft were made using private short‐term financing as to which Ex‐Im Bank had no involvement
ldquoAirbusrdquo Airbus SAS is a Europe‐based manufacturer of large commercial aircraft Airbus is the only competitor to Boeing the US manufacturer Airbus sales are supported by the ECAs of Germany France and the UK
ldquoAircraft Sector also known as the ASU is an agreement among members of the OECD Understandingrdquo that manufacture aircraft and Brazil The ASU requires that Export
Credit Agencies that support the export of aircraft follow certain rules and restrictions that set forth the most favorable terms that can be provided These rules and restrictions include the Export Credit Agency must charge a minimum risk premium which is determined by the ASU the term of any loan made by or supported by the Export Credit Agency for the purchase of aircraft cannot exceed 12 years the Export Credit Agency today can lend or guarantee only up to 85 of the actual purchase price of the aircraft being exported and the use of risk mitigants The ASU was preceded by the Large Aircraft Sector Understanding which governed these issues until the enactment of the 2007 ASU The ASU was again updated and revised in 2011 (See also the Large Aircraft Sector Understanding)
ldquoArrangementrdquo is the agreement among Export Credit Agencies governing the terms by which they will provide loans guarantees or insurance in support of exports from their respective countries Among other things the Arrangement requires Export Credit Agencies to charge a minimum risk premium which is governed by the Arrangement See also Organization for Economic Cooperation and Development
ldquoASUrdquo see Aircraft Sector Understanding ldquoAverage Weighted Liferdquo for purposes of this paper refers to the average number of years that
each dollar of unpaid principal on a loan remains outstanding For example a loan with equal principal payments throughout the loan term will have an average weighted life close to the middle of the whole loan term
26
ldquoBank Actrdquo is the Export‐Import Bank Act of 1945 12 USC sect635 as amended ldquoBank Advisory Committeerdquo is the official Advisory Committee of the Bank appointed in accordance
with the Bank Act and the Advisory Committee Act The Bank Advisory Committee is comprised of representatives of various industry and market sectors as well as representatives of labor and international trade experts
ldquoBasis pointsrdquo are a numerical measure applied to interest rates One basis point equals 1100th of one percent or 100 basis points equals one percent
ldquoCapital Equipmentrdquo is equipment used to manufacture a product provide a service or sell store or deliver merchandise A wide‐body aircraft is a piece of capital equipment
ldquoCharterrdquo is the Bank Act as well the provisions of the Export Import Bank Reauthorization Act of 2012 (Public Law 112‐122) that are not codified in the Bank Act
ldquoDreamlinerrdquo is the name given to a Boeing 787 wide‐body commercial aircraft ldquoECArdquo see Export Credit Agencies ldquoEconomic Impact Proceduresrdquo
are procedures adopted by Ex‐Im Bank to assess whether transactions supported by the Bank cause a serious adverse economic impact to US industries and US jobs See also Adverse Economic Impact
ldquoEETCrdquo see Enhanced Equipment Trust Certificate ldquoEnhanced Equipment Trust Certificaterdquo
also known as an EETC is a type of secured bond issued by a borrower in the capital markets The EETC is secured by the equipment being purchased with the proceeds of the bond issuance EETCs are used primarily for aircraft and since the late 1990s has been the dominant financing tool used by US airlines to purchase aircraft Section 1110 of the US Bankruptcy Codemdashwhich allows creditors of aircraft borrowers to obtain their collateral within 60 days if the payments on their debt is not current ndash has provided creditors of US airlines a level of comfort not available to creditors of foreign airlines until recently This generally provided US airlines with a significant financial advantage vis a vis their foreign competitors Recently the adoption of the Cape Town Convention and the related Aircraft Equipment Protocol has provided creditors of foreign airlines with protections similar to the protections provided by section 1110 of the US Bankruptcy Code Recently this has led to the beginnings of an international EETC market
ldquoEquipment Trust Certificaterdquo
also known as an ETC was the predecessor to the Enhanced Equipment Trust Certificate
ldquoETCrdquo see Equipment Trust Certificate ldquoEx‐Im Bankrdquo or ldquoBankrdquo See The Export‐Import Bank of the United States ldquoExport Credit Agenciesrdquo are agencies or ministries of government that have the official role of
providing loans guarantees or insurance in support of exports from their respective countries or in support of exports by sales of companies from their respective countries Ex‐Im Bank is the official Export Credit Agency of the United States of America
ldquoexportable goods screenrdquo is a screen or filter adopted by Ex‐Im Bank in its 2001 Economic Impact Procedures The exportable goods screen is utilized along with other screens to balance the Bankrsquos obligation to consider the adverse
27
economic effects of its transactions on US industries and US jobs with the Bankrsquos mandate to support US export transactions in a timely manner so as to fully support the exporterrsquos business opportunity The exportable goods screen filtered out transactions that supported exports which could only be used by a foreign buyer to provide services rather than produce goods
ldquoExport‐Import Bank of the is an independent agency of the Federal Government of the United United Statesrdquo States of America Also known as ldquoEx‐Im Bankrdquo Ex‐Im Bankrsquos mission
is to support US jobs by supporting US exports See 12 USC 635 et seq
ldquoExposure Feerdquo is the risk premium charged by Ex‐Im Bank in exchange for its guarantee in certain transactions The exposure fee must be at least equal to the minimum risk premium required by the terms of the Arrangement and the Aircraft Sector Understanding
ldquoForeign Sales Corporationrdquo is a company created under the terms of a former provision of the US Internal Revenue Code Foreign Sales Corporations received significant tax benefits
ldquoFSCrdquo see Foreign Sales Corporation ldquoInvestment Tax Creditrdquo is a credit permitted under the US Internal Revenue Code for the
purchase of certain types of equipment in certain circumstances See also Leveraged Leases
ldquoKFWrdquo the development bank for the Federal Republic of Germany KFW is an Export Credit Agency but it also operates through a ldquomarket windowrdquo which is not subject to the Home Market Rule Thus KFW provides support to Airbus for its sales of aircraft to US airlines The United States does not have an equivalent institution and Ex‐Im Bank does not have a ldquomarket windowrdquo
ldquoLarge Aircraft Sector also known as LASU was the predecessor to the Aircraft Sector Understandingrdquo Understanding The LASU governed the same general issues as are set
forth in the Aircraft Sector Understanding except that the minimum risk premium was lower than that required in the 2007 ASU and 2011 ASU When the 2007 ASU was enacted grandfathering provisions allowed ECA‐supported financing for a limited number of aircraft to be governed by LASU
ldquoLASUrdquo see Large Aircraft Sector Understanding ldquoLeveraged Leaserdquo is a lease of equipment and is designed to allow the lessor to take
advantage of certain tax code provisions such as the depreciation deduction and the investment tax credit while allowing the lessee to obtain the equipment involved at a significantly lower cost Leveraged Leases were a very popular means for US airlines to acquire aircraft throughout the 1980s and 1990s The value of the tax deductions to the lessor were significant so that the implicit interest rate in the lease payments by the US airline were extremely low Usually the US airline did not have sufficient profit to take advantage of the favorable tax code provisions By using a leveraged lease another company that could shelter income by using the tax code provisions would buy the equipment and lease the equipment to the US airline Usually at the end of the lease term the US airline would purchase the aircraft
28
ldquoLIBORrdquo is the London Inter‐bank Offering Rate It is commonly used as a reference rate in loan transactions that have floating or adjustable interest rates LIBOR reflects the rate at which banks will lend money to each other LIBOR is set for various loan terms (eg 3 months 6 months etc) and is widely published making it a convenient rate to use as a reference rate
ldquoNet pricerdquo is the price paid after all discounts have been deducted The net price is the actual price paid for a piece of equipment In aircraft transactions pursuant to the ASU Ex‐Im Bank will only support up to 85 of the net price of an aircraft EETC transactions on the other hand often support the nominal purchase price of an aircraft and thus result in a significantly higher amount financed
ldquoOECDrdquo see the Organization for Economic Cooperation and Development Open Skies Agreement Is a type of bilateral agreement between countries that govern the
rights of airlines from the two countries to fly into the other country Open Skies Agreements generally allow free access to fly as many routes to a country as an airline may choose but then usually restrict the ability to fly within the other country Generally it is a ldquofly in and outrdquo rule although there are exceptions
ldquoOrganization for Economic Cooperation and Developmentrdquo
also known as the OECD is an organization comprised of 34 member countries that work together to promote development The United States is a member With regard to Ex‐Im Bank the OECD is the organization through which the US Government negotiates an agreement among Export Credit Agencies known as the Arrangement and the ASU (and its predecessor the LASU)
ldquoPass Through Certificaterdquo also known as a PTC is a group of Equipment Trust Certificates pooled together to form the basis for a bond issuance
ldquoPTCrdquo See Pass Through Certificate ldquoRyanairrdquo is a low‐cost Irish airline that began business after European
deregulation of airlines in 1997 Ryanair rapidly expanded during the first decade of the 2000s creating significant competition for other airlines
ldquoScreensrdquo are a type of filter used by Ex‐Im Bank in its Economic Impact Procedures Screens are designed to identify those transactions which are not likely to cause an adverse economic impact to US industries or US jobs so that such transactions can be processed more quickly and efficiently as required by the Bank Act
ldquoSubstantial Injuryrdquo is a term defined in Ex‐Im Bankrsquos Charter to be applied in connection with the Bankrsquos economic impact procedures 12 USC sect635(e)(4) The Charter states ldquohellipthe extension of any credit or guarantee by the Bank will cause substantial injury if the amount of the capacity for production established or the amount of the increase in such capacity expanded by such credit or guarantee equals or exceeds 1 percent of United States productionrdquo
ldquoTPCCrdquo see Trade Promotion Coordinating Committee ldquoTrade Promotion Coordinating Committeerdquo
also known as the TPCC is an interagency committee of the US Government chaired by the Secretary of Commerce It was established under the Export Enhancement Act of 1992 to provide a
29
unifying framework to coordinate the export promotion and export financing activities of the US government and to develop a government‐wide strategic plan for carrying out such programs
ldquoTrade Sanctionsrdquo refers to any of a number of sanctions imposed by the US Government against companies countries industries or products usually as a result of an accusation of adjudication of a violation of an international trade agreement The Bank Act requires Ex‐Im Bank to take certain trade sanctions into account in its economic impact procedures
30
Table A ndash Congressional Actions and Ex-Im Bank Responses
Year Congressional Action Ex‐Im Bank Response
1968 Bank directed to take into account the possible adverse effect [of its loans and guarantees] upon the United States economy
Bank adds this transactions
factor to analysis of
1975 1 Standard refined to take into account any serious adverse effect of loans and guarantees on competitive position of US industry availability of scarce materials in US and employment in US
2 Bank directed to be competitive with rates terms and conditions offered by principal countries whose exporters compete with US exporters
3 Bank directed to submit semi‐annual report on competitiveness and conduct survey of US exporters and lenders to determine experience in meeting financing competition
Bank adds these of transactions
considerations to analysis
Year Congressional Action Ex‐Im Bank Response
1978 ‐ 1979
1 Bank directed to take into account any serious adverse effect of loans on competitive position of US industry and scarce materials Bank directed to emphasize strengthening competitive position of US exporters and expanding total US exports
2 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [From Appropriations Act Restated in Bank Charter in 1986]
3 Bank directed to implement regulations and procedures to insure full consideration of extent to which loan or guarantee is likely to have adverse effect on industries and employment in US either by reducing demand for US produced goods or increasing imports to the US
Bank develops framework and set of written economic impact procedures
1 Exclude exports the use of which remained localized in foreign country This
is first ldquoforeign localized goods and services screenrdquo
2 ldquoIntent and stimulus for projectrdquo examined to determine likelihood of substantial adverse economic impact Does transaction involve ldquorunaway industryrdquo
(leaving US for cheaper foreign labor)
3 Does export of capital equipment result in ldquobuy backrdquo of product being imported into the US
4 Is net impact on US economy and jobs positive or negative and to what degree
32
Year Congressional Action Ex‐Im Bank Response
1986 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [Originally from 1978 Appropriations incorporated into Bank Charter in 1986]
Senate Report recognizes knowledge and experience of Bank and need to respond to exportersrsquo requests for support in a timely and confidential fashion Economic impact procedures are to be practical and workable and not reduce Bankrsquos competitiveness and flexibility nor ignore positive aspects of export sale
Bank develops ldquoSummary of Adverse Economic Guidelinesrdquo to be applied to both
goods and services (a) is commodity to be produced surplus or likely to compete with US‐produced surplus (b) will Bankrsquos
assistance cause substantial injury to US producers of competing commodity (c)
will injury to US producers of competing commodity outweigh the short‐ and long‐
term benefits to US industry and employment If answer is no then no
further economic impact analysis
1988 Congress establishes test for ldquosubstantial injuryrdquo if the amount of capacity for production established or amount of increase in such capacity expanded by Bankrsquos credit or guarantee exceeds 1 of US production
Bankrsquos Board recognizes requirement to balance (a) possibility of substantial harm
to US production and employment with (b) being responsive competitive and efficient New economic impact procedures ask (a) will the project be in direct competition with US production (b) is the Bankrsquos support significantly associated with the project (c) will the output of the project
cause substantial injury to US producers of the same similar or competing
commodity If answer is no then no further economic impact analysis is required
33
Year Congressional Action Ex‐Im Bank Response
1998 Bank revised procedures involving countries against which trade sanctions were pending or imposed
2001
2006 ‐2007
1 Bank required to determine whether extension of credit or guarantee is likely to produce same or other commodities and whether the production may cause substantial injury to US producers
2 Bank prohibited from providing a loan or guarantee that will facilitate circumvention of trade law order or determination
3 Bank required to designate sensitive commercial sectors and products for which Bank financing deemed unlikely due to potential for adverse economic impact on US
4 Bank required to aggregate financial thresholds on rolling 24‐month basis
Bank develops ldquoexportable goods screenrdquo Does Ex‐Im Bank support result in production of exportable good from the foreign buyerrsquos country If not no further economic impact analysis is required Notice and request for comments were published in the Federal Register US airline industry did not respond
Bank issues 2007 Economic Impact Procedures ldquoExportable goods screenrdquo is modified Will the transaction (capital goods and services) result in either new or additional production capacity of an exportable good
34
enforce an equilibrium between the cost of ECA aircraft financings and the financing available
to US airlines in the private market In addition this very issue continues to be a regular topic
of discussion among the ASU participant countries as well Based on the data that have been
developed and presented to date the Bank believes that the 2011 ASU properly serves its
intended function of ensuring that airlines using private market financing do not suffer a
competitive disadvantage when compared to ECA financing of aircraft under the ASU
IV Conclusion
Ex‐Im Bankrsquos exportable goods screen complied with the Bankrsquos statutory requirements to
assess the potential adverse effects of all transactions and to focus on those transactions that
were likely to result in a substantial adverse economic impact on US industry Historically
financing available to US airlines for the purchase of new wide‐body aircraft has been either
more favorable than or equally favorable as Ex‐Im Bank financing to foreign airlines for the
purchase of equivalent aircraft The exportable goods screen was an appropriate reasonable
and efficient response to the realities of aircraft financing It properly balanced the
Congressional directives to assess the likelihood of substantial economic impact on US
industry and US jobs with the need to finance transactions in an efficient manner so as to
support US exports and US jobs
November 22 2013
Export‐Import Bank of the United States 811 Vermont Ave NW Washington DC 20571
16
Appendix A
Excerpt from Staff Memorandum to Ex‐Im Bank Board of Directors Accompanying 1979
Economic Impact Procedures30
Thus Section 2(b)(1)(B) of the Act requires the Board of Directors to take into account ldquoany
serious adverse effectrdquo which loans or guarantees may have on US industry materials in short
supply and employment Section 1911 of the 1978 Amendments requires consideration by the
Bank of the extent to which a loan or financial guarantee ldquois likely to have an adverse
effecthellipeither by reducing demand for goods produced in the United States or by increasing
imports to the United Statesrdquo and Section 608 of the Appropriations Act requires a finding that
the commodity ultimately produced as a result of [Bank] financing will be in surplus when the
production comes on‐stream and that US producers of the same similar or competing
commodity will be substantially injured It is apparent that the latter two statutory provisions
are explications of the basic mandate of the Act and do not expand the Bankrsquos mandate to
examine domestic impact but rather suggest factors to be considered in that examination To
a great extent the 1978 Amendments language and the Appropriations Act provisions set forth
the same concept in different ways Thus the reference in Section 1911 of the 1978
Amendments to ldquoreducing demand for goods in the United Statesrdquo and ldquoincreasing imports to
the United Statesrdquo is no more than the inevitable consequence of a commodity being ldquoin
surplusrdquo as stated in Section 608 of the Appropriations Act
Section 2(b)(1)(B) is the broadest formulation of the basic concept since it contains the most
general language ie ldquoany serious impactrdquo and encompasses all types of exports Section
1911 is primarily procedural in nature directing the Bank not only to implement appropriate
regulations and procedures to ensure full consideration of adverse impact but also to request a
report from the International Trade Commission Section 1911 includes a more detailed
description of events which would constitute adverse impactmdashie a reduction in demand for
US produced goods or an increase in imports to the US Finally this section contains an
explicit reference to agriculture which was only implicitly covered by Section 2(b)(1)(B) It
should be noted that this is one of several references to agriculture which were added to the
Act by the 1978 Amendments
The Appropriations Act provision explicitly refers to a balancing by the Board of Directors of the
benefits of the [Bank]‐supported export against the injury to US [producers] of the commodity
in question At the same time the Act has always necessitated such a balancing by requiring
the Bank to take into account ldquoserious adverse effects upon the US economyrdquo at the same
time it carries out the Bankrsquos basic mandate to ldquofacilitate exportsrdquo and to ldquofoster expansion of
exportsrdquo Under either provision therefore the Board of Directors will be taking into
30 Memorandum ldquoProcedures Regarding Adverse Domestic Impact of Eximbank Financingrdquo Pp 7‐12 Jan 5 1979 17
consideration the results of the balancing as one of the many factors involved in making a
decision to provide financing It should be noted that Section 1911 of the 1978 Amendments is
consistent with both of these provisions since it only seeks to ensure that ldquofull considerationrdquo is
given to adverse effects upon the US economy
Section 2(b)(1)(B) of the Act refers to ldquoserious adverse effectrdquo upon the US economy as a
whole whereas Section 608 of the Appropriations Act imposes a more stringent test by
focusing on a single industry ndash the domestic producers of the commodity to be produced by the
project supported by [the Bank] ndash and requiring a determination of substantial injury for that
industry alone However a reading of the entire Section shows that such a determination
would have to be made only if the net effect upon the US economy of the project for which
support was requested from [the Bank] is negative and if the commodity is likely to be in
surplus on world markets at the time the project becomes operative In any event under
Section 2(b)(1)(B) the Board would have to take into account any serious adverse effects of the
transaction upon the US economy Only if the Board decides to proceed with the transaction
regardless of such effects would it be necessary to determine if there will be substantial injury
to US producers of the commodity and thus trigger the prohibition contained in Section 608
It should also be noted that Section 1911 of the 1978 Amendments speaks in terms only of ldquoany
adverse effectrdquo However the language of that provision clearly shows that it was not intended
to set up a substantive test but rather as was mentioned above to insure that formal
procedures to take into account impacts upon the US economy are established by [Ex‐Im
Bank] as well as to enable the Bank to obtain a report from the International Trade
Commissionrdquo PL 95‐630 92 Stat 3641 (1978)
18
Appendix B
Financial Tools Available to US Airlines
Generally over the past several decades US airlines have had access to a broad range of
aircraft financing options
Accordingly at different times during the past several decades US airlines took advantage of
whichever financing option provided the most attractive overall financing terms from such
airlinesrsquo perspective For instance a US airline would be able to maximize the amount of the
financing thereby minimizing the amount of its own money it had to invest in the aircraft (ie
the ldquodown paymentrdquo) It might also maximize the amount of money in excess of the actual cost
of the aircraft it could raise against the aircraft obtain the longest possible repayment term and
the slowest possible amortization schedule (ie the longest ldquoweighted average liferdquo) obtain
the lowest interest rate and risk premium obtain the least restrictive operational and financial
covenants provide the least amount of collateral or other security or obtain other benefits
Due to the fact that the United States is seen as not presenting any ldquocountry riskrdquo and has well‐
developed and well‐regarded legal and judicial systems that are seen as being protective of
creditorsrsquo rights US airlines have usually had access to secured aircraft financings from
commercial banks from around the world During the past several decades commercial banks
from different regions have been at the forefront of the aircraft finance industry and have
provided financing to US airlines on attractive financing terms Initially US‐based banks
provided most of the aircraft financing to US airlines but during the 1980s Japanese banks
became very significant lenders to the US airlines During the 1990s and 2000s the European
banks (German French British and Swiss banks) were the most significant source of
commercial bank funding for US airlines
In addition to commercial bank financing during the 1970s and 1980s US airlines obtained
long‐term financing from US‐based institutional investors (eg insurance companies and
pension funds) through the use of the Equipment Trust Certificate (ldquoETCrdquo) financing structure or
the Pass Through Certificate (ldquoPTCrdquo) financing structure The ETC is a financing provided by
institutional investors that is secured by one or more items of equipment (eg aircraft) The
PTC is a group of ETCs combined into a public debt security that is sold into the capital markets
to institutional investors
However during the 1980s the simplest and most prevalent form of aircraft financing for US
airlines was the US leveraged lease
The US leveraged lease allowed US airlines to take advantage of the US tax code which
generally provides for all types of capital assets to be depreciated and thereby reduces or
defers taxes due to the deductibility of tax depreciation Because US airlines generally did not 19
have sufficient income to fully take advantage of the benefit of the tax depreciation deductions
associated with acquiring aircraft the US airlines entered into US leveraged leases Under a
leveraged lease the benefits of the tax depreciation deductions related to the aircraft were
transferred to profitable companies that had income they wanted to shelter from tax In
return the company was willing to provide the equity in a US leverage lease (approximately
20 of the appraised value of the aircraft) and to ldquoleaserdquo the aircraft back to the airline for the
airlinersquos use A number of different entities entered into such leases including banks insurance
companies and other financial institutions such as Ford Motor Credit as well as finance
subsidiaries of other corporate entities including consumer product companies such as Phillip
Morris or entertainment companies such as Disney The fact that these were ldquoleveragedrdquo
leases (as opposed to ldquosingle investor leasesrdquo) also enabled the equity providers to deduct the
interest expense associated with the US leveraged lease
Through the use of a combination of lease equity and debt a US leveraged lease allowed US
airlines to arrange financing for up to 100 of the appraised value of an aircraft This was
particularly attractive to major US airlines because due to their size and relative importance
to the aircraft manufacturers every major US airline generally was able to negotiate aircraft
purchases with the aircraft manufacturers that enabled the airline to buy the aircraft for
amounts significantly less than the appraised value The result was that by using a US
leveraged lease to finance its aircraft a US airline was able to ldquoover‐financerdquo the aircraft (ie
finance the aircraft for more than the airline was paying for the aircraft) resulting in the airline
effectively having the ability each time the airline financed an aircraft to arrange 100
financing for its aircraft and at the same time arrange a long‐term working capital loan This is
the equivalent of a home buyer being able to buy a house with no money down (no down
payment) and also receiving a long‐term loan for non‐home expenses
In contrast Ex‐Im Bank‐supported aircraft financing is for only 85 (and sometimes less) of the
actual ldquonet pricerdquo that the airline is paying the US aircraft manufacturer (after deducting all
discounts and other concessions the airline has negotiated with the US aircraft manufacturer
which results in a net price that is almost always less than the appraised value) This requires
the foreign airline that is using Ex‐Im Bank support to come up with a down payment of at least
15 of the net price of the aircraft As a result US airlines were able to obtain more financing
under a US leveraged lease (without putting any money down) than foreign airlines could
under an Ex‐Im Bank supported aircraft financing (which required a down payment)
In addition US leveraged leases used by US airlines always had very long repayment terms
Generally speaking the longer the repayment the longer the tax deferral and the more
advantageous the terms of the US leveraged lease As a result it was not unusual for the US
leveraged leases used by US airlines to have a repayment term of between 18 and 22 years
and sometimes as long as 25 years The only constraint was that the lease term of the
20
leveraged lease should not exceed 80 of the economic useful life of the aircraft which in
some instances was more than 30 years
In contrast the repayment term in an Ex‐Im Bank‐supported aircraft financing is never longer
than 12 years which is the maximum repayment term Ex‐Im Bank is permitted to offer for an
aircraft financing under the guidelines for export credits promulgated by the Organization for
Economic Cooperation and Development (the ldquoOECDrdquo) with which guidelines the US
Government (including Ex‐Im Bank) has agreed to abide This difference in repayment terms is
significant it is similar to the difference in monthly payments under a 15 year home mortgage
versus a 30 year home mortgage As a result US airlines were able to obtain significantly
longer financing under a US leveraged lease (which generally resulted in a smaller periodic
principal repayment burden due to the longer repayment term) than foreign airlines could
under an Ex‐Im Bank‐supported financing
US leveraged leases used by US airlines also had a slower amortization profile with a very
long weighted average life (ie small amounts of debt amortization in the early years of the
financing) of at least 10 years In the same manner that a longer repayment term increased the
tax deferral a longer weighted average life also increased the tax deferral
In contrast the amortization profile in an Ex‐Im Bank supported aircraft financing for a foreign
airline is usually between 6 years and 65 years (at least 4 years shorter than the weighted
average life of the US leveraged leases historically used by US airlines) which imposes a
much greater cash flow burden on the foreign airline in comparison with the cash flows
required of a US airline under a US leveraged lease
Although the absolute interest rate on the debt in a US leveraged lease fluctuated over time
with the overall level of interest rates the providers of the debt into these US leveraged leases
(primarily insurance companies and other institutional investors) were generally willing to
accept an interest rate margin of less than 100 basis points31 over LIBOR32 on a fixed rate
equivalent basis (and sometimes significantly less than 100 basis points)
In contrast the interest rate margin on the debt on an Ex‐Im Bank‐supported aircraft financing
was generally between a few basis points over LIBOR to 50 basis points over LIBOR because the
interest on the Ex‐Im Bank‐guaranteed aircraft financing is guaranteed by Ex‐Im Bank and
reflects the low risk associated with a US Government guaranteed loan However the interest
rate margin on an Ex‐Im Bank‐guaranteed aircraft financing does not reflect the Ex‐Im Bank
exposure fee (or risk premium) that is paid to Ex‐Im Bank in view of the underlying risk of the
foreign airline The minimum exposure fee charged by Ex‐Im Bank was 2 during the 1980s
31 100 basis points equals 1 percent 32 LIBOR is the London Inter‐Bank Offering Rate and is a common reference rate such as ldquoPrimerdquo or ldquoTreasury Raterdquo used in adjustable interest rate transactions
21
and early 1990s and 3 until 2007 when the OECD promulgated a new set of guidelines for
export credits for aircraft (known as the ldquo2007 Aircraft Sector Understandingrdquo or the ldquo2007
ASUrdquo) This exposure fee was required to be paid ldquoup frontrdquo ndash ie at the inception of the loan
On a per annum basis this equates to between 30 basis points and 50 basis points which
should be added to the interest rate margin received by the guaranteed lender to obtain the
equivalent interest rate paid by a foreign airline under Ex‐Im Bank‐supported financing (for
purposes of comparing the overall financing cost to those incurred by US airlines) The Ex‐Im
Bank exposure fee is similar to a homeowner having to pay ldquopointsrdquo up front at the time he
obtains his mortgage The effect of paying points up front and paying an Ex‐Im Bank exposure
fee effectively increases the cost of the financing In comparing the overall cost of financing
through ECA support including the exposure fee to the overall cost of a leveraged lease for
borrowers with comparable credit profiles the overall cost of the US leveraged lease was
considerably more favorable than what could be achieved through an Ex‐Im Bank‐supported
aircraft financing
Although the US leveraged lease was itself a very attractive financing structure for US
airlines at different times the basic US leveraged lease was made even more attractive due to
other provisions of the US and foreign tax codes
For instance from the 1960s (during the Kennedy Administration) until its repeal under the Tax
Reform Act of 1986 the US tax code provided for an investment tax credit which was intended
to encourage investment in capital goods and therefore allowed airlines or the equity investor
in a US leveraged lease to get a credit against the taxes it would otherwise be required to pay
This credit was a permanent reduction in taxes paid as opposed to only the deferral of taxes
(postponement of when taxes had to be paid) that could be achieved through the use of the
US leveraged lease
Similarly from the 1980s to the mid‐1990s it was common for a US airline to combine a US
leveraged lease with a lease into a foreign jurisdiction that had a ldquoform over substancerdquo
approach to its tax code (as opposed to the United States which has a ldquosubstance over formrdquo
approach to its tax code) Taking advantage of the disparity a US airline could ldquosellrdquo the
aircraft to both (i) an equity investor in the United States and (ii) an equity investor in a foreign
country such as Japan Germany or Hong Kong and each equity investor could depreciate the
same aircraft and therefore shelter its respective income Over time due to changes in the
respective tax codes these more aggressive tax advantaged cross‐border leasing structures
(ldquoDouble Dipsrdquo and even on occasion ldquoTriple Dipsrdquo) were disallowed but not before US airlines
financed billions of dollars of aircraft using such tax advantaged leasing structures
During the 1990s the basic US leveraged lease was made even more attractive by taking
advantage of another provision of the US tax code that allowed additional US taxes to be
22
deferred if the equity investor in the transaction used an offshore subsidiary that qualified as a
Foreign Sales Corporation (ldquoFSCrdquo) under the US tax code and structured the deal as a
Commission FSC
In addition during the 1980s and 1990s US airlines had access to other sources of financing
with overall financing terms that were much more attractive than what was available to foreign
airlines via Ex‐Im Bank‐supported export credits For example during the late 1980s and 1990s
Airbus made its first significant sales to US airlines In order to do so Airbus arranged and
provided very attractive and flexible financing terms to US airlines to encourage them to
purchase European‐manufactured Airbus aircraft instead of US‐manufactured Boeing or
McDonnell Douglas aircraft The US airlines were more than willing to accept these incentives
During this period some US airlines entered into ldquowalk awayrdquo leases of Airbus aircraft
pursuant to which Airbus North America (backed by the joint and several guarantees of each of
the four countries that are members of Airbus SAS) entered into a US leveraged lease of the
Airbus aircraft and then subleased the aircraft to a US airline on terms that (i) passed along
most of the tax benefits to the US airline through lower lease rentals and (ii) permitted the
US airline to terminate the sublease and simply ldquowalk awayrdquo from the lease upon a relatively
short notice period
Under the ldquoHome Market Rulerdquo the European export credit agencies (including those of
France Germany and the United Kingdom) that usually support the financing of Airbus aircraft
could not provide such support to US airlines Therefore Airbus arranged for Kreditanstalt fur
Wiederaufbau the development bank of Germany to provide very attractive financing for the
Airbus aircraft being acquired by US airlines These financings occurred on terms much more
favorable (with 18‐ to 22‐year repayment terms) than what export credit agencies could
provide (with a maximum repayment term of 12‐years)
Similarly during the 1990s US airlines began to acquire a large number of 35 to 50 seat
regional jet aircraft manufactured by Bombardier of Canada and Embraer of Brazil Many of
these aircraft were acquired by the US airlines by using export credit support from Canada and
Brazil Some of the financing terms (ie the repayment terms) of these Brazilian and Canadian
government‐supported export credit financings were even more attractive (15‐ to 18‐year
repayment terms) than what was available from the export credit agencies of France Germany
and the United Kingdom with respect to Airbus aircraft or from Ex‐Im Bank with respect to
Boeing aircraft (10‐ to 12‐year repayment terms)
To make the financing of Canadian‐manufactured Bombardier regional jets even more
attractive to US airlines the province of Quebec (where Bombardier has its headquarters)
through Investment Quebec provided additional aircraft financing support to the US airlines
23
Finally to the extent even more attractive financing was needed to convince US airlines to
purchase Canadian or Brazilian‐manufactured regional aircraft the manufacturers themselves
provided residual value guarantees with respect to such aircraft to the airline or to the
financiers (ie to the equity investor in a US leveraged lease or the creditors financing the
aircraft)
The next major development in aircraft financing used by US airlines was the development in
the 1990s of the Enhanced Equipment Trust Certificate (ldquoEETCrdquo) which was an ETC with certain
structural enhancements The most important of these enhancements is a liquidity facility to
ensure that if there is a default the financiers would continue to receive current interest
during the period of time while the aircraft is being repossessed and remarketed A key
element in the development of the EETC was the existence of Section 1110 of the US
Bankruptcy Code which gives a type of ldquopreferred creditorrdquo status to financiers of aircraft for
US airlines This ldquopreferred creditorrdquo status exempts aircraft financiers of US airlines from
the automatic stay generally imposed following a bankruptcy filing by a borrower subject to the
protections of the US Bankruptcy Code Section 1110 of the US Bankruptcy Code
accomplishes this by requiring the airline within 60 days of such bankruptcy filing to either (i)
resume payments under the originally agreed aircraft financing or (ii) return the aircraft to the
financier
The first EETC was done in 1994 and the practice has now been successfully used by almost
every major US airline including Alaska Airlines America West Airlines American Airlines
Continental Airlines Delta Airlines Hawaiian Airlines Jet Blue Airlines Northwest Airlines
Southwest Airlines United Airlines and US Airways The overall financing cost of a US airline
acquiring an aircraft through the use of the EETC ndash which includes the amount of financing
repayment term amortization profile effective cost of the financing etc ndash has generally been
significantly more attractive than (i) what such US airline could have achieved under an export
credit‐supported aircraft financing for such airline and (ii) what a similarly rated foreign airline
could have achieved under an export credit‐supported aircraft financing
This is particularly true for the financing of new aircraft The development of the EETC market
provided enormous financing flexibility to US airlines for the financing of new aircraft the
EETC provided the airline with the option to finance on a simple secured mortgage basis or the
US airline could opt for a leveraged lease with all of the benefits associated with a leveraged
lease described above
Beginning in 1997 US airlines had the ability to raise money in the capital markets when the
overall financing terms were most attractive They were able to ldquolock‐inrdquo such favorable
financing terms to fund new aircraft that were scheduled to be delivered in the future by
issuing a ldquopre‐fundedrdquo EETC These pre‐funded EETCs were used to great success by US
24
airlines in the late 1990s through 2001 a period in which the US airlines were taking delivery
of a significant number of aircraft
As a result of the downturn in the US airline industry following the September 11 2001
terrorist attacks many US airlines deferred or cancelled their orders for new aircraft This
reduced the need for US airlines to finance new aircraft when the financing terms available to
such US airlines via the EETC were not as favorable due to (i) the perceived increased credit
risks of the US airline industry following the September 11 terrorist attacks and (ii) the
temporary disequilibrium in the credit markets following the 200820092010 credit crisis
Now that the US airlines have once again begun to take delivery of a significant number of
new aircraft the pre‐funded EETC continues to be the preferred source of financing for US
airlines as evidenced by the number and amount of EETC issuances during 2012 and 2013
Based on an analysis of the EETC transactions occurring during 2012 and 2013 EETCs are once
again generally considered to provide more attractive overall financing terms than what could
be achieved by an airline under an export credit‐supported financing done under the terms of
the 2011 Aircraft Sector Understanding
25
GLOSSARY
ldquoAdverse Economic Impactrdquo is the short‐hand term used to refer to any serious negative effects on US industries or US jobs as set forth in the Bankrsquos Charter that result from Ex‐Im Bank loans guarantees or insurance The Bankrsquos Charter contains three provisions that address adverse economic impact found at 12 USC sectsect 635(b)(1) 635a‐2 635(e)
ldquoAir Indiardquo is an airline owned by the Government of the Republic of India ldquoAir India Transactionsrdquo are the two final commitments approved by Ex‐Im Bank on September
30 2011 for loan guarantees for the purchase of a number of 787 ldquoDreamlinerrdquo aircraft from Boeing and to be financed by a commercial lender not identified at the time As of the date of this paper Ex‐Im Bank has not issued any of its loan guarantees but is expected to do so in the coming months Ten of the aircraft involved in these two final commitments have been delivered to Air India and are in use by Air India on routes outside the United States The deliveries of the ten aircraft were made using private short‐term financing as to which Ex‐Im Bank had no involvement
ldquoAirbusrdquo Airbus SAS is a Europe‐based manufacturer of large commercial aircraft Airbus is the only competitor to Boeing the US manufacturer Airbus sales are supported by the ECAs of Germany France and the UK
ldquoAircraft Sector also known as the ASU is an agreement among members of the OECD Understandingrdquo that manufacture aircraft and Brazil The ASU requires that Export
Credit Agencies that support the export of aircraft follow certain rules and restrictions that set forth the most favorable terms that can be provided These rules and restrictions include the Export Credit Agency must charge a minimum risk premium which is determined by the ASU the term of any loan made by or supported by the Export Credit Agency for the purchase of aircraft cannot exceed 12 years the Export Credit Agency today can lend or guarantee only up to 85 of the actual purchase price of the aircraft being exported and the use of risk mitigants The ASU was preceded by the Large Aircraft Sector Understanding which governed these issues until the enactment of the 2007 ASU The ASU was again updated and revised in 2011 (See also the Large Aircraft Sector Understanding)
ldquoArrangementrdquo is the agreement among Export Credit Agencies governing the terms by which they will provide loans guarantees or insurance in support of exports from their respective countries Among other things the Arrangement requires Export Credit Agencies to charge a minimum risk premium which is governed by the Arrangement See also Organization for Economic Cooperation and Development
ldquoASUrdquo see Aircraft Sector Understanding ldquoAverage Weighted Liferdquo for purposes of this paper refers to the average number of years that
each dollar of unpaid principal on a loan remains outstanding For example a loan with equal principal payments throughout the loan term will have an average weighted life close to the middle of the whole loan term
26
ldquoBank Actrdquo is the Export‐Import Bank Act of 1945 12 USC sect635 as amended ldquoBank Advisory Committeerdquo is the official Advisory Committee of the Bank appointed in accordance
with the Bank Act and the Advisory Committee Act The Bank Advisory Committee is comprised of representatives of various industry and market sectors as well as representatives of labor and international trade experts
ldquoBasis pointsrdquo are a numerical measure applied to interest rates One basis point equals 1100th of one percent or 100 basis points equals one percent
ldquoCapital Equipmentrdquo is equipment used to manufacture a product provide a service or sell store or deliver merchandise A wide‐body aircraft is a piece of capital equipment
ldquoCharterrdquo is the Bank Act as well the provisions of the Export Import Bank Reauthorization Act of 2012 (Public Law 112‐122) that are not codified in the Bank Act
ldquoDreamlinerrdquo is the name given to a Boeing 787 wide‐body commercial aircraft ldquoECArdquo see Export Credit Agencies ldquoEconomic Impact Proceduresrdquo
are procedures adopted by Ex‐Im Bank to assess whether transactions supported by the Bank cause a serious adverse economic impact to US industries and US jobs See also Adverse Economic Impact
ldquoEETCrdquo see Enhanced Equipment Trust Certificate ldquoEnhanced Equipment Trust Certificaterdquo
also known as an EETC is a type of secured bond issued by a borrower in the capital markets The EETC is secured by the equipment being purchased with the proceeds of the bond issuance EETCs are used primarily for aircraft and since the late 1990s has been the dominant financing tool used by US airlines to purchase aircraft Section 1110 of the US Bankruptcy Codemdashwhich allows creditors of aircraft borrowers to obtain their collateral within 60 days if the payments on their debt is not current ndash has provided creditors of US airlines a level of comfort not available to creditors of foreign airlines until recently This generally provided US airlines with a significant financial advantage vis a vis their foreign competitors Recently the adoption of the Cape Town Convention and the related Aircraft Equipment Protocol has provided creditors of foreign airlines with protections similar to the protections provided by section 1110 of the US Bankruptcy Code Recently this has led to the beginnings of an international EETC market
ldquoEquipment Trust Certificaterdquo
also known as an ETC was the predecessor to the Enhanced Equipment Trust Certificate
ldquoETCrdquo see Equipment Trust Certificate ldquoEx‐Im Bankrdquo or ldquoBankrdquo See The Export‐Import Bank of the United States ldquoExport Credit Agenciesrdquo are agencies or ministries of government that have the official role of
providing loans guarantees or insurance in support of exports from their respective countries or in support of exports by sales of companies from their respective countries Ex‐Im Bank is the official Export Credit Agency of the United States of America
ldquoexportable goods screenrdquo is a screen or filter adopted by Ex‐Im Bank in its 2001 Economic Impact Procedures The exportable goods screen is utilized along with other screens to balance the Bankrsquos obligation to consider the adverse
27
economic effects of its transactions on US industries and US jobs with the Bankrsquos mandate to support US export transactions in a timely manner so as to fully support the exporterrsquos business opportunity The exportable goods screen filtered out transactions that supported exports which could only be used by a foreign buyer to provide services rather than produce goods
ldquoExport‐Import Bank of the is an independent agency of the Federal Government of the United United Statesrdquo States of America Also known as ldquoEx‐Im Bankrdquo Ex‐Im Bankrsquos mission
is to support US jobs by supporting US exports See 12 USC 635 et seq
ldquoExposure Feerdquo is the risk premium charged by Ex‐Im Bank in exchange for its guarantee in certain transactions The exposure fee must be at least equal to the minimum risk premium required by the terms of the Arrangement and the Aircraft Sector Understanding
ldquoForeign Sales Corporationrdquo is a company created under the terms of a former provision of the US Internal Revenue Code Foreign Sales Corporations received significant tax benefits
ldquoFSCrdquo see Foreign Sales Corporation ldquoInvestment Tax Creditrdquo is a credit permitted under the US Internal Revenue Code for the
purchase of certain types of equipment in certain circumstances See also Leveraged Leases
ldquoKFWrdquo the development bank for the Federal Republic of Germany KFW is an Export Credit Agency but it also operates through a ldquomarket windowrdquo which is not subject to the Home Market Rule Thus KFW provides support to Airbus for its sales of aircraft to US airlines The United States does not have an equivalent institution and Ex‐Im Bank does not have a ldquomarket windowrdquo
ldquoLarge Aircraft Sector also known as LASU was the predecessor to the Aircraft Sector Understandingrdquo Understanding The LASU governed the same general issues as are set
forth in the Aircraft Sector Understanding except that the minimum risk premium was lower than that required in the 2007 ASU and 2011 ASU When the 2007 ASU was enacted grandfathering provisions allowed ECA‐supported financing for a limited number of aircraft to be governed by LASU
ldquoLASUrdquo see Large Aircraft Sector Understanding ldquoLeveraged Leaserdquo is a lease of equipment and is designed to allow the lessor to take
advantage of certain tax code provisions such as the depreciation deduction and the investment tax credit while allowing the lessee to obtain the equipment involved at a significantly lower cost Leveraged Leases were a very popular means for US airlines to acquire aircraft throughout the 1980s and 1990s The value of the tax deductions to the lessor were significant so that the implicit interest rate in the lease payments by the US airline were extremely low Usually the US airline did not have sufficient profit to take advantage of the favorable tax code provisions By using a leveraged lease another company that could shelter income by using the tax code provisions would buy the equipment and lease the equipment to the US airline Usually at the end of the lease term the US airline would purchase the aircraft
28
ldquoLIBORrdquo is the London Inter‐bank Offering Rate It is commonly used as a reference rate in loan transactions that have floating or adjustable interest rates LIBOR reflects the rate at which banks will lend money to each other LIBOR is set for various loan terms (eg 3 months 6 months etc) and is widely published making it a convenient rate to use as a reference rate
ldquoNet pricerdquo is the price paid after all discounts have been deducted The net price is the actual price paid for a piece of equipment In aircraft transactions pursuant to the ASU Ex‐Im Bank will only support up to 85 of the net price of an aircraft EETC transactions on the other hand often support the nominal purchase price of an aircraft and thus result in a significantly higher amount financed
ldquoOECDrdquo see the Organization for Economic Cooperation and Development Open Skies Agreement Is a type of bilateral agreement between countries that govern the
rights of airlines from the two countries to fly into the other country Open Skies Agreements generally allow free access to fly as many routes to a country as an airline may choose but then usually restrict the ability to fly within the other country Generally it is a ldquofly in and outrdquo rule although there are exceptions
ldquoOrganization for Economic Cooperation and Developmentrdquo
also known as the OECD is an organization comprised of 34 member countries that work together to promote development The United States is a member With regard to Ex‐Im Bank the OECD is the organization through which the US Government negotiates an agreement among Export Credit Agencies known as the Arrangement and the ASU (and its predecessor the LASU)
ldquoPass Through Certificaterdquo also known as a PTC is a group of Equipment Trust Certificates pooled together to form the basis for a bond issuance
ldquoPTCrdquo See Pass Through Certificate ldquoRyanairrdquo is a low‐cost Irish airline that began business after European
deregulation of airlines in 1997 Ryanair rapidly expanded during the first decade of the 2000s creating significant competition for other airlines
ldquoScreensrdquo are a type of filter used by Ex‐Im Bank in its Economic Impact Procedures Screens are designed to identify those transactions which are not likely to cause an adverse economic impact to US industries or US jobs so that such transactions can be processed more quickly and efficiently as required by the Bank Act
ldquoSubstantial Injuryrdquo is a term defined in Ex‐Im Bankrsquos Charter to be applied in connection with the Bankrsquos economic impact procedures 12 USC sect635(e)(4) The Charter states ldquohellipthe extension of any credit or guarantee by the Bank will cause substantial injury if the amount of the capacity for production established or the amount of the increase in such capacity expanded by such credit or guarantee equals or exceeds 1 percent of United States productionrdquo
ldquoTPCCrdquo see Trade Promotion Coordinating Committee ldquoTrade Promotion Coordinating Committeerdquo
also known as the TPCC is an interagency committee of the US Government chaired by the Secretary of Commerce It was established under the Export Enhancement Act of 1992 to provide a
29
unifying framework to coordinate the export promotion and export financing activities of the US government and to develop a government‐wide strategic plan for carrying out such programs
ldquoTrade Sanctionsrdquo refers to any of a number of sanctions imposed by the US Government against companies countries industries or products usually as a result of an accusation of adjudication of a violation of an international trade agreement The Bank Act requires Ex‐Im Bank to take certain trade sanctions into account in its economic impact procedures
30
Table A ndash Congressional Actions and Ex-Im Bank Responses
Year Congressional Action Ex‐Im Bank Response
1968 Bank directed to take into account the possible adverse effect [of its loans and guarantees] upon the United States economy
Bank adds this transactions
factor to analysis of
1975 1 Standard refined to take into account any serious adverse effect of loans and guarantees on competitive position of US industry availability of scarce materials in US and employment in US
2 Bank directed to be competitive with rates terms and conditions offered by principal countries whose exporters compete with US exporters
3 Bank directed to submit semi‐annual report on competitiveness and conduct survey of US exporters and lenders to determine experience in meeting financing competition
Bank adds these of transactions
considerations to analysis
Year Congressional Action Ex‐Im Bank Response
1978 ‐ 1979
1 Bank directed to take into account any serious adverse effect of loans on competitive position of US industry and scarce materials Bank directed to emphasize strengthening competitive position of US exporters and expanding total US exports
2 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [From Appropriations Act Restated in Bank Charter in 1986]
3 Bank directed to implement regulations and procedures to insure full consideration of extent to which loan or guarantee is likely to have adverse effect on industries and employment in US either by reducing demand for US produced goods or increasing imports to the US
Bank develops framework and set of written economic impact procedures
1 Exclude exports the use of which remained localized in foreign country This
is first ldquoforeign localized goods and services screenrdquo
2 ldquoIntent and stimulus for projectrdquo examined to determine likelihood of substantial adverse economic impact Does transaction involve ldquorunaway industryrdquo
(leaving US for cheaper foreign labor)
3 Does export of capital equipment result in ldquobuy backrdquo of product being imported into the US
4 Is net impact on US economy and jobs positive or negative and to what degree
32
Year Congressional Action Ex‐Im Bank Response
1986 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [Originally from 1978 Appropriations incorporated into Bank Charter in 1986]
Senate Report recognizes knowledge and experience of Bank and need to respond to exportersrsquo requests for support in a timely and confidential fashion Economic impact procedures are to be practical and workable and not reduce Bankrsquos competitiveness and flexibility nor ignore positive aspects of export sale
Bank develops ldquoSummary of Adverse Economic Guidelinesrdquo to be applied to both
goods and services (a) is commodity to be produced surplus or likely to compete with US‐produced surplus (b) will Bankrsquos
assistance cause substantial injury to US producers of competing commodity (c)
will injury to US producers of competing commodity outweigh the short‐ and long‐
term benefits to US industry and employment If answer is no then no
further economic impact analysis
1988 Congress establishes test for ldquosubstantial injuryrdquo if the amount of capacity for production established or amount of increase in such capacity expanded by Bankrsquos credit or guarantee exceeds 1 of US production
Bankrsquos Board recognizes requirement to balance (a) possibility of substantial harm
to US production and employment with (b) being responsive competitive and efficient New economic impact procedures ask (a) will the project be in direct competition with US production (b) is the Bankrsquos support significantly associated with the project (c) will the output of the project
cause substantial injury to US producers of the same similar or competing
commodity If answer is no then no further economic impact analysis is required
33
Year Congressional Action Ex‐Im Bank Response
1998 Bank revised procedures involving countries against which trade sanctions were pending or imposed
2001
2006 ‐2007
1 Bank required to determine whether extension of credit or guarantee is likely to produce same or other commodities and whether the production may cause substantial injury to US producers
2 Bank prohibited from providing a loan or guarantee that will facilitate circumvention of trade law order or determination
3 Bank required to designate sensitive commercial sectors and products for which Bank financing deemed unlikely due to potential for adverse economic impact on US
4 Bank required to aggregate financial thresholds on rolling 24‐month basis
Bank develops ldquoexportable goods screenrdquo Does Ex‐Im Bank support result in production of exportable good from the foreign buyerrsquos country If not no further economic impact analysis is required Notice and request for comments were published in the Federal Register US airline industry did not respond
Bank issues 2007 Economic Impact Procedures ldquoExportable goods screenrdquo is modified Will the transaction (capital goods and services) result in either new or additional production capacity of an exportable good
34
Appendix A
Excerpt from Staff Memorandum to Ex‐Im Bank Board of Directors Accompanying 1979
Economic Impact Procedures30
Thus Section 2(b)(1)(B) of the Act requires the Board of Directors to take into account ldquoany
serious adverse effectrdquo which loans or guarantees may have on US industry materials in short
supply and employment Section 1911 of the 1978 Amendments requires consideration by the
Bank of the extent to which a loan or financial guarantee ldquois likely to have an adverse
effecthellipeither by reducing demand for goods produced in the United States or by increasing
imports to the United Statesrdquo and Section 608 of the Appropriations Act requires a finding that
the commodity ultimately produced as a result of [Bank] financing will be in surplus when the
production comes on‐stream and that US producers of the same similar or competing
commodity will be substantially injured It is apparent that the latter two statutory provisions
are explications of the basic mandate of the Act and do not expand the Bankrsquos mandate to
examine domestic impact but rather suggest factors to be considered in that examination To
a great extent the 1978 Amendments language and the Appropriations Act provisions set forth
the same concept in different ways Thus the reference in Section 1911 of the 1978
Amendments to ldquoreducing demand for goods in the United Statesrdquo and ldquoincreasing imports to
the United Statesrdquo is no more than the inevitable consequence of a commodity being ldquoin
surplusrdquo as stated in Section 608 of the Appropriations Act
Section 2(b)(1)(B) is the broadest formulation of the basic concept since it contains the most
general language ie ldquoany serious impactrdquo and encompasses all types of exports Section
1911 is primarily procedural in nature directing the Bank not only to implement appropriate
regulations and procedures to ensure full consideration of adverse impact but also to request a
report from the International Trade Commission Section 1911 includes a more detailed
description of events which would constitute adverse impactmdashie a reduction in demand for
US produced goods or an increase in imports to the US Finally this section contains an
explicit reference to agriculture which was only implicitly covered by Section 2(b)(1)(B) It
should be noted that this is one of several references to agriculture which were added to the
Act by the 1978 Amendments
The Appropriations Act provision explicitly refers to a balancing by the Board of Directors of the
benefits of the [Bank]‐supported export against the injury to US [producers] of the commodity
in question At the same time the Act has always necessitated such a balancing by requiring
the Bank to take into account ldquoserious adverse effects upon the US economyrdquo at the same
time it carries out the Bankrsquos basic mandate to ldquofacilitate exportsrdquo and to ldquofoster expansion of
exportsrdquo Under either provision therefore the Board of Directors will be taking into
30 Memorandum ldquoProcedures Regarding Adverse Domestic Impact of Eximbank Financingrdquo Pp 7‐12 Jan 5 1979 17
consideration the results of the balancing as one of the many factors involved in making a
decision to provide financing It should be noted that Section 1911 of the 1978 Amendments is
consistent with both of these provisions since it only seeks to ensure that ldquofull considerationrdquo is
given to adverse effects upon the US economy
Section 2(b)(1)(B) of the Act refers to ldquoserious adverse effectrdquo upon the US economy as a
whole whereas Section 608 of the Appropriations Act imposes a more stringent test by
focusing on a single industry ndash the domestic producers of the commodity to be produced by the
project supported by [the Bank] ndash and requiring a determination of substantial injury for that
industry alone However a reading of the entire Section shows that such a determination
would have to be made only if the net effect upon the US economy of the project for which
support was requested from [the Bank] is negative and if the commodity is likely to be in
surplus on world markets at the time the project becomes operative In any event under
Section 2(b)(1)(B) the Board would have to take into account any serious adverse effects of the
transaction upon the US economy Only if the Board decides to proceed with the transaction
regardless of such effects would it be necessary to determine if there will be substantial injury
to US producers of the commodity and thus trigger the prohibition contained in Section 608
It should also be noted that Section 1911 of the 1978 Amendments speaks in terms only of ldquoany
adverse effectrdquo However the language of that provision clearly shows that it was not intended
to set up a substantive test but rather as was mentioned above to insure that formal
procedures to take into account impacts upon the US economy are established by [Ex‐Im
Bank] as well as to enable the Bank to obtain a report from the International Trade
Commissionrdquo PL 95‐630 92 Stat 3641 (1978)
18
Appendix B
Financial Tools Available to US Airlines
Generally over the past several decades US airlines have had access to a broad range of
aircraft financing options
Accordingly at different times during the past several decades US airlines took advantage of
whichever financing option provided the most attractive overall financing terms from such
airlinesrsquo perspective For instance a US airline would be able to maximize the amount of the
financing thereby minimizing the amount of its own money it had to invest in the aircraft (ie
the ldquodown paymentrdquo) It might also maximize the amount of money in excess of the actual cost
of the aircraft it could raise against the aircraft obtain the longest possible repayment term and
the slowest possible amortization schedule (ie the longest ldquoweighted average liferdquo) obtain
the lowest interest rate and risk premium obtain the least restrictive operational and financial
covenants provide the least amount of collateral or other security or obtain other benefits
Due to the fact that the United States is seen as not presenting any ldquocountry riskrdquo and has well‐
developed and well‐regarded legal and judicial systems that are seen as being protective of
creditorsrsquo rights US airlines have usually had access to secured aircraft financings from
commercial banks from around the world During the past several decades commercial banks
from different regions have been at the forefront of the aircraft finance industry and have
provided financing to US airlines on attractive financing terms Initially US‐based banks
provided most of the aircraft financing to US airlines but during the 1980s Japanese banks
became very significant lenders to the US airlines During the 1990s and 2000s the European
banks (German French British and Swiss banks) were the most significant source of
commercial bank funding for US airlines
In addition to commercial bank financing during the 1970s and 1980s US airlines obtained
long‐term financing from US‐based institutional investors (eg insurance companies and
pension funds) through the use of the Equipment Trust Certificate (ldquoETCrdquo) financing structure or
the Pass Through Certificate (ldquoPTCrdquo) financing structure The ETC is a financing provided by
institutional investors that is secured by one or more items of equipment (eg aircraft) The
PTC is a group of ETCs combined into a public debt security that is sold into the capital markets
to institutional investors
However during the 1980s the simplest and most prevalent form of aircraft financing for US
airlines was the US leveraged lease
The US leveraged lease allowed US airlines to take advantage of the US tax code which
generally provides for all types of capital assets to be depreciated and thereby reduces or
defers taxes due to the deductibility of tax depreciation Because US airlines generally did not 19
have sufficient income to fully take advantage of the benefit of the tax depreciation deductions
associated with acquiring aircraft the US airlines entered into US leveraged leases Under a
leveraged lease the benefits of the tax depreciation deductions related to the aircraft were
transferred to profitable companies that had income they wanted to shelter from tax In
return the company was willing to provide the equity in a US leverage lease (approximately
20 of the appraised value of the aircraft) and to ldquoleaserdquo the aircraft back to the airline for the
airlinersquos use A number of different entities entered into such leases including banks insurance
companies and other financial institutions such as Ford Motor Credit as well as finance
subsidiaries of other corporate entities including consumer product companies such as Phillip
Morris or entertainment companies such as Disney The fact that these were ldquoleveragedrdquo
leases (as opposed to ldquosingle investor leasesrdquo) also enabled the equity providers to deduct the
interest expense associated with the US leveraged lease
Through the use of a combination of lease equity and debt a US leveraged lease allowed US
airlines to arrange financing for up to 100 of the appraised value of an aircraft This was
particularly attractive to major US airlines because due to their size and relative importance
to the aircraft manufacturers every major US airline generally was able to negotiate aircraft
purchases with the aircraft manufacturers that enabled the airline to buy the aircraft for
amounts significantly less than the appraised value The result was that by using a US
leveraged lease to finance its aircraft a US airline was able to ldquoover‐financerdquo the aircraft (ie
finance the aircraft for more than the airline was paying for the aircraft) resulting in the airline
effectively having the ability each time the airline financed an aircraft to arrange 100
financing for its aircraft and at the same time arrange a long‐term working capital loan This is
the equivalent of a home buyer being able to buy a house with no money down (no down
payment) and also receiving a long‐term loan for non‐home expenses
In contrast Ex‐Im Bank‐supported aircraft financing is for only 85 (and sometimes less) of the
actual ldquonet pricerdquo that the airline is paying the US aircraft manufacturer (after deducting all
discounts and other concessions the airline has negotiated with the US aircraft manufacturer
which results in a net price that is almost always less than the appraised value) This requires
the foreign airline that is using Ex‐Im Bank support to come up with a down payment of at least
15 of the net price of the aircraft As a result US airlines were able to obtain more financing
under a US leveraged lease (without putting any money down) than foreign airlines could
under an Ex‐Im Bank supported aircraft financing (which required a down payment)
In addition US leveraged leases used by US airlines always had very long repayment terms
Generally speaking the longer the repayment the longer the tax deferral and the more
advantageous the terms of the US leveraged lease As a result it was not unusual for the US
leveraged leases used by US airlines to have a repayment term of between 18 and 22 years
and sometimes as long as 25 years The only constraint was that the lease term of the
20
leveraged lease should not exceed 80 of the economic useful life of the aircraft which in
some instances was more than 30 years
In contrast the repayment term in an Ex‐Im Bank‐supported aircraft financing is never longer
than 12 years which is the maximum repayment term Ex‐Im Bank is permitted to offer for an
aircraft financing under the guidelines for export credits promulgated by the Organization for
Economic Cooperation and Development (the ldquoOECDrdquo) with which guidelines the US
Government (including Ex‐Im Bank) has agreed to abide This difference in repayment terms is
significant it is similar to the difference in monthly payments under a 15 year home mortgage
versus a 30 year home mortgage As a result US airlines were able to obtain significantly
longer financing under a US leveraged lease (which generally resulted in a smaller periodic
principal repayment burden due to the longer repayment term) than foreign airlines could
under an Ex‐Im Bank‐supported financing
US leveraged leases used by US airlines also had a slower amortization profile with a very
long weighted average life (ie small amounts of debt amortization in the early years of the
financing) of at least 10 years In the same manner that a longer repayment term increased the
tax deferral a longer weighted average life also increased the tax deferral
In contrast the amortization profile in an Ex‐Im Bank supported aircraft financing for a foreign
airline is usually between 6 years and 65 years (at least 4 years shorter than the weighted
average life of the US leveraged leases historically used by US airlines) which imposes a
much greater cash flow burden on the foreign airline in comparison with the cash flows
required of a US airline under a US leveraged lease
Although the absolute interest rate on the debt in a US leveraged lease fluctuated over time
with the overall level of interest rates the providers of the debt into these US leveraged leases
(primarily insurance companies and other institutional investors) were generally willing to
accept an interest rate margin of less than 100 basis points31 over LIBOR32 on a fixed rate
equivalent basis (and sometimes significantly less than 100 basis points)
In contrast the interest rate margin on the debt on an Ex‐Im Bank‐supported aircraft financing
was generally between a few basis points over LIBOR to 50 basis points over LIBOR because the
interest on the Ex‐Im Bank‐guaranteed aircraft financing is guaranteed by Ex‐Im Bank and
reflects the low risk associated with a US Government guaranteed loan However the interest
rate margin on an Ex‐Im Bank‐guaranteed aircraft financing does not reflect the Ex‐Im Bank
exposure fee (or risk premium) that is paid to Ex‐Im Bank in view of the underlying risk of the
foreign airline The minimum exposure fee charged by Ex‐Im Bank was 2 during the 1980s
31 100 basis points equals 1 percent 32 LIBOR is the London Inter‐Bank Offering Rate and is a common reference rate such as ldquoPrimerdquo or ldquoTreasury Raterdquo used in adjustable interest rate transactions
21
and early 1990s and 3 until 2007 when the OECD promulgated a new set of guidelines for
export credits for aircraft (known as the ldquo2007 Aircraft Sector Understandingrdquo or the ldquo2007
ASUrdquo) This exposure fee was required to be paid ldquoup frontrdquo ndash ie at the inception of the loan
On a per annum basis this equates to between 30 basis points and 50 basis points which
should be added to the interest rate margin received by the guaranteed lender to obtain the
equivalent interest rate paid by a foreign airline under Ex‐Im Bank‐supported financing (for
purposes of comparing the overall financing cost to those incurred by US airlines) The Ex‐Im
Bank exposure fee is similar to a homeowner having to pay ldquopointsrdquo up front at the time he
obtains his mortgage The effect of paying points up front and paying an Ex‐Im Bank exposure
fee effectively increases the cost of the financing In comparing the overall cost of financing
through ECA support including the exposure fee to the overall cost of a leveraged lease for
borrowers with comparable credit profiles the overall cost of the US leveraged lease was
considerably more favorable than what could be achieved through an Ex‐Im Bank‐supported
aircraft financing
Although the US leveraged lease was itself a very attractive financing structure for US
airlines at different times the basic US leveraged lease was made even more attractive due to
other provisions of the US and foreign tax codes
For instance from the 1960s (during the Kennedy Administration) until its repeal under the Tax
Reform Act of 1986 the US tax code provided for an investment tax credit which was intended
to encourage investment in capital goods and therefore allowed airlines or the equity investor
in a US leveraged lease to get a credit against the taxes it would otherwise be required to pay
This credit was a permanent reduction in taxes paid as opposed to only the deferral of taxes
(postponement of when taxes had to be paid) that could be achieved through the use of the
US leveraged lease
Similarly from the 1980s to the mid‐1990s it was common for a US airline to combine a US
leveraged lease with a lease into a foreign jurisdiction that had a ldquoform over substancerdquo
approach to its tax code (as opposed to the United States which has a ldquosubstance over formrdquo
approach to its tax code) Taking advantage of the disparity a US airline could ldquosellrdquo the
aircraft to both (i) an equity investor in the United States and (ii) an equity investor in a foreign
country such as Japan Germany or Hong Kong and each equity investor could depreciate the
same aircraft and therefore shelter its respective income Over time due to changes in the
respective tax codes these more aggressive tax advantaged cross‐border leasing structures
(ldquoDouble Dipsrdquo and even on occasion ldquoTriple Dipsrdquo) were disallowed but not before US airlines
financed billions of dollars of aircraft using such tax advantaged leasing structures
During the 1990s the basic US leveraged lease was made even more attractive by taking
advantage of another provision of the US tax code that allowed additional US taxes to be
22
deferred if the equity investor in the transaction used an offshore subsidiary that qualified as a
Foreign Sales Corporation (ldquoFSCrdquo) under the US tax code and structured the deal as a
Commission FSC
In addition during the 1980s and 1990s US airlines had access to other sources of financing
with overall financing terms that were much more attractive than what was available to foreign
airlines via Ex‐Im Bank‐supported export credits For example during the late 1980s and 1990s
Airbus made its first significant sales to US airlines In order to do so Airbus arranged and
provided very attractive and flexible financing terms to US airlines to encourage them to
purchase European‐manufactured Airbus aircraft instead of US‐manufactured Boeing or
McDonnell Douglas aircraft The US airlines were more than willing to accept these incentives
During this period some US airlines entered into ldquowalk awayrdquo leases of Airbus aircraft
pursuant to which Airbus North America (backed by the joint and several guarantees of each of
the four countries that are members of Airbus SAS) entered into a US leveraged lease of the
Airbus aircraft and then subleased the aircraft to a US airline on terms that (i) passed along
most of the tax benefits to the US airline through lower lease rentals and (ii) permitted the
US airline to terminate the sublease and simply ldquowalk awayrdquo from the lease upon a relatively
short notice period
Under the ldquoHome Market Rulerdquo the European export credit agencies (including those of
France Germany and the United Kingdom) that usually support the financing of Airbus aircraft
could not provide such support to US airlines Therefore Airbus arranged for Kreditanstalt fur
Wiederaufbau the development bank of Germany to provide very attractive financing for the
Airbus aircraft being acquired by US airlines These financings occurred on terms much more
favorable (with 18‐ to 22‐year repayment terms) than what export credit agencies could
provide (with a maximum repayment term of 12‐years)
Similarly during the 1990s US airlines began to acquire a large number of 35 to 50 seat
regional jet aircraft manufactured by Bombardier of Canada and Embraer of Brazil Many of
these aircraft were acquired by the US airlines by using export credit support from Canada and
Brazil Some of the financing terms (ie the repayment terms) of these Brazilian and Canadian
government‐supported export credit financings were even more attractive (15‐ to 18‐year
repayment terms) than what was available from the export credit agencies of France Germany
and the United Kingdom with respect to Airbus aircraft or from Ex‐Im Bank with respect to
Boeing aircraft (10‐ to 12‐year repayment terms)
To make the financing of Canadian‐manufactured Bombardier regional jets even more
attractive to US airlines the province of Quebec (where Bombardier has its headquarters)
through Investment Quebec provided additional aircraft financing support to the US airlines
23
Finally to the extent even more attractive financing was needed to convince US airlines to
purchase Canadian or Brazilian‐manufactured regional aircraft the manufacturers themselves
provided residual value guarantees with respect to such aircraft to the airline or to the
financiers (ie to the equity investor in a US leveraged lease or the creditors financing the
aircraft)
The next major development in aircraft financing used by US airlines was the development in
the 1990s of the Enhanced Equipment Trust Certificate (ldquoEETCrdquo) which was an ETC with certain
structural enhancements The most important of these enhancements is a liquidity facility to
ensure that if there is a default the financiers would continue to receive current interest
during the period of time while the aircraft is being repossessed and remarketed A key
element in the development of the EETC was the existence of Section 1110 of the US
Bankruptcy Code which gives a type of ldquopreferred creditorrdquo status to financiers of aircraft for
US airlines This ldquopreferred creditorrdquo status exempts aircraft financiers of US airlines from
the automatic stay generally imposed following a bankruptcy filing by a borrower subject to the
protections of the US Bankruptcy Code Section 1110 of the US Bankruptcy Code
accomplishes this by requiring the airline within 60 days of such bankruptcy filing to either (i)
resume payments under the originally agreed aircraft financing or (ii) return the aircraft to the
financier
The first EETC was done in 1994 and the practice has now been successfully used by almost
every major US airline including Alaska Airlines America West Airlines American Airlines
Continental Airlines Delta Airlines Hawaiian Airlines Jet Blue Airlines Northwest Airlines
Southwest Airlines United Airlines and US Airways The overall financing cost of a US airline
acquiring an aircraft through the use of the EETC ndash which includes the amount of financing
repayment term amortization profile effective cost of the financing etc ndash has generally been
significantly more attractive than (i) what such US airline could have achieved under an export
credit‐supported aircraft financing for such airline and (ii) what a similarly rated foreign airline
could have achieved under an export credit‐supported aircraft financing
This is particularly true for the financing of new aircraft The development of the EETC market
provided enormous financing flexibility to US airlines for the financing of new aircraft the
EETC provided the airline with the option to finance on a simple secured mortgage basis or the
US airline could opt for a leveraged lease with all of the benefits associated with a leveraged
lease described above
Beginning in 1997 US airlines had the ability to raise money in the capital markets when the
overall financing terms were most attractive They were able to ldquolock‐inrdquo such favorable
financing terms to fund new aircraft that were scheduled to be delivered in the future by
issuing a ldquopre‐fundedrdquo EETC These pre‐funded EETCs were used to great success by US
24
airlines in the late 1990s through 2001 a period in which the US airlines were taking delivery
of a significant number of aircraft
As a result of the downturn in the US airline industry following the September 11 2001
terrorist attacks many US airlines deferred or cancelled their orders for new aircraft This
reduced the need for US airlines to finance new aircraft when the financing terms available to
such US airlines via the EETC were not as favorable due to (i) the perceived increased credit
risks of the US airline industry following the September 11 terrorist attacks and (ii) the
temporary disequilibrium in the credit markets following the 200820092010 credit crisis
Now that the US airlines have once again begun to take delivery of a significant number of
new aircraft the pre‐funded EETC continues to be the preferred source of financing for US
airlines as evidenced by the number and amount of EETC issuances during 2012 and 2013
Based on an analysis of the EETC transactions occurring during 2012 and 2013 EETCs are once
again generally considered to provide more attractive overall financing terms than what could
be achieved by an airline under an export credit‐supported financing done under the terms of
the 2011 Aircraft Sector Understanding
25
GLOSSARY
ldquoAdverse Economic Impactrdquo is the short‐hand term used to refer to any serious negative effects on US industries or US jobs as set forth in the Bankrsquos Charter that result from Ex‐Im Bank loans guarantees or insurance The Bankrsquos Charter contains three provisions that address adverse economic impact found at 12 USC sectsect 635(b)(1) 635a‐2 635(e)
ldquoAir Indiardquo is an airline owned by the Government of the Republic of India ldquoAir India Transactionsrdquo are the two final commitments approved by Ex‐Im Bank on September
30 2011 for loan guarantees for the purchase of a number of 787 ldquoDreamlinerrdquo aircraft from Boeing and to be financed by a commercial lender not identified at the time As of the date of this paper Ex‐Im Bank has not issued any of its loan guarantees but is expected to do so in the coming months Ten of the aircraft involved in these two final commitments have been delivered to Air India and are in use by Air India on routes outside the United States The deliveries of the ten aircraft were made using private short‐term financing as to which Ex‐Im Bank had no involvement
ldquoAirbusrdquo Airbus SAS is a Europe‐based manufacturer of large commercial aircraft Airbus is the only competitor to Boeing the US manufacturer Airbus sales are supported by the ECAs of Germany France and the UK
ldquoAircraft Sector also known as the ASU is an agreement among members of the OECD Understandingrdquo that manufacture aircraft and Brazil The ASU requires that Export
Credit Agencies that support the export of aircraft follow certain rules and restrictions that set forth the most favorable terms that can be provided These rules and restrictions include the Export Credit Agency must charge a minimum risk premium which is determined by the ASU the term of any loan made by or supported by the Export Credit Agency for the purchase of aircraft cannot exceed 12 years the Export Credit Agency today can lend or guarantee only up to 85 of the actual purchase price of the aircraft being exported and the use of risk mitigants The ASU was preceded by the Large Aircraft Sector Understanding which governed these issues until the enactment of the 2007 ASU The ASU was again updated and revised in 2011 (See also the Large Aircraft Sector Understanding)
ldquoArrangementrdquo is the agreement among Export Credit Agencies governing the terms by which they will provide loans guarantees or insurance in support of exports from their respective countries Among other things the Arrangement requires Export Credit Agencies to charge a minimum risk premium which is governed by the Arrangement See also Organization for Economic Cooperation and Development
ldquoASUrdquo see Aircraft Sector Understanding ldquoAverage Weighted Liferdquo for purposes of this paper refers to the average number of years that
each dollar of unpaid principal on a loan remains outstanding For example a loan with equal principal payments throughout the loan term will have an average weighted life close to the middle of the whole loan term
26
ldquoBank Actrdquo is the Export‐Import Bank Act of 1945 12 USC sect635 as amended ldquoBank Advisory Committeerdquo is the official Advisory Committee of the Bank appointed in accordance
with the Bank Act and the Advisory Committee Act The Bank Advisory Committee is comprised of representatives of various industry and market sectors as well as representatives of labor and international trade experts
ldquoBasis pointsrdquo are a numerical measure applied to interest rates One basis point equals 1100th of one percent or 100 basis points equals one percent
ldquoCapital Equipmentrdquo is equipment used to manufacture a product provide a service or sell store or deliver merchandise A wide‐body aircraft is a piece of capital equipment
ldquoCharterrdquo is the Bank Act as well the provisions of the Export Import Bank Reauthorization Act of 2012 (Public Law 112‐122) that are not codified in the Bank Act
ldquoDreamlinerrdquo is the name given to a Boeing 787 wide‐body commercial aircraft ldquoECArdquo see Export Credit Agencies ldquoEconomic Impact Proceduresrdquo
are procedures adopted by Ex‐Im Bank to assess whether transactions supported by the Bank cause a serious adverse economic impact to US industries and US jobs See also Adverse Economic Impact
ldquoEETCrdquo see Enhanced Equipment Trust Certificate ldquoEnhanced Equipment Trust Certificaterdquo
also known as an EETC is a type of secured bond issued by a borrower in the capital markets The EETC is secured by the equipment being purchased with the proceeds of the bond issuance EETCs are used primarily for aircraft and since the late 1990s has been the dominant financing tool used by US airlines to purchase aircraft Section 1110 of the US Bankruptcy Codemdashwhich allows creditors of aircraft borrowers to obtain their collateral within 60 days if the payments on their debt is not current ndash has provided creditors of US airlines a level of comfort not available to creditors of foreign airlines until recently This generally provided US airlines with a significant financial advantage vis a vis their foreign competitors Recently the adoption of the Cape Town Convention and the related Aircraft Equipment Protocol has provided creditors of foreign airlines with protections similar to the protections provided by section 1110 of the US Bankruptcy Code Recently this has led to the beginnings of an international EETC market
ldquoEquipment Trust Certificaterdquo
also known as an ETC was the predecessor to the Enhanced Equipment Trust Certificate
ldquoETCrdquo see Equipment Trust Certificate ldquoEx‐Im Bankrdquo or ldquoBankrdquo See The Export‐Import Bank of the United States ldquoExport Credit Agenciesrdquo are agencies or ministries of government that have the official role of
providing loans guarantees or insurance in support of exports from their respective countries or in support of exports by sales of companies from their respective countries Ex‐Im Bank is the official Export Credit Agency of the United States of America
ldquoexportable goods screenrdquo is a screen or filter adopted by Ex‐Im Bank in its 2001 Economic Impact Procedures The exportable goods screen is utilized along with other screens to balance the Bankrsquos obligation to consider the adverse
27
economic effects of its transactions on US industries and US jobs with the Bankrsquos mandate to support US export transactions in a timely manner so as to fully support the exporterrsquos business opportunity The exportable goods screen filtered out transactions that supported exports which could only be used by a foreign buyer to provide services rather than produce goods
ldquoExport‐Import Bank of the is an independent agency of the Federal Government of the United United Statesrdquo States of America Also known as ldquoEx‐Im Bankrdquo Ex‐Im Bankrsquos mission
is to support US jobs by supporting US exports See 12 USC 635 et seq
ldquoExposure Feerdquo is the risk premium charged by Ex‐Im Bank in exchange for its guarantee in certain transactions The exposure fee must be at least equal to the minimum risk premium required by the terms of the Arrangement and the Aircraft Sector Understanding
ldquoForeign Sales Corporationrdquo is a company created under the terms of a former provision of the US Internal Revenue Code Foreign Sales Corporations received significant tax benefits
ldquoFSCrdquo see Foreign Sales Corporation ldquoInvestment Tax Creditrdquo is a credit permitted under the US Internal Revenue Code for the
purchase of certain types of equipment in certain circumstances See also Leveraged Leases
ldquoKFWrdquo the development bank for the Federal Republic of Germany KFW is an Export Credit Agency but it also operates through a ldquomarket windowrdquo which is not subject to the Home Market Rule Thus KFW provides support to Airbus for its sales of aircraft to US airlines The United States does not have an equivalent institution and Ex‐Im Bank does not have a ldquomarket windowrdquo
ldquoLarge Aircraft Sector also known as LASU was the predecessor to the Aircraft Sector Understandingrdquo Understanding The LASU governed the same general issues as are set
forth in the Aircraft Sector Understanding except that the minimum risk premium was lower than that required in the 2007 ASU and 2011 ASU When the 2007 ASU was enacted grandfathering provisions allowed ECA‐supported financing for a limited number of aircraft to be governed by LASU
ldquoLASUrdquo see Large Aircraft Sector Understanding ldquoLeveraged Leaserdquo is a lease of equipment and is designed to allow the lessor to take
advantage of certain tax code provisions such as the depreciation deduction and the investment tax credit while allowing the lessee to obtain the equipment involved at a significantly lower cost Leveraged Leases were a very popular means for US airlines to acquire aircraft throughout the 1980s and 1990s The value of the tax deductions to the lessor were significant so that the implicit interest rate in the lease payments by the US airline were extremely low Usually the US airline did not have sufficient profit to take advantage of the favorable tax code provisions By using a leveraged lease another company that could shelter income by using the tax code provisions would buy the equipment and lease the equipment to the US airline Usually at the end of the lease term the US airline would purchase the aircraft
28
ldquoLIBORrdquo is the London Inter‐bank Offering Rate It is commonly used as a reference rate in loan transactions that have floating or adjustable interest rates LIBOR reflects the rate at which banks will lend money to each other LIBOR is set for various loan terms (eg 3 months 6 months etc) and is widely published making it a convenient rate to use as a reference rate
ldquoNet pricerdquo is the price paid after all discounts have been deducted The net price is the actual price paid for a piece of equipment In aircraft transactions pursuant to the ASU Ex‐Im Bank will only support up to 85 of the net price of an aircraft EETC transactions on the other hand often support the nominal purchase price of an aircraft and thus result in a significantly higher amount financed
ldquoOECDrdquo see the Organization for Economic Cooperation and Development Open Skies Agreement Is a type of bilateral agreement between countries that govern the
rights of airlines from the two countries to fly into the other country Open Skies Agreements generally allow free access to fly as many routes to a country as an airline may choose but then usually restrict the ability to fly within the other country Generally it is a ldquofly in and outrdquo rule although there are exceptions
ldquoOrganization for Economic Cooperation and Developmentrdquo
also known as the OECD is an organization comprised of 34 member countries that work together to promote development The United States is a member With regard to Ex‐Im Bank the OECD is the organization through which the US Government negotiates an agreement among Export Credit Agencies known as the Arrangement and the ASU (and its predecessor the LASU)
ldquoPass Through Certificaterdquo also known as a PTC is a group of Equipment Trust Certificates pooled together to form the basis for a bond issuance
ldquoPTCrdquo See Pass Through Certificate ldquoRyanairrdquo is a low‐cost Irish airline that began business after European
deregulation of airlines in 1997 Ryanair rapidly expanded during the first decade of the 2000s creating significant competition for other airlines
ldquoScreensrdquo are a type of filter used by Ex‐Im Bank in its Economic Impact Procedures Screens are designed to identify those transactions which are not likely to cause an adverse economic impact to US industries or US jobs so that such transactions can be processed more quickly and efficiently as required by the Bank Act
ldquoSubstantial Injuryrdquo is a term defined in Ex‐Im Bankrsquos Charter to be applied in connection with the Bankrsquos economic impact procedures 12 USC sect635(e)(4) The Charter states ldquohellipthe extension of any credit or guarantee by the Bank will cause substantial injury if the amount of the capacity for production established or the amount of the increase in such capacity expanded by such credit or guarantee equals or exceeds 1 percent of United States productionrdquo
ldquoTPCCrdquo see Trade Promotion Coordinating Committee ldquoTrade Promotion Coordinating Committeerdquo
also known as the TPCC is an interagency committee of the US Government chaired by the Secretary of Commerce It was established under the Export Enhancement Act of 1992 to provide a
29
unifying framework to coordinate the export promotion and export financing activities of the US government and to develop a government‐wide strategic plan for carrying out such programs
ldquoTrade Sanctionsrdquo refers to any of a number of sanctions imposed by the US Government against companies countries industries or products usually as a result of an accusation of adjudication of a violation of an international trade agreement The Bank Act requires Ex‐Im Bank to take certain trade sanctions into account in its economic impact procedures
30
Table A ndash Congressional Actions and Ex-Im Bank Responses
Year Congressional Action Ex‐Im Bank Response
1968 Bank directed to take into account the possible adverse effect [of its loans and guarantees] upon the United States economy
Bank adds this transactions
factor to analysis of
1975 1 Standard refined to take into account any serious adverse effect of loans and guarantees on competitive position of US industry availability of scarce materials in US and employment in US
2 Bank directed to be competitive with rates terms and conditions offered by principal countries whose exporters compete with US exporters
3 Bank directed to submit semi‐annual report on competitiveness and conduct survey of US exporters and lenders to determine experience in meeting financing competition
Bank adds these of transactions
considerations to analysis
Year Congressional Action Ex‐Im Bank Response
1978 ‐ 1979
1 Bank directed to take into account any serious adverse effect of loans on competitive position of US industry and scarce materials Bank directed to emphasize strengthening competitive position of US exporters and expanding total US exports
2 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [From Appropriations Act Restated in Bank Charter in 1986]
3 Bank directed to implement regulations and procedures to insure full consideration of extent to which loan or guarantee is likely to have adverse effect on industries and employment in US either by reducing demand for US produced goods or increasing imports to the US
Bank develops framework and set of written economic impact procedures
1 Exclude exports the use of which remained localized in foreign country This
is first ldquoforeign localized goods and services screenrdquo
2 ldquoIntent and stimulus for projectrdquo examined to determine likelihood of substantial adverse economic impact Does transaction involve ldquorunaway industryrdquo
(leaving US for cheaper foreign labor)
3 Does export of capital equipment result in ldquobuy backrdquo of product being imported into the US
4 Is net impact on US economy and jobs positive or negative and to what degree
32
Year Congressional Action Ex‐Im Bank Response
1986 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [Originally from 1978 Appropriations incorporated into Bank Charter in 1986]
Senate Report recognizes knowledge and experience of Bank and need to respond to exportersrsquo requests for support in a timely and confidential fashion Economic impact procedures are to be practical and workable and not reduce Bankrsquos competitiveness and flexibility nor ignore positive aspects of export sale
Bank develops ldquoSummary of Adverse Economic Guidelinesrdquo to be applied to both
goods and services (a) is commodity to be produced surplus or likely to compete with US‐produced surplus (b) will Bankrsquos
assistance cause substantial injury to US producers of competing commodity (c)
will injury to US producers of competing commodity outweigh the short‐ and long‐
term benefits to US industry and employment If answer is no then no
further economic impact analysis
1988 Congress establishes test for ldquosubstantial injuryrdquo if the amount of capacity for production established or amount of increase in such capacity expanded by Bankrsquos credit or guarantee exceeds 1 of US production
Bankrsquos Board recognizes requirement to balance (a) possibility of substantial harm
to US production and employment with (b) being responsive competitive and efficient New economic impact procedures ask (a) will the project be in direct competition with US production (b) is the Bankrsquos support significantly associated with the project (c) will the output of the project
cause substantial injury to US producers of the same similar or competing
commodity If answer is no then no further economic impact analysis is required
33
Year Congressional Action Ex‐Im Bank Response
1998 Bank revised procedures involving countries against which trade sanctions were pending or imposed
2001
2006 ‐2007
1 Bank required to determine whether extension of credit or guarantee is likely to produce same or other commodities and whether the production may cause substantial injury to US producers
2 Bank prohibited from providing a loan or guarantee that will facilitate circumvention of trade law order or determination
3 Bank required to designate sensitive commercial sectors and products for which Bank financing deemed unlikely due to potential for adverse economic impact on US
4 Bank required to aggregate financial thresholds on rolling 24‐month basis
Bank develops ldquoexportable goods screenrdquo Does Ex‐Im Bank support result in production of exportable good from the foreign buyerrsquos country If not no further economic impact analysis is required Notice and request for comments were published in the Federal Register US airline industry did not respond
Bank issues 2007 Economic Impact Procedures ldquoExportable goods screenrdquo is modified Will the transaction (capital goods and services) result in either new or additional production capacity of an exportable good
34
consideration the results of the balancing as one of the many factors involved in making a
decision to provide financing It should be noted that Section 1911 of the 1978 Amendments is
consistent with both of these provisions since it only seeks to ensure that ldquofull considerationrdquo is
given to adverse effects upon the US economy
Section 2(b)(1)(B) of the Act refers to ldquoserious adverse effectrdquo upon the US economy as a
whole whereas Section 608 of the Appropriations Act imposes a more stringent test by
focusing on a single industry ndash the domestic producers of the commodity to be produced by the
project supported by [the Bank] ndash and requiring a determination of substantial injury for that
industry alone However a reading of the entire Section shows that such a determination
would have to be made only if the net effect upon the US economy of the project for which
support was requested from [the Bank] is negative and if the commodity is likely to be in
surplus on world markets at the time the project becomes operative In any event under
Section 2(b)(1)(B) the Board would have to take into account any serious adverse effects of the
transaction upon the US economy Only if the Board decides to proceed with the transaction
regardless of such effects would it be necessary to determine if there will be substantial injury
to US producers of the commodity and thus trigger the prohibition contained in Section 608
It should also be noted that Section 1911 of the 1978 Amendments speaks in terms only of ldquoany
adverse effectrdquo However the language of that provision clearly shows that it was not intended
to set up a substantive test but rather as was mentioned above to insure that formal
procedures to take into account impacts upon the US economy are established by [Ex‐Im
Bank] as well as to enable the Bank to obtain a report from the International Trade
Commissionrdquo PL 95‐630 92 Stat 3641 (1978)
18
Appendix B
Financial Tools Available to US Airlines
Generally over the past several decades US airlines have had access to a broad range of
aircraft financing options
Accordingly at different times during the past several decades US airlines took advantage of
whichever financing option provided the most attractive overall financing terms from such
airlinesrsquo perspective For instance a US airline would be able to maximize the amount of the
financing thereby minimizing the amount of its own money it had to invest in the aircraft (ie
the ldquodown paymentrdquo) It might also maximize the amount of money in excess of the actual cost
of the aircraft it could raise against the aircraft obtain the longest possible repayment term and
the slowest possible amortization schedule (ie the longest ldquoweighted average liferdquo) obtain
the lowest interest rate and risk premium obtain the least restrictive operational and financial
covenants provide the least amount of collateral or other security or obtain other benefits
Due to the fact that the United States is seen as not presenting any ldquocountry riskrdquo and has well‐
developed and well‐regarded legal and judicial systems that are seen as being protective of
creditorsrsquo rights US airlines have usually had access to secured aircraft financings from
commercial banks from around the world During the past several decades commercial banks
from different regions have been at the forefront of the aircraft finance industry and have
provided financing to US airlines on attractive financing terms Initially US‐based banks
provided most of the aircraft financing to US airlines but during the 1980s Japanese banks
became very significant lenders to the US airlines During the 1990s and 2000s the European
banks (German French British and Swiss banks) were the most significant source of
commercial bank funding for US airlines
In addition to commercial bank financing during the 1970s and 1980s US airlines obtained
long‐term financing from US‐based institutional investors (eg insurance companies and
pension funds) through the use of the Equipment Trust Certificate (ldquoETCrdquo) financing structure or
the Pass Through Certificate (ldquoPTCrdquo) financing structure The ETC is a financing provided by
institutional investors that is secured by one or more items of equipment (eg aircraft) The
PTC is a group of ETCs combined into a public debt security that is sold into the capital markets
to institutional investors
However during the 1980s the simplest and most prevalent form of aircraft financing for US
airlines was the US leveraged lease
The US leveraged lease allowed US airlines to take advantage of the US tax code which
generally provides for all types of capital assets to be depreciated and thereby reduces or
defers taxes due to the deductibility of tax depreciation Because US airlines generally did not 19
have sufficient income to fully take advantage of the benefit of the tax depreciation deductions
associated with acquiring aircraft the US airlines entered into US leveraged leases Under a
leveraged lease the benefits of the tax depreciation deductions related to the aircraft were
transferred to profitable companies that had income they wanted to shelter from tax In
return the company was willing to provide the equity in a US leverage lease (approximately
20 of the appraised value of the aircraft) and to ldquoleaserdquo the aircraft back to the airline for the
airlinersquos use A number of different entities entered into such leases including banks insurance
companies and other financial institutions such as Ford Motor Credit as well as finance
subsidiaries of other corporate entities including consumer product companies such as Phillip
Morris or entertainment companies such as Disney The fact that these were ldquoleveragedrdquo
leases (as opposed to ldquosingle investor leasesrdquo) also enabled the equity providers to deduct the
interest expense associated with the US leveraged lease
Through the use of a combination of lease equity and debt a US leveraged lease allowed US
airlines to arrange financing for up to 100 of the appraised value of an aircraft This was
particularly attractive to major US airlines because due to their size and relative importance
to the aircraft manufacturers every major US airline generally was able to negotiate aircraft
purchases with the aircraft manufacturers that enabled the airline to buy the aircraft for
amounts significantly less than the appraised value The result was that by using a US
leveraged lease to finance its aircraft a US airline was able to ldquoover‐financerdquo the aircraft (ie
finance the aircraft for more than the airline was paying for the aircraft) resulting in the airline
effectively having the ability each time the airline financed an aircraft to arrange 100
financing for its aircraft and at the same time arrange a long‐term working capital loan This is
the equivalent of a home buyer being able to buy a house with no money down (no down
payment) and also receiving a long‐term loan for non‐home expenses
In contrast Ex‐Im Bank‐supported aircraft financing is for only 85 (and sometimes less) of the
actual ldquonet pricerdquo that the airline is paying the US aircraft manufacturer (after deducting all
discounts and other concessions the airline has negotiated with the US aircraft manufacturer
which results in a net price that is almost always less than the appraised value) This requires
the foreign airline that is using Ex‐Im Bank support to come up with a down payment of at least
15 of the net price of the aircraft As a result US airlines were able to obtain more financing
under a US leveraged lease (without putting any money down) than foreign airlines could
under an Ex‐Im Bank supported aircraft financing (which required a down payment)
In addition US leveraged leases used by US airlines always had very long repayment terms
Generally speaking the longer the repayment the longer the tax deferral and the more
advantageous the terms of the US leveraged lease As a result it was not unusual for the US
leveraged leases used by US airlines to have a repayment term of between 18 and 22 years
and sometimes as long as 25 years The only constraint was that the lease term of the
20
leveraged lease should not exceed 80 of the economic useful life of the aircraft which in
some instances was more than 30 years
In contrast the repayment term in an Ex‐Im Bank‐supported aircraft financing is never longer
than 12 years which is the maximum repayment term Ex‐Im Bank is permitted to offer for an
aircraft financing under the guidelines for export credits promulgated by the Organization for
Economic Cooperation and Development (the ldquoOECDrdquo) with which guidelines the US
Government (including Ex‐Im Bank) has agreed to abide This difference in repayment terms is
significant it is similar to the difference in monthly payments under a 15 year home mortgage
versus a 30 year home mortgage As a result US airlines were able to obtain significantly
longer financing under a US leveraged lease (which generally resulted in a smaller periodic
principal repayment burden due to the longer repayment term) than foreign airlines could
under an Ex‐Im Bank‐supported financing
US leveraged leases used by US airlines also had a slower amortization profile with a very
long weighted average life (ie small amounts of debt amortization in the early years of the
financing) of at least 10 years In the same manner that a longer repayment term increased the
tax deferral a longer weighted average life also increased the tax deferral
In contrast the amortization profile in an Ex‐Im Bank supported aircraft financing for a foreign
airline is usually between 6 years and 65 years (at least 4 years shorter than the weighted
average life of the US leveraged leases historically used by US airlines) which imposes a
much greater cash flow burden on the foreign airline in comparison with the cash flows
required of a US airline under a US leveraged lease
Although the absolute interest rate on the debt in a US leveraged lease fluctuated over time
with the overall level of interest rates the providers of the debt into these US leveraged leases
(primarily insurance companies and other institutional investors) were generally willing to
accept an interest rate margin of less than 100 basis points31 over LIBOR32 on a fixed rate
equivalent basis (and sometimes significantly less than 100 basis points)
In contrast the interest rate margin on the debt on an Ex‐Im Bank‐supported aircraft financing
was generally between a few basis points over LIBOR to 50 basis points over LIBOR because the
interest on the Ex‐Im Bank‐guaranteed aircraft financing is guaranteed by Ex‐Im Bank and
reflects the low risk associated with a US Government guaranteed loan However the interest
rate margin on an Ex‐Im Bank‐guaranteed aircraft financing does not reflect the Ex‐Im Bank
exposure fee (or risk premium) that is paid to Ex‐Im Bank in view of the underlying risk of the
foreign airline The minimum exposure fee charged by Ex‐Im Bank was 2 during the 1980s
31 100 basis points equals 1 percent 32 LIBOR is the London Inter‐Bank Offering Rate and is a common reference rate such as ldquoPrimerdquo or ldquoTreasury Raterdquo used in adjustable interest rate transactions
21
and early 1990s and 3 until 2007 when the OECD promulgated a new set of guidelines for
export credits for aircraft (known as the ldquo2007 Aircraft Sector Understandingrdquo or the ldquo2007
ASUrdquo) This exposure fee was required to be paid ldquoup frontrdquo ndash ie at the inception of the loan
On a per annum basis this equates to between 30 basis points and 50 basis points which
should be added to the interest rate margin received by the guaranteed lender to obtain the
equivalent interest rate paid by a foreign airline under Ex‐Im Bank‐supported financing (for
purposes of comparing the overall financing cost to those incurred by US airlines) The Ex‐Im
Bank exposure fee is similar to a homeowner having to pay ldquopointsrdquo up front at the time he
obtains his mortgage The effect of paying points up front and paying an Ex‐Im Bank exposure
fee effectively increases the cost of the financing In comparing the overall cost of financing
through ECA support including the exposure fee to the overall cost of a leveraged lease for
borrowers with comparable credit profiles the overall cost of the US leveraged lease was
considerably more favorable than what could be achieved through an Ex‐Im Bank‐supported
aircraft financing
Although the US leveraged lease was itself a very attractive financing structure for US
airlines at different times the basic US leveraged lease was made even more attractive due to
other provisions of the US and foreign tax codes
For instance from the 1960s (during the Kennedy Administration) until its repeal under the Tax
Reform Act of 1986 the US tax code provided for an investment tax credit which was intended
to encourage investment in capital goods and therefore allowed airlines or the equity investor
in a US leveraged lease to get a credit against the taxes it would otherwise be required to pay
This credit was a permanent reduction in taxes paid as opposed to only the deferral of taxes
(postponement of when taxes had to be paid) that could be achieved through the use of the
US leveraged lease
Similarly from the 1980s to the mid‐1990s it was common for a US airline to combine a US
leveraged lease with a lease into a foreign jurisdiction that had a ldquoform over substancerdquo
approach to its tax code (as opposed to the United States which has a ldquosubstance over formrdquo
approach to its tax code) Taking advantage of the disparity a US airline could ldquosellrdquo the
aircraft to both (i) an equity investor in the United States and (ii) an equity investor in a foreign
country such as Japan Germany or Hong Kong and each equity investor could depreciate the
same aircraft and therefore shelter its respective income Over time due to changes in the
respective tax codes these more aggressive tax advantaged cross‐border leasing structures
(ldquoDouble Dipsrdquo and even on occasion ldquoTriple Dipsrdquo) were disallowed but not before US airlines
financed billions of dollars of aircraft using such tax advantaged leasing structures
During the 1990s the basic US leveraged lease was made even more attractive by taking
advantage of another provision of the US tax code that allowed additional US taxes to be
22
deferred if the equity investor in the transaction used an offshore subsidiary that qualified as a
Foreign Sales Corporation (ldquoFSCrdquo) under the US tax code and structured the deal as a
Commission FSC
In addition during the 1980s and 1990s US airlines had access to other sources of financing
with overall financing terms that were much more attractive than what was available to foreign
airlines via Ex‐Im Bank‐supported export credits For example during the late 1980s and 1990s
Airbus made its first significant sales to US airlines In order to do so Airbus arranged and
provided very attractive and flexible financing terms to US airlines to encourage them to
purchase European‐manufactured Airbus aircraft instead of US‐manufactured Boeing or
McDonnell Douglas aircraft The US airlines were more than willing to accept these incentives
During this period some US airlines entered into ldquowalk awayrdquo leases of Airbus aircraft
pursuant to which Airbus North America (backed by the joint and several guarantees of each of
the four countries that are members of Airbus SAS) entered into a US leveraged lease of the
Airbus aircraft and then subleased the aircraft to a US airline on terms that (i) passed along
most of the tax benefits to the US airline through lower lease rentals and (ii) permitted the
US airline to terminate the sublease and simply ldquowalk awayrdquo from the lease upon a relatively
short notice period
Under the ldquoHome Market Rulerdquo the European export credit agencies (including those of
France Germany and the United Kingdom) that usually support the financing of Airbus aircraft
could not provide such support to US airlines Therefore Airbus arranged for Kreditanstalt fur
Wiederaufbau the development bank of Germany to provide very attractive financing for the
Airbus aircraft being acquired by US airlines These financings occurred on terms much more
favorable (with 18‐ to 22‐year repayment terms) than what export credit agencies could
provide (with a maximum repayment term of 12‐years)
Similarly during the 1990s US airlines began to acquire a large number of 35 to 50 seat
regional jet aircraft manufactured by Bombardier of Canada and Embraer of Brazil Many of
these aircraft were acquired by the US airlines by using export credit support from Canada and
Brazil Some of the financing terms (ie the repayment terms) of these Brazilian and Canadian
government‐supported export credit financings were even more attractive (15‐ to 18‐year
repayment terms) than what was available from the export credit agencies of France Germany
and the United Kingdom with respect to Airbus aircraft or from Ex‐Im Bank with respect to
Boeing aircraft (10‐ to 12‐year repayment terms)
To make the financing of Canadian‐manufactured Bombardier regional jets even more
attractive to US airlines the province of Quebec (where Bombardier has its headquarters)
through Investment Quebec provided additional aircraft financing support to the US airlines
23
Finally to the extent even more attractive financing was needed to convince US airlines to
purchase Canadian or Brazilian‐manufactured regional aircraft the manufacturers themselves
provided residual value guarantees with respect to such aircraft to the airline or to the
financiers (ie to the equity investor in a US leveraged lease or the creditors financing the
aircraft)
The next major development in aircraft financing used by US airlines was the development in
the 1990s of the Enhanced Equipment Trust Certificate (ldquoEETCrdquo) which was an ETC with certain
structural enhancements The most important of these enhancements is a liquidity facility to
ensure that if there is a default the financiers would continue to receive current interest
during the period of time while the aircraft is being repossessed and remarketed A key
element in the development of the EETC was the existence of Section 1110 of the US
Bankruptcy Code which gives a type of ldquopreferred creditorrdquo status to financiers of aircraft for
US airlines This ldquopreferred creditorrdquo status exempts aircraft financiers of US airlines from
the automatic stay generally imposed following a bankruptcy filing by a borrower subject to the
protections of the US Bankruptcy Code Section 1110 of the US Bankruptcy Code
accomplishes this by requiring the airline within 60 days of such bankruptcy filing to either (i)
resume payments under the originally agreed aircraft financing or (ii) return the aircraft to the
financier
The first EETC was done in 1994 and the practice has now been successfully used by almost
every major US airline including Alaska Airlines America West Airlines American Airlines
Continental Airlines Delta Airlines Hawaiian Airlines Jet Blue Airlines Northwest Airlines
Southwest Airlines United Airlines and US Airways The overall financing cost of a US airline
acquiring an aircraft through the use of the EETC ndash which includes the amount of financing
repayment term amortization profile effective cost of the financing etc ndash has generally been
significantly more attractive than (i) what such US airline could have achieved under an export
credit‐supported aircraft financing for such airline and (ii) what a similarly rated foreign airline
could have achieved under an export credit‐supported aircraft financing
This is particularly true for the financing of new aircraft The development of the EETC market
provided enormous financing flexibility to US airlines for the financing of new aircraft the
EETC provided the airline with the option to finance on a simple secured mortgage basis or the
US airline could opt for a leveraged lease with all of the benefits associated with a leveraged
lease described above
Beginning in 1997 US airlines had the ability to raise money in the capital markets when the
overall financing terms were most attractive They were able to ldquolock‐inrdquo such favorable
financing terms to fund new aircraft that were scheduled to be delivered in the future by
issuing a ldquopre‐fundedrdquo EETC These pre‐funded EETCs were used to great success by US
24
airlines in the late 1990s through 2001 a period in which the US airlines were taking delivery
of a significant number of aircraft
As a result of the downturn in the US airline industry following the September 11 2001
terrorist attacks many US airlines deferred or cancelled their orders for new aircraft This
reduced the need for US airlines to finance new aircraft when the financing terms available to
such US airlines via the EETC were not as favorable due to (i) the perceived increased credit
risks of the US airline industry following the September 11 terrorist attacks and (ii) the
temporary disequilibrium in the credit markets following the 200820092010 credit crisis
Now that the US airlines have once again begun to take delivery of a significant number of
new aircraft the pre‐funded EETC continues to be the preferred source of financing for US
airlines as evidenced by the number and amount of EETC issuances during 2012 and 2013
Based on an analysis of the EETC transactions occurring during 2012 and 2013 EETCs are once
again generally considered to provide more attractive overall financing terms than what could
be achieved by an airline under an export credit‐supported financing done under the terms of
the 2011 Aircraft Sector Understanding
25
GLOSSARY
ldquoAdverse Economic Impactrdquo is the short‐hand term used to refer to any serious negative effects on US industries or US jobs as set forth in the Bankrsquos Charter that result from Ex‐Im Bank loans guarantees or insurance The Bankrsquos Charter contains three provisions that address adverse economic impact found at 12 USC sectsect 635(b)(1) 635a‐2 635(e)
ldquoAir Indiardquo is an airline owned by the Government of the Republic of India ldquoAir India Transactionsrdquo are the two final commitments approved by Ex‐Im Bank on September
30 2011 for loan guarantees for the purchase of a number of 787 ldquoDreamlinerrdquo aircraft from Boeing and to be financed by a commercial lender not identified at the time As of the date of this paper Ex‐Im Bank has not issued any of its loan guarantees but is expected to do so in the coming months Ten of the aircraft involved in these two final commitments have been delivered to Air India and are in use by Air India on routes outside the United States The deliveries of the ten aircraft were made using private short‐term financing as to which Ex‐Im Bank had no involvement
ldquoAirbusrdquo Airbus SAS is a Europe‐based manufacturer of large commercial aircraft Airbus is the only competitor to Boeing the US manufacturer Airbus sales are supported by the ECAs of Germany France and the UK
ldquoAircraft Sector also known as the ASU is an agreement among members of the OECD Understandingrdquo that manufacture aircraft and Brazil The ASU requires that Export
Credit Agencies that support the export of aircraft follow certain rules and restrictions that set forth the most favorable terms that can be provided These rules and restrictions include the Export Credit Agency must charge a minimum risk premium which is determined by the ASU the term of any loan made by or supported by the Export Credit Agency for the purchase of aircraft cannot exceed 12 years the Export Credit Agency today can lend or guarantee only up to 85 of the actual purchase price of the aircraft being exported and the use of risk mitigants The ASU was preceded by the Large Aircraft Sector Understanding which governed these issues until the enactment of the 2007 ASU The ASU was again updated and revised in 2011 (See also the Large Aircraft Sector Understanding)
ldquoArrangementrdquo is the agreement among Export Credit Agencies governing the terms by which they will provide loans guarantees or insurance in support of exports from their respective countries Among other things the Arrangement requires Export Credit Agencies to charge a minimum risk premium which is governed by the Arrangement See also Organization for Economic Cooperation and Development
ldquoASUrdquo see Aircraft Sector Understanding ldquoAverage Weighted Liferdquo for purposes of this paper refers to the average number of years that
each dollar of unpaid principal on a loan remains outstanding For example a loan with equal principal payments throughout the loan term will have an average weighted life close to the middle of the whole loan term
26
ldquoBank Actrdquo is the Export‐Import Bank Act of 1945 12 USC sect635 as amended ldquoBank Advisory Committeerdquo is the official Advisory Committee of the Bank appointed in accordance
with the Bank Act and the Advisory Committee Act The Bank Advisory Committee is comprised of representatives of various industry and market sectors as well as representatives of labor and international trade experts
ldquoBasis pointsrdquo are a numerical measure applied to interest rates One basis point equals 1100th of one percent or 100 basis points equals one percent
ldquoCapital Equipmentrdquo is equipment used to manufacture a product provide a service or sell store or deliver merchandise A wide‐body aircraft is a piece of capital equipment
ldquoCharterrdquo is the Bank Act as well the provisions of the Export Import Bank Reauthorization Act of 2012 (Public Law 112‐122) that are not codified in the Bank Act
ldquoDreamlinerrdquo is the name given to a Boeing 787 wide‐body commercial aircraft ldquoECArdquo see Export Credit Agencies ldquoEconomic Impact Proceduresrdquo
are procedures adopted by Ex‐Im Bank to assess whether transactions supported by the Bank cause a serious adverse economic impact to US industries and US jobs See also Adverse Economic Impact
ldquoEETCrdquo see Enhanced Equipment Trust Certificate ldquoEnhanced Equipment Trust Certificaterdquo
also known as an EETC is a type of secured bond issued by a borrower in the capital markets The EETC is secured by the equipment being purchased with the proceeds of the bond issuance EETCs are used primarily for aircraft and since the late 1990s has been the dominant financing tool used by US airlines to purchase aircraft Section 1110 of the US Bankruptcy Codemdashwhich allows creditors of aircraft borrowers to obtain their collateral within 60 days if the payments on their debt is not current ndash has provided creditors of US airlines a level of comfort not available to creditors of foreign airlines until recently This generally provided US airlines with a significant financial advantage vis a vis their foreign competitors Recently the adoption of the Cape Town Convention and the related Aircraft Equipment Protocol has provided creditors of foreign airlines with protections similar to the protections provided by section 1110 of the US Bankruptcy Code Recently this has led to the beginnings of an international EETC market
ldquoEquipment Trust Certificaterdquo
also known as an ETC was the predecessor to the Enhanced Equipment Trust Certificate
ldquoETCrdquo see Equipment Trust Certificate ldquoEx‐Im Bankrdquo or ldquoBankrdquo See The Export‐Import Bank of the United States ldquoExport Credit Agenciesrdquo are agencies or ministries of government that have the official role of
providing loans guarantees or insurance in support of exports from their respective countries or in support of exports by sales of companies from their respective countries Ex‐Im Bank is the official Export Credit Agency of the United States of America
ldquoexportable goods screenrdquo is a screen or filter adopted by Ex‐Im Bank in its 2001 Economic Impact Procedures The exportable goods screen is utilized along with other screens to balance the Bankrsquos obligation to consider the adverse
27
economic effects of its transactions on US industries and US jobs with the Bankrsquos mandate to support US export transactions in a timely manner so as to fully support the exporterrsquos business opportunity The exportable goods screen filtered out transactions that supported exports which could only be used by a foreign buyer to provide services rather than produce goods
ldquoExport‐Import Bank of the is an independent agency of the Federal Government of the United United Statesrdquo States of America Also known as ldquoEx‐Im Bankrdquo Ex‐Im Bankrsquos mission
is to support US jobs by supporting US exports See 12 USC 635 et seq
ldquoExposure Feerdquo is the risk premium charged by Ex‐Im Bank in exchange for its guarantee in certain transactions The exposure fee must be at least equal to the minimum risk premium required by the terms of the Arrangement and the Aircraft Sector Understanding
ldquoForeign Sales Corporationrdquo is a company created under the terms of a former provision of the US Internal Revenue Code Foreign Sales Corporations received significant tax benefits
ldquoFSCrdquo see Foreign Sales Corporation ldquoInvestment Tax Creditrdquo is a credit permitted under the US Internal Revenue Code for the
purchase of certain types of equipment in certain circumstances See also Leveraged Leases
ldquoKFWrdquo the development bank for the Federal Republic of Germany KFW is an Export Credit Agency but it also operates through a ldquomarket windowrdquo which is not subject to the Home Market Rule Thus KFW provides support to Airbus for its sales of aircraft to US airlines The United States does not have an equivalent institution and Ex‐Im Bank does not have a ldquomarket windowrdquo
ldquoLarge Aircraft Sector also known as LASU was the predecessor to the Aircraft Sector Understandingrdquo Understanding The LASU governed the same general issues as are set
forth in the Aircraft Sector Understanding except that the minimum risk premium was lower than that required in the 2007 ASU and 2011 ASU When the 2007 ASU was enacted grandfathering provisions allowed ECA‐supported financing for a limited number of aircraft to be governed by LASU
ldquoLASUrdquo see Large Aircraft Sector Understanding ldquoLeveraged Leaserdquo is a lease of equipment and is designed to allow the lessor to take
advantage of certain tax code provisions such as the depreciation deduction and the investment tax credit while allowing the lessee to obtain the equipment involved at a significantly lower cost Leveraged Leases were a very popular means for US airlines to acquire aircraft throughout the 1980s and 1990s The value of the tax deductions to the lessor were significant so that the implicit interest rate in the lease payments by the US airline were extremely low Usually the US airline did not have sufficient profit to take advantage of the favorable tax code provisions By using a leveraged lease another company that could shelter income by using the tax code provisions would buy the equipment and lease the equipment to the US airline Usually at the end of the lease term the US airline would purchase the aircraft
28
ldquoLIBORrdquo is the London Inter‐bank Offering Rate It is commonly used as a reference rate in loan transactions that have floating or adjustable interest rates LIBOR reflects the rate at which banks will lend money to each other LIBOR is set for various loan terms (eg 3 months 6 months etc) and is widely published making it a convenient rate to use as a reference rate
ldquoNet pricerdquo is the price paid after all discounts have been deducted The net price is the actual price paid for a piece of equipment In aircraft transactions pursuant to the ASU Ex‐Im Bank will only support up to 85 of the net price of an aircraft EETC transactions on the other hand often support the nominal purchase price of an aircraft and thus result in a significantly higher amount financed
ldquoOECDrdquo see the Organization for Economic Cooperation and Development Open Skies Agreement Is a type of bilateral agreement between countries that govern the
rights of airlines from the two countries to fly into the other country Open Skies Agreements generally allow free access to fly as many routes to a country as an airline may choose but then usually restrict the ability to fly within the other country Generally it is a ldquofly in and outrdquo rule although there are exceptions
ldquoOrganization for Economic Cooperation and Developmentrdquo
also known as the OECD is an organization comprised of 34 member countries that work together to promote development The United States is a member With regard to Ex‐Im Bank the OECD is the organization through which the US Government negotiates an agreement among Export Credit Agencies known as the Arrangement and the ASU (and its predecessor the LASU)
ldquoPass Through Certificaterdquo also known as a PTC is a group of Equipment Trust Certificates pooled together to form the basis for a bond issuance
ldquoPTCrdquo See Pass Through Certificate ldquoRyanairrdquo is a low‐cost Irish airline that began business after European
deregulation of airlines in 1997 Ryanair rapidly expanded during the first decade of the 2000s creating significant competition for other airlines
ldquoScreensrdquo are a type of filter used by Ex‐Im Bank in its Economic Impact Procedures Screens are designed to identify those transactions which are not likely to cause an adverse economic impact to US industries or US jobs so that such transactions can be processed more quickly and efficiently as required by the Bank Act
ldquoSubstantial Injuryrdquo is a term defined in Ex‐Im Bankrsquos Charter to be applied in connection with the Bankrsquos economic impact procedures 12 USC sect635(e)(4) The Charter states ldquohellipthe extension of any credit or guarantee by the Bank will cause substantial injury if the amount of the capacity for production established or the amount of the increase in such capacity expanded by such credit or guarantee equals or exceeds 1 percent of United States productionrdquo
ldquoTPCCrdquo see Trade Promotion Coordinating Committee ldquoTrade Promotion Coordinating Committeerdquo
also known as the TPCC is an interagency committee of the US Government chaired by the Secretary of Commerce It was established under the Export Enhancement Act of 1992 to provide a
29
unifying framework to coordinate the export promotion and export financing activities of the US government and to develop a government‐wide strategic plan for carrying out such programs
ldquoTrade Sanctionsrdquo refers to any of a number of sanctions imposed by the US Government against companies countries industries or products usually as a result of an accusation of adjudication of a violation of an international trade agreement The Bank Act requires Ex‐Im Bank to take certain trade sanctions into account in its economic impact procedures
30
Table A ndash Congressional Actions and Ex-Im Bank Responses
Year Congressional Action Ex‐Im Bank Response
1968 Bank directed to take into account the possible adverse effect [of its loans and guarantees] upon the United States economy
Bank adds this transactions
factor to analysis of
1975 1 Standard refined to take into account any serious adverse effect of loans and guarantees on competitive position of US industry availability of scarce materials in US and employment in US
2 Bank directed to be competitive with rates terms and conditions offered by principal countries whose exporters compete with US exporters
3 Bank directed to submit semi‐annual report on competitiveness and conduct survey of US exporters and lenders to determine experience in meeting financing competition
Bank adds these of transactions
considerations to analysis
Year Congressional Action Ex‐Im Bank Response
1978 ‐ 1979
1 Bank directed to take into account any serious adverse effect of loans on competitive position of US industry and scarce materials Bank directed to emphasize strengthening competitive position of US exporters and expanding total US exports
2 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [From Appropriations Act Restated in Bank Charter in 1986]
3 Bank directed to implement regulations and procedures to insure full consideration of extent to which loan or guarantee is likely to have adverse effect on industries and employment in US either by reducing demand for US produced goods or increasing imports to the US
Bank develops framework and set of written economic impact procedures
1 Exclude exports the use of which remained localized in foreign country This
is first ldquoforeign localized goods and services screenrdquo
2 ldquoIntent and stimulus for projectrdquo examined to determine likelihood of substantial adverse economic impact Does transaction involve ldquorunaway industryrdquo
(leaving US for cheaper foreign labor)
3 Does export of capital equipment result in ldquobuy backrdquo of product being imported into the US
4 Is net impact on US economy and jobs positive or negative and to what degree
32
Year Congressional Action Ex‐Im Bank Response
1986 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [Originally from 1978 Appropriations incorporated into Bank Charter in 1986]
Senate Report recognizes knowledge and experience of Bank and need to respond to exportersrsquo requests for support in a timely and confidential fashion Economic impact procedures are to be practical and workable and not reduce Bankrsquos competitiveness and flexibility nor ignore positive aspects of export sale
Bank develops ldquoSummary of Adverse Economic Guidelinesrdquo to be applied to both
goods and services (a) is commodity to be produced surplus or likely to compete with US‐produced surplus (b) will Bankrsquos
assistance cause substantial injury to US producers of competing commodity (c)
will injury to US producers of competing commodity outweigh the short‐ and long‐
term benefits to US industry and employment If answer is no then no
further economic impact analysis
1988 Congress establishes test for ldquosubstantial injuryrdquo if the amount of capacity for production established or amount of increase in such capacity expanded by Bankrsquos credit or guarantee exceeds 1 of US production
Bankrsquos Board recognizes requirement to balance (a) possibility of substantial harm
to US production and employment with (b) being responsive competitive and efficient New economic impact procedures ask (a) will the project be in direct competition with US production (b) is the Bankrsquos support significantly associated with the project (c) will the output of the project
cause substantial injury to US producers of the same similar or competing
commodity If answer is no then no further economic impact analysis is required
33
Year Congressional Action Ex‐Im Bank Response
1998 Bank revised procedures involving countries against which trade sanctions were pending or imposed
2001
2006 ‐2007
1 Bank required to determine whether extension of credit or guarantee is likely to produce same or other commodities and whether the production may cause substantial injury to US producers
2 Bank prohibited from providing a loan or guarantee that will facilitate circumvention of trade law order or determination
3 Bank required to designate sensitive commercial sectors and products for which Bank financing deemed unlikely due to potential for adverse economic impact on US
4 Bank required to aggregate financial thresholds on rolling 24‐month basis
Bank develops ldquoexportable goods screenrdquo Does Ex‐Im Bank support result in production of exportable good from the foreign buyerrsquos country If not no further economic impact analysis is required Notice and request for comments were published in the Federal Register US airline industry did not respond
Bank issues 2007 Economic Impact Procedures ldquoExportable goods screenrdquo is modified Will the transaction (capital goods and services) result in either new or additional production capacity of an exportable good
34
Appendix B
Financial Tools Available to US Airlines
Generally over the past several decades US airlines have had access to a broad range of
aircraft financing options
Accordingly at different times during the past several decades US airlines took advantage of
whichever financing option provided the most attractive overall financing terms from such
airlinesrsquo perspective For instance a US airline would be able to maximize the amount of the
financing thereby minimizing the amount of its own money it had to invest in the aircraft (ie
the ldquodown paymentrdquo) It might also maximize the amount of money in excess of the actual cost
of the aircraft it could raise against the aircraft obtain the longest possible repayment term and
the slowest possible amortization schedule (ie the longest ldquoweighted average liferdquo) obtain
the lowest interest rate and risk premium obtain the least restrictive operational and financial
covenants provide the least amount of collateral or other security or obtain other benefits
Due to the fact that the United States is seen as not presenting any ldquocountry riskrdquo and has well‐
developed and well‐regarded legal and judicial systems that are seen as being protective of
creditorsrsquo rights US airlines have usually had access to secured aircraft financings from
commercial banks from around the world During the past several decades commercial banks
from different regions have been at the forefront of the aircraft finance industry and have
provided financing to US airlines on attractive financing terms Initially US‐based banks
provided most of the aircraft financing to US airlines but during the 1980s Japanese banks
became very significant lenders to the US airlines During the 1990s and 2000s the European
banks (German French British and Swiss banks) were the most significant source of
commercial bank funding for US airlines
In addition to commercial bank financing during the 1970s and 1980s US airlines obtained
long‐term financing from US‐based institutional investors (eg insurance companies and
pension funds) through the use of the Equipment Trust Certificate (ldquoETCrdquo) financing structure or
the Pass Through Certificate (ldquoPTCrdquo) financing structure The ETC is a financing provided by
institutional investors that is secured by one or more items of equipment (eg aircraft) The
PTC is a group of ETCs combined into a public debt security that is sold into the capital markets
to institutional investors
However during the 1980s the simplest and most prevalent form of aircraft financing for US
airlines was the US leveraged lease
The US leveraged lease allowed US airlines to take advantage of the US tax code which
generally provides for all types of capital assets to be depreciated and thereby reduces or
defers taxes due to the deductibility of tax depreciation Because US airlines generally did not 19
have sufficient income to fully take advantage of the benefit of the tax depreciation deductions
associated with acquiring aircraft the US airlines entered into US leveraged leases Under a
leveraged lease the benefits of the tax depreciation deductions related to the aircraft were
transferred to profitable companies that had income they wanted to shelter from tax In
return the company was willing to provide the equity in a US leverage lease (approximately
20 of the appraised value of the aircraft) and to ldquoleaserdquo the aircraft back to the airline for the
airlinersquos use A number of different entities entered into such leases including banks insurance
companies and other financial institutions such as Ford Motor Credit as well as finance
subsidiaries of other corporate entities including consumer product companies such as Phillip
Morris or entertainment companies such as Disney The fact that these were ldquoleveragedrdquo
leases (as opposed to ldquosingle investor leasesrdquo) also enabled the equity providers to deduct the
interest expense associated with the US leveraged lease
Through the use of a combination of lease equity and debt a US leveraged lease allowed US
airlines to arrange financing for up to 100 of the appraised value of an aircraft This was
particularly attractive to major US airlines because due to their size and relative importance
to the aircraft manufacturers every major US airline generally was able to negotiate aircraft
purchases with the aircraft manufacturers that enabled the airline to buy the aircraft for
amounts significantly less than the appraised value The result was that by using a US
leveraged lease to finance its aircraft a US airline was able to ldquoover‐financerdquo the aircraft (ie
finance the aircraft for more than the airline was paying for the aircraft) resulting in the airline
effectively having the ability each time the airline financed an aircraft to arrange 100
financing for its aircraft and at the same time arrange a long‐term working capital loan This is
the equivalent of a home buyer being able to buy a house with no money down (no down
payment) and also receiving a long‐term loan for non‐home expenses
In contrast Ex‐Im Bank‐supported aircraft financing is for only 85 (and sometimes less) of the
actual ldquonet pricerdquo that the airline is paying the US aircraft manufacturer (after deducting all
discounts and other concessions the airline has negotiated with the US aircraft manufacturer
which results in a net price that is almost always less than the appraised value) This requires
the foreign airline that is using Ex‐Im Bank support to come up with a down payment of at least
15 of the net price of the aircraft As a result US airlines were able to obtain more financing
under a US leveraged lease (without putting any money down) than foreign airlines could
under an Ex‐Im Bank supported aircraft financing (which required a down payment)
In addition US leveraged leases used by US airlines always had very long repayment terms
Generally speaking the longer the repayment the longer the tax deferral and the more
advantageous the terms of the US leveraged lease As a result it was not unusual for the US
leveraged leases used by US airlines to have a repayment term of between 18 and 22 years
and sometimes as long as 25 years The only constraint was that the lease term of the
20
leveraged lease should not exceed 80 of the economic useful life of the aircraft which in
some instances was more than 30 years
In contrast the repayment term in an Ex‐Im Bank‐supported aircraft financing is never longer
than 12 years which is the maximum repayment term Ex‐Im Bank is permitted to offer for an
aircraft financing under the guidelines for export credits promulgated by the Organization for
Economic Cooperation and Development (the ldquoOECDrdquo) with which guidelines the US
Government (including Ex‐Im Bank) has agreed to abide This difference in repayment terms is
significant it is similar to the difference in monthly payments under a 15 year home mortgage
versus a 30 year home mortgage As a result US airlines were able to obtain significantly
longer financing under a US leveraged lease (which generally resulted in a smaller periodic
principal repayment burden due to the longer repayment term) than foreign airlines could
under an Ex‐Im Bank‐supported financing
US leveraged leases used by US airlines also had a slower amortization profile with a very
long weighted average life (ie small amounts of debt amortization in the early years of the
financing) of at least 10 years In the same manner that a longer repayment term increased the
tax deferral a longer weighted average life also increased the tax deferral
In contrast the amortization profile in an Ex‐Im Bank supported aircraft financing for a foreign
airline is usually between 6 years and 65 years (at least 4 years shorter than the weighted
average life of the US leveraged leases historically used by US airlines) which imposes a
much greater cash flow burden on the foreign airline in comparison with the cash flows
required of a US airline under a US leveraged lease
Although the absolute interest rate on the debt in a US leveraged lease fluctuated over time
with the overall level of interest rates the providers of the debt into these US leveraged leases
(primarily insurance companies and other institutional investors) were generally willing to
accept an interest rate margin of less than 100 basis points31 over LIBOR32 on a fixed rate
equivalent basis (and sometimes significantly less than 100 basis points)
In contrast the interest rate margin on the debt on an Ex‐Im Bank‐supported aircraft financing
was generally between a few basis points over LIBOR to 50 basis points over LIBOR because the
interest on the Ex‐Im Bank‐guaranteed aircraft financing is guaranteed by Ex‐Im Bank and
reflects the low risk associated with a US Government guaranteed loan However the interest
rate margin on an Ex‐Im Bank‐guaranteed aircraft financing does not reflect the Ex‐Im Bank
exposure fee (or risk premium) that is paid to Ex‐Im Bank in view of the underlying risk of the
foreign airline The minimum exposure fee charged by Ex‐Im Bank was 2 during the 1980s
31 100 basis points equals 1 percent 32 LIBOR is the London Inter‐Bank Offering Rate and is a common reference rate such as ldquoPrimerdquo or ldquoTreasury Raterdquo used in adjustable interest rate transactions
21
and early 1990s and 3 until 2007 when the OECD promulgated a new set of guidelines for
export credits for aircraft (known as the ldquo2007 Aircraft Sector Understandingrdquo or the ldquo2007
ASUrdquo) This exposure fee was required to be paid ldquoup frontrdquo ndash ie at the inception of the loan
On a per annum basis this equates to between 30 basis points and 50 basis points which
should be added to the interest rate margin received by the guaranteed lender to obtain the
equivalent interest rate paid by a foreign airline under Ex‐Im Bank‐supported financing (for
purposes of comparing the overall financing cost to those incurred by US airlines) The Ex‐Im
Bank exposure fee is similar to a homeowner having to pay ldquopointsrdquo up front at the time he
obtains his mortgage The effect of paying points up front and paying an Ex‐Im Bank exposure
fee effectively increases the cost of the financing In comparing the overall cost of financing
through ECA support including the exposure fee to the overall cost of a leveraged lease for
borrowers with comparable credit profiles the overall cost of the US leveraged lease was
considerably more favorable than what could be achieved through an Ex‐Im Bank‐supported
aircraft financing
Although the US leveraged lease was itself a very attractive financing structure for US
airlines at different times the basic US leveraged lease was made even more attractive due to
other provisions of the US and foreign tax codes
For instance from the 1960s (during the Kennedy Administration) until its repeal under the Tax
Reform Act of 1986 the US tax code provided for an investment tax credit which was intended
to encourage investment in capital goods and therefore allowed airlines or the equity investor
in a US leveraged lease to get a credit against the taxes it would otherwise be required to pay
This credit was a permanent reduction in taxes paid as opposed to only the deferral of taxes
(postponement of when taxes had to be paid) that could be achieved through the use of the
US leveraged lease
Similarly from the 1980s to the mid‐1990s it was common for a US airline to combine a US
leveraged lease with a lease into a foreign jurisdiction that had a ldquoform over substancerdquo
approach to its tax code (as opposed to the United States which has a ldquosubstance over formrdquo
approach to its tax code) Taking advantage of the disparity a US airline could ldquosellrdquo the
aircraft to both (i) an equity investor in the United States and (ii) an equity investor in a foreign
country such as Japan Germany or Hong Kong and each equity investor could depreciate the
same aircraft and therefore shelter its respective income Over time due to changes in the
respective tax codes these more aggressive tax advantaged cross‐border leasing structures
(ldquoDouble Dipsrdquo and even on occasion ldquoTriple Dipsrdquo) were disallowed but not before US airlines
financed billions of dollars of aircraft using such tax advantaged leasing structures
During the 1990s the basic US leveraged lease was made even more attractive by taking
advantage of another provision of the US tax code that allowed additional US taxes to be
22
deferred if the equity investor in the transaction used an offshore subsidiary that qualified as a
Foreign Sales Corporation (ldquoFSCrdquo) under the US tax code and structured the deal as a
Commission FSC
In addition during the 1980s and 1990s US airlines had access to other sources of financing
with overall financing terms that were much more attractive than what was available to foreign
airlines via Ex‐Im Bank‐supported export credits For example during the late 1980s and 1990s
Airbus made its first significant sales to US airlines In order to do so Airbus arranged and
provided very attractive and flexible financing terms to US airlines to encourage them to
purchase European‐manufactured Airbus aircraft instead of US‐manufactured Boeing or
McDonnell Douglas aircraft The US airlines were more than willing to accept these incentives
During this period some US airlines entered into ldquowalk awayrdquo leases of Airbus aircraft
pursuant to which Airbus North America (backed by the joint and several guarantees of each of
the four countries that are members of Airbus SAS) entered into a US leveraged lease of the
Airbus aircraft and then subleased the aircraft to a US airline on terms that (i) passed along
most of the tax benefits to the US airline through lower lease rentals and (ii) permitted the
US airline to terminate the sublease and simply ldquowalk awayrdquo from the lease upon a relatively
short notice period
Under the ldquoHome Market Rulerdquo the European export credit agencies (including those of
France Germany and the United Kingdom) that usually support the financing of Airbus aircraft
could not provide such support to US airlines Therefore Airbus arranged for Kreditanstalt fur
Wiederaufbau the development bank of Germany to provide very attractive financing for the
Airbus aircraft being acquired by US airlines These financings occurred on terms much more
favorable (with 18‐ to 22‐year repayment terms) than what export credit agencies could
provide (with a maximum repayment term of 12‐years)
Similarly during the 1990s US airlines began to acquire a large number of 35 to 50 seat
regional jet aircraft manufactured by Bombardier of Canada and Embraer of Brazil Many of
these aircraft were acquired by the US airlines by using export credit support from Canada and
Brazil Some of the financing terms (ie the repayment terms) of these Brazilian and Canadian
government‐supported export credit financings were even more attractive (15‐ to 18‐year
repayment terms) than what was available from the export credit agencies of France Germany
and the United Kingdom with respect to Airbus aircraft or from Ex‐Im Bank with respect to
Boeing aircraft (10‐ to 12‐year repayment terms)
To make the financing of Canadian‐manufactured Bombardier regional jets even more
attractive to US airlines the province of Quebec (where Bombardier has its headquarters)
through Investment Quebec provided additional aircraft financing support to the US airlines
23
Finally to the extent even more attractive financing was needed to convince US airlines to
purchase Canadian or Brazilian‐manufactured regional aircraft the manufacturers themselves
provided residual value guarantees with respect to such aircraft to the airline or to the
financiers (ie to the equity investor in a US leveraged lease or the creditors financing the
aircraft)
The next major development in aircraft financing used by US airlines was the development in
the 1990s of the Enhanced Equipment Trust Certificate (ldquoEETCrdquo) which was an ETC with certain
structural enhancements The most important of these enhancements is a liquidity facility to
ensure that if there is a default the financiers would continue to receive current interest
during the period of time while the aircraft is being repossessed and remarketed A key
element in the development of the EETC was the existence of Section 1110 of the US
Bankruptcy Code which gives a type of ldquopreferred creditorrdquo status to financiers of aircraft for
US airlines This ldquopreferred creditorrdquo status exempts aircraft financiers of US airlines from
the automatic stay generally imposed following a bankruptcy filing by a borrower subject to the
protections of the US Bankruptcy Code Section 1110 of the US Bankruptcy Code
accomplishes this by requiring the airline within 60 days of such bankruptcy filing to either (i)
resume payments under the originally agreed aircraft financing or (ii) return the aircraft to the
financier
The first EETC was done in 1994 and the practice has now been successfully used by almost
every major US airline including Alaska Airlines America West Airlines American Airlines
Continental Airlines Delta Airlines Hawaiian Airlines Jet Blue Airlines Northwest Airlines
Southwest Airlines United Airlines and US Airways The overall financing cost of a US airline
acquiring an aircraft through the use of the EETC ndash which includes the amount of financing
repayment term amortization profile effective cost of the financing etc ndash has generally been
significantly more attractive than (i) what such US airline could have achieved under an export
credit‐supported aircraft financing for such airline and (ii) what a similarly rated foreign airline
could have achieved under an export credit‐supported aircraft financing
This is particularly true for the financing of new aircraft The development of the EETC market
provided enormous financing flexibility to US airlines for the financing of new aircraft the
EETC provided the airline with the option to finance on a simple secured mortgage basis or the
US airline could opt for a leveraged lease with all of the benefits associated with a leveraged
lease described above
Beginning in 1997 US airlines had the ability to raise money in the capital markets when the
overall financing terms were most attractive They were able to ldquolock‐inrdquo such favorable
financing terms to fund new aircraft that were scheduled to be delivered in the future by
issuing a ldquopre‐fundedrdquo EETC These pre‐funded EETCs were used to great success by US
24
airlines in the late 1990s through 2001 a period in which the US airlines were taking delivery
of a significant number of aircraft
As a result of the downturn in the US airline industry following the September 11 2001
terrorist attacks many US airlines deferred or cancelled their orders for new aircraft This
reduced the need for US airlines to finance new aircraft when the financing terms available to
such US airlines via the EETC were not as favorable due to (i) the perceived increased credit
risks of the US airline industry following the September 11 terrorist attacks and (ii) the
temporary disequilibrium in the credit markets following the 200820092010 credit crisis
Now that the US airlines have once again begun to take delivery of a significant number of
new aircraft the pre‐funded EETC continues to be the preferred source of financing for US
airlines as evidenced by the number and amount of EETC issuances during 2012 and 2013
Based on an analysis of the EETC transactions occurring during 2012 and 2013 EETCs are once
again generally considered to provide more attractive overall financing terms than what could
be achieved by an airline under an export credit‐supported financing done under the terms of
the 2011 Aircraft Sector Understanding
25
GLOSSARY
ldquoAdverse Economic Impactrdquo is the short‐hand term used to refer to any serious negative effects on US industries or US jobs as set forth in the Bankrsquos Charter that result from Ex‐Im Bank loans guarantees or insurance The Bankrsquos Charter contains three provisions that address adverse economic impact found at 12 USC sectsect 635(b)(1) 635a‐2 635(e)
ldquoAir Indiardquo is an airline owned by the Government of the Republic of India ldquoAir India Transactionsrdquo are the two final commitments approved by Ex‐Im Bank on September
30 2011 for loan guarantees for the purchase of a number of 787 ldquoDreamlinerrdquo aircraft from Boeing and to be financed by a commercial lender not identified at the time As of the date of this paper Ex‐Im Bank has not issued any of its loan guarantees but is expected to do so in the coming months Ten of the aircraft involved in these two final commitments have been delivered to Air India and are in use by Air India on routes outside the United States The deliveries of the ten aircraft were made using private short‐term financing as to which Ex‐Im Bank had no involvement
ldquoAirbusrdquo Airbus SAS is a Europe‐based manufacturer of large commercial aircraft Airbus is the only competitor to Boeing the US manufacturer Airbus sales are supported by the ECAs of Germany France and the UK
ldquoAircraft Sector also known as the ASU is an agreement among members of the OECD Understandingrdquo that manufacture aircraft and Brazil The ASU requires that Export
Credit Agencies that support the export of aircraft follow certain rules and restrictions that set forth the most favorable terms that can be provided These rules and restrictions include the Export Credit Agency must charge a minimum risk premium which is determined by the ASU the term of any loan made by or supported by the Export Credit Agency for the purchase of aircraft cannot exceed 12 years the Export Credit Agency today can lend or guarantee only up to 85 of the actual purchase price of the aircraft being exported and the use of risk mitigants The ASU was preceded by the Large Aircraft Sector Understanding which governed these issues until the enactment of the 2007 ASU The ASU was again updated and revised in 2011 (See also the Large Aircraft Sector Understanding)
ldquoArrangementrdquo is the agreement among Export Credit Agencies governing the terms by which they will provide loans guarantees or insurance in support of exports from their respective countries Among other things the Arrangement requires Export Credit Agencies to charge a minimum risk premium which is governed by the Arrangement See also Organization for Economic Cooperation and Development
ldquoASUrdquo see Aircraft Sector Understanding ldquoAverage Weighted Liferdquo for purposes of this paper refers to the average number of years that
each dollar of unpaid principal on a loan remains outstanding For example a loan with equal principal payments throughout the loan term will have an average weighted life close to the middle of the whole loan term
26
ldquoBank Actrdquo is the Export‐Import Bank Act of 1945 12 USC sect635 as amended ldquoBank Advisory Committeerdquo is the official Advisory Committee of the Bank appointed in accordance
with the Bank Act and the Advisory Committee Act The Bank Advisory Committee is comprised of representatives of various industry and market sectors as well as representatives of labor and international trade experts
ldquoBasis pointsrdquo are a numerical measure applied to interest rates One basis point equals 1100th of one percent or 100 basis points equals one percent
ldquoCapital Equipmentrdquo is equipment used to manufacture a product provide a service or sell store or deliver merchandise A wide‐body aircraft is a piece of capital equipment
ldquoCharterrdquo is the Bank Act as well the provisions of the Export Import Bank Reauthorization Act of 2012 (Public Law 112‐122) that are not codified in the Bank Act
ldquoDreamlinerrdquo is the name given to a Boeing 787 wide‐body commercial aircraft ldquoECArdquo see Export Credit Agencies ldquoEconomic Impact Proceduresrdquo
are procedures adopted by Ex‐Im Bank to assess whether transactions supported by the Bank cause a serious adverse economic impact to US industries and US jobs See also Adverse Economic Impact
ldquoEETCrdquo see Enhanced Equipment Trust Certificate ldquoEnhanced Equipment Trust Certificaterdquo
also known as an EETC is a type of secured bond issued by a borrower in the capital markets The EETC is secured by the equipment being purchased with the proceeds of the bond issuance EETCs are used primarily for aircraft and since the late 1990s has been the dominant financing tool used by US airlines to purchase aircraft Section 1110 of the US Bankruptcy Codemdashwhich allows creditors of aircraft borrowers to obtain their collateral within 60 days if the payments on their debt is not current ndash has provided creditors of US airlines a level of comfort not available to creditors of foreign airlines until recently This generally provided US airlines with a significant financial advantage vis a vis their foreign competitors Recently the adoption of the Cape Town Convention and the related Aircraft Equipment Protocol has provided creditors of foreign airlines with protections similar to the protections provided by section 1110 of the US Bankruptcy Code Recently this has led to the beginnings of an international EETC market
ldquoEquipment Trust Certificaterdquo
also known as an ETC was the predecessor to the Enhanced Equipment Trust Certificate
ldquoETCrdquo see Equipment Trust Certificate ldquoEx‐Im Bankrdquo or ldquoBankrdquo See The Export‐Import Bank of the United States ldquoExport Credit Agenciesrdquo are agencies or ministries of government that have the official role of
providing loans guarantees or insurance in support of exports from their respective countries or in support of exports by sales of companies from their respective countries Ex‐Im Bank is the official Export Credit Agency of the United States of America
ldquoexportable goods screenrdquo is a screen or filter adopted by Ex‐Im Bank in its 2001 Economic Impact Procedures The exportable goods screen is utilized along with other screens to balance the Bankrsquos obligation to consider the adverse
27
economic effects of its transactions on US industries and US jobs with the Bankrsquos mandate to support US export transactions in a timely manner so as to fully support the exporterrsquos business opportunity The exportable goods screen filtered out transactions that supported exports which could only be used by a foreign buyer to provide services rather than produce goods
ldquoExport‐Import Bank of the is an independent agency of the Federal Government of the United United Statesrdquo States of America Also known as ldquoEx‐Im Bankrdquo Ex‐Im Bankrsquos mission
is to support US jobs by supporting US exports See 12 USC 635 et seq
ldquoExposure Feerdquo is the risk premium charged by Ex‐Im Bank in exchange for its guarantee in certain transactions The exposure fee must be at least equal to the minimum risk premium required by the terms of the Arrangement and the Aircraft Sector Understanding
ldquoForeign Sales Corporationrdquo is a company created under the terms of a former provision of the US Internal Revenue Code Foreign Sales Corporations received significant tax benefits
ldquoFSCrdquo see Foreign Sales Corporation ldquoInvestment Tax Creditrdquo is a credit permitted under the US Internal Revenue Code for the
purchase of certain types of equipment in certain circumstances See also Leveraged Leases
ldquoKFWrdquo the development bank for the Federal Republic of Germany KFW is an Export Credit Agency but it also operates through a ldquomarket windowrdquo which is not subject to the Home Market Rule Thus KFW provides support to Airbus for its sales of aircraft to US airlines The United States does not have an equivalent institution and Ex‐Im Bank does not have a ldquomarket windowrdquo
ldquoLarge Aircraft Sector also known as LASU was the predecessor to the Aircraft Sector Understandingrdquo Understanding The LASU governed the same general issues as are set
forth in the Aircraft Sector Understanding except that the minimum risk premium was lower than that required in the 2007 ASU and 2011 ASU When the 2007 ASU was enacted grandfathering provisions allowed ECA‐supported financing for a limited number of aircraft to be governed by LASU
ldquoLASUrdquo see Large Aircraft Sector Understanding ldquoLeveraged Leaserdquo is a lease of equipment and is designed to allow the lessor to take
advantage of certain tax code provisions such as the depreciation deduction and the investment tax credit while allowing the lessee to obtain the equipment involved at a significantly lower cost Leveraged Leases were a very popular means for US airlines to acquire aircraft throughout the 1980s and 1990s The value of the tax deductions to the lessor were significant so that the implicit interest rate in the lease payments by the US airline were extremely low Usually the US airline did not have sufficient profit to take advantage of the favorable tax code provisions By using a leveraged lease another company that could shelter income by using the tax code provisions would buy the equipment and lease the equipment to the US airline Usually at the end of the lease term the US airline would purchase the aircraft
28
ldquoLIBORrdquo is the London Inter‐bank Offering Rate It is commonly used as a reference rate in loan transactions that have floating or adjustable interest rates LIBOR reflects the rate at which banks will lend money to each other LIBOR is set for various loan terms (eg 3 months 6 months etc) and is widely published making it a convenient rate to use as a reference rate
ldquoNet pricerdquo is the price paid after all discounts have been deducted The net price is the actual price paid for a piece of equipment In aircraft transactions pursuant to the ASU Ex‐Im Bank will only support up to 85 of the net price of an aircraft EETC transactions on the other hand often support the nominal purchase price of an aircraft and thus result in a significantly higher amount financed
ldquoOECDrdquo see the Organization for Economic Cooperation and Development Open Skies Agreement Is a type of bilateral agreement between countries that govern the
rights of airlines from the two countries to fly into the other country Open Skies Agreements generally allow free access to fly as many routes to a country as an airline may choose but then usually restrict the ability to fly within the other country Generally it is a ldquofly in and outrdquo rule although there are exceptions
ldquoOrganization for Economic Cooperation and Developmentrdquo
also known as the OECD is an organization comprised of 34 member countries that work together to promote development The United States is a member With regard to Ex‐Im Bank the OECD is the organization through which the US Government negotiates an agreement among Export Credit Agencies known as the Arrangement and the ASU (and its predecessor the LASU)
ldquoPass Through Certificaterdquo also known as a PTC is a group of Equipment Trust Certificates pooled together to form the basis for a bond issuance
ldquoPTCrdquo See Pass Through Certificate ldquoRyanairrdquo is a low‐cost Irish airline that began business after European
deregulation of airlines in 1997 Ryanair rapidly expanded during the first decade of the 2000s creating significant competition for other airlines
ldquoScreensrdquo are a type of filter used by Ex‐Im Bank in its Economic Impact Procedures Screens are designed to identify those transactions which are not likely to cause an adverse economic impact to US industries or US jobs so that such transactions can be processed more quickly and efficiently as required by the Bank Act
ldquoSubstantial Injuryrdquo is a term defined in Ex‐Im Bankrsquos Charter to be applied in connection with the Bankrsquos economic impact procedures 12 USC sect635(e)(4) The Charter states ldquohellipthe extension of any credit or guarantee by the Bank will cause substantial injury if the amount of the capacity for production established or the amount of the increase in such capacity expanded by such credit or guarantee equals or exceeds 1 percent of United States productionrdquo
ldquoTPCCrdquo see Trade Promotion Coordinating Committee ldquoTrade Promotion Coordinating Committeerdquo
also known as the TPCC is an interagency committee of the US Government chaired by the Secretary of Commerce It was established under the Export Enhancement Act of 1992 to provide a
29
unifying framework to coordinate the export promotion and export financing activities of the US government and to develop a government‐wide strategic plan for carrying out such programs
ldquoTrade Sanctionsrdquo refers to any of a number of sanctions imposed by the US Government against companies countries industries or products usually as a result of an accusation of adjudication of a violation of an international trade agreement The Bank Act requires Ex‐Im Bank to take certain trade sanctions into account in its economic impact procedures
30
Table A ndash Congressional Actions and Ex-Im Bank Responses
Year Congressional Action Ex‐Im Bank Response
1968 Bank directed to take into account the possible adverse effect [of its loans and guarantees] upon the United States economy
Bank adds this transactions
factor to analysis of
1975 1 Standard refined to take into account any serious adverse effect of loans and guarantees on competitive position of US industry availability of scarce materials in US and employment in US
2 Bank directed to be competitive with rates terms and conditions offered by principal countries whose exporters compete with US exporters
3 Bank directed to submit semi‐annual report on competitiveness and conduct survey of US exporters and lenders to determine experience in meeting financing competition
Bank adds these of transactions
considerations to analysis
Year Congressional Action Ex‐Im Bank Response
1978 ‐ 1979
1 Bank directed to take into account any serious adverse effect of loans on competitive position of US industry and scarce materials Bank directed to emphasize strengthening competitive position of US exporters and expanding total US exports
2 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [From Appropriations Act Restated in Bank Charter in 1986]
3 Bank directed to implement regulations and procedures to insure full consideration of extent to which loan or guarantee is likely to have adverse effect on industries and employment in US either by reducing demand for US produced goods or increasing imports to the US
Bank develops framework and set of written economic impact procedures
1 Exclude exports the use of which remained localized in foreign country This
is first ldquoforeign localized goods and services screenrdquo
2 ldquoIntent and stimulus for projectrdquo examined to determine likelihood of substantial adverse economic impact Does transaction involve ldquorunaway industryrdquo
(leaving US for cheaper foreign labor)
3 Does export of capital equipment result in ldquobuy backrdquo of product being imported into the US
4 Is net impact on US economy and jobs positive or negative and to what degree
32
Year Congressional Action Ex‐Im Bank Response
1986 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [Originally from 1978 Appropriations incorporated into Bank Charter in 1986]
Senate Report recognizes knowledge and experience of Bank and need to respond to exportersrsquo requests for support in a timely and confidential fashion Economic impact procedures are to be practical and workable and not reduce Bankrsquos competitiveness and flexibility nor ignore positive aspects of export sale
Bank develops ldquoSummary of Adverse Economic Guidelinesrdquo to be applied to both
goods and services (a) is commodity to be produced surplus or likely to compete with US‐produced surplus (b) will Bankrsquos
assistance cause substantial injury to US producers of competing commodity (c)
will injury to US producers of competing commodity outweigh the short‐ and long‐
term benefits to US industry and employment If answer is no then no
further economic impact analysis
1988 Congress establishes test for ldquosubstantial injuryrdquo if the amount of capacity for production established or amount of increase in such capacity expanded by Bankrsquos credit or guarantee exceeds 1 of US production
Bankrsquos Board recognizes requirement to balance (a) possibility of substantial harm
to US production and employment with (b) being responsive competitive and efficient New economic impact procedures ask (a) will the project be in direct competition with US production (b) is the Bankrsquos support significantly associated with the project (c) will the output of the project
cause substantial injury to US producers of the same similar or competing
commodity If answer is no then no further economic impact analysis is required
33
Year Congressional Action Ex‐Im Bank Response
1998 Bank revised procedures involving countries against which trade sanctions were pending or imposed
2001
2006 ‐2007
1 Bank required to determine whether extension of credit or guarantee is likely to produce same or other commodities and whether the production may cause substantial injury to US producers
2 Bank prohibited from providing a loan or guarantee that will facilitate circumvention of trade law order or determination
3 Bank required to designate sensitive commercial sectors and products for which Bank financing deemed unlikely due to potential for adverse economic impact on US
4 Bank required to aggregate financial thresholds on rolling 24‐month basis
Bank develops ldquoexportable goods screenrdquo Does Ex‐Im Bank support result in production of exportable good from the foreign buyerrsquos country If not no further economic impact analysis is required Notice and request for comments were published in the Federal Register US airline industry did not respond
Bank issues 2007 Economic Impact Procedures ldquoExportable goods screenrdquo is modified Will the transaction (capital goods and services) result in either new or additional production capacity of an exportable good
34
have sufficient income to fully take advantage of the benefit of the tax depreciation deductions
associated with acquiring aircraft the US airlines entered into US leveraged leases Under a
leveraged lease the benefits of the tax depreciation deductions related to the aircraft were
transferred to profitable companies that had income they wanted to shelter from tax In
return the company was willing to provide the equity in a US leverage lease (approximately
20 of the appraised value of the aircraft) and to ldquoleaserdquo the aircraft back to the airline for the
airlinersquos use A number of different entities entered into such leases including banks insurance
companies and other financial institutions such as Ford Motor Credit as well as finance
subsidiaries of other corporate entities including consumer product companies such as Phillip
Morris or entertainment companies such as Disney The fact that these were ldquoleveragedrdquo
leases (as opposed to ldquosingle investor leasesrdquo) also enabled the equity providers to deduct the
interest expense associated with the US leveraged lease
Through the use of a combination of lease equity and debt a US leveraged lease allowed US
airlines to arrange financing for up to 100 of the appraised value of an aircraft This was
particularly attractive to major US airlines because due to their size and relative importance
to the aircraft manufacturers every major US airline generally was able to negotiate aircraft
purchases with the aircraft manufacturers that enabled the airline to buy the aircraft for
amounts significantly less than the appraised value The result was that by using a US
leveraged lease to finance its aircraft a US airline was able to ldquoover‐financerdquo the aircraft (ie
finance the aircraft for more than the airline was paying for the aircraft) resulting in the airline
effectively having the ability each time the airline financed an aircraft to arrange 100
financing for its aircraft and at the same time arrange a long‐term working capital loan This is
the equivalent of a home buyer being able to buy a house with no money down (no down
payment) and also receiving a long‐term loan for non‐home expenses
In contrast Ex‐Im Bank‐supported aircraft financing is for only 85 (and sometimes less) of the
actual ldquonet pricerdquo that the airline is paying the US aircraft manufacturer (after deducting all
discounts and other concessions the airline has negotiated with the US aircraft manufacturer
which results in a net price that is almost always less than the appraised value) This requires
the foreign airline that is using Ex‐Im Bank support to come up with a down payment of at least
15 of the net price of the aircraft As a result US airlines were able to obtain more financing
under a US leveraged lease (without putting any money down) than foreign airlines could
under an Ex‐Im Bank supported aircraft financing (which required a down payment)
In addition US leveraged leases used by US airlines always had very long repayment terms
Generally speaking the longer the repayment the longer the tax deferral and the more
advantageous the terms of the US leveraged lease As a result it was not unusual for the US
leveraged leases used by US airlines to have a repayment term of between 18 and 22 years
and sometimes as long as 25 years The only constraint was that the lease term of the
20
leveraged lease should not exceed 80 of the economic useful life of the aircraft which in
some instances was more than 30 years
In contrast the repayment term in an Ex‐Im Bank‐supported aircraft financing is never longer
than 12 years which is the maximum repayment term Ex‐Im Bank is permitted to offer for an
aircraft financing under the guidelines for export credits promulgated by the Organization for
Economic Cooperation and Development (the ldquoOECDrdquo) with which guidelines the US
Government (including Ex‐Im Bank) has agreed to abide This difference in repayment terms is
significant it is similar to the difference in monthly payments under a 15 year home mortgage
versus a 30 year home mortgage As a result US airlines were able to obtain significantly
longer financing under a US leveraged lease (which generally resulted in a smaller periodic
principal repayment burden due to the longer repayment term) than foreign airlines could
under an Ex‐Im Bank‐supported financing
US leveraged leases used by US airlines also had a slower amortization profile with a very
long weighted average life (ie small amounts of debt amortization in the early years of the
financing) of at least 10 years In the same manner that a longer repayment term increased the
tax deferral a longer weighted average life also increased the tax deferral
In contrast the amortization profile in an Ex‐Im Bank supported aircraft financing for a foreign
airline is usually between 6 years and 65 years (at least 4 years shorter than the weighted
average life of the US leveraged leases historically used by US airlines) which imposes a
much greater cash flow burden on the foreign airline in comparison with the cash flows
required of a US airline under a US leveraged lease
Although the absolute interest rate on the debt in a US leveraged lease fluctuated over time
with the overall level of interest rates the providers of the debt into these US leveraged leases
(primarily insurance companies and other institutional investors) were generally willing to
accept an interest rate margin of less than 100 basis points31 over LIBOR32 on a fixed rate
equivalent basis (and sometimes significantly less than 100 basis points)
In contrast the interest rate margin on the debt on an Ex‐Im Bank‐supported aircraft financing
was generally between a few basis points over LIBOR to 50 basis points over LIBOR because the
interest on the Ex‐Im Bank‐guaranteed aircraft financing is guaranteed by Ex‐Im Bank and
reflects the low risk associated with a US Government guaranteed loan However the interest
rate margin on an Ex‐Im Bank‐guaranteed aircraft financing does not reflect the Ex‐Im Bank
exposure fee (or risk premium) that is paid to Ex‐Im Bank in view of the underlying risk of the
foreign airline The minimum exposure fee charged by Ex‐Im Bank was 2 during the 1980s
31 100 basis points equals 1 percent 32 LIBOR is the London Inter‐Bank Offering Rate and is a common reference rate such as ldquoPrimerdquo or ldquoTreasury Raterdquo used in adjustable interest rate transactions
21
and early 1990s and 3 until 2007 when the OECD promulgated a new set of guidelines for
export credits for aircraft (known as the ldquo2007 Aircraft Sector Understandingrdquo or the ldquo2007
ASUrdquo) This exposure fee was required to be paid ldquoup frontrdquo ndash ie at the inception of the loan
On a per annum basis this equates to between 30 basis points and 50 basis points which
should be added to the interest rate margin received by the guaranteed lender to obtain the
equivalent interest rate paid by a foreign airline under Ex‐Im Bank‐supported financing (for
purposes of comparing the overall financing cost to those incurred by US airlines) The Ex‐Im
Bank exposure fee is similar to a homeowner having to pay ldquopointsrdquo up front at the time he
obtains his mortgage The effect of paying points up front and paying an Ex‐Im Bank exposure
fee effectively increases the cost of the financing In comparing the overall cost of financing
through ECA support including the exposure fee to the overall cost of a leveraged lease for
borrowers with comparable credit profiles the overall cost of the US leveraged lease was
considerably more favorable than what could be achieved through an Ex‐Im Bank‐supported
aircraft financing
Although the US leveraged lease was itself a very attractive financing structure for US
airlines at different times the basic US leveraged lease was made even more attractive due to
other provisions of the US and foreign tax codes
For instance from the 1960s (during the Kennedy Administration) until its repeal under the Tax
Reform Act of 1986 the US tax code provided for an investment tax credit which was intended
to encourage investment in capital goods and therefore allowed airlines or the equity investor
in a US leveraged lease to get a credit against the taxes it would otherwise be required to pay
This credit was a permanent reduction in taxes paid as opposed to only the deferral of taxes
(postponement of when taxes had to be paid) that could be achieved through the use of the
US leveraged lease
Similarly from the 1980s to the mid‐1990s it was common for a US airline to combine a US
leveraged lease with a lease into a foreign jurisdiction that had a ldquoform over substancerdquo
approach to its tax code (as opposed to the United States which has a ldquosubstance over formrdquo
approach to its tax code) Taking advantage of the disparity a US airline could ldquosellrdquo the
aircraft to both (i) an equity investor in the United States and (ii) an equity investor in a foreign
country such as Japan Germany or Hong Kong and each equity investor could depreciate the
same aircraft and therefore shelter its respective income Over time due to changes in the
respective tax codes these more aggressive tax advantaged cross‐border leasing structures
(ldquoDouble Dipsrdquo and even on occasion ldquoTriple Dipsrdquo) were disallowed but not before US airlines
financed billions of dollars of aircraft using such tax advantaged leasing structures
During the 1990s the basic US leveraged lease was made even more attractive by taking
advantage of another provision of the US tax code that allowed additional US taxes to be
22
deferred if the equity investor in the transaction used an offshore subsidiary that qualified as a
Foreign Sales Corporation (ldquoFSCrdquo) under the US tax code and structured the deal as a
Commission FSC
In addition during the 1980s and 1990s US airlines had access to other sources of financing
with overall financing terms that were much more attractive than what was available to foreign
airlines via Ex‐Im Bank‐supported export credits For example during the late 1980s and 1990s
Airbus made its first significant sales to US airlines In order to do so Airbus arranged and
provided very attractive and flexible financing terms to US airlines to encourage them to
purchase European‐manufactured Airbus aircraft instead of US‐manufactured Boeing or
McDonnell Douglas aircraft The US airlines were more than willing to accept these incentives
During this period some US airlines entered into ldquowalk awayrdquo leases of Airbus aircraft
pursuant to which Airbus North America (backed by the joint and several guarantees of each of
the four countries that are members of Airbus SAS) entered into a US leveraged lease of the
Airbus aircraft and then subleased the aircraft to a US airline on terms that (i) passed along
most of the tax benefits to the US airline through lower lease rentals and (ii) permitted the
US airline to terminate the sublease and simply ldquowalk awayrdquo from the lease upon a relatively
short notice period
Under the ldquoHome Market Rulerdquo the European export credit agencies (including those of
France Germany and the United Kingdom) that usually support the financing of Airbus aircraft
could not provide such support to US airlines Therefore Airbus arranged for Kreditanstalt fur
Wiederaufbau the development bank of Germany to provide very attractive financing for the
Airbus aircraft being acquired by US airlines These financings occurred on terms much more
favorable (with 18‐ to 22‐year repayment terms) than what export credit agencies could
provide (with a maximum repayment term of 12‐years)
Similarly during the 1990s US airlines began to acquire a large number of 35 to 50 seat
regional jet aircraft manufactured by Bombardier of Canada and Embraer of Brazil Many of
these aircraft were acquired by the US airlines by using export credit support from Canada and
Brazil Some of the financing terms (ie the repayment terms) of these Brazilian and Canadian
government‐supported export credit financings were even more attractive (15‐ to 18‐year
repayment terms) than what was available from the export credit agencies of France Germany
and the United Kingdom with respect to Airbus aircraft or from Ex‐Im Bank with respect to
Boeing aircraft (10‐ to 12‐year repayment terms)
To make the financing of Canadian‐manufactured Bombardier regional jets even more
attractive to US airlines the province of Quebec (where Bombardier has its headquarters)
through Investment Quebec provided additional aircraft financing support to the US airlines
23
Finally to the extent even more attractive financing was needed to convince US airlines to
purchase Canadian or Brazilian‐manufactured regional aircraft the manufacturers themselves
provided residual value guarantees with respect to such aircraft to the airline or to the
financiers (ie to the equity investor in a US leveraged lease or the creditors financing the
aircraft)
The next major development in aircraft financing used by US airlines was the development in
the 1990s of the Enhanced Equipment Trust Certificate (ldquoEETCrdquo) which was an ETC with certain
structural enhancements The most important of these enhancements is a liquidity facility to
ensure that if there is a default the financiers would continue to receive current interest
during the period of time while the aircraft is being repossessed and remarketed A key
element in the development of the EETC was the existence of Section 1110 of the US
Bankruptcy Code which gives a type of ldquopreferred creditorrdquo status to financiers of aircraft for
US airlines This ldquopreferred creditorrdquo status exempts aircraft financiers of US airlines from
the automatic stay generally imposed following a bankruptcy filing by a borrower subject to the
protections of the US Bankruptcy Code Section 1110 of the US Bankruptcy Code
accomplishes this by requiring the airline within 60 days of such bankruptcy filing to either (i)
resume payments under the originally agreed aircraft financing or (ii) return the aircraft to the
financier
The first EETC was done in 1994 and the practice has now been successfully used by almost
every major US airline including Alaska Airlines America West Airlines American Airlines
Continental Airlines Delta Airlines Hawaiian Airlines Jet Blue Airlines Northwest Airlines
Southwest Airlines United Airlines and US Airways The overall financing cost of a US airline
acquiring an aircraft through the use of the EETC ndash which includes the amount of financing
repayment term amortization profile effective cost of the financing etc ndash has generally been
significantly more attractive than (i) what such US airline could have achieved under an export
credit‐supported aircraft financing for such airline and (ii) what a similarly rated foreign airline
could have achieved under an export credit‐supported aircraft financing
This is particularly true for the financing of new aircraft The development of the EETC market
provided enormous financing flexibility to US airlines for the financing of new aircraft the
EETC provided the airline with the option to finance on a simple secured mortgage basis or the
US airline could opt for a leveraged lease with all of the benefits associated with a leveraged
lease described above
Beginning in 1997 US airlines had the ability to raise money in the capital markets when the
overall financing terms were most attractive They were able to ldquolock‐inrdquo such favorable
financing terms to fund new aircraft that were scheduled to be delivered in the future by
issuing a ldquopre‐fundedrdquo EETC These pre‐funded EETCs were used to great success by US
24
airlines in the late 1990s through 2001 a period in which the US airlines were taking delivery
of a significant number of aircraft
As a result of the downturn in the US airline industry following the September 11 2001
terrorist attacks many US airlines deferred or cancelled their orders for new aircraft This
reduced the need for US airlines to finance new aircraft when the financing terms available to
such US airlines via the EETC were not as favorable due to (i) the perceived increased credit
risks of the US airline industry following the September 11 terrorist attacks and (ii) the
temporary disequilibrium in the credit markets following the 200820092010 credit crisis
Now that the US airlines have once again begun to take delivery of a significant number of
new aircraft the pre‐funded EETC continues to be the preferred source of financing for US
airlines as evidenced by the number and amount of EETC issuances during 2012 and 2013
Based on an analysis of the EETC transactions occurring during 2012 and 2013 EETCs are once
again generally considered to provide more attractive overall financing terms than what could
be achieved by an airline under an export credit‐supported financing done under the terms of
the 2011 Aircraft Sector Understanding
25
GLOSSARY
ldquoAdverse Economic Impactrdquo is the short‐hand term used to refer to any serious negative effects on US industries or US jobs as set forth in the Bankrsquos Charter that result from Ex‐Im Bank loans guarantees or insurance The Bankrsquos Charter contains three provisions that address adverse economic impact found at 12 USC sectsect 635(b)(1) 635a‐2 635(e)
ldquoAir Indiardquo is an airline owned by the Government of the Republic of India ldquoAir India Transactionsrdquo are the two final commitments approved by Ex‐Im Bank on September
30 2011 for loan guarantees for the purchase of a number of 787 ldquoDreamlinerrdquo aircraft from Boeing and to be financed by a commercial lender not identified at the time As of the date of this paper Ex‐Im Bank has not issued any of its loan guarantees but is expected to do so in the coming months Ten of the aircraft involved in these two final commitments have been delivered to Air India and are in use by Air India on routes outside the United States The deliveries of the ten aircraft were made using private short‐term financing as to which Ex‐Im Bank had no involvement
ldquoAirbusrdquo Airbus SAS is a Europe‐based manufacturer of large commercial aircraft Airbus is the only competitor to Boeing the US manufacturer Airbus sales are supported by the ECAs of Germany France and the UK
ldquoAircraft Sector also known as the ASU is an agreement among members of the OECD Understandingrdquo that manufacture aircraft and Brazil The ASU requires that Export
Credit Agencies that support the export of aircraft follow certain rules and restrictions that set forth the most favorable terms that can be provided These rules and restrictions include the Export Credit Agency must charge a minimum risk premium which is determined by the ASU the term of any loan made by or supported by the Export Credit Agency for the purchase of aircraft cannot exceed 12 years the Export Credit Agency today can lend or guarantee only up to 85 of the actual purchase price of the aircraft being exported and the use of risk mitigants The ASU was preceded by the Large Aircraft Sector Understanding which governed these issues until the enactment of the 2007 ASU The ASU was again updated and revised in 2011 (See also the Large Aircraft Sector Understanding)
ldquoArrangementrdquo is the agreement among Export Credit Agencies governing the terms by which they will provide loans guarantees or insurance in support of exports from their respective countries Among other things the Arrangement requires Export Credit Agencies to charge a minimum risk premium which is governed by the Arrangement See also Organization for Economic Cooperation and Development
ldquoASUrdquo see Aircraft Sector Understanding ldquoAverage Weighted Liferdquo for purposes of this paper refers to the average number of years that
each dollar of unpaid principal on a loan remains outstanding For example a loan with equal principal payments throughout the loan term will have an average weighted life close to the middle of the whole loan term
26
ldquoBank Actrdquo is the Export‐Import Bank Act of 1945 12 USC sect635 as amended ldquoBank Advisory Committeerdquo is the official Advisory Committee of the Bank appointed in accordance
with the Bank Act and the Advisory Committee Act The Bank Advisory Committee is comprised of representatives of various industry and market sectors as well as representatives of labor and international trade experts
ldquoBasis pointsrdquo are a numerical measure applied to interest rates One basis point equals 1100th of one percent or 100 basis points equals one percent
ldquoCapital Equipmentrdquo is equipment used to manufacture a product provide a service or sell store or deliver merchandise A wide‐body aircraft is a piece of capital equipment
ldquoCharterrdquo is the Bank Act as well the provisions of the Export Import Bank Reauthorization Act of 2012 (Public Law 112‐122) that are not codified in the Bank Act
ldquoDreamlinerrdquo is the name given to a Boeing 787 wide‐body commercial aircraft ldquoECArdquo see Export Credit Agencies ldquoEconomic Impact Proceduresrdquo
are procedures adopted by Ex‐Im Bank to assess whether transactions supported by the Bank cause a serious adverse economic impact to US industries and US jobs See also Adverse Economic Impact
ldquoEETCrdquo see Enhanced Equipment Trust Certificate ldquoEnhanced Equipment Trust Certificaterdquo
also known as an EETC is a type of secured bond issued by a borrower in the capital markets The EETC is secured by the equipment being purchased with the proceeds of the bond issuance EETCs are used primarily for aircraft and since the late 1990s has been the dominant financing tool used by US airlines to purchase aircraft Section 1110 of the US Bankruptcy Codemdashwhich allows creditors of aircraft borrowers to obtain their collateral within 60 days if the payments on their debt is not current ndash has provided creditors of US airlines a level of comfort not available to creditors of foreign airlines until recently This generally provided US airlines with a significant financial advantage vis a vis their foreign competitors Recently the adoption of the Cape Town Convention and the related Aircraft Equipment Protocol has provided creditors of foreign airlines with protections similar to the protections provided by section 1110 of the US Bankruptcy Code Recently this has led to the beginnings of an international EETC market
ldquoEquipment Trust Certificaterdquo
also known as an ETC was the predecessor to the Enhanced Equipment Trust Certificate
ldquoETCrdquo see Equipment Trust Certificate ldquoEx‐Im Bankrdquo or ldquoBankrdquo See The Export‐Import Bank of the United States ldquoExport Credit Agenciesrdquo are agencies or ministries of government that have the official role of
providing loans guarantees or insurance in support of exports from their respective countries or in support of exports by sales of companies from their respective countries Ex‐Im Bank is the official Export Credit Agency of the United States of America
ldquoexportable goods screenrdquo is a screen or filter adopted by Ex‐Im Bank in its 2001 Economic Impact Procedures The exportable goods screen is utilized along with other screens to balance the Bankrsquos obligation to consider the adverse
27
economic effects of its transactions on US industries and US jobs with the Bankrsquos mandate to support US export transactions in a timely manner so as to fully support the exporterrsquos business opportunity The exportable goods screen filtered out transactions that supported exports which could only be used by a foreign buyer to provide services rather than produce goods
ldquoExport‐Import Bank of the is an independent agency of the Federal Government of the United United Statesrdquo States of America Also known as ldquoEx‐Im Bankrdquo Ex‐Im Bankrsquos mission
is to support US jobs by supporting US exports See 12 USC 635 et seq
ldquoExposure Feerdquo is the risk premium charged by Ex‐Im Bank in exchange for its guarantee in certain transactions The exposure fee must be at least equal to the minimum risk premium required by the terms of the Arrangement and the Aircraft Sector Understanding
ldquoForeign Sales Corporationrdquo is a company created under the terms of a former provision of the US Internal Revenue Code Foreign Sales Corporations received significant tax benefits
ldquoFSCrdquo see Foreign Sales Corporation ldquoInvestment Tax Creditrdquo is a credit permitted under the US Internal Revenue Code for the
purchase of certain types of equipment in certain circumstances See also Leveraged Leases
ldquoKFWrdquo the development bank for the Federal Republic of Germany KFW is an Export Credit Agency but it also operates through a ldquomarket windowrdquo which is not subject to the Home Market Rule Thus KFW provides support to Airbus for its sales of aircraft to US airlines The United States does not have an equivalent institution and Ex‐Im Bank does not have a ldquomarket windowrdquo
ldquoLarge Aircraft Sector also known as LASU was the predecessor to the Aircraft Sector Understandingrdquo Understanding The LASU governed the same general issues as are set
forth in the Aircraft Sector Understanding except that the minimum risk premium was lower than that required in the 2007 ASU and 2011 ASU When the 2007 ASU was enacted grandfathering provisions allowed ECA‐supported financing for a limited number of aircraft to be governed by LASU
ldquoLASUrdquo see Large Aircraft Sector Understanding ldquoLeveraged Leaserdquo is a lease of equipment and is designed to allow the lessor to take
advantage of certain tax code provisions such as the depreciation deduction and the investment tax credit while allowing the lessee to obtain the equipment involved at a significantly lower cost Leveraged Leases were a very popular means for US airlines to acquire aircraft throughout the 1980s and 1990s The value of the tax deductions to the lessor were significant so that the implicit interest rate in the lease payments by the US airline were extremely low Usually the US airline did not have sufficient profit to take advantage of the favorable tax code provisions By using a leveraged lease another company that could shelter income by using the tax code provisions would buy the equipment and lease the equipment to the US airline Usually at the end of the lease term the US airline would purchase the aircraft
28
ldquoLIBORrdquo is the London Inter‐bank Offering Rate It is commonly used as a reference rate in loan transactions that have floating or adjustable interest rates LIBOR reflects the rate at which banks will lend money to each other LIBOR is set for various loan terms (eg 3 months 6 months etc) and is widely published making it a convenient rate to use as a reference rate
ldquoNet pricerdquo is the price paid after all discounts have been deducted The net price is the actual price paid for a piece of equipment In aircraft transactions pursuant to the ASU Ex‐Im Bank will only support up to 85 of the net price of an aircraft EETC transactions on the other hand often support the nominal purchase price of an aircraft and thus result in a significantly higher amount financed
ldquoOECDrdquo see the Organization for Economic Cooperation and Development Open Skies Agreement Is a type of bilateral agreement between countries that govern the
rights of airlines from the two countries to fly into the other country Open Skies Agreements generally allow free access to fly as many routes to a country as an airline may choose but then usually restrict the ability to fly within the other country Generally it is a ldquofly in and outrdquo rule although there are exceptions
ldquoOrganization for Economic Cooperation and Developmentrdquo
also known as the OECD is an organization comprised of 34 member countries that work together to promote development The United States is a member With regard to Ex‐Im Bank the OECD is the organization through which the US Government negotiates an agreement among Export Credit Agencies known as the Arrangement and the ASU (and its predecessor the LASU)
ldquoPass Through Certificaterdquo also known as a PTC is a group of Equipment Trust Certificates pooled together to form the basis for a bond issuance
ldquoPTCrdquo See Pass Through Certificate ldquoRyanairrdquo is a low‐cost Irish airline that began business after European
deregulation of airlines in 1997 Ryanair rapidly expanded during the first decade of the 2000s creating significant competition for other airlines
ldquoScreensrdquo are a type of filter used by Ex‐Im Bank in its Economic Impact Procedures Screens are designed to identify those transactions which are not likely to cause an adverse economic impact to US industries or US jobs so that such transactions can be processed more quickly and efficiently as required by the Bank Act
ldquoSubstantial Injuryrdquo is a term defined in Ex‐Im Bankrsquos Charter to be applied in connection with the Bankrsquos economic impact procedures 12 USC sect635(e)(4) The Charter states ldquohellipthe extension of any credit or guarantee by the Bank will cause substantial injury if the amount of the capacity for production established or the amount of the increase in such capacity expanded by such credit or guarantee equals or exceeds 1 percent of United States productionrdquo
ldquoTPCCrdquo see Trade Promotion Coordinating Committee ldquoTrade Promotion Coordinating Committeerdquo
also known as the TPCC is an interagency committee of the US Government chaired by the Secretary of Commerce It was established under the Export Enhancement Act of 1992 to provide a
29
unifying framework to coordinate the export promotion and export financing activities of the US government and to develop a government‐wide strategic plan for carrying out such programs
ldquoTrade Sanctionsrdquo refers to any of a number of sanctions imposed by the US Government against companies countries industries or products usually as a result of an accusation of adjudication of a violation of an international trade agreement The Bank Act requires Ex‐Im Bank to take certain trade sanctions into account in its economic impact procedures
30
Table A ndash Congressional Actions and Ex-Im Bank Responses
Year Congressional Action Ex‐Im Bank Response
1968 Bank directed to take into account the possible adverse effect [of its loans and guarantees] upon the United States economy
Bank adds this transactions
factor to analysis of
1975 1 Standard refined to take into account any serious adverse effect of loans and guarantees on competitive position of US industry availability of scarce materials in US and employment in US
2 Bank directed to be competitive with rates terms and conditions offered by principal countries whose exporters compete with US exporters
3 Bank directed to submit semi‐annual report on competitiveness and conduct survey of US exporters and lenders to determine experience in meeting financing competition
Bank adds these of transactions
considerations to analysis
Year Congressional Action Ex‐Im Bank Response
1978 ‐ 1979
1 Bank directed to take into account any serious adverse effect of loans on competitive position of US industry and scarce materials Bank directed to emphasize strengthening competitive position of US exporters and expanding total US exports
2 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [From Appropriations Act Restated in Bank Charter in 1986]
3 Bank directed to implement regulations and procedures to insure full consideration of extent to which loan or guarantee is likely to have adverse effect on industries and employment in US either by reducing demand for US produced goods or increasing imports to the US
Bank develops framework and set of written economic impact procedures
1 Exclude exports the use of which remained localized in foreign country This
is first ldquoforeign localized goods and services screenrdquo
2 ldquoIntent and stimulus for projectrdquo examined to determine likelihood of substantial adverse economic impact Does transaction involve ldquorunaway industryrdquo
(leaving US for cheaper foreign labor)
3 Does export of capital equipment result in ldquobuy backrdquo of product being imported into the US
4 Is net impact on US economy and jobs positive or negative and to what degree
32
Year Congressional Action Ex‐Im Bank Response
1986 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [Originally from 1978 Appropriations incorporated into Bank Charter in 1986]
Senate Report recognizes knowledge and experience of Bank and need to respond to exportersrsquo requests for support in a timely and confidential fashion Economic impact procedures are to be practical and workable and not reduce Bankrsquos competitiveness and flexibility nor ignore positive aspects of export sale
Bank develops ldquoSummary of Adverse Economic Guidelinesrdquo to be applied to both
goods and services (a) is commodity to be produced surplus or likely to compete with US‐produced surplus (b) will Bankrsquos
assistance cause substantial injury to US producers of competing commodity (c)
will injury to US producers of competing commodity outweigh the short‐ and long‐
term benefits to US industry and employment If answer is no then no
further economic impact analysis
1988 Congress establishes test for ldquosubstantial injuryrdquo if the amount of capacity for production established or amount of increase in such capacity expanded by Bankrsquos credit or guarantee exceeds 1 of US production
Bankrsquos Board recognizes requirement to balance (a) possibility of substantial harm
to US production and employment with (b) being responsive competitive and efficient New economic impact procedures ask (a) will the project be in direct competition with US production (b) is the Bankrsquos support significantly associated with the project (c) will the output of the project
cause substantial injury to US producers of the same similar or competing
commodity If answer is no then no further economic impact analysis is required
33
Year Congressional Action Ex‐Im Bank Response
1998 Bank revised procedures involving countries against which trade sanctions were pending or imposed
2001
2006 ‐2007
1 Bank required to determine whether extension of credit or guarantee is likely to produce same or other commodities and whether the production may cause substantial injury to US producers
2 Bank prohibited from providing a loan or guarantee that will facilitate circumvention of trade law order or determination
3 Bank required to designate sensitive commercial sectors and products for which Bank financing deemed unlikely due to potential for adverse economic impact on US
4 Bank required to aggregate financial thresholds on rolling 24‐month basis
Bank develops ldquoexportable goods screenrdquo Does Ex‐Im Bank support result in production of exportable good from the foreign buyerrsquos country If not no further economic impact analysis is required Notice and request for comments were published in the Federal Register US airline industry did not respond
Bank issues 2007 Economic Impact Procedures ldquoExportable goods screenrdquo is modified Will the transaction (capital goods and services) result in either new or additional production capacity of an exportable good
34
leveraged lease should not exceed 80 of the economic useful life of the aircraft which in
some instances was more than 30 years
In contrast the repayment term in an Ex‐Im Bank‐supported aircraft financing is never longer
than 12 years which is the maximum repayment term Ex‐Im Bank is permitted to offer for an
aircraft financing under the guidelines for export credits promulgated by the Organization for
Economic Cooperation and Development (the ldquoOECDrdquo) with which guidelines the US
Government (including Ex‐Im Bank) has agreed to abide This difference in repayment terms is
significant it is similar to the difference in monthly payments under a 15 year home mortgage
versus a 30 year home mortgage As a result US airlines were able to obtain significantly
longer financing under a US leveraged lease (which generally resulted in a smaller periodic
principal repayment burden due to the longer repayment term) than foreign airlines could
under an Ex‐Im Bank‐supported financing
US leveraged leases used by US airlines also had a slower amortization profile with a very
long weighted average life (ie small amounts of debt amortization in the early years of the
financing) of at least 10 years In the same manner that a longer repayment term increased the
tax deferral a longer weighted average life also increased the tax deferral
In contrast the amortization profile in an Ex‐Im Bank supported aircraft financing for a foreign
airline is usually between 6 years and 65 years (at least 4 years shorter than the weighted
average life of the US leveraged leases historically used by US airlines) which imposes a
much greater cash flow burden on the foreign airline in comparison with the cash flows
required of a US airline under a US leveraged lease
Although the absolute interest rate on the debt in a US leveraged lease fluctuated over time
with the overall level of interest rates the providers of the debt into these US leveraged leases
(primarily insurance companies and other institutional investors) were generally willing to
accept an interest rate margin of less than 100 basis points31 over LIBOR32 on a fixed rate
equivalent basis (and sometimes significantly less than 100 basis points)
In contrast the interest rate margin on the debt on an Ex‐Im Bank‐supported aircraft financing
was generally between a few basis points over LIBOR to 50 basis points over LIBOR because the
interest on the Ex‐Im Bank‐guaranteed aircraft financing is guaranteed by Ex‐Im Bank and
reflects the low risk associated with a US Government guaranteed loan However the interest
rate margin on an Ex‐Im Bank‐guaranteed aircraft financing does not reflect the Ex‐Im Bank
exposure fee (or risk premium) that is paid to Ex‐Im Bank in view of the underlying risk of the
foreign airline The minimum exposure fee charged by Ex‐Im Bank was 2 during the 1980s
31 100 basis points equals 1 percent 32 LIBOR is the London Inter‐Bank Offering Rate and is a common reference rate such as ldquoPrimerdquo or ldquoTreasury Raterdquo used in adjustable interest rate transactions
21
and early 1990s and 3 until 2007 when the OECD promulgated a new set of guidelines for
export credits for aircraft (known as the ldquo2007 Aircraft Sector Understandingrdquo or the ldquo2007
ASUrdquo) This exposure fee was required to be paid ldquoup frontrdquo ndash ie at the inception of the loan
On a per annum basis this equates to between 30 basis points and 50 basis points which
should be added to the interest rate margin received by the guaranteed lender to obtain the
equivalent interest rate paid by a foreign airline under Ex‐Im Bank‐supported financing (for
purposes of comparing the overall financing cost to those incurred by US airlines) The Ex‐Im
Bank exposure fee is similar to a homeowner having to pay ldquopointsrdquo up front at the time he
obtains his mortgage The effect of paying points up front and paying an Ex‐Im Bank exposure
fee effectively increases the cost of the financing In comparing the overall cost of financing
through ECA support including the exposure fee to the overall cost of a leveraged lease for
borrowers with comparable credit profiles the overall cost of the US leveraged lease was
considerably more favorable than what could be achieved through an Ex‐Im Bank‐supported
aircraft financing
Although the US leveraged lease was itself a very attractive financing structure for US
airlines at different times the basic US leveraged lease was made even more attractive due to
other provisions of the US and foreign tax codes
For instance from the 1960s (during the Kennedy Administration) until its repeal under the Tax
Reform Act of 1986 the US tax code provided for an investment tax credit which was intended
to encourage investment in capital goods and therefore allowed airlines or the equity investor
in a US leveraged lease to get a credit against the taxes it would otherwise be required to pay
This credit was a permanent reduction in taxes paid as opposed to only the deferral of taxes
(postponement of when taxes had to be paid) that could be achieved through the use of the
US leveraged lease
Similarly from the 1980s to the mid‐1990s it was common for a US airline to combine a US
leveraged lease with a lease into a foreign jurisdiction that had a ldquoform over substancerdquo
approach to its tax code (as opposed to the United States which has a ldquosubstance over formrdquo
approach to its tax code) Taking advantage of the disparity a US airline could ldquosellrdquo the
aircraft to both (i) an equity investor in the United States and (ii) an equity investor in a foreign
country such as Japan Germany or Hong Kong and each equity investor could depreciate the
same aircraft and therefore shelter its respective income Over time due to changes in the
respective tax codes these more aggressive tax advantaged cross‐border leasing structures
(ldquoDouble Dipsrdquo and even on occasion ldquoTriple Dipsrdquo) were disallowed but not before US airlines
financed billions of dollars of aircraft using such tax advantaged leasing structures
During the 1990s the basic US leveraged lease was made even more attractive by taking
advantage of another provision of the US tax code that allowed additional US taxes to be
22
deferred if the equity investor in the transaction used an offshore subsidiary that qualified as a
Foreign Sales Corporation (ldquoFSCrdquo) under the US tax code and structured the deal as a
Commission FSC
In addition during the 1980s and 1990s US airlines had access to other sources of financing
with overall financing terms that were much more attractive than what was available to foreign
airlines via Ex‐Im Bank‐supported export credits For example during the late 1980s and 1990s
Airbus made its first significant sales to US airlines In order to do so Airbus arranged and
provided very attractive and flexible financing terms to US airlines to encourage them to
purchase European‐manufactured Airbus aircraft instead of US‐manufactured Boeing or
McDonnell Douglas aircraft The US airlines were more than willing to accept these incentives
During this period some US airlines entered into ldquowalk awayrdquo leases of Airbus aircraft
pursuant to which Airbus North America (backed by the joint and several guarantees of each of
the four countries that are members of Airbus SAS) entered into a US leveraged lease of the
Airbus aircraft and then subleased the aircraft to a US airline on terms that (i) passed along
most of the tax benefits to the US airline through lower lease rentals and (ii) permitted the
US airline to terminate the sublease and simply ldquowalk awayrdquo from the lease upon a relatively
short notice period
Under the ldquoHome Market Rulerdquo the European export credit agencies (including those of
France Germany and the United Kingdom) that usually support the financing of Airbus aircraft
could not provide such support to US airlines Therefore Airbus arranged for Kreditanstalt fur
Wiederaufbau the development bank of Germany to provide very attractive financing for the
Airbus aircraft being acquired by US airlines These financings occurred on terms much more
favorable (with 18‐ to 22‐year repayment terms) than what export credit agencies could
provide (with a maximum repayment term of 12‐years)
Similarly during the 1990s US airlines began to acquire a large number of 35 to 50 seat
regional jet aircraft manufactured by Bombardier of Canada and Embraer of Brazil Many of
these aircraft were acquired by the US airlines by using export credit support from Canada and
Brazil Some of the financing terms (ie the repayment terms) of these Brazilian and Canadian
government‐supported export credit financings were even more attractive (15‐ to 18‐year
repayment terms) than what was available from the export credit agencies of France Germany
and the United Kingdom with respect to Airbus aircraft or from Ex‐Im Bank with respect to
Boeing aircraft (10‐ to 12‐year repayment terms)
To make the financing of Canadian‐manufactured Bombardier regional jets even more
attractive to US airlines the province of Quebec (where Bombardier has its headquarters)
through Investment Quebec provided additional aircraft financing support to the US airlines
23
Finally to the extent even more attractive financing was needed to convince US airlines to
purchase Canadian or Brazilian‐manufactured regional aircraft the manufacturers themselves
provided residual value guarantees with respect to such aircraft to the airline or to the
financiers (ie to the equity investor in a US leveraged lease or the creditors financing the
aircraft)
The next major development in aircraft financing used by US airlines was the development in
the 1990s of the Enhanced Equipment Trust Certificate (ldquoEETCrdquo) which was an ETC with certain
structural enhancements The most important of these enhancements is a liquidity facility to
ensure that if there is a default the financiers would continue to receive current interest
during the period of time while the aircraft is being repossessed and remarketed A key
element in the development of the EETC was the existence of Section 1110 of the US
Bankruptcy Code which gives a type of ldquopreferred creditorrdquo status to financiers of aircraft for
US airlines This ldquopreferred creditorrdquo status exempts aircraft financiers of US airlines from
the automatic stay generally imposed following a bankruptcy filing by a borrower subject to the
protections of the US Bankruptcy Code Section 1110 of the US Bankruptcy Code
accomplishes this by requiring the airline within 60 days of such bankruptcy filing to either (i)
resume payments under the originally agreed aircraft financing or (ii) return the aircraft to the
financier
The first EETC was done in 1994 and the practice has now been successfully used by almost
every major US airline including Alaska Airlines America West Airlines American Airlines
Continental Airlines Delta Airlines Hawaiian Airlines Jet Blue Airlines Northwest Airlines
Southwest Airlines United Airlines and US Airways The overall financing cost of a US airline
acquiring an aircraft through the use of the EETC ndash which includes the amount of financing
repayment term amortization profile effective cost of the financing etc ndash has generally been
significantly more attractive than (i) what such US airline could have achieved under an export
credit‐supported aircraft financing for such airline and (ii) what a similarly rated foreign airline
could have achieved under an export credit‐supported aircraft financing
This is particularly true for the financing of new aircraft The development of the EETC market
provided enormous financing flexibility to US airlines for the financing of new aircraft the
EETC provided the airline with the option to finance on a simple secured mortgage basis or the
US airline could opt for a leveraged lease with all of the benefits associated with a leveraged
lease described above
Beginning in 1997 US airlines had the ability to raise money in the capital markets when the
overall financing terms were most attractive They were able to ldquolock‐inrdquo such favorable
financing terms to fund new aircraft that were scheduled to be delivered in the future by
issuing a ldquopre‐fundedrdquo EETC These pre‐funded EETCs were used to great success by US
24
airlines in the late 1990s through 2001 a period in which the US airlines were taking delivery
of a significant number of aircraft
As a result of the downturn in the US airline industry following the September 11 2001
terrorist attacks many US airlines deferred or cancelled their orders for new aircraft This
reduced the need for US airlines to finance new aircraft when the financing terms available to
such US airlines via the EETC were not as favorable due to (i) the perceived increased credit
risks of the US airline industry following the September 11 terrorist attacks and (ii) the
temporary disequilibrium in the credit markets following the 200820092010 credit crisis
Now that the US airlines have once again begun to take delivery of a significant number of
new aircraft the pre‐funded EETC continues to be the preferred source of financing for US
airlines as evidenced by the number and amount of EETC issuances during 2012 and 2013
Based on an analysis of the EETC transactions occurring during 2012 and 2013 EETCs are once
again generally considered to provide more attractive overall financing terms than what could
be achieved by an airline under an export credit‐supported financing done under the terms of
the 2011 Aircraft Sector Understanding
25
GLOSSARY
ldquoAdverse Economic Impactrdquo is the short‐hand term used to refer to any serious negative effects on US industries or US jobs as set forth in the Bankrsquos Charter that result from Ex‐Im Bank loans guarantees or insurance The Bankrsquos Charter contains three provisions that address adverse economic impact found at 12 USC sectsect 635(b)(1) 635a‐2 635(e)
ldquoAir Indiardquo is an airline owned by the Government of the Republic of India ldquoAir India Transactionsrdquo are the two final commitments approved by Ex‐Im Bank on September
30 2011 for loan guarantees for the purchase of a number of 787 ldquoDreamlinerrdquo aircraft from Boeing and to be financed by a commercial lender not identified at the time As of the date of this paper Ex‐Im Bank has not issued any of its loan guarantees but is expected to do so in the coming months Ten of the aircraft involved in these two final commitments have been delivered to Air India and are in use by Air India on routes outside the United States The deliveries of the ten aircraft were made using private short‐term financing as to which Ex‐Im Bank had no involvement
ldquoAirbusrdquo Airbus SAS is a Europe‐based manufacturer of large commercial aircraft Airbus is the only competitor to Boeing the US manufacturer Airbus sales are supported by the ECAs of Germany France and the UK
ldquoAircraft Sector also known as the ASU is an agreement among members of the OECD Understandingrdquo that manufacture aircraft and Brazil The ASU requires that Export
Credit Agencies that support the export of aircraft follow certain rules and restrictions that set forth the most favorable terms that can be provided These rules and restrictions include the Export Credit Agency must charge a minimum risk premium which is determined by the ASU the term of any loan made by or supported by the Export Credit Agency for the purchase of aircraft cannot exceed 12 years the Export Credit Agency today can lend or guarantee only up to 85 of the actual purchase price of the aircraft being exported and the use of risk mitigants The ASU was preceded by the Large Aircraft Sector Understanding which governed these issues until the enactment of the 2007 ASU The ASU was again updated and revised in 2011 (See also the Large Aircraft Sector Understanding)
ldquoArrangementrdquo is the agreement among Export Credit Agencies governing the terms by which they will provide loans guarantees or insurance in support of exports from their respective countries Among other things the Arrangement requires Export Credit Agencies to charge a minimum risk premium which is governed by the Arrangement See also Organization for Economic Cooperation and Development
ldquoASUrdquo see Aircraft Sector Understanding ldquoAverage Weighted Liferdquo for purposes of this paper refers to the average number of years that
each dollar of unpaid principal on a loan remains outstanding For example a loan with equal principal payments throughout the loan term will have an average weighted life close to the middle of the whole loan term
26
ldquoBank Actrdquo is the Export‐Import Bank Act of 1945 12 USC sect635 as amended ldquoBank Advisory Committeerdquo is the official Advisory Committee of the Bank appointed in accordance
with the Bank Act and the Advisory Committee Act The Bank Advisory Committee is comprised of representatives of various industry and market sectors as well as representatives of labor and international trade experts
ldquoBasis pointsrdquo are a numerical measure applied to interest rates One basis point equals 1100th of one percent or 100 basis points equals one percent
ldquoCapital Equipmentrdquo is equipment used to manufacture a product provide a service or sell store or deliver merchandise A wide‐body aircraft is a piece of capital equipment
ldquoCharterrdquo is the Bank Act as well the provisions of the Export Import Bank Reauthorization Act of 2012 (Public Law 112‐122) that are not codified in the Bank Act
ldquoDreamlinerrdquo is the name given to a Boeing 787 wide‐body commercial aircraft ldquoECArdquo see Export Credit Agencies ldquoEconomic Impact Proceduresrdquo
are procedures adopted by Ex‐Im Bank to assess whether transactions supported by the Bank cause a serious adverse economic impact to US industries and US jobs See also Adverse Economic Impact
ldquoEETCrdquo see Enhanced Equipment Trust Certificate ldquoEnhanced Equipment Trust Certificaterdquo
also known as an EETC is a type of secured bond issued by a borrower in the capital markets The EETC is secured by the equipment being purchased with the proceeds of the bond issuance EETCs are used primarily for aircraft and since the late 1990s has been the dominant financing tool used by US airlines to purchase aircraft Section 1110 of the US Bankruptcy Codemdashwhich allows creditors of aircraft borrowers to obtain their collateral within 60 days if the payments on their debt is not current ndash has provided creditors of US airlines a level of comfort not available to creditors of foreign airlines until recently This generally provided US airlines with a significant financial advantage vis a vis their foreign competitors Recently the adoption of the Cape Town Convention and the related Aircraft Equipment Protocol has provided creditors of foreign airlines with protections similar to the protections provided by section 1110 of the US Bankruptcy Code Recently this has led to the beginnings of an international EETC market
ldquoEquipment Trust Certificaterdquo
also known as an ETC was the predecessor to the Enhanced Equipment Trust Certificate
ldquoETCrdquo see Equipment Trust Certificate ldquoEx‐Im Bankrdquo or ldquoBankrdquo See The Export‐Import Bank of the United States ldquoExport Credit Agenciesrdquo are agencies or ministries of government that have the official role of
providing loans guarantees or insurance in support of exports from their respective countries or in support of exports by sales of companies from their respective countries Ex‐Im Bank is the official Export Credit Agency of the United States of America
ldquoexportable goods screenrdquo is a screen or filter adopted by Ex‐Im Bank in its 2001 Economic Impact Procedures The exportable goods screen is utilized along with other screens to balance the Bankrsquos obligation to consider the adverse
27
economic effects of its transactions on US industries and US jobs with the Bankrsquos mandate to support US export transactions in a timely manner so as to fully support the exporterrsquos business opportunity The exportable goods screen filtered out transactions that supported exports which could only be used by a foreign buyer to provide services rather than produce goods
ldquoExport‐Import Bank of the is an independent agency of the Federal Government of the United United Statesrdquo States of America Also known as ldquoEx‐Im Bankrdquo Ex‐Im Bankrsquos mission
is to support US jobs by supporting US exports See 12 USC 635 et seq
ldquoExposure Feerdquo is the risk premium charged by Ex‐Im Bank in exchange for its guarantee in certain transactions The exposure fee must be at least equal to the minimum risk premium required by the terms of the Arrangement and the Aircraft Sector Understanding
ldquoForeign Sales Corporationrdquo is a company created under the terms of a former provision of the US Internal Revenue Code Foreign Sales Corporations received significant tax benefits
ldquoFSCrdquo see Foreign Sales Corporation ldquoInvestment Tax Creditrdquo is a credit permitted under the US Internal Revenue Code for the
purchase of certain types of equipment in certain circumstances See also Leveraged Leases
ldquoKFWrdquo the development bank for the Federal Republic of Germany KFW is an Export Credit Agency but it also operates through a ldquomarket windowrdquo which is not subject to the Home Market Rule Thus KFW provides support to Airbus for its sales of aircraft to US airlines The United States does not have an equivalent institution and Ex‐Im Bank does not have a ldquomarket windowrdquo
ldquoLarge Aircraft Sector also known as LASU was the predecessor to the Aircraft Sector Understandingrdquo Understanding The LASU governed the same general issues as are set
forth in the Aircraft Sector Understanding except that the minimum risk premium was lower than that required in the 2007 ASU and 2011 ASU When the 2007 ASU was enacted grandfathering provisions allowed ECA‐supported financing for a limited number of aircraft to be governed by LASU
ldquoLASUrdquo see Large Aircraft Sector Understanding ldquoLeveraged Leaserdquo is a lease of equipment and is designed to allow the lessor to take
advantage of certain tax code provisions such as the depreciation deduction and the investment tax credit while allowing the lessee to obtain the equipment involved at a significantly lower cost Leveraged Leases were a very popular means for US airlines to acquire aircraft throughout the 1980s and 1990s The value of the tax deductions to the lessor were significant so that the implicit interest rate in the lease payments by the US airline were extremely low Usually the US airline did not have sufficient profit to take advantage of the favorable tax code provisions By using a leveraged lease another company that could shelter income by using the tax code provisions would buy the equipment and lease the equipment to the US airline Usually at the end of the lease term the US airline would purchase the aircraft
28
ldquoLIBORrdquo is the London Inter‐bank Offering Rate It is commonly used as a reference rate in loan transactions that have floating or adjustable interest rates LIBOR reflects the rate at which banks will lend money to each other LIBOR is set for various loan terms (eg 3 months 6 months etc) and is widely published making it a convenient rate to use as a reference rate
ldquoNet pricerdquo is the price paid after all discounts have been deducted The net price is the actual price paid for a piece of equipment In aircraft transactions pursuant to the ASU Ex‐Im Bank will only support up to 85 of the net price of an aircraft EETC transactions on the other hand often support the nominal purchase price of an aircraft and thus result in a significantly higher amount financed
ldquoOECDrdquo see the Organization for Economic Cooperation and Development Open Skies Agreement Is a type of bilateral agreement between countries that govern the
rights of airlines from the two countries to fly into the other country Open Skies Agreements generally allow free access to fly as many routes to a country as an airline may choose but then usually restrict the ability to fly within the other country Generally it is a ldquofly in and outrdquo rule although there are exceptions
ldquoOrganization for Economic Cooperation and Developmentrdquo
also known as the OECD is an organization comprised of 34 member countries that work together to promote development The United States is a member With regard to Ex‐Im Bank the OECD is the organization through which the US Government negotiates an agreement among Export Credit Agencies known as the Arrangement and the ASU (and its predecessor the LASU)
ldquoPass Through Certificaterdquo also known as a PTC is a group of Equipment Trust Certificates pooled together to form the basis for a bond issuance
ldquoPTCrdquo See Pass Through Certificate ldquoRyanairrdquo is a low‐cost Irish airline that began business after European
deregulation of airlines in 1997 Ryanair rapidly expanded during the first decade of the 2000s creating significant competition for other airlines
ldquoScreensrdquo are a type of filter used by Ex‐Im Bank in its Economic Impact Procedures Screens are designed to identify those transactions which are not likely to cause an adverse economic impact to US industries or US jobs so that such transactions can be processed more quickly and efficiently as required by the Bank Act
ldquoSubstantial Injuryrdquo is a term defined in Ex‐Im Bankrsquos Charter to be applied in connection with the Bankrsquos economic impact procedures 12 USC sect635(e)(4) The Charter states ldquohellipthe extension of any credit or guarantee by the Bank will cause substantial injury if the amount of the capacity for production established or the amount of the increase in such capacity expanded by such credit or guarantee equals or exceeds 1 percent of United States productionrdquo
ldquoTPCCrdquo see Trade Promotion Coordinating Committee ldquoTrade Promotion Coordinating Committeerdquo
also known as the TPCC is an interagency committee of the US Government chaired by the Secretary of Commerce It was established under the Export Enhancement Act of 1992 to provide a
29
unifying framework to coordinate the export promotion and export financing activities of the US government and to develop a government‐wide strategic plan for carrying out such programs
ldquoTrade Sanctionsrdquo refers to any of a number of sanctions imposed by the US Government against companies countries industries or products usually as a result of an accusation of adjudication of a violation of an international trade agreement The Bank Act requires Ex‐Im Bank to take certain trade sanctions into account in its economic impact procedures
30
Table A ndash Congressional Actions and Ex-Im Bank Responses
Year Congressional Action Ex‐Im Bank Response
1968 Bank directed to take into account the possible adverse effect [of its loans and guarantees] upon the United States economy
Bank adds this transactions
factor to analysis of
1975 1 Standard refined to take into account any serious adverse effect of loans and guarantees on competitive position of US industry availability of scarce materials in US and employment in US
2 Bank directed to be competitive with rates terms and conditions offered by principal countries whose exporters compete with US exporters
3 Bank directed to submit semi‐annual report on competitiveness and conduct survey of US exporters and lenders to determine experience in meeting financing competition
Bank adds these of transactions
considerations to analysis
Year Congressional Action Ex‐Im Bank Response
1978 ‐ 1979
1 Bank directed to take into account any serious adverse effect of loans on competitive position of US industry and scarce materials Bank directed to emphasize strengthening competitive position of US exporters and expanding total US exports
2 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [From Appropriations Act Restated in Bank Charter in 1986]
3 Bank directed to implement regulations and procedures to insure full consideration of extent to which loan or guarantee is likely to have adverse effect on industries and employment in US either by reducing demand for US produced goods or increasing imports to the US
Bank develops framework and set of written economic impact procedures
1 Exclude exports the use of which remained localized in foreign country This
is first ldquoforeign localized goods and services screenrdquo
2 ldquoIntent and stimulus for projectrdquo examined to determine likelihood of substantial adverse economic impact Does transaction involve ldquorunaway industryrdquo
(leaving US for cheaper foreign labor)
3 Does export of capital equipment result in ldquobuy backrdquo of product being imported into the US
4 Is net impact on US economy and jobs positive or negative and to what degree
32
Year Congressional Action Ex‐Im Bank Response
1986 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [Originally from 1978 Appropriations incorporated into Bank Charter in 1986]
Senate Report recognizes knowledge and experience of Bank and need to respond to exportersrsquo requests for support in a timely and confidential fashion Economic impact procedures are to be practical and workable and not reduce Bankrsquos competitiveness and flexibility nor ignore positive aspects of export sale
Bank develops ldquoSummary of Adverse Economic Guidelinesrdquo to be applied to both
goods and services (a) is commodity to be produced surplus or likely to compete with US‐produced surplus (b) will Bankrsquos
assistance cause substantial injury to US producers of competing commodity (c)
will injury to US producers of competing commodity outweigh the short‐ and long‐
term benefits to US industry and employment If answer is no then no
further economic impact analysis
1988 Congress establishes test for ldquosubstantial injuryrdquo if the amount of capacity for production established or amount of increase in such capacity expanded by Bankrsquos credit or guarantee exceeds 1 of US production
Bankrsquos Board recognizes requirement to balance (a) possibility of substantial harm
to US production and employment with (b) being responsive competitive and efficient New economic impact procedures ask (a) will the project be in direct competition with US production (b) is the Bankrsquos support significantly associated with the project (c) will the output of the project
cause substantial injury to US producers of the same similar or competing
commodity If answer is no then no further economic impact analysis is required
33
Year Congressional Action Ex‐Im Bank Response
1998 Bank revised procedures involving countries against which trade sanctions were pending or imposed
2001
2006 ‐2007
1 Bank required to determine whether extension of credit or guarantee is likely to produce same or other commodities and whether the production may cause substantial injury to US producers
2 Bank prohibited from providing a loan or guarantee that will facilitate circumvention of trade law order or determination
3 Bank required to designate sensitive commercial sectors and products for which Bank financing deemed unlikely due to potential for adverse economic impact on US
4 Bank required to aggregate financial thresholds on rolling 24‐month basis
Bank develops ldquoexportable goods screenrdquo Does Ex‐Im Bank support result in production of exportable good from the foreign buyerrsquos country If not no further economic impact analysis is required Notice and request for comments were published in the Federal Register US airline industry did not respond
Bank issues 2007 Economic Impact Procedures ldquoExportable goods screenrdquo is modified Will the transaction (capital goods and services) result in either new or additional production capacity of an exportable good
34
and early 1990s and 3 until 2007 when the OECD promulgated a new set of guidelines for
export credits for aircraft (known as the ldquo2007 Aircraft Sector Understandingrdquo or the ldquo2007
ASUrdquo) This exposure fee was required to be paid ldquoup frontrdquo ndash ie at the inception of the loan
On a per annum basis this equates to between 30 basis points and 50 basis points which
should be added to the interest rate margin received by the guaranteed lender to obtain the
equivalent interest rate paid by a foreign airline under Ex‐Im Bank‐supported financing (for
purposes of comparing the overall financing cost to those incurred by US airlines) The Ex‐Im
Bank exposure fee is similar to a homeowner having to pay ldquopointsrdquo up front at the time he
obtains his mortgage The effect of paying points up front and paying an Ex‐Im Bank exposure
fee effectively increases the cost of the financing In comparing the overall cost of financing
through ECA support including the exposure fee to the overall cost of a leveraged lease for
borrowers with comparable credit profiles the overall cost of the US leveraged lease was
considerably more favorable than what could be achieved through an Ex‐Im Bank‐supported
aircraft financing
Although the US leveraged lease was itself a very attractive financing structure for US
airlines at different times the basic US leveraged lease was made even more attractive due to
other provisions of the US and foreign tax codes
For instance from the 1960s (during the Kennedy Administration) until its repeal under the Tax
Reform Act of 1986 the US tax code provided for an investment tax credit which was intended
to encourage investment in capital goods and therefore allowed airlines or the equity investor
in a US leveraged lease to get a credit against the taxes it would otherwise be required to pay
This credit was a permanent reduction in taxes paid as opposed to only the deferral of taxes
(postponement of when taxes had to be paid) that could be achieved through the use of the
US leveraged lease
Similarly from the 1980s to the mid‐1990s it was common for a US airline to combine a US
leveraged lease with a lease into a foreign jurisdiction that had a ldquoform over substancerdquo
approach to its tax code (as opposed to the United States which has a ldquosubstance over formrdquo
approach to its tax code) Taking advantage of the disparity a US airline could ldquosellrdquo the
aircraft to both (i) an equity investor in the United States and (ii) an equity investor in a foreign
country such as Japan Germany or Hong Kong and each equity investor could depreciate the
same aircraft and therefore shelter its respective income Over time due to changes in the
respective tax codes these more aggressive tax advantaged cross‐border leasing structures
(ldquoDouble Dipsrdquo and even on occasion ldquoTriple Dipsrdquo) were disallowed but not before US airlines
financed billions of dollars of aircraft using such tax advantaged leasing structures
During the 1990s the basic US leveraged lease was made even more attractive by taking
advantage of another provision of the US tax code that allowed additional US taxes to be
22
deferred if the equity investor in the transaction used an offshore subsidiary that qualified as a
Foreign Sales Corporation (ldquoFSCrdquo) under the US tax code and structured the deal as a
Commission FSC
In addition during the 1980s and 1990s US airlines had access to other sources of financing
with overall financing terms that were much more attractive than what was available to foreign
airlines via Ex‐Im Bank‐supported export credits For example during the late 1980s and 1990s
Airbus made its first significant sales to US airlines In order to do so Airbus arranged and
provided very attractive and flexible financing terms to US airlines to encourage them to
purchase European‐manufactured Airbus aircraft instead of US‐manufactured Boeing or
McDonnell Douglas aircraft The US airlines were more than willing to accept these incentives
During this period some US airlines entered into ldquowalk awayrdquo leases of Airbus aircraft
pursuant to which Airbus North America (backed by the joint and several guarantees of each of
the four countries that are members of Airbus SAS) entered into a US leveraged lease of the
Airbus aircraft and then subleased the aircraft to a US airline on terms that (i) passed along
most of the tax benefits to the US airline through lower lease rentals and (ii) permitted the
US airline to terminate the sublease and simply ldquowalk awayrdquo from the lease upon a relatively
short notice period
Under the ldquoHome Market Rulerdquo the European export credit agencies (including those of
France Germany and the United Kingdom) that usually support the financing of Airbus aircraft
could not provide such support to US airlines Therefore Airbus arranged for Kreditanstalt fur
Wiederaufbau the development bank of Germany to provide very attractive financing for the
Airbus aircraft being acquired by US airlines These financings occurred on terms much more
favorable (with 18‐ to 22‐year repayment terms) than what export credit agencies could
provide (with a maximum repayment term of 12‐years)
Similarly during the 1990s US airlines began to acquire a large number of 35 to 50 seat
regional jet aircraft manufactured by Bombardier of Canada and Embraer of Brazil Many of
these aircraft were acquired by the US airlines by using export credit support from Canada and
Brazil Some of the financing terms (ie the repayment terms) of these Brazilian and Canadian
government‐supported export credit financings were even more attractive (15‐ to 18‐year
repayment terms) than what was available from the export credit agencies of France Germany
and the United Kingdom with respect to Airbus aircraft or from Ex‐Im Bank with respect to
Boeing aircraft (10‐ to 12‐year repayment terms)
To make the financing of Canadian‐manufactured Bombardier regional jets even more
attractive to US airlines the province of Quebec (where Bombardier has its headquarters)
through Investment Quebec provided additional aircraft financing support to the US airlines
23
Finally to the extent even more attractive financing was needed to convince US airlines to
purchase Canadian or Brazilian‐manufactured regional aircraft the manufacturers themselves
provided residual value guarantees with respect to such aircraft to the airline or to the
financiers (ie to the equity investor in a US leveraged lease or the creditors financing the
aircraft)
The next major development in aircraft financing used by US airlines was the development in
the 1990s of the Enhanced Equipment Trust Certificate (ldquoEETCrdquo) which was an ETC with certain
structural enhancements The most important of these enhancements is a liquidity facility to
ensure that if there is a default the financiers would continue to receive current interest
during the period of time while the aircraft is being repossessed and remarketed A key
element in the development of the EETC was the existence of Section 1110 of the US
Bankruptcy Code which gives a type of ldquopreferred creditorrdquo status to financiers of aircraft for
US airlines This ldquopreferred creditorrdquo status exempts aircraft financiers of US airlines from
the automatic stay generally imposed following a bankruptcy filing by a borrower subject to the
protections of the US Bankruptcy Code Section 1110 of the US Bankruptcy Code
accomplishes this by requiring the airline within 60 days of such bankruptcy filing to either (i)
resume payments under the originally agreed aircraft financing or (ii) return the aircraft to the
financier
The first EETC was done in 1994 and the practice has now been successfully used by almost
every major US airline including Alaska Airlines America West Airlines American Airlines
Continental Airlines Delta Airlines Hawaiian Airlines Jet Blue Airlines Northwest Airlines
Southwest Airlines United Airlines and US Airways The overall financing cost of a US airline
acquiring an aircraft through the use of the EETC ndash which includes the amount of financing
repayment term amortization profile effective cost of the financing etc ndash has generally been
significantly more attractive than (i) what such US airline could have achieved under an export
credit‐supported aircraft financing for such airline and (ii) what a similarly rated foreign airline
could have achieved under an export credit‐supported aircraft financing
This is particularly true for the financing of new aircraft The development of the EETC market
provided enormous financing flexibility to US airlines for the financing of new aircraft the
EETC provided the airline with the option to finance on a simple secured mortgage basis or the
US airline could opt for a leveraged lease with all of the benefits associated with a leveraged
lease described above
Beginning in 1997 US airlines had the ability to raise money in the capital markets when the
overall financing terms were most attractive They were able to ldquolock‐inrdquo such favorable
financing terms to fund new aircraft that were scheduled to be delivered in the future by
issuing a ldquopre‐fundedrdquo EETC These pre‐funded EETCs were used to great success by US
24
airlines in the late 1990s through 2001 a period in which the US airlines were taking delivery
of a significant number of aircraft
As a result of the downturn in the US airline industry following the September 11 2001
terrorist attacks many US airlines deferred or cancelled their orders for new aircraft This
reduced the need for US airlines to finance new aircraft when the financing terms available to
such US airlines via the EETC were not as favorable due to (i) the perceived increased credit
risks of the US airline industry following the September 11 terrorist attacks and (ii) the
temporary disequilibrium in the credit markets following the 200820092010 credit crisis
Now that the US airlines have once again begun to take delivery of a significant number of
new aircraft the pre‐funded EETC continues to be the preferred source of financing for US
airlines as evidenced by the number and amount of EETC issuances during 2012 and 2013
Based on an analysis of the EETC transactions occurring during 2012 and 2013 EETCs are once
again generally considered to provide more attractive overall financing terms than what could
be achieved by an airline under an export credit‐supported financing done under the terms of
the 2011 Aircraft Sector Understanding
25
GLOSSARY
ldquoAdverse Economic Impactrdquo is the short‐hand term used to refer to any serious negative effects on US industries or US jobs as set forth in the Bankrsquos Charter that result from Ex‐Im Bank loans guarantees or insurance The Bankrsquos Charter contains three provisions that address adverse economic impact found at 12 USC sectsect 635(b)(1) 635a‐2 635(e)
ldquoAir Indiardquo is an airline owned by the Government of the Republic of India ldquoAir India Transactionsrdquo are the two final commitments approved by Ex‐Im Bank on September
30 2011 for loan guarantees for the purchase of a number of 787 ldquoDreamlinerrdquo aircraft from Boeing and to be financed by a commercial lender not identified at the time As of the date of this paper Ex‐Im Bank has not issued any of its loan guarantees but is expected to do so in the coming months Ten of the aircraft involved in these two final commitments have been delivered to Air India and are in use by Air India on routes outside the United States The deliveries of the ten aircraft were made using private short‐term financing as to which Ex‐Im Bank had no involvement
ldquoAirbusrdquo Airbus SAS is a Europe‐based manufacturer of large commercial aircraft Airbus is the only competitor to Boeing the US manufacturer Airbus sales are supported by the ECAs of Germany France and the UK
ldquoAircraft Sector also known as the ASU is an agreement among members of the OECD Understandingrdquo that manufacture aircraft and Brazil The ASU requires that Export
Credit Agencies that support the export of aircraft follow certain rules and restrictions that set forth the most favorable terms that can be provided These rules and restrictions include the Export Credit Agency must charge a minimum risk premium which is determined by the ASU the term of any loan made by or supported by the Export Credit Agency for the purchase of aircraft cannot exceed 12 years the Export Credit Agency today can lend or guarantee only up to 85 of the actual purchase price of the aircraft being exported and the use of risk mitigants The ASU was preceded by the Large Aircraft Sector Understanding which governed these issues until the enactment of the 2007 ASU The ASU was again updated and revised in 2011 (See also the Large Aircraft Sector Understanding)
ldquoArrangementrdquo is the agreement among Export Credit Agencies governing the terms by which they will provide loans guarantees or insurance in support of exports from their respective countries Among other things the Arrangement requires Export Credit Agencies to charge a minimum risk premium which is governed by the Arrangement See also Organization for Economic Cooperation and Development
ldquoASUrdquo see Aircraft Sector Understanding ldquoAverage Weighted Liferdquo for purposes of this paper refers to the average number of years that
each dollar of unpaid principal on a loan remains outstanding For example a loan with equal principal payments throughout the loan term will have an average weighted life close to the middle of the whole loan term
26
ldquoBank Actrdquo is the Export‐Import Bank Act of 1945 12 USC sect635 as amended ldquoBank Advisory Committeerdquo is the official Advisory Committee of the Bank appointed in accordance
with the Bank Act and the Advisory Committee Act The Bank Advisory Committee is comprised of representatives of various industry and market sectors as well as representatives of labor and international trade experts
ldquoBasis pointsrdquo are a numerical measure applied to interest rates One basis point equals 1100th of one percent or 100 basis points equals one percent
ldquoCapital Equipmentrdquo is equipment used to manufacture a product provide a service or sell store or deliver merchandise A wide‐body aircraft is a piece of capital equipment
ldquoCharterrdquo is the Bank Act as well the provisions of the Export Import Bank Reauthorization Act of 2012 (Public Law 112‐122) that are not codified in the Bank Act
ldquoDreamlinerrdquo is the name given to a Boeing 787 wide‐body commercial aircraft ldquoECArdquo see Export Credit Agencies ldquoEconomic Impact Proceduresrdquo
are procedures adopted by Ex‐Im Bank to assess whether transactions supported by the Bank cause a serious adverse economic impact to US industries and US jobs See also Adverse Economic Impact
ldquoEETCrdquo see Enhanced Equipment Trust Certificate ldquoEnhanced Equipment Trust Certificaterdquo
also known as an EETC is a type of secured bond issued by a borrower in the capital markets The EETC is secured by the equipment being purchased with the proceeds of the bond issuance EETCs are used primarily for aircraft and since the late 1990s has been the dominant financing tool used by US airlines to purchase aircraft Section 1110 of the US Bankruptcy Codemdashwhich allows creditors of aircraft borrowers to obtain their collateral within 60 days if the payments on their debt is not current ndash has provided creditors of US airlines a level of comfort not available to creditors of foreign airlines until recently This generally provided US airlines with a significant financial advantage vis a vis their foreign competitors Recently the adoption of the Cape Town Convention and the related Aircraft Equipment Protocol has provided creditors of foreign airlines with protections similar to the protections provided by section 1110 of the US Bankruptcy Code Recently this has led to the beginnings of an international EETC market
ldquoEquipment Trust Certificaterdquo
also known as an ETC was the predecessor to the Enhanced Equipment Trust Certificate
ldquoETCrdquo see Equipment Trust Certificate ldquoEx‐Im Bankrdquo or ldquoBankrdquo See The Export‐Import Bank of the United States ldquoExport Credit Agenciesrdquo are agencies or ministries of government that have the official role of
providing loans guarantees or insurance in support of exports from their respective countries or in support of exports by sales of companies from their respective countries Ex‐Im Bank is the official Export Credit Agency of the United States of America
ldquoexportable goods screenrdquo is a screen or filter adopted by Ex‐Im Bank in its 2001 Economic Impact Procedures The exportable goods screen is utilized along with other screens to balance the Bankrsquos obligation to consider the adverse
27
economic effects of its transactions on US industries and US jobs with the Bankrsquos mandate to support US export transactions in a timely manner so as to fully support the exporterrsquos business opportunity The exportable goods screen filtered out transactions that supported exports which could only be used by a foreign buyer to provide services rather than produce goods
ldquoExport‐Import Bank of the is an independent agency of the Federal Government of the United United Statesrdquo States of America Also known as ldquoEx‐Im Bankrdquo Ex‐Im Bankrsquos mission
is to support US jobs by supporting US exports See 12 USC 635 et seq
ldquoExposure Feerdquo is the risk premium charged by Ex‐Im Bank in exchange for its guarantee in certain transactions The exposure fee must be at least equal to the minimum risk premium required by the terms of the Arrangement and the Aircraft Sector Understanding
ldquoForeign Sales Corporationrdquo is a company created under the terms of a former provision of the US Internal Revenue Code Foreign Sales Corporations received significant tax benefits
ldquoFSCrdquo see Foreign Sales Corporation ldquoInvestment Tax Creditrdquo is a credit permitted under the US Internal Revenue Code for the
purchase of certain types of equipment in certain circumstances See also Leveraged Leases
ldquoKFWrdquo the development bank for the Federal Republic of Germany KFW is an Export Credit Agency but it also operates through a ldquomarket windowrdquo which is not subject to the Home Market Rule Thus KFW provides support to Airbus for its sales of aircraft to US airlines The United States does not have an equivalent institution and Ex‐Im Bank does not have a ldquomarket windowrdquo
ldquoLarge Aircraft Sector also known as LASU was the predecessor to the Aircraft Sector Understandingrdquo Understanding The LASU governed the same general issues as are set
forth in the Aircraft Sector Understanding except that the minimum risk premium was lower than that required in the 2007 ASU and 2011 ASU When the 2007 ASU was enacted grandfathering provisions allowed ECA‐supported financing for a limited number of aircraft to be governed by LASU
ldquoLASUrdquo see Large Aircraft Sector Understanding ldquoLeveraged Leaserdquo is a lease of equipment and is designed to allow the lessor to take
advantage of certain tax code provisions such as the depreciation deduction and the investment tax credit while allowing the lessee to obtain the equipment involved at a significantly lower cost Leveraged Leases were a very popular means for US airlines to acquire aircraft throughout the 1980s and 1990s The value of the tax deductions to the lessor were significant so that the implicit interest rate in the lease payments by the US airline were extremely low Usually the US airline did not have sufficient profit to take advantage of the favorable tax code provisions By using a leveraged lease another company that could shelter income by using the tax code provisions would buy the equipment and lease the equipment to the US airline Usually at the end of the lease term the US airline would purchase the aircraft
28
ldquoLIBORrdquo is the London Inter‐bank Offering Rate It is commonly used as a reference rate in loan transactions that have floating or adjustable interest rates LIBOR reflects the rate at which banks will lend money to each other LIBOR is set for various loan terms (eg 3 months 6 months etc) and is widely published making it a convenient rate to use as a reference rate
ldquoNet pricerdquo is the price paid after all discounts have been deducted The net price is the actual price paid for a piece of equipment In aircraft transactions pursuant to the ASU Ex‐Im Bank will only support up to 85 of the net price of an aircraft EETC transactions on the other hand often support the nominal purchase price of an aircraft and thus result in a significantly higher amount financed
ldquoOECDrdquo see the Organization for Economic Cooperation and Development Open Skies Agreement Is a type of bilateral agreement between countries that govern the
rights of airlines from the two countries to fly into the other country Open Skies Agreements generally allow free access to fly as many routes to a country as an airline may choose but then usually restrict the ability to fly within the other country Generally it is a ldquofly in and outrdquo rule although there are exceptions
ldquoOrganization for Economic Cooperation and Developmentrdquo
also known as the OECD is an organization comprised of 34 member countries that work together to promote development The United States is a member With regard to Ex‐Im Bank the OECD is the organization through which the US Government negotiates an agreement among Export Credit Agencies known as the Arrangement and the ASU (and its predecessor the LASU)
ldquoPass Through Certificaterdquo also known as a PTC is a group of Equipment Trust Certificates pooled together to form the basis for a bond issuance
ldquoPTCrdquo See Pass Through Certificate ldquoRyanairrdquo is a low‐cost Irish airline that began business after European
deregulation of airlines in 1997 Ryanair rapidly expanded during the first decade of the 2000s creating significant competition for other airlines
ldquoScreensrdquo are a type of filter used by Ex‐Im Bank in its Economic Impact Procedures Screens are designed to identify those transactions which are not likely to cause an adverse economic impact to US industries or US jobs so that such transactions can be processed more quickly and efficiently as required by the Bank Act
ldquoSubstantial Injuryrdquo is a term defined in Ex‐Im Bankrsquos Charter to be applied in connection with the Bankrsquos economic impact procedures 12 USC sect635(e)(4) The Charter states ldquohellipthe extension of any credit or guarantee by the Bank will cause substantial injury if the amount of the capacity for production established or the amount of the increase in such capacity expanded by such credit or guarantee equals or exceeds 1 percent of United States productionrdquo
ldquoTPCCrdquo see Trade Promotion Coordinating Committee ldquoTrade Promotion Coordinating Committeerdquo
also known as the TPCC is an interagency committee of the US Government chaired by the Secretary of Commerce It was established under the Export Enhancement Act of 1992 to provide a
29
unifying framework to coordinate the export promotion and export financing activities of the US government and to develop a government‐wide strategic plan for carrying out such programs
ldquoTrade Sanctionsrdquo refers to any of a number of sanctions imposed by the US Government against companies countries industries or products usually as a result of an accusation of adjudication of a violation of an international trade agreement The Bank Act requires Ex‐Im Bank to take certain trade sanctions into account in its economic impact procedures
30
Table A ndash Congressional Actions and Ex-Im Bank Responses
Year Congressional Action Ex‐Im Bank Response
1968 Bank directed to take into account the possible adverse effect [of its loans and guarantees] upon the United States economy
Bank adds this transactions
factor to analysis of
1975 1 Standard refined to take into account any serious adverse effect of loans and guarantees on competitive position of US industry availability of scarce materials in US and employment in US
2 Bank directed to be competitive with rates terms and conditions offered by principal countries whose exporters compete with US exporters
3 Bank directed to submit semi‐annual report on competitiveness and conduct survey of US exporters and lenders to determine experience in meeting financing competition
Bank adds these of transactions
considerations to analysis
Year Congressional Action Ex‐Im Bank Response
1978 ‐ 1979
1 Bank directed to take into account any serious adverse effect of loans on competitive position of US industry and scarce materials Bank directed to emphasize strengthening competitive position of US exporters and expanding total US exports
2 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [From Appropriations Act Restated in Bank Charter in 1986]
3 Bank directed to implement regulations and procedures to insure full consideration of extent to which loan or guarantee is likely to have adverse effect on industries and employment in US either by reducing demand for US produced goods or increasing imports to the US
Bank develops framework and set of written economic impact procedures
1 Exclude exports the use of which remained localized in foreign country This
is first ldquoforeign localized goods and services screenrdquo
2 ldquoIntent and stimulus for projectrdquo examined to determine likelihood of substantial adverse economic impact Does transaction involve ldquorunaway industryrdquo
(leaving US for cheaper foreign labor)
3 Does export of capital equipment result in ldquobuy backrdquo of product being imported into the US
4 Is net impact on US economy and jobs positive or negative and to what degree
32
Year Congressional Action Ex‐Im Bank Response
1986 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [Originally from 1978 Appropriations incorporated into Bank Charter in 1986]
Senate Report recognizes knowledge and experience of Bank and need to respond to exportersrsquo requests for support in a timely and confidential fashion Economic impact procedures are to be practical and workable and not reduce Bankrsquos competitiveness and flexibility nor ignore positive aspects of export sale
Bank develops ldquoSummary of Adverse Economic Guidelinesrdquo to be applied to both
goods and services (a) is commodity to be produced surplus or likely to compete with US‐produced surplus (b) will Bankrsquos
assistance cause substantial injury to US producers of competing commodity (c)
will injury to US producers of competing commodity outweigh the short‐ and long‐
term benefits to US industry and employment If answer is no then no
further economic impact analysis
1988 Congress establishes test for ldquosubstantial injuryrdquo if the amount of capacity for production established or amount of increase in such capacity expanded by Bankrsquos credit or guarantee exceeds 1 of US production
Bankrsquos Board recognizes requirement to balance (a) possibility of substantial harm
to US production and employment with (b) being responsive competitive and efficient New economic impact procedures ask (a) will the project be in direct competition with US production (b) is the Bankrsquos support significantly associated with the project (c) will the output of the project
cause substantial injury to US producers of the same similar or competing
commodity If answer is no then no further economic impact analysis is required
33
Year Congressional Action Ex‐Im Bank Response
1998 Bank revised procedures involving countries against which trade sanctions were pending or imposed
2001
2006 ‐2007
1 Bank required to determine whether extension of credit or guarantee is likely to produce same or other commodities and whether the production may cause substantial injury to US producers
2 Bank prohibited from providing a loan or guarantee that will facilitate circumvention of trade law order or determination
3 Bank required to designate sensitive commercial sectors and products for which Bank financing deemed unlikely due to potential for adverse economic impact on US
4 Bank required to aggregate financial thresholds on rolling 24‐month basis
Bank develops ldquoexportable goods screenrdquo Does Ex‐Im Bank support result in production of exportable good from the foreign buyerrsquos country If not no further economic impact analysis is required Notice and request for comments were published in the Federal Register US airline industry did not respond
Bank issues 2007 Economic Impact Procedures ldquoExportable goods screenrdquo is modified Will the transaction (capital goods and services) result in either new or additional production capacity of an exportable good
34
deferred if the equity investor in the transaction used an offshore subsidiary that qualified as a
Foreign Sales Corporation (ldquoFSCrdquo) under the US tax code and structured the deal as a
Commission FSC
In addition during the 1980s and 1990s US airlines had access to other sources of financing
with overall financing terms that were much more attractive than what was available to foreign
airlines via Ex‐Im Bank‐supported export credits For example during the late 1980s and 1990s
Airbus made its first significant sales to US airlines In order to do so Airbus arranged and
provided very attractive and flexible financing terms to US airlines to encourage them to
purchase European‐manufactured Airbus aircraft instead of US‐manufactured Boeing or
McDonnell Douglas aircraft The US airlines were more than willing to accept these incentives
During this period some US airlines entered into ldquowalk awayrdquo leases of Airbus aircraft
pursuant to which Airbus North America (backed by the joint and several guarantees of each of
the four countries that are members of Airbus SAS) entered into a US leveraged lease of the
Airbus aircraft and then subleased the aircraft to a US airline on terms that (i) passed along
most of the tax benefits to the US airline through lower lease rentals and (ii) permitted the
US airline to terminate the sublease and simply ldquowalk awayrdquo from the lease upon a relatively
short notice period
Under the ldquoHome Market Rulerdquo the European export credit agencies (including those of
France Germany and the United Kingdom) that usually support the financing of Airbus aircraft
could not provide such support to US airlines Therefore Airbus arranged for Kreditanstalt fur
Wiederaufbau the development bank of Germany to provide very attractive financing for the
Airbus aircraft being acquired by US airlines These financings occurred on terms much more
favorable (with 18‐ to 22‐year repayment terms) than what export credit agencies could
provide (with a maximum repayment term of 12‐years)
Similarly during the 1990s US airlines began to acquire a large number of 35 to 50 seat
regional jet aircraft manufactured by Bombardier of Canada and Embraer of Brazil Many of
these aircraft were acquired by the US airlines by using export credit support from Canada and
Brazil Some of the financing terms (ie the repayment terms) of these Brazilian and Canadian
government‐supported export credit financings were even more attractive (15‐ to 18‐year
repayment terms) than what was available from the export credit agencies of France Germany
and the United Kingdom with respect to Airbus aircraft or from Ex‐Im Bank with respect to
Boeing aircraft (10‐ to 12‐year repayment terms)
To make the financing of Canadian‐manufactured Bombardier regional jets even more
attractive to US airlines the province of Quebec (where Bombardier has its headquarters)
through Investment Quebec provided additional aircraft financing support to the US airlines
23
Finally to the extent even more attractive financing was needed to convince US airlines to
purchase Canadian or Brazilian‐manufactured regional aircraft the manufacturers themselves
provided residual value guarantees with respect to such aircraft to the airline or to the
financiers (ie to the equity investor in a US leveraged lease or the creditors financing the
aircraft)
The next major development in aircraft financing used by US airlines was the development in
the 1990s of the Enhanced Equipment Trust Certificate (ldquoEETCrdquo) which was an ETC with certain
structural enhancements The most important of these enhancements is a liquidity facility to
ensure that if there is a default the financiers would continue to receive current interest
during the period of time while the aircraft is being repossessed and remarketed A key
element in the development of the EETC was the existence of Section 1110 of the US
Bankruptcy Code which gives a type of ldquopreferred creditorrdquo status to financiers of aircraft for
US airlines This ldquopreferred creditorrdquo status exempts aircraft financiers of US airlines from
the automatic stay generally imposed following a bankruptcy filing by a borrower subject to the
protections of the US Bankruptcy Code Section 1110 of the US Bankruptcy Code
accomplishes this by requiring the airline within 60 days of such bankruptcy filing to either (i)
resume payments under the originally agreed aircraft financing or (ii) return the aircraft to the
financier
The first EETC was done in 1994 and the practice has now been successfully used by almost
every major US airline including Alaska Airlines America West Airlines American Airlines
Continental Airlines Delta Airlines Hawaiian Airlines Jet Blue Airlines Northwest Airlines
Southwest Airlines United Airlines and US Airways The overall financing cost of a US airline
acquiring an aircraft through the use of the EETC ndash which includes the amount of financing
repayment term amortization profile effective cost of the financing etc ndash has generally been
significantly more attractive than (i) what such US airline could have achieved under an export
credit‐supported aircraft financing for such airline and (ii) what a similarly rated foreign airline
could have achieved under an export credit‐supported aircraft financing
This is particularly true for the financing of new aircraft The development of the EETC market
provided enormous financing flexibility to US airlines for the financing of new aircraft the
EETC provided the airline with the option to finance on a simple secured mortgage basis or the
US airline could opt for a leveraged lease with all of the benefits associated with a leveraged
lease described above
Beginning in 1997 US airlines had the ability to raise money in the capital markets when the
overall financing terms were most attractive They were able to ldquolock‐inrdquo such favorable
financing terms to fund new aircraft that were scheduled to be delivered in the future by
issuing a ldquopre‐fundedrdquo EETC These pre‐funded EETCs were used to great success by US
24
airlines in the late 1990s through 2001 a period in which the US airlines were taking delivery
of a significant number of aircraft
As a result of the downturn in the US airline industry following the September 11 2001
terrorist attacks many US airlines deferred or cancelled their orders for new aircraft This
reduced the need for US airlines to finance new aircraft when the financing terms available to
such US airlines via the EETC were not as favorable due to (i) the perceived increased credit
risks of the US airline industry following the September 11 terrorist attacks and (ii) the
temporary disequilibrium in the credit markets following the 200820092010 credit crisis
Now that the US airlines have once again begun to take delivery of a significant number of
new aircraft the pre‐funded EETC continues to be the preferred source of financing for US
airlines as evidenced by the number and amount of EETC issuances during 2012 and 2013
Based on an analysis of the EETC transactions occurring during 2012 and 2013 EETCs are once
again generally considered to provide more attractive overall financing terms than what could
be achieved by an airline under an export credit‐supported financing done under the terms of
the 2011 Aircraft Sector Understanding
25
GLOSSARY
ldquoAdverse Economic Impactrdquo is the short‐hand term used to refer to any serious negative effects on US industries or US jobs as set forth in the Bankrsquos Charter that result from Ex‐Im Bank loans guarantees or insurance The Bankrsquos Charter contains three provisions that address adverse economic impact found at 12 USC sectsect 635(b)(1) 635a‐2 635(e)
ldquoAir Indiardquo is an airline owned by the Government of the Republic of India ldquoAir India Transactionsrdquo are the two final commitments approved by Ex‐Im Bank on September
30 2011 for loan guarantees for the purchase of a number of 787 ldquoDreamlinerrdquo aircraft from Boeing and to be financed by a commercial lender not identified at the time As of the date of this paper Ex‐Im Bank has not issued any of its loan guarantees but is expected to do so in the coming months Ten of the aircraft involved in these two final commitments have been delivered to Air India and are in use by Air India on routes outside the United States The deliveries of the ten aircraft were made using private short‐term financing as to which Ex‐Im Bank had no involvement
ldquoAirbusrdquo Airbus SAS is a Europe‐based manufacturer of large commercial aircraft Airbus is the only competitor to Boeing the US manufacturer Airbus sales are supported by the ECAs of Germany France and the UK
ldquoAircraft Sector also known as the ASU is an agreement among members of the OECD Understandingrdquo that manufacture aircraft and Brazil The ASU requires that Export
Credit Agencies that support the export of aircraft follow certain rules and restrictions that set forth the most favorable terms that can be provided These rules and restrictions include the Export Credit Agency must charge a minimum risk premium which is determined by the ASU the term of any loan made by or supported by the Export Credit Agency for the purchase of aircraft cannot exceed 12 years the Export Credit Agency today can lend or guarantee only up to 85 of the actual purchase price of the aircraft being exported and the use of risk mitigants The ASU was preceded by the Large Aircraft Sector Understanding which governed these issues until the enactment of the 2007 ASU The ASU was again updated and revised in 2011 (See also the Large Aircraft Sector Understanding)
ldquoArrangementrdquo is the agreement among Export Credit Agencies governing the terms by which they will provide loans guarantees or insurance in support of exports from their respective countries Among other things the Arrangement requires Export Credit Agencies to charge a minimum risk premium which is governed by the Arrangement See also Organization for Economic Cooperation and Development
ldquoASUrdquo see Aircraft Sector Understanding ldquoAverage Weighted Liferdquo for purposes of this paper refers to the average number of years that
each dollar of unpaid principal on a loan remains outstanding For example a loan with equal principal payments throughout the loan term will have an average weighted life close to the middle of the whole loan term
26
ldquoBank Actrdquo is the Export‐Import Bank Act of 1945 12 USC sect635 as amended ldquoBank Advisory Committeerdquo is the official Advisory Committee of the Bank appointed in accordance
with the Bank Act and the Advisory Committee Act The Bank Advisory Committee is comprised of representatives of various industry and market sectors as well as representatives of labor and international trade experts
ldquoBasis pointsrdquo are a numerical measure applied to interest rates One basis point equals 1100th of one percent or 100 basis points equals one percent
ldquoCapital Equipmentrdquo is equipment used to manufacture a product provide a service or sell store or deliver merchandise A wide‐body aircraft is a piece of capital equipment
ldquoCharterrdquo is the Bank Act as well the provisions of the Export Import Bank Reauthorization Act of 2012 (Public Law 112‐122) that are not codified in the Bank Act
ldquoDreamlinerrdquo is the name given to a Boeing 787 wide‐body commercial aircraft ldquoECArdquo see Export Credit Agencies ldquoEconomic Impact Proceduresrdquo
are procedures adopted by Ex‐Im Bank to assess whether transactions supported by the Bank cause a serious adverse economic impact to US industries and US jobs See also Adverse Economic Impact
ldquoEETCrdquo see Enhanced Equipment Trust Certificate ldquoEnhanced Equipment Trust Certificaterdquo
also known as an EETC is a type of secured bond issued by a borrower in the capital markets The EETC is secured by the equipment being purchased with the proceeds of the bond issuance EETCs are used primarily for aircraft and since the late 1990s has been the dominant financing tool used by US airlines to purchase aircraft Section 1110 of the US Bankruptcy Codemdashwhich allows creditors of aircraft borrowers to obtain their collateral within 60 days if the payments on their debt is not current ndash has provided creditors of US airlines a level of comfort not available to creditors of foreign airlines until recently This generally provided US airlines with a significant financial advantage vis a vis their foreign competitors Recently the adoption of the Cape Town Convention and the related Aircraft Equipment Protocol has provided creditors of foreign airlines with protections similar to the protections provided by section 1110 of the US Bankruptcy Code Recently this has led to the beginnings of an international EETC market
ldquoEquipment Trust Certificaterdquo
also known as an ETC was the predecessor to the Enhanced Equipment Trust Certificate
ldquoETCrdquo see Equipment Trust Certificate ldquoEx‐Im Bankrdquo or ldquoBankrdquo See The Export‐Import Bank of the United States ldquoExport Credit Agenciesrdquo are agencies or ministries of government that have the official role of
providing loans guarantees or insurance in support of exports from their respective countries or in support of exports by sales of companies from their respective countries Ex‐Im Bank is the official Export Credit Agency of the United States of America
ldquoexportable goods screenrdquo is a screen or filter adopted by Ex‐Im Bank in its 2001 Economic Impact Procedures The exportable goods screen is utilized along with other screens to balance the Bankrsquos obligation to consider the adverse
27
economic effects of its transactions on US industries and US jobs with the Bankrsquos mandate to support US export transactions in a timely manner so as to fully support the exporterrsquos business opportunity The exportable goods screen filtered out transactions that supported exports which could only be used by a foreign buyer to provide services rather than produce goods
ldquoExport‐Import Bank of the is an independent agency of the Federal Government of the United United Statesrdquo States of America Also known as ldquoEx‐Im Bankrdquo Ex‐Im Bankrsquos mission
is to support US jobs by supporting US exports See 12 USC 635 et seq
ldquoExposure Feerdquo is the risk premium charged by Ex‐Im Bank in exchange for its guarantee in certain transactions The exposure fee must be at least equal to the minimum risk premium required by the terms of the Arrangement and the Aircraft Sector Understanding
ldquoForeign Sales Corporationrdquo is a company created under the terms of a former provision of the US Internal Revenue Code Foreign Sales Corporations received significant tax benefits
ldquoFSCrdquo see Foreign Sales Corporation ldquoInvestment Tax Creditrdquo is a credit permitted under the US Internal Revenue Code for the
purchase of certain types of equipment in certain circumstances See also Leveraged Leases
ldquoKFWrdquo the development bank for the Federal Republic of Germany KFW is an Export Credit Agency but it also operates through a ldquomarket windowrdquo which is not subject to the Home Market Rule Thus KFW provides support to Airbus for its sales of aircraft to US airlines The United States does not have an equivalent institution and Ex‐Im Bank does not have a ldquomarket windowrdquo
ldquoLarge Aircraft Sector also known as LASU was the predecessor to the Aircraft Sector Understandingrdquo Understanding The LASU governed the same general issues as are set
forth in the Aircraft Sector Understanding except that the minimum risk premium was lower than that required in the 2007 ASU and 2011 ASU When the 2007 ASU was enacted grandfathering provisions allowed ECA‐supported financing for a limited number of aircraft to be governed by LASU
ldquoLASUrdquo see Large Aircraft Sector Understanding ldquoLeveraged Leaserdquo is a lease of equipment and is designed to allow the lessor to take
advantage of certain tax code provisions such as the depreciation deduction and the investment tax credit while allowing the lessee to obtain the equipment involved at a significantly lower cost Leveraged Leases were a very popular means for US airlines to acquire aircraft throughout the 1980s and 1990s The value of the tax deductions to the lessor were significant so that the implicit interest rate in the lease payments by the US airline were extremely low Usually the US airline did not have sufficient profit to take advantage of the favorable tax code provisions By using a leveraged lease another company that could shelter income by using the tax code provisions would buy the equipment and lease the equipment to the US airline Usually at the end of the lease term the US airline would purchase the aircraft
28
ldquoLIBORrdquo is the London Inter‐bank Offering Rate It is commonly used as a reference rate in loan transactions that have floating or adjustable interest rates LIBOR reflects the rate at which banks will lend money to each other LIBOR is set for various loan terms (eg 3 months 6 months etc) and is widely published making it a convenient rate to use as a reference rate
ldquoNet pricerdquo is the price paid after all discounts have been deducted The net price is the actual price paid for a piece of equipment In aircraft transactions pursuant to the ASU Ex‐Im Bank will only support up to 85 of the net price of an aircraft EETC transactions on the other hand often support the nominal purchase price of an aircraft and thus result in a significantly higher amount financed
ldquoOECDrdquo see the Organization for Economic Cooperation and Development Open Skies Agreement Is a type of bilateral agreement between countries that govern the
rights of airlines from the two countries to fly into the other country Open Skies Agreements generally allow free access to fly as many routes to a country as an airline may choose but then usually restrict the ability to fly within the other country Generally it is a ldquofly in and outrdquo rule although there are exceptions
ldquoOrganization for Economic Cooperation and Developmentrdquo
also known as the OECD is an organization comprised of 34 member countries that work together to promote development The United States is a member With regard to Ex‐Im Bank the OECD is the organization through which the US Government negotiates an agreement among Export Credit Agencies known as the Arrangement and the ASU (and its predecessor the LASU)
ldquoPass Through Certificaterdquo also known as a PTC is a group of Equipment Trust Certificates pooled together to form the basis for a bond issuance
ldquoPTCrdquo See Pass Through Certificate ldquoRyanairrdquo is a low‐cost Irish airline that began business after European
deregulation of airlines in 1997 Ryanair rapidly expanded during the first decade of the 2000s creating significant competition for other airlines
ldquoScreensrdquo are a type of filter used by Ex‐Im Bank in its Economic Impact Procedures Screens are designed to identify those transactions which are not likely to cause an adverse economic impact to US industries or US jobs so that such transactions can be processed more quickly and efficiently as required by the Bank Act
ldquoSubstantial Injuryrdquo is a term defined in Ex‐Im Bankrsquos Charter to be applied in connection with the Bankrsquos economic impact procedures 12 USC sect635(e)(4) The Charter states ldquohellipthe extension of any credit or guarantee by the Bank will cause substantial injury if the amount of the capacity for production established or the amount of the increase in such capacity expanded by such credit or guarantee equals or exceeds 1 percent of United States productionrdquo
ldquoTPCCrdquo see Trade Promotion Coordinating Committee ldquoTrade Promotion Coordinating Committeerdquo
also known as the TPCC is an interagency committee of the US Government chaired by the Secretary of Commerce It was established under the Export Enhancement Act of 1992 to provide a
29
unifying framework to coordinate the export promotion and export financing activities of the US government and to develop a government‐wide strategic plan for carrying out such programs
ldquoTrade Sanctionsrdquo refers to any of a number of sanctions imposed by the US Government against companies countries industries or products usually as a result of an accusation of adjudication of a violation of an international trade agreement The Bank Act requires Ex‐Im Bank to take certain trade sanctions into account in its economic impact procedures
30
Table A ndash Congressional Actions and Ex-Im Bank Responses
Year Congressional Action Ex‐Im Bank Response
1968 Bank directed to take into account the possible adverse effect [of its loans and guarantees] upon the United States economy
Bank adds this transactions
factor to analysis of
1975 1 Standard refined to take into account any serious adverse effect of loans and guarantees on competitive position of US industry availability of scarce materials in US and employment in US
2 Bank directed to be competitive with rates terms and conditions offered by principal countries whose exporters compete with US exporters
3 Bank directed to submit semi‐annual report on competitiveness and conduct survey of US exporters and lenders to determine experience in meeting financing competition
Bank adds these of transactions
considerations to analysis
Year Congressional Action Ex‐Im Bank Response
1978 ‐ 1979
1 Bank directed to take into account any serious adverse effect of loans on competitive position of US industry and scarce materials Bank directed to emphasize strengthening competitive position of US exporters and expanding total US exports
2 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [From Appropriations Act Restated in Bank Charter in 1986]
3 Bank directed to implement regulations and procedures to insure full consideration of extent to which loan or guarantee is likely to have adverse effect on industries and employment in US either by reducing demand for US produced goods or increasing imports to the US
Bank develops framework and set of written economic impact procedures
1 Exclude exports the use of which remained localized in foreign country This
is first ldquoforeign localized goods and services screenrdquo
2 ldquoIntent and stimulus for projectrdquo examined to determine likelihood of substantial adverse economic impact Does transaction involve ldquorunaway industryrdquo
(leaving US for cheaper foreign labor)
3 Does export of capital equipment result in ldquobuy backrdquo of product being imported into the US
4 Is net impact on US economy and jobs positive or negative and to what degree
32
Year Congressional Action Ex‐Im Bank Response
1986 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [Originally from 1978 Appropriations incorporated into Bank Charter in 1986]
Senate Report recognizes knowledge and experience of Bank and need to respond to exportersrsquo requests for support in a timely and confidential fashion Economic impact procedures are to be practical and workable and not reduce Bankrsquos competitiveness and flexibility nor ignore positive aspects of export sale
Bank develops ldquoSummary of Adverse Economic Guidelinesrdquo to be applied to both
goods and services (a) is commodity to be produced surplus or likely to compete with US‐produced surplus (b) will Bankrsquos
assistance cause substantial injury to US producers of competing commodity (c)
will injury to US producers of competing commodity outweigh the short‐ and long‐
term benefits to US industry and employment If answer is no then no
further economic impact analysis
1988 Congress establishes test for ldquosubstantial injuryrdquo if the amount of capacity for production established or amount of increase in such capacity expanded by Bankrsquos credit or guarantee exceeds 1 of US production
Bankrsquos Board recognizes requirement to balance (a) possibility of substantial harm
to US production and employment with (b) being responsive competitive and efficient New economic impact procedures ask (a) will the project be in direct competition with US production (b) is the Bankrsquos support significantly associated with the project (c) will the output of the project
cause substantial injury to US producers of the same similar or competing
commodity If answer is no then no further economic impact analysis is required
33
Year Congressional Action Ex‐Im Bank Response
1998 Bank revised procedures involving countries against which trade sanctions were pending or imposed
2001
2006 ‐2007
1 Bank required to determine whether extension of credit or guarantee is likely to produce same or other commodities and whether the production may cause substantial injury to US producers
2 Bank prohibited from providing a loan or guarantee that will facilitate circumvention of trade law order or determination
3 Bank required to designate sensitive commercial sectors and products for which Bank financing deemed unlikely due to potential for adverse economic impact on US
4 Bank required to aggregate financial thresholds on rolling 24‐month basis
Bank develops ldquoexportable goods screenrdquo Does Ex‐Im Bank support result in production of exportable good from the foreign buyerrsquos country If not no further economic impact analysis is required Notice and request for comments were published in the Federal Register US airline industry did not respond
Bank issues 2007 Economic Impact Procedures ldquoExportable goods screenrdquo is modified Will the transaction (capital goods and services) result in either new or additional production capacity of an exportable good
34
Finally to the extent even more attractive financing was needed to convince US airlines to
purchase Canadian or Brazilian‐manufactured regional aircraft the manufacturers themselves
provided residual value guarantees with respect to such aircraft to the airline or to the
financiers (ie to the equity investor in a US leveraged lease or the creditors financing the
aircraft)
The next major development in aircraft financing used by US airlines was the development in
the 1990s of the Enhanced Equipment Trust Certificate (ldquoEETCrdquo) which was an ETC with certain
structural enhancements The most important of these enhancements is a liquidity facility to
ensure that if there is a default the financiers would continue to receive current interest
during the period of time while the aircraft is being repossessed and remarketed A key
element in the development of the EETC was the existence of Section 1110 of the US
Bankruptcy Code which gives a type of ldquopreferred creditorrdquo status to financiers of aircraft for
US airlines This ldquopreferred creditorrdquo status exempts aircraft financiers of US airlines from
the automatic stay generally imposed following a bankruptcy filing by a borrower subject to the
protections of the US Bankruptcy Code Section 1110 of the US Bankruptcy Code
accomplishes this by requiring the airline within 60 days of such bankruptcy filing to either (i)
resume payments under the originally agreed aircraft financing or (ii) return the aircraft to the
financier
The first EETC was done in 1994 and the practice has now been successfully used by almost
every major US airline including Alaska Airlines America West Airlines American Airlines
Continental Airlines Delta Airlines Hawaiian Airlines Jet Blue Airlines Northwest Airlines
Southwest Airlines United Airlines and US Airways The overall financing cost of a US airline
acquiring an aircraft through the use of the EETC ndash which includes the amount of financing
repayment term amortization profile effective cost of the financing etc ndash has generally been
significantly more attractive than (i) what such US airline could have achieved under an export
credit‐supported aircraft financing for such airline and (ii) what a similarly rated foreign airline
could have achieved under an export credit‐supported aircraft financing
This is particularly true for the financing of new aircraft The development of the EETC market
provided enormous financing flexibility to US airlines for the financing of new aircraft the
EETC provided the airline with the option to finance on a simple secured mortgage basis or the
US airline could opt for a leveraged lease with all of the benefits associated with a leveraged
lease described above
Beginning in 1997 US airlines had the ability to raise money in the capital markets when the
overall financing terms were most attractive They were able to ldquolock‐inrdquo such favorable
financing terms to fund new aircraft that were scheduled to be delivered in the future by
issuing a ldquopre‐fundedrdquo EETC These pre‐funded EETCs were used to great success by US
24
airlines in the late 1990s through 2001 a period in which the US airlines were taking delivery
of a significant number of aircraft
As a result of the downturn in the US airline industry following the September 11 2001
terrorist attacks many US airlines deferred or cancelled their orders for new aircraft This
reduced the need for US airlines to finance new aircraft when the financing terms available to
such US airlines via the EETC were not as favorable due to (i) the perceived increased credit
risks of the US airline industry following the September 11 terrorist attacks and (ii) the
temporary disequilibrium in the credit markets following the 200820092010 credit crisis
Now that the US airlines have once again begun to take delivery of a significant number of
new aircraft the pre‐funded EETC continues to be the preferred source of financing for US
airlines as evidenced by the number and amount of EETC issuances during 2012 and 2013
Based on an analysis of the EETC transactions occurring during 2012 and 2013 EETCs are once
again generally considered to provide more attractive overall financing terms than what could
be achieved by an airline under an export credit‐supported financing done under the terms of
the 2011 Aircraft Sector Understanding
25
GLOSSARY
ldquoAdverse Economic Impactrdquo is the short‐hand term used to refer to any serious negative effects on US industries or US jobs as set forth in the Bankrsquos Charter that result from Ex‐Im Bank loans guarantees or insurance The Bankrsquos Charter contains three provisions that address adverse economic impact found at 12 USC sectsect 635(b)(1) 635a‐2 635(e)
ldquoAir Indiardquo is an airline owned by the Government of the Republic of India ldquoAir India Transactionsrdquo are the two final commitments approved by Ex‐Im Bank on September
30 2011 for loan guarantees for the purchase of a number of 787 ldquoDreamlinerrdquo aircraft from Boeing and to be financed by a commercial lender not identified at the time As of the date of this paper Ex‐Im Bank has not issued any of its loan guarantees but is expected to do so in the coming months Ten of the aircraft involved in these two final commitments have been delivered to Air India and are in use by Air India on routes outside the United States The deliveries of the ten aircraft were made using private short‐term financing as to which Ex‐Im Bank had no involvement
ldquoAirbusrdquo Airbus SAS is a Europe‐based manufacturer of large commercial aircraft Airbus is the only competitor to Boeing the US manufacturer Airbus sales are supported by the ECAs of Germany France and the UK
ldquoAircraft Sector also known as the ASU is an agreement among members of the OECD Understandingrdquo that manufacture aircraft and Brazil The ASU requires that Export
Credit Agencies that support the export of aircraft follow certain rules and restrictions that set forth the most favorable terms that can be provided These rules and restrictions include the Export Credit Agency must charge a minimum risk premium which is determined by the ASU the term of any loan made by or supported by the Export Credit Agency for the purchase of aircraft cannot exceed 12 years the Export Credit Agency today can lend or guarantee only up to 85 of the actual purchase price of the aircraft being exported and the use of risk mitigants The ASU was preceded by the Large Aircraft Sector Understanding which governed these issues until the enactment of the 2007 ASU The ASU was again updated and revised in 2011 (See also the Large Aircraft Sector Understanding)
ldquoArrangementrdquo is the agreement among Export Credit Agencies governing the terms by which they will provide loans guarantees or insurance in support of exports from their respective countries Among other things the Arrangement requires Export Credit Agencies to charge a minimum risk premium which is governed by the Arrangement See also Organization for Economic Cooperation and Development
ldquoASUrdquo see Aircraft Sector Understanding ldquoAverage Weighted Liferdquo for purposes of this paper refers to the average number of years that
each dollar of unpaid principal on a loan remains outstanding For example a loan with equal principal payments throughout the loan term will have an average weighted life close to the middle of the whole loan term
26
ldquoBank Actrdquo is the Export‐Import Bank Act of 1945 12 USC sect635 as amended ldquoBank Advisory Committeerdquo is the official Advisory Committee of the Bank appointed in accordance
with the Bank Act and the Advisory Committee Act The Bank Advisory Committee is comprised of representatives of various industry and market sectors as well as representatives of labor and international trade experts
ldquoBasis pointsrdquo are a numerical measure applied to interest rates One basis point equals 1100th of one percent or 100 basis points equals one percent
ldquoCapital Equipmentrdquo is equipment used to manufacture a product provide a service or sell store or deliver merchandise A wide‐body aircraft is a piece of capital equipment
ldquoCharterrdquo is the Bank Act as well the provisions of the Export Import Bank Reauthorization Act of 2012 (Public Law 112‐122) that are not codified in the Bank Act
ldquoDreamlinerrdquo is the name given to a Boeing 787 wide‐body commercial aircraft ldquoECArdquo see Export Credit Agencies ldquoEconomic Impact Proceduresrdquo
are procedures adopted by Ex‐Im Bank to assess whether transactions supported by the Bank cause a serious adverse economic impact to US industries and US jobs See also Adverse Economic Impact
ldquoEETCrdquo see Enhanced Equipment Trust Certificate ldquoEnhanced Equipment Trust Certificaterdquo
also known as an EETC is a type of secured bond issued by a borrower in the capital markets The EETC is secured by the equipment being purchased with the proceeds of the bond issuance EETCs are used primarily for aircraft and since the late 1990s has been the dominant financing tool used by US airlines to purchase aircraft Section 1110 of the US Bankruptcy Codemdashwhich allows creditors of aircraft borrowers to obtain their collateral within 60 days if the payments on their debt is not current ndash has provided creditors of US airlines a level of comfort not available to creditors of foreign airlines until recently This generally provided US airlines with a significant financial advantage vis a vis their foreign competitors Recently the adoption of the Cape Town Convention and the related Aircraft Equipment Protocol has provided creditors of foreign airlines with protections similar to the protections provided by section 1110 of the US Bankruptcy Code Recently this has led to the beginnings of an international EETC market
ldquoEquipment Trust Certificaterdquo
also known as an ETC was the predecessor to the Enhanced Equipment Trust Certificate
ldquoETCrdquo see Equipment Trust Certificate ldquoEx‐Im Bankrdquo or ldquoBankrdquo See The Export‐Import Bank of the United States ldquoExport Credit Agenciesrdquo are agencies or ministries of government that have the official role of
providing loans guarantees or insurance in support of exports from their respective countries or in support of exports by sales of companies from their respective countries Ex‐Im Bank is the official Export Credit Agency of the United States of America
ldquoexportable goods screenrdquo is a screen or filter adopted by Ex‐Im Bank in its 2001 Economic Impact Procedures The exportable goods screen is utilized along with other screens to balance the Bankrsquos obligation to consider the adverse
27
economic effects of its transactions on US industries and US jobs with the Bankrsquos mandate to support US export transactions in a timely manner so as to fully support the exporterrsquos business opportunity The exportable goods screen filtered out transactions that supported exports which could only be used by a foreign buyer to provide services rather than produce goods
ldquoExport‐Import Bank of the is an independent agency of the Federal Government of the United United Statesrdquo States of America Also known as ldquoEx‐Im Bankrdquo Ex‐Im Bankrsquos mission
is to support US jobs by supporting US exports See 12 USC 635 et seq
ldquoExposure Feerdquo is the risk premium charged by Ex‐Im Bank in exchange for its guarantee in certain transactions The exposure fee must be at least equal to the minimum risk premium required by the terms of the Arrangement and the Aircraft Sector Understanding
ldquoForeign Sales Corporationrdquo is a company created under the terms of a former provision of the US Internal Revenue Code Foreign Sales Corporations received significant tax benefits
ldquoFSCrdquo see Foreign Sales Corporation ldquoInvestment Tax Creditrdquo is a credit permitted under the US Internal Revenue Code for the
purchase of certain types of equipment in certain circumstances See also Leveraged Leases
ldquoKFWrdquo the development bank for the Federal Republic of Germany KFW is an Export Credit Agency but it also operates through a ldquomarket windowrdquo which is not subject to the Home Market Rule Thus KFW provides support to Airbus for its sales of aircraft to US airlines The United States does not have an equivalent institution and Ex‐Im Bank does not have a ldquomarket windowrdquo
ldquoLarge Aircraft Sector also known as LASU was the predecessor to the Aircraft Sector Understandingrdquo Understanding The LASU governed the same general issues as are set
forth in the Aircraft Sector Understanding except that the minimum risk premium was lower than that required in the 2007 ASU and 2011 ASU When the 2007 ASU was enacted grandfathering provisions allowed ECA‐supported financing for a limited number of aircraft to be governed by LASU
ldquoLASUrdquo see Large Aircraft Sector Understanding ldquoLeveraged Leaserdquo is a lease of equipment and is designed to allow the lessor to take
advantage of certain tax code provisions such as the depreciation deduction and the investment tax credit while allowing the lessee to obtain the equipment involved at a significantly lower cost Leveraged Leases were a very popular means for US airlines to acquire aircraft throughout the 1980s and 1990s The value of the tax deductions to the lessor were significant so that the implicit interest rate in the lease payments by the US airline were extremely low Usually the US airline did not have sufficient profit to take advantage of the favorable tax code provisions By using a leveraged lease another company that could shelter income by using the tax code provisions would buy the equipment and lease the equipment to the US airline Usually at the end of the lease term the US airline would purchase the aircraft
28
ldquoLIBORrdquo is the London Inter‐bank Offering Rate It is commonly used as a reference rate in loan transactions that have floating or adjustable interest rates LIBOR reflects the rate at which banks will lend money to each other LIBOR is set for various loan terms (eg 3 months 6 months etc) and is widely published making it a convenient rate to use as a reference rate
ldquoNet pricerdquo is the price paid after all discounts have been deducted The net price is the actual price paid for a piece of equipment In aircraft transactions pursuant to the ASU Ex‐Im Bank will only support up to 85 of the net price of an aircraft EETC transactions on the other hand often support the nominal purchase price of an aircraft and thus result in a significantly higher amount financed
ldquoOECDrdquo see the Organization for Economic Cooperation and Development Open Skies Agreement Is a type of bilateral agreement between countries that govern the
rights of airlines from the two countries to fly into the other country Open Skies Agreements generally allow free access to fly as many routes to a country as an airline may choose but then usually restrict the ability to fly within the other country Generally it is a ldquofly in and outrdquo rule although there are exceptions
ldquoOrganization for Economic Cooperation and Developmentrdquo
also known as the OECD is an organization comprised of 34 member countries that work together to promote development The United States is a member With regard to Ex‐Im Bank the OECD is the organization through which the US Government negotiates an agreement among Export Credit Agencies known as the Arrangement and the ASU (and its predecessor the LASU)
ldquoPass Through Certificaterdquo also known as a PTC is a group of Equipment Trust Certificates pooled together to form the basis for a bond issuance
ldquoPTCrdquo See Pass Through Certificate ldquoRyanairrdquo is a low‐cost Irish airline that began business after European
deregulation of airlines in 1997 Ryanair rapidly expanded during the first decade of the 2000s creating significant competition for other airlines
ldquoScreensrdquo are a type of filter used by Ex‐Im Bank in its Economic Impact Procedures Screens are designed to identify those transactions which are not likely to cause an adverse economic impact to US industries or US jobs so that such transactions can be processed more quickly and efficiently as required by the Bank Act
ldquoSubstantial Injuryrdquo is a term defined in Ex‐Im Bankrsquos Charter to be applied in connection with the Bankrsquos economic impact procedures 12 USC sect635(e)(4) The Charter states ldquohellipthe extension of any credit or guarantee by the Bank will cause substantial injury if the amount of the capacity for production established or the amount of the increase in such capacity expanded by such credit or guarantee equals or exceeds 1 percent of United States productionrdquo
ldquoTPCCrdquo see Trade Promotion Coordinating Committee ldquoTrade Promotion Coordinating Committeerdquo
also known as the TPCC is an interagency committee of the US Government chaired by the Secretary of Commerce It was established under the Export Enhancement Act of 1992 to provide a
29
unifying framework to coordinate the export promotion and export financing activities of the US government and to develop a government‐wide strategic plan for carrying out such programs
ldquoTrade Sanctionsrdquo refers to any of a number of sanctions imposed by the US Government against companies countries industries or products usually as a result of an accusation of adjudication of a violation of an international trade agreement The Bank Act requires Ex‐Im Bank to take certain trade sanctions into account in its economic impact procedures
30
Table A ndash Congressional Actions and Ex-Im Bank Responses
Year Congressional Action Ex‐Im Bank Response
1968 Bank directed to take into account the possible adverse effect [of its loans and guarantees] upon the United States economy
Bank adds this transactions
factor to analysis of
1975 1 Standard refined to take into account any serious adverse effect of loans and guarantees on competitive position of US industry availability of scarce materials in US and employment in US
2 Bank directed to be competitive with rates terms and conditions offered by principal countries whose exporters compete with US exporters
3 Bank directed to submit semi‐annual report on competitiveness and conduct survey of US exporters and lenders to determine experience in meeting financing competition
Bank adds these of transactions
considerations to analysis
Year Congressional Action Ex‐Im Bank Response
1978 ‐ 1979
1 Bank directed to take into account any serious adverse effect of loans on competitive position of US industry and scarce materials Bank directed to emphasize strengthening competitive position of US exporters and expanding total US exports
2 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [From Appropriations Act Restated in Bank Charter in 1986]
3 Bank directed to implement regulations and procedures to insure full consideration of extent to which loan or guarantee is likely to have adverse effect on industries and employment in US either by reducing demand for US produced goods or increasing imports to the US
Bank develops framework and set of written economic impact procedures
1 Exclude exports the use of which remained localized in foreign country This
is first ldquoforeign localized goods and services screenrdquo
2 ldquoIntent and stimulus for projectrdquo examined to determine likelihood of substantial adverse economic impact Does transaction involve ldquorunaway industryrdquo
(leaving US for cheaper foreign labor)
3 Does export of capital equipment result in ldquobuy backrdquo of product being imported into the US
4 Is net impact on US economy and jobs positive or negative and to what degree
32
Year Congressional Action Ex‐Im Bank Response
1986 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [Originally from 1978 Appropriations incorporated into Bank Charter in 1986]
Senate Report recognizes knowledge and experience of Bank and need to respond to exportersrsquo requests for support in a timely and confidential fashion Economic impact procedures are to be practical and workable and not reduce Bankrsquos competitiveness and flexibility nor ignore positive aspects of export sale
Bank develops ldquoSummary of Adverse Economic Guidelinesrdquo to be applied to both
goods and services (a) is commodity to be produced surplus or likely to compete with US‐produced surplus (b) will Bankrsquos
assistance cause substantial injury to US producers of competing commodity (c)
will injury to US producers of competing commodity outweigh the short‐ and long‐
term benefits to US industry and employment If answer is no then no
further economic impact analysis
1988 Congress establishes test for ldquosubstantial injuryrdquo if the amount of capacity for production established or amount of increase in such capacity expanded by Bankrsquos credit or guarantee exceeds 1 of US production
Bankrsquos Board recognizes requirement to balance (a) possibility of substantial harm
to US production and employment with (b) being responsive competitive and efficient New economic impact procedures ask (a) will the project be in direct competition with US production (b) is the Bankrsquos support significantly associated with the project (c) will the output of the project
cause substantial injury to US producers of the same similar or competing
commodity If answer is no then no further economic impact analysis is required
33
Year Congressional Action Ex‐Im Bank Response
1998 Bank revised procedures involving countries against which trade sanctions were pending or imposed
2001
2006 ‐2007
1 Bank required to determine whether extension of credit or guarantee is likely to produce same or other commodities and whether the production may cause substantial injury to US producers
2 Bank prohibited from providing a loan or guarantee that will facilitate circumvention of trade law order or determination
3 Bank required to designate sensitive commercial sectors and products for which Bank financing deemed unlikely due to potential for adverse economic impact on US
4 Bank required to aggregate financial thresholds on rolling 24‐month basis
Bank develops ldquoexportable goods screenrdquo Does Ex‐Im Bank support result in production of exportable good from the foreign buyerrsquos country If not no further economic impact analysis is required Notice and request for comments were published in the Federal Register US airline industry did not respond
Bank issues 2007 Economic Impact Procedures ldquoExportable goods screenrdquo is modified Will the transaction (capital goods and services) result in either new or additional production capacity of an exportable good
34
airlines in the late 1990s through 2001 a period in which the US airlines were taking delivery
of a significant number of aircraft
As a result of the downturn in the US airline industry following the September 11 2001
terrorist attacks many US airlines deferred or cancelled their orders for new aircraft This
reduced the need for US airlines to finance new aircraft when the financing terms available to
such US airlines via the EETC were not as favorable due to (i) the perceived increased credit
risks of the US airline industry following the September 11 terrorist attacks and (ii) the
temporary disequilibrium in the credit markets following the 200820092010 credit crisis
Now that the US airlines have once again begun to take delivery of a significant number of
new aircraft the pre‐funded EETC continues to be the preferred source of financing for US
airlines as evidenced by the number and amount of EETC issuances during 2012 and 2013
Based on an analysis of the EETC transactions occurring during 2012 and 2013 EETCs are once
again generally considered to provide more attractive overall financing terms than what could
be achieved by an airline under an export credit‐supported financing done under the terms of
the 2011 Aircraft Sector Understanding
25
GLOSSARY
ldquoAdverse Economic Impactrdquo is the short‐hand term used to refer to any serious negative effects on US industries or US jobs as set forth in the Bankrsquos Charter that result from Ex‐Im Bank loans guarantees or insurance The Bankrsquos Charter contains three provisions that address adverse economic impact found at 12 USC sectsect 635(b)(1) 635a‐2 635(e)
ldquoAir Indiardquo is an airline owned by the Government of the Republic of India ldquoAir India Transactionsrdquo are the two final commitments approved by Ex‐Im Bank on September
30 2011 for loan guarantees for the purchase of a number of 787 ldquoDreamlinerrdquo aircraft from Boeing and to be financed by a commercial lender not identified at the time As of the date of this paper Ex‐Im Bank has not issued any of its loan guarantees but is expected to do so in the coming months Ten of the aircraft involved in these two final commitments have been delivered to Air India and are in use by Air India on routes outside the United States The deliveries of the ten aircraft were made using private short‐term financing as to which Ex‐Im Bank had no involvement
ldquoAirbusrdquo Airbus SAS is a Europe‐based manufacturer of large commercial aircraft Airbus is the only competitor to Boeing the US manufacturer Airbus sales are supported by the ECAs of Germany France and the UK
ldquoAircraft Sector also known as the ASU is an agreement among members of the OECD Understandingrdquo that manufacture aircraft and Brazil The ASU requires that Export
Credit Agencies that support the export of aircraft follow certain rules and restrictions that set forth the most favorable terms that can be provided These rules and restrictions include the Export Credit Agency must charge a minimum risk premium which is determined by the ASU the term of any loan made by or supported by the Export Credit Agency for the purchase of aircraft cannot exceed 12 years the Export Credit Agency today can lend or guarantee only up to 85 of the actual purchase price of the aircraft being exported and the use of risk mitigants The ASU was preceded by the Large Aircraft Sector Understanding which governed these issues until the enactment of the 2007 ASU The ASU was again updated and revised in 2011 (See also the Large Aircraft Sector Understanding)
ldquoArrangementrdquo is the agreement among Export Credit Agencies governing the terms by which they will provide loans guarantees or insurance in support of exports from their respective countries Among other things the Arrangement requires Export Credit Agencies to charge a minimum risk premium which is governed by the Arrangement See also Organization for Economic Cooperation and Development
ldquoASUrdquo see Aircraft Sector Understanding ldquoAverage Weighted Liferdquo for purposes of this paper refers to the average number of years that
each dollar of unpaid principal on a loan remains outstanding For example a loan with equal principal payments throughout the loan term will have an average weighted life close to the middle of the whole loan term
26
ldquoBank Actrdquo is the Export‐Import Bank Act of 1945 12 USC sect635 as amended ldquoBank Advisory Committeerdquo is the official Advisory Committee of the Bank appointed in accordance
with the Bank Act and the Advisory Committee Act The Bank Advisory Committee is comprised of representatives of various industry and market sectors as well as representatives of labor and international trade experts
ldquoBasis pointsrdquo are a numerical measure applied to interest rates One basis point equals 1100th of one percent or 100 basis points equals one percent
ldquoCapital Equipmentrdquo is equipment used to manufacture a product provide a service or sell store or deliver merchandise A wide‐body aircraft is a piece of capital equipment
ldquoCharterrdquo is the Bank Act as well the provisions of the Export Import Bank Reauthorization Act of 2012 (Public Law 112‐122) that are not codified in the Bank Act
ldquoDreamlinerrdquo is the name given to a Boeing 787 wide‐body commercial aircraft ldquoECArdquo see Export Credit Agencies ldquoEconomic Impact Proceduresrdquo
are procedures adopted by Ex‐Im Bank to assess whether transactions supported by the Bank cause a serious adverse economic impact to US industries and US jobs See also Adverse Economic Impact
ldquoEETCrdquo see Enhanced Equipment Trust Certificate ldquoEnhanced Equipment Trust Certificaterdquo
also known as an EETC is a type of secured bond issued by a borrower in the capital markets The EETC is secured by the equipment being purchased with the proceeds of the bond issuance EETCs are used primarily for aircraft and since the late 1990s has been the dominant financing tool used by US airlines to purchase aircraft Section 1110 of the US Bankruptcy Codemdashwhich allows creditors of aircraft borrowers to obtain their collateral within 60 days if the payments on their debt is not current ndash has provided creditors of US airlines a level of comfort not available to creditors of foreign airlines until recently This generally provided US airlines with a significant financial advantage vis a vis their foreign competitors Recently the adoption of the Cape Town Convention and the related Aircraft Equipment Protocol has provided creditors of foreign airlines with protections similar to the protections provided by section 1110 of the US Bankruptcy Code Recently this has led to the beginnings of an international EETC market
ldquoEquipment Trust Certificaterdquo
also known as an ETC was the predecessor to the Enhanced Equipment Trust Certificate
ldquoETCrdquo see Equipment Trust Certificate ldquoEx‐Im Bankrdquo or ldquoBankrdquo See The Export‐Import Bank of the United States ldquoExport Credit Agenciesrdquo are agencies or ministries of government that have the official role of
providing loans guarantees or insurance in support of exports from their respective countries or in support of exports by sales of companies from their respective countries Ex‐Im Bank is the official Export Credit Agency of the United States of America
ldquoexportable goods screenrdquo is a screen or filter adopted by Ex‐Im Bank in its 2001 Economic Impact Procedures The exportable goods screen is utilized along with other screens to balance the Bankrsquos obligation to consider the adverse
27
economic effects of its transactions on US industries and US jobs with the Bankrsquos mandate to support US export transactions in a timely manner so as to fully support the exporterrsquos business opportunity The exportable goods screen filtered out transactions that supported exports which could only be used by a foreign buyer to provide services rather than produce goods
ldquoExport‐Import Bank of the is an independent agency of the Federal Government of the United United Statesrdquo States of America Also known as ldquoEx‐Im Bankrdquo Ex‐Im Bankrsquos mission
is to support US jobs by supporting US exports See 12 USC 635 et seq
ldquoExposure Feerdquo is the risk premium charged by Ex‐Im Bank in exchange for its guarantee in certain transactions The exposure fee must be at least equal to the minimum risk premium required by the terms of the Arrangement and the Aircraft Sector Understanding
ldquoForeign Sales Corporationrdquo is a company created under the terms of a former provision of the US Internal Revenue Code Foreign Sales Corporations received significant tax benefits
ldquoFSCrdquo see Foreign Sales Corporation ldquoInvestment Tax Creditrdquo is a credit permitted under the US Internal Revenue Code for the
purchase of certain types of equipment in certain circumstances See also Leveraged Leases
ldquoKFWrdquo the development bank for the Federal Republic of Germany KFW is an Export Credit Agency but it also operates through a ldquomarket windowrdquo which is not subject to the Home Market Rule Thus KFW provides support to Airbus for its sales of aircraft to US airlines The United States does not have an equivalent institution and Ex‐Im Bank does not have a ldquomarket windowrdquo
ldquoLarge Aircraft Sector also known as LASU was the predecessor to the Aircraft Sector Understandingrdquo Understanding The LASU governed the same general issues as are set
forth in the Aircraft Sector Understanding except that the minimum risk premium was lower than that required in the 2007 ASU and 2011 ASU When the 2007 ASU was enacted grandfathering provisions allowed ECA‐supported financing for a limited number of aircraft to be governed by LASU
ldquoLASUrdquo see Large Aircraft Sector Understanding ldquoLeveraged Leaserdquo is a lease of equipment and is designed to allow the lessor to take
advantage of certain tax code provisions such as the depreciation deduction and the investment tax credit while allowing the lessee to obtain the equipment involved at a significantly lower cost Leveraged Leases were a very popular means for US airlines to acquire aircraft throughout the 1980s and 1990s The value of the tax deductions to the lessor were significant so that the implicit interest rate in the lease payments by the US airline were extremely low Usually the US airline did not have sufficient profit to take advantage of the favorable tax code provisions By using a leveraged lease another company that could shelter income by using the tax code provisions would buy the equipment and lease the equipment to the US airline Usually at the end of the lease term the US airline would purchase the aircraft
28
ldquoLIBORrdquo is the London Inter‐bank Offering Rate It is commonly used as a reference rate in loan transactions that have floating or adjustable interest rates LIBOR reflects the rate at which banks will lend money to each other LIBOR is set for various loan terms (eg 3 months 6 months etc) and is widely published making it a convenient rate to use as a reference rate
ldquoNet pricerdquo is the price paid after all discounts have been deducted The net price is the actual price paid for a piece of equipment In aircraft transactions pursuant to the ASU Ex‐Im Bank will only support up to 85 of the net price of an aircraft EETC transactions on the other hand often support the nominal purchase price of an aircraft and thus result in a significantly higher amount financed
ldquoOECDrdquo see the Organization for Economic Cooperation and Development Open Skies Agreement Is a type of bilateral agreement between countries that govern the
rights of airlines from the two countries to fly into the other country Open Skies Agreements generally allow free access to fly as many routes to a country as an airline may choose but then usually restrict the ability to fly within the other country Generally it is a ldquofly in and outrdquo rule although there are exceptions
ldquoOrganization for Economic Cooperation and Developmentrdquo
also known as the OECD is an organization comprised of 34 member countries that work together to promote development The United States is a member With regard to Ex‐Im Bank the OECD is the organization through which the US Government negotiates an agreement among Export Credit Agencies known as the Arrangement and the ASU (and its predecessor the LASU)
ldquoPass Through Certificaterdquo also known as a PTC is a group of Equipment Trust Certificates pooled together to form the basis for a bond issuance
ldquoPTCrdquo See Pass Through Certificate ldquoRyanairrdquo is a low‐cost Irish airline that began business after European
deregulation of airlines in 1997 Ryanair rapidly expanded during the first decade of the 2000s creating significant competition for other airlines
ldquoScreensrdquo are a type of filter used by Ex‐Im Bank in its Economic Impact Procedures Screens are designed to identify those transactions which are not likely to cause an adverse economic impact to US industries or US jobs so that such transactions can be processed more quickly and efficiently as required by the Bank Act
ldquoSubstantial Injuryrdquo is a term defined in Ex‐Im Bankrsquos Charter to be applied in connection with the Bankrsquos economic impact procedures 12 USC sect635(e)(4) The Charter states ldquohellipthe extension of any credit or guarantee by the Bank will cause substantial injury if the amount of the capacity for production established or the amount of the increase in such capacity expanded by such credit or guarantee equals or exceeds 1 percent of United States productionrdquo
ldquoTPCCrdquo see Trade Promotion Coordinating Committee ldquoTrade Promotion Coordinating Committeerdquo
also known as the TPCC is an interagency committee of the US Government chaired by the Secretary of Commerce It was established under the Export Enhancement Act of 1992 to provide a
29
unifying framework to coordinate the export promotion and export financing activities of the US government and to develop a government‐wide strategic plan for carrying out such programs
ldquoTrade Sanctionsrdquo refers to any of a number of sanctions imposed by the US Government against companies countries industries or products usually as a result of an accusation of adjudication of a violation of an international trade agreement The Bank Act requires Ex‐Im Bank to take certain trade sanctions into account in its economic impact procedures
30
Table A ndash Congressional Actions and Ex-Im Bank Responses
Year Congressional Action Ex‐Im Bank Response
1968 Bank directed to take into account the possible adverse effect [of its loans and guarantees] upon the United States economy
Bank adds this transactions
factor to analysis of
1975 1 Standard refined to take into account any serious adverse effect of loans and guarantees on competitive position of US industry availability of scarce materials in US and employment in US
2 Bank directed to be competitive with rates terms and conditions offered by principal countries whose exporters compete with US exporters
3 Bank directed to submit semi‐annual report on competitiveness and conduct survey of US exporters and lenders to determine experience in meeting financing competition
Bank adds these of transactions
considerations to analysis
Year Congressional Action Ex‐Im Bank Response
1978 ‐ 1979
1 Bank directed to take into account any serious adverse effect of loans on competitive position of US industry and scarce materials Bank directed to emphasize strengthening competitive position of US exporters and expanding total US exports
2 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [From Appropriations Act Restated in Bank Charter in 1986]
3 Bank directed to implement regulations and procedures to insure full consideration of extent to which loan or guarantee is likely to have adverse effect on industries and employment in US either by reducing demand for US produced goods or increasing imports to the US
Bank develops framework and set of written economic impact procedures
1 Exclude exports the use of which remained localized in foreign country This
is first ldquoforeign localized goods and services screenrdquo
2 ldquoIntent and stimulus for projectrdquo examined to determine likelihood of substantial adverse economic impact Does transaction involve ldquorunaway industryrdquo
(leaving US for cheaper foreign labor)
3 Does export of capital equipment result in ldquobuy backrdquo of product being imported into the US
4 Is net impact on US economy and jobs positive or negative and to what degree
32
Year Congressional Action Ex‐Im Bank Response
1986 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [Originally from 1978 Appropriations incorporated into Bank Charter in 1986]
Senate Report recognizes knowledge and experience of Bank and need to respond to exportersrsquo requests for support in a timely and confidential fashion Economic impact procedures are to be practical and workable and not reduce Bankrsquos competitiveness and flexibility nor ignore positive aspects of export sale
Bank develops ldquoSummary of Adverse Economic Guidelinesrdquo to be applied to both
goods and services (a) is commodity to be produced surplus or likely to compete with US‐produced surplus (b) will Bankrsquos
assistance cause substantial injury to US producers of competing commodity (c)
will injury to US producers of competing commodity outweigh the short‐ and long‐
term benefits to US industry and employment If answer is no then no
further economic impact analysis
1988 Congress establishes test for ldquosubstantial injuryrdquo if the amount of capacity for production established or amount of increase in such capacity expanded by Bankrsquos credit or guarantee exceeds 1 of US production
Bankrsquos Board recognizes requirement to balance (a) possibility of substantial harm
to US production and employment with (b) being responsive competitive and efficient New economic impact procedures ask (a) will the project be in direct competition with US production (b) is the Bankrsquos support significantly associated with the project (c) will the output of the project
cause substantial injury to US producers of the same similar or competing
commodity If answer is no then no further economic impact analysis is required
33
Year Congressional Action Ex‐Im Bank Response
1998 Bank revised procedures involving countries against which trade sanctions were pending or imposed
2001
2006 ‐2007
1 Bank required to determine whether extension of credit or guarantee is likely to produce same or other commodities and whether the production may cause substantial injury to US producers
2 Bank prohibited from providing a loan or guarantee that will facilitate circumvention of trade law order or determination
3 Bank required to designate sensitive commercial sectors and products for which Bank financing deemed unlikely due to potential for adverse economic impact on US
4 Bank required to aggregate financial thresholds on rolling 24‐month basis
Bank develops ldquoexportable goods screenrdquo Does Ex‐Im Bank support result in production of exportable good from the foreign buyerrsquos country If not no further economic impact analysis is required Notice and request for comments were published in the Federal Register US airline industry did not respond
Bank issues 2007 Economic Impact Procedures ldquoExportable goods screenrdquo is modified Will the transaction (capital goods and services) result in either new or additional production capacity of an exportable good
34
GLOSSARY
ldquoAdverse Economic Impactrdquo is the short‐hand term used to refer to any serious negative effects on US industries or US jobs as set forth in the Bankrsquos Charter that result from Ex‐Im Bank loans guarantees or insurance The Bankrsquos Charter contains three provisions that address adverse economic impact found at 12 USC sectsect 635(b)(1) 635a‐2 635(e)
ldquoAir Indiardquo is an airline owned by the Government of the Republic of India ldquoAir India Transactionsrdquo are the two final commitments approved by Ex‐Im Bank on September
30 2011 for loan guarantees for the purchase of a number of 787 ldquoDreamlinerrdquo aircraft from Boeing and to be financed by a commercial lender not identified at the time As of the date of this paper Ex‐Im Bank has not issued any of its loan guarantees but is expected to do so in the coming months Ten of the aircraft involved in these two final commitments have been delivered to Air India and are in use by Air India on routes outside the United States The deliveries of the ten aircraft were made using private short‐term financing as to which Ex‐Im Bank had no involvement
ldquoAirbusrdquo Airbus SAS is a Europe‐based manufacturer of large commercial aircraft Airbus is the only competitor to Boeing the US manufacturer Airbus sales are supported by the ECAs of Germany France and the UK
ldquoAircraft Sector also known as the ASU is an agreement among members of the OECD Understandingrdquo that manufacture aircraft and Brazil The ASU requires that Export
Credit Agencies that support the export of aircraft follow certain rules and restrictions that set forth the most favorable terms that can be provided These rules and restrictions include the Export Credit Agency must charge a minimum risk premium which is determined by the ASU the term of any loan made by or supported by the Export Credit Agency for the purchase of aircraft cannot exceed 12 years the Export Credit Agency today can lend or guarantee only up to 85 of the actual purchase price of the aircraft being exported and the use of risk mitigants The ASU was preceded by the Large Aircraft Sector Understanding which governed these issues until the enactment of the 2007 ASU The ASU was again updated and revised in 2011 (See also the Large Aircraft Sector Understanding)
ldquoArrangementrdquo is the agreement among Export Credit Agencies governing the terms by which they will provide loans guarantees or insurance in support of exports from their respective countries Among other things the Arrangement requires Export Credit Agencies to charge a minimum risk premium which is governed by the Arrangement See also Organization for Economic Cooperation and Development
ldquoASUrdquo see Aircraft Sector Understanding ldquoAverage Weighted Liferdquo for purposes of this paper refers to the average number of years that
each dollar of unpaid principal on a loan remains outstanding For example a loan with equal principal payments throughout the loan term will have an average weighted life close to the middle of the whole loan term
26
ldquoBank Actrdquo is the Export‐Import Bank Act of 1945 12 USC sect635 as amended ldquoBank Advisory Committeerdquo is the official Advisory Committee of the Bank appointed in accordance
with the Bank Act and the Advisory Committee Act The Bank Advisory Committee is comprised of representatives of various industry and market sectors as well as representatives of labor and international trade experts
ldquoBasis pointsrdquo are a numerical measure applied to interest rates One basis point equals 1100th of one percent or 100 basis points equals one percent
ldquoCapital Equipmentrdquo is equipment used to manufacture a product provide a service or sell store or deliver merchandise A wide‐body aircraft is a piece of capital equipment
ldquoCharterrdquo is the Bank Act as well the provisions of the Export Import Bank Reauthorization Act of 2012 (Public Law 112‐122) that are not codified in the Bank Act
ldquoDreamlinerrdquo is the name given to a Boeing 787 wide‐body commercial aircraft ldquoECArdquo see Export Credit Agencies ldquoEconomic Impact Proceduresrdquo
are procedures adopted by Ex‐Im Bank to assess whether transactions supported by the Bank cause a serious adverse economic impact to US industries and US jobs See also Adverse Economic Impact
ldquoEETCrdquo see Enhanced Equipment Trust Certificate ldquoEnhanced Equipment Trust Certificaterdquo
also known as an EETC is a type of secured bond issued by a borrower in the capital markets The EETC is secured by the equipment being purchased with the proceeds of the bond issuance EETCs are used primarily for aircraft and since the late 1990s has been the dominant financing tool used by US airlines to purchase aircraft Section 1110 of the US Bankruptcy Codemdashwhich allows creditors of aircraft borrowers to obtain their collateral within 60 days if the payments on their debt is not current ndash has provided creditors of US airlines a level of comfort not available to creditors of foreign airlines until recently This generally provided US airlines with a significant financial advantage vis a vis their foreign competitors Recently the adoption of the Cape Town Convention and the related Aircraft Equipment Protocol has provided creditors of foreign airlines with protections similar to the protections provided by section 1110 of the US Bankruptcy Code Recently this has led to the beginnings of an international EETC market
ldquoEquipment Trust Certificaterdquo
also known as an ETC was the predecessor to the Enhanced Equipment Trust Certificate
ldquoETCrdquo see Equipment Trust Certificate ldquoEx‐Im Bankrdquo or ldquoBankrdquo See The Export‐Import Bank of the United States ldquoExport Credit Agenciesrdquo are agencies or ministries of government that have the official role of
providing loans guarantees or insurance in support of exports from their respective countries or in support of exports by sales of companies from their respective countries Ex‐Im Bank is the official Export Credit Agency of the United States of America
ldquoexportable goods screenrdquo is a screen or filter adopted by Ex‐Im Bank in its 2001 Economic Impact Procedures The exportable goods screen is utilized along with other screens to balance the Bankrsquos obligation to consider the adverse
27
economic effects of its transactions on US industries and US jobs with the Bankrsquos mandate to support US export transactions in a timely manner so as to fully support the exporterrsquos business opportunity The exportable goods screen filtered out transactions that supported exports which could only be used by a foreign buyer to provide services rather than produce goods
ldquoExport‐Import Bank of the is an independent agency of the Federal Government of the United United Statesrdquo States of America Also known as ldquoEx‐Im Bankrdquo Ex‐Im Bankrsquos mission
is to support US jobs by supporting US exports See 12 USC 635 et seq
ldquoExposure Feerdquo is the risk premium charged by Ex‐Im Bank in exchange for its guarantee in certain transactions The exposure fee must be at least equal to the minimum risk premium required by the terms of the Arrangement and the Aircraft Sector Understanding
ldquoForeign Sales Corporationrdquo is a company created under the terms of a former provision of the US Internal Revenue Code Foreign Sales Corporations received significant tax benefits
ldquoFSCrdquo see Foreign Sales Corporation ldquoInvestment Tax Creditrdquo is a credit permitted under the US Internal Revenue Code for the
purchase of certain types of equipment in certain circumstances See also Leveraged Leases
ldquoKFWrdquo the development bank for the Federal Republic of Germany KFW is an Export Credit Agency but it also operates through a ldquomarket windowrdquo which is not subject to the Home Market Rule Thus KFW provides support to Airbus for its sales of aircraft to US airlines The United States does not have an equivalent institution and Ex‐Im Bank does not have a ldquomarket windowrdquo
ldquoLarge Aircraft Sector also known as LASU was the predecessor to the Aircraft Sector Understandingrdquo Understanding The LASU governed the same general issues as are set
forth in the Aircraft Sector Understanding except that the minimum risk premium was lower than that required in the 2007 ASU and 2011 ASU When the 2007 ASU was enacted grandfathering provisions allowed ECA‐supported financing for a limited number of aircraft to be governed by LASU
ldquoLASUrdquo see Large Aircraft Sector Understanding ldquoLeveraged Leaserdquo is a lease of equipment and is designed to allow the lessor to take
advantage of certain tax code provisions such as the depreciation deduction and the investment tax credit while allowing the lessee to obtain the equipment involved at a significantly lower cost Leveraged Leases were a very popular means for US airlines to acquire aircraft throughout the 1980s and 1990s The value of the tax deductions to the lessor were significant so that the implicit interest rate in the lease payments by the US airline were extremely low Usually the US airline did not have sufficient profit to take advantage of the favorable tax code provisions By using a leveraged lease another company that could shelter income by using the tax code provisions would buy the equipment and lease the equipment to the US airline Usually at the end of the lease term the US airline would purchase the aircraft
28
ldquoLIBORrdquo is the London Inter‐bank Offering Rate It is commonly used as a reference rate in loan transactions that have floating or adjustable interest rates LIBOR reflects the rate at which banks will lend money to each other LIBOR is set for various loan terms (eg 3 months 6 months etc) and is widely published making it a convenient rate to use as a reference rate
ldquoNet pricerdquo is the price paid after all discounts have been deducted The net price is the actual price paid for a piece of equipment In aircraft transactions pursuant to the ASU Ex‐Im Bank will only support up to 85 of the net price of an aircraft EETC transactions on the other hand often support the nominal purchase price of an aircraft and thus result in a significantly higher amount financed
ldquoOECDrdquo see the Organization for Economic Cooperation and Development Open Skies Agreement Is a type of bilateral agreement between countries that govern the
rights of airlines from the two countries to fly into the other country Open Skies Agreements generally allow free access to fly as many routes to a country as an airline may choose but then usually restrict the ability to fly within the other country Generally it is a ldquofly in and outrdquo rule although there are exceptions
ldquoOrganization for Economic Cooperation and Developmentrdquo
also known as the OECD is an organization comprised of 34 member countries that work together to promote development The United States is a member With regard to Ex‐Im Bank the OECD is the organization through which the US Government negotiates an agreement among Export Credit Agencies known as the Arrangement and the ASU (and its predecessor the LASU)
ldquoPass Through Certificaterdquo also known as a PTC is a group of Equipment Trust Certificates pooled together to form the basis for a bond issuance
ldquoPTCrdquo See Pass Through Certificate ldquoRyanairrdquo is a low‐cost Irish airline that began business after European
deregulation of airlines in 1997 Ryanair rapidly expanded during the first decade of the 2000s creating significant competition for other airlines
ldquoScreensrdquo are a type of filter used by Ex‐Im Bank in its Economic Impact Procedures Screens are designed to identify those transactions which are not likely to cause an adverse economic impact to US industries or US jobs so that such transactions can be processed more quickly and efficiently as required by the Bank Act
ldquoSubstantial Injuryrdquo is a term defined in Ex‐Im Bankrsquos Charter to be applied in connection with the Bankrsquos economic impact procedures 12 USC sect635(e)(4) The Charter states ldquohellipthe extension of any credit or guarantee by the Bank will cause substantial injury if the amount of the capacity for production established or the amount of the increase in such capacity expanded by such credit or guarantee equals or exceeds 1 percent of United States productionrdquo
ldquoTPCCrdquo see Trade Promotion Coordinating Committee ldquoTrade Promotion Coordinating Committeerdquo
also known as the TPCC is an interagency committee of the US Government chaired by the Secretary of Commerce It was established under the Export Enhancement Act of 1992 to provide a
29
unifying framework to coordinate the export promotion and export financing activities of the US government and to develop a government‐wide strategic plan for carrying out such programs
ldquoTrade Sanctionsrdquo refers to any of a number of sanctions imposed by the US Government against companies countries industries or products usually as a result of an accusation of adjudication of a violation of an international trade agreement The Bank Act requires Ex‐Im Bank to take certain trade sanctions into account in its economic impact procedures
30
Table A ndash Congressional Actions and Ex-Im Bank Responses
Year Congressional Action Ex‐Im Bank Response
1968 Bank directed to take into account the possible adverse effect [of its loans and guarantees] upon the United States economy
Bank adds this transactions
factor to analysis of
1975 1 Standard refined to take into account any serious adverse effect of loans and guarantees on competitive position of US industry availability of scarce materials in US and employment in US
2 Bank directed to be competitive with rates terms and conditions offered by principal countries whose exporters compete with US exporters
3 Bank directed to submit semi‐annual report on competitiveness and conduct survey of US exporters and lenders to determine experience in meeting financing competition
Bank adds these of transactions
considerations to analysis
Year Congressional Action Ex‐Im Bank Response
1978 ‐ 1979
1 Bank directed to take into account any serious adverse effect of loans on competitive position of US industry and scarce materials Bank directed to emphasize strengthening competitive position of US exporters and expanding total US exports
2 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [From Appropriations Act Restated in Bank Charter in 1986]
3 Bank directed to implement regulations and procedures to insure full consideration of extent to which loan or guarantee is likely to have adverse effect on industries and employment in US either by reducing demand for US produced goods or increasing imports to the US
Bank develops framework and set of written economic impact procedures
1 Exclude exports the use of which remained localized in foreign country This
is first ldquoforeign localized goods and services screenrdquo
2 ldquoIntent and stimulus for projectrdquo examined to determine likelihood of substantial adverse economic impact Does transaction involve ldquorunaway industryrdquo
(leaving US for cheaper foreign labor)
3 Does export of capital equipment result in ldquobuy backrdquo of product being imported into the US
4 Is net impact on US economy and jobs positive or negative and to what degree
32
Year Congressional Action Ex‐Im Bank Response
1986 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [Originally from 1978 Appropriations incorporated into Bank Charter in 1986]
Senate Report recognizes knowledge and experience of Bank and need to respond to exportersrsquo requests for support in a timely and confidential fashion Economic impact procedures are to be practical and workable and not reduce Bankrsquos competitiveness and flexibility nor ignore positive aspects of export sale
Bank develops ldquoSummary of Adverse Economic Guidelinesrdquo to be applied to both
goods and services (a) is commodity to be produced surplus or likely to compete with US‐produced surplus (b) will Bankrsquos
assistance cause substantial injury to US producers of competing commodity (c)
will injury to US producers of competing commodity outweigh the short‐ and long‐
term benefits to US industry and employment If answer is no then no
further economic impact analysis
1988 Congress establishes test for ldquosubstantial injuryrdquo if the amount of capacity for production established or amount of increase in such capacity expanded by Bankrsquos credit or guarantee exceeds 1 of US production
Bankrsquos Board recognizes requirement to balance (a) possibility of substantial harm
to US production and employment with (b) being responsive competitive and efficient New economic impact procedures ask (a) will the project be in direct competition with US production (b) is the Bankrsquos support significantly associated with the project (c) will the output of the project
cause substantial injury to US producers of the same similar or competing
commodity If answer is no then no further economic impact analysis is required
33
Year Congressional Action Ex‐Im Bank Response
1998 Bank revised procedures involving countries against which trade sanctions were pending or imposed
2001
2006 ‐2007
1 Bank required to determine whether extension of credit or guarantee is likely to produce same or other commodities and whether the production may cause substantial injury to US producers
2 Bank prohibited from providing a loan or guarantee that will facilitate circumvention of trade law order or determination
3 Bank required to designate sensitive commercial sectors and products for which Bank financing deemed unlikely due to potential for adverse economic impact on US
4 Bank required to aggregate financial thresholds on rolling 24‐month basis
Bank develops ldquoexportable goods screenrdquo Does Ex‐Im Bank support result in production of exportable good from the foreign buyerrsquos country If not no further economic impact analysis is required Notice and request for comments were published in the Federal Register US airline industry did not respond
Bank issues 2007 Economic Impact Procedures ldquoExportable goods screenrdquo is modified Will the transaction (capital goods and services) result in either new or additional production capacity of an exportable good
34
ldquoBank Actrdquo is the Export‐Import Bank Act of 1945 12 USC sect635 as amended ldquoBank Advisory Committeerdquo is the official Advisory Committee of the Bank appointed in accordance
with the Bank Act and the Advisory Committee Act The Bank Advisory Committee is comprised of representatives of various industry and market sectors as well as representatives of labor and international trade experts
ldquoBasis pointsrdquo are a numerical measure applied to interest rates One basis point equals 1100th of one percent or 100 basis points equals one percent
ldquoCapital Equipmentrdquo is equipment used to manufacture a product provide a service or sell store or deliver merchandise A wide‐body aircraft is a piece of capital equipment
ldquoCharterrdquo is the Bank Act as well the provisions of the Export Import Bank Reauthorization Act of 2012 (Public Law 112‐122) that are not codified in the Bank Act
ldquoDreamlinerrdquo is the name given to a Boeing 787 wide‐body commercial aircraft ldquoECArdquo see Export Credit Agencies ldquoEconomic Impact Proceduresrdquo
are procedures adopted by Ex‐Im Bank to assess whether transactions supported by the Bank cause a serious adverse economic impact to US industries and US jobs See also Adverse Economic Impact
ldquoEETCrdquo see Enhanced Equipment Trust Certificate ldquoEnhanced Equipment Trust Certificaterdquo
also known as an EETC is a type of secured bond issued by a borrower in the capital markets The EETC is secured by the equipment being purchased with the proceeds of the bond issuance EETCs are used primarily for aircraft and since the late 1990s has been the dominant financing tool used by US airlines to purchase aircraft Section 1110 of the US Bankruptcy Codemdashwhich allows creditors of aircraft borrowers to obtain their collateral within 60 days if the payments on their debt is not current ndash has provided creditors of US airlines a level of comfort not available to creditors of foreign airlines until recently This generally provided US airlines with a significant financial advantage vis a vis their foreign competitors Recently the adoption of the Cape Town Convention and the related Aircraft Equipment Protocol has provided creditors of foreign airlines with protections similar to the protections provided by section 1110 of the US Bankruptcy Code Recently this has led to the beginnings of an international EETC market
ldquoEquipment Trust Certificaterdquo
also known as an ETC was the predecessor to the Enhanced Equipment Trust Certificate
ldquoETCrdquo see Equipment Trust Certificate ldquoEx‐Im Bankrdquo or ldquoBankrdquo See The Export‐Import Bank of the United States ldquoExport Credit Agenciesrdquo are agencies or ministries of government that have the official role of
providing loans guarantees or insurance in support of exports from their respective countries or in support of exports by sales of companies from their respective countries Ex‐Im Bank is the official Export Credit Agency of the United States of America
ldquoexportable goods screenrdquo is a screen or filter adopted by Ex‐Im Bank in its 2001 Economic Impact Procedures The exportable goods screen is utilized along with other screens to balance the Bankrsquos obligation to consider the adverse
27
economic effects of its transactions on US industries and US jobs with the Bankrsquos mandate to support US export transactions in a timely manner so as to fully support the exporterrsquos business opportunity The exportable goods screen filtered out transactions that supported exports which could only be used by a foreign buyer to provide services rather than produce goods
ldquoExport‐Import Bank of the is an independent agency of the Federal Government of the United United Statesrdquo States of America Also known as ldquoEx‐Im Bankrdquo Ex‐Im Bankrsquos mission
is to support US jobs by supporting US exports See 12 USC 635 et seq
ldquoExposure Feerdquo is the risk premium charged by Ex‐Im Bank in exchange for its guarantee in certain transactions The exposure fee must be at least equal to the minimum risk premium required by the terms of the Arrangement and the Aircraft Sector Understanding
ldquoForeign Sales Corporationrdquo is a company created under the terms of a former provision of the US Internal Revenue Code Foreign Sales Corporations received significant tax benefits
ldquoFSCrdquo see Foreign Sales Corporation ldquoInvestment Tax Creditrdquo is a credit permitted under the US Internal Revenue Code for the
purchase of certain types of equipment in certain circumstances See also Leveraged Leases
ldquoKFWrdquo the development bank for the Federal Republic of Germany KFW is an Export Credit Agency but it also operates through a ldquomarket windowrdquo which is not subject to the Home Market Rule Thus KFW provides support to Airbus for its sales of aircraft to US airlines The United States does not have an equivalent institution and Ex‐Im Bank does not have a ldquomarket windowrdquo
ldquoLarge Aircraft Sector also known as LASU was the predecessor to the Aircraft Sector Understandingrdquo Understanding The LASU governed the same general issues as are set
forth in the Aircraft Sector Understanding except that the minimum risk premium was lower than that required in the 2007 ASU and 2011 ASU When the 2007 ASU was enacted grandfathering provisions allowed ECA‐supported financing for a limited number of aircraft to be governed by LASU
ldquoLASUrdquo see Large Aircraft Sector Understanding ldquoLeveraged Leaserdquo is a lease of equipment and is designed to allow the lessor to take
advantage of certain tax code provisions such as the depreciation deduction and the investment tax credit while allowing the lessee to obtain the equipment involved at a significantly lower cost Leveraged Leases were a very popular means for US airlines to acquire aircraft throughout the 1980s and 1990s The value of the tax deductions to the lessor were significant so that the implicit interest rate in the lease payments by the US airline were extremely low Usually the US airline did not have sufficient profit to take advantage of the favorable tax code provisions By using a leveraged lease another company that could shelter income by using the tax code provisions would buy the equipment and lease the equipment to the US airline Usually at the end of the lease term the US airline would purchase the aircraft
28
ldquoLIBORrdquo is the London Inter‐bank Offering Rate It is commonly used as a reference rate in loan transactions that have floating or adjustable interest rates LIBOR reflects the rate at which banks will lend money to each other LIBOR is set for various loan terms (eg 3 months 6 months etc) and is widely published making it a convenient rate to use as a reference rate
ldquoNet pricerdquo is the price paid after all discounts have been deducted The net price is the actual price paid for a piece of equipment In aircraft transactions pursuant to the ASU Ex‐Im Bank will only support up to 85 of the net price of an aircraft EETC transactions on the other hand often support the nominal purchase price of an aircraft and thus result in a significantly higher amount financed
ldquoOECDrdquo see the Organization for Economic Cooperation and Development Open Skies Agreement Is a type of bilateral agreement between countries that govern the
rights of airlines from the two countries to fly into the other country Open Skies Agreements generally allow free access to fly as many routes to a country as an airline may choose but then usually restrict the ability to fly within the other country Generally it is a ldquofly in and outrdquo rule although there are exceptions
ldquoOrganization for Economic Cooperation and Developmentrdquo
also known as the OECD is an organization comprised of 34 member countries that work together to promote development The United States is a member With regard to Ex‐Im Bank the OECD is the organization through which the US Government negotiates an agreement among Export Credit Agencies known as the Arrangement and the ASU (and its predecessor the LASU)
ldquoPass Through Certificaterdquo also known as a PTC is a group of Equipment Trust Certificates pooled together to form the basis for a bond issuance
ldquoPTCrdquo See Pass Through Certificate ldquoRyanairrdquo is a low‐cost Irish airline that began business after European
deregulation of airlines in 1997 Ryanair rapidly expanded during the first decade of the 2000s creating significant competition for other airlines
ldquoScreensrdquo are a type of filter used by Ex‐Im Bank in its Economic Impact Procedures Screens are designed to identify those transactions which are not likely to cause an adverse economic impact to US industries or US jobs so that such transactions can be processed more quickly and efficiently as required by the Bank Act
ldquoSubstantial Injuryrdquo is a term defined in Ex‐Im Bankrsquos Charter to be applied in connection with the Bankrsquos economic impact procedures 12 USC sect635(e)(4) The Charter states ldquohellipthe extension of any credit or guarantee by the Bank will cause substantial injury if the amount of the capacity for production established or the amount of the increase in such capacity expanded by such credit or guarantee equals or exceeds 1 percent of United States productionrdquo
ldquoTPCCrdquo see Trade Promotion Coordinating Committee ldquoTrade Promotion Coordinating Committeerdquo
also known as the TPCC is an interagency committee of the US Government chaired by the Secretary of Commerce It was established under the Export Enhancement Act of 1992 to provide a
29
unifying framework to coordinate the export promotion and export financing activities of the US government and to develop a government‐wide strategic plan for carrying out such programs
ldquoTrade Sanctionsrdquo refers to any of a number of sanctions imposed by the US Government against companies countries industries or products usually as a result of an accusation of adjudication of a violation of an international trade agreement The Bank Act requires Ex‐Im Bank to take certain trade sanctions into account in its economic impact procedures
30
Table A ndash Congressional Actions and Ex-Im Bank Responses
Year Congressional Action Ex‐Im Bank Response
1968 Bank directed to take into account the possible adverse effect [of its loans and guarantees] upon the United States economy
Bank adds this transactions
factor to analysis of
1975 1 Standard refined to take into account any serious adverse effect of loans and guarantees on competitive position of US industry availability of scarce materials in US and employment in US
2 Bank directed to be competitive with rates terms and conditions offered by principal countries whose exporters compete with US exporters
3 Bank directed to submit semi‐annual report on competitiveness and conduct survey of US exporters and lenders to determine experience in meeting financing competition
Bank adds these of transactions
considerations to analysis
Year Congressional Action Ex‐Im Bank Response
1978 ‐ 1979
1 Bank directed to take into account any serious adverse effect of loans on competitive position of US industry and scarce materials Bank directed to emphasize strengthening competitive position of US exporters and expanding total US exports
2 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [From Appropriations Act Restated in Bank Charter in 1986]
3 Bank directed to implement regulations and procedures to insure full consideration of extent to which loan or guarantee is likely to have adverse effect on industries and employment in US either by reducing demand for US produced goods or increasing imports to the US
Bank develops framework and set of written economic impact procedures
1 Exclude exports the use of which remained localized in foreign country This
is first ldquoforeign localized goods and services screenrdquo
2 ldquoIntent and stimulus for projectrdquo examined to determine likelihood of substantial adverse economic impact Does transaction involve ldquorunaway industryrdquo
(leaving US for cheaper foreign labor)
3 Does export of capital equipment result in ldquobuy backrdquo of product being imported into the US
4 Is net impact on US economy and jobs positive or negative and to what degree
32
Year Congressional Action Ex‐Im Bank Response
1986 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [Originally from 1978 Appropriations incorporated into Bank Charter in 1986]
Senate Report recognizes knowledge and experience of Bank and need to respond to exportersrsquo requests for support in a timely and confidential fashion Economic impact procedures are to be practical and workable and not reduce Bankrsquos competitiveness and flexibility nor ignore positive aspects of export sale
Bank develops ldquoSummary of Adverse Economic Guidelinesrdquo to be applied to both
goods and services (a) is commodity to be produced surplus or likely to compete with US‐produced surplus (b) will Bankrsquos
assistance cause substantial injury to US producers of competing commodity (c)
will injury to US producers of competing commodity outweigh the short‐ and long‐
term benefits to US industry and employment If answer is no then no
further economic impact analysis
1988 Congress establishes test for ldquosubstantial injuryrdquo if the amount of capacity for production established or amount of increase in such capacity expanded by Bankrsquos credit or guarantee exceeds 1 of US production
Bankrsquos Board recognizes requirement to balance (a) possibility of substantial harm
to US production and employment with (b) being responsive competitive and efficient New economic impact procedures ask (a) will the project be in direct competition with US production (b) is the Bankrsquos support significantly associated with the project (c) will the output of the project
cause substantial injury to US producers of the same similar or competing
commodity If answer is no then no further economic impact analysis is required
33
Year Congressional Action Ex‐Im Bank Response
1998 Bank revised procedures involving countries against which trade sanctions were pending or imposed
2001
2006 ‐2007
1 Bank required to determine whether extension of credit or guarantee is likely to produce same or other commodities and whether the production may cause substantial injury to US producers
2 Bank prohibited from providing a loan or guarantee that will facilitate circumvention of trade law order or determination
3 Bank required to designate sensitive commercial sectors and products for which Bank financing deemed unlikely due to potential for adverse economic impact on US
4 Bank required to aggregate financial thresholds on rolling 24‐month basis
Bank develops ldquoexportable goods screenrdquo Does Ex‐Im Bank support result in production of exportable good from the foreign buyerrsquos country If not no further economic impact analysis is required Notice and request for comments were published in the Federal Register US airline industry did not respond
Bank issues 2007 Economic Impact Procedures ldquoExportable goods screenrdquo is modified Will the transaction (capital goods and services) result in either new or additional production capacity of an exportable good
34
economic effects of its transactions on US industries and US jobs with the Bankrsquos mandate to support US export transactions in a timely manner so as to fully support the exporterrsquos business opportunity The exportable goods screen filtered out transactions that supported exports which could only be used by a foreign buyer to provide services rather than produce goods
ldquoExport‐Import Bank of the is an independent agency of the Federal Government of the United United Statesrdquo States of America Also known as ldquoEx‐Im Bankrdquo Ex‐Im Bankrsquos mission
is to support US jobs by supporting US exports See 12 USC 635 et seq
ldquoExposure Feerdquo is the risk premium charged by Ex‐Im Bank in exchange for its guarantee in certain transactions The exposure fee must be at least equal to the minimum risk premium required by the terms of the Arrangement and the Aircraft Sector Understanding
ldquoForeign Sales Corporationrdquo is a company created under the terms of a former provision of the US Internal Revenue Code Foreign Sales Corporations received significant tax benefits
ldquoFSCrdquo see Foreign Sales Corporation ldquoInvestment Tax Creditrdquo is a credit permitted under the US Internal Revenue Code for the
purchase of certain types of equipment in certain circumstances See also Leveraged Leases
ldquoKFWrdquo the development bank for the Federal Republic of Germany KFW is an Export Credit Agency but it also operates through a ldquomarket windowrdquo which is not subject to the Home Market Rule Thus KFW provides support to Airbus for its sales of aircraft to US airlines The United States does not have an equivalent institution and Ex‐Im Bank does not have a ldquomarket windowrdquo
ldquoLarge Aircraft Sector also known as LASU was the predecessor to the Aircraft Sector Understandingrdquo Understanding The LASU governed the same general issues as are set
forth in the Aircraft Sector Understanding except that the minimum risk premium was lower than that required in the 2007 ASU and 2011 ASU When the 2007 ASU was enacted grandfathering provisions allowed ECA‐supported financing for a limited number of aircraft to be governed by LASU
ldquoLASUrdquo see Large Aircraft Sector Understanding ldquoLeveraged Leaserdquo is a lease of equipment and is designed to allow the lessor to take
advantage of certain tax code provisions such as the depreciation deduction and the investment tax credit while allowing the lessee to obtain the equipment involved at a significantly lower cost Leveraged Leases were a very popular means for US airlines to acquire aircraft throughout the 1980s and 1990s The value of the tax deductions to the lessor were significant so that the implicit interest rate in the lease payments by the US airline were extremely low Usually the US airline did not have sufficient profit to take advantage of the favorable tax code provisions By using a leveraged lease another company that could shelter income by using the tax code provisions would buy the equipment and lease the equipment to the US airline Usually at the end of the lease term the US airline would purchase the aircraft
28
ldquoLIBORrdquo is the London Inter‐bank Offering Rate It is commonly used as a reference rate in loan transactions that have floating or adjustable interest rates LIBOR reflects the rate at which banks will lend money to each other LIBOR is set for various loan terms (eg 3 months 6 months etc) and is widely published making it a convenient rate to use as a reference rate
ldquoNet pricerdquo is the price paid after all discounts have been deducted The net price is the actual price paid for a piece of equipment In aircraft transactions pursuant to the ASU Ex‐Im Bank will only support up to 85 of the net price of an aircraft EETC transactions on the other hand often support the nominal purchase price of an aircraft and thus result in a significantly higher amount financed
ldquoOECDrdquo see the Organization for Economic Cooperation and Development Open Skies Agreement Is a type of bilateral agreement between countries that govern the
rights of airlines from the two countries to fly into the other country Open Skies Agreements generally allow free access to fly as many routes to a country as an airline may choose but then usually restrict the ability to fly within the other country Generally it is a ldquofly in and outrdquo rule although there are exceptions
ldquoOrganization for Economic Cooperation and Developmentrdquo
also known as the OECD is an organization comprised of 34 member countries that work together to promote development The United States is a member With regard to Ex‐Im Bank the OECD is the organization through which the US Government negotiates an agreement among Export Credit Agencies known as the Arrangement and the ASU (and its predecessor the LASU)
ldquoPass Through Certificaterdquo also known as a PTC is a group of Equipment Trust Certificates pooled together to form the basis for a bond issuance
ldquoPTCrdquo See Pass Through Certificate ldquoRyanairrdquo is a low‐cost Irish airline that began business after European
deregulation of airlines in 1997 Ryanair rapidly expanded during the first decade of the 2000s creating significant competition for other airlines
ldquoScreensrdquo are a type of filter used by Ex‐Im Bank in its Economic Impact Procedures Screens are designed to identify those transactions which are not likely to cause an adverse economic impact to US industries or US jobs so that such transactions can be processed more quickly and efficiently as required by the Bank Act
ldquoSubstantial Injuryrdquo is a term defined in Ex‐Im Bankrsquos Charter to be applied in connection with the Bankrsquos economic impact procedures 12 USC sect635(e)(4) The Charter states ldquohellipthe extension of any credit or guarantee by the Bank will cause substantial injury if the amount of the capacity for production established or the amount of the increase in such capacity expanded by such credit or guarantee equals or exceeds 1 percent of United States productionrdquo
ldquoTPCCrdquo see Trade Promotion Coordinating Committee ldquoTrade Promotion Coordinating Committeerdquo
also known as the TPCC is an interagency committee of the US Government chaired by the Secretary of Commerce It was established under the Export Enhancement Act of 1992 to provide a
29
unifying framework to coordinate the export promotion and export financing activities of the US government and to develop a government‐wide strategic plan for carrying out such programs
ldquoTrade Sanctionsrdquo refers to any of a number of sanctions imposed by the US Government against companies countries industries or products usually as a result of an accusation of adjudication of a violation of an international trade agreement The Bank Act requires Ex‐Im Bank to take certain trade sanctions into account in its economic impact procedures
30
Table A ndash Congressional Actions and Ex-Im Bank Responses
Year Congressional Action Ex‐Im Bank Response
1968 Bank directed to take into account the possible adverse effect [of its loans and guarantees] upon the United States economy
Bank adds this transactions
factor to analysis of
1975 1 Standard refined to take into account any serious adverse effect of loans and guarantees on competitive position of US industry availability of scarce materials in US and employment in US
2 Bank directed to be competitive with rates terms and conditions offered by principal countries whose exporters compete with US exporters
3 Bank directed to submit semi‐annual report on competitiveness and conduct survey of US exporters and lenders to determine experience in meeting financing competition
Bank adds these of transactions
considerations to analysis
Year Congressional Action Ex‐Im Bank Response
1978 ‐ 1979
1 Bank directed to take into account any serious adverse effect of loans on competitive position of US industry and scarce materials Bank directed to emphasize strengthening competitive position of US exporters and expanding total US exports
2 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [From Appropriations Act Restated in Bank Charter in 1986]
3 Bank directed to implement regulations and procedures to insure full consideration of extent to which loan or guarantee is likely to have adverse effect on industries and employment in US either by reducing demand for US produced goods or increasing imports to the US
Bank develops framework and set of written economic impact procedures
1 Exclude exports the use of which remained localized in foreign country This
is first ldquoforeign localized goods and services screenrdquo
2 ldquoIntent and stimulus for projectrdquo examined to determine likelihood of substantial adverse economic impact Does transaction involve ldquorunaway industryrdquo
(leaving US for cheaper foreign labor)
3 Does export of capital equipment result in ldquobuy backrdquo of product being imported into the US
4 Is net impact on US economy and jobs positive or negative and to what degree
32
Year Congressional Action Ex‐Im Bank Response
1986 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [Originally from 1978 Appropriations incorporated into Bank Charter in 1986]
Senate Report recognizes knowledge and experience of Bank and need to respond to exportersrsquo requests for support in a timely and confidential fashion Economic impact procedures are to be practical and workable and not reduce Bankrsquos competitiveness and flexibility nor ignore positive aspects of export sale
Bank develops ldquoSummary of Adverse Economic Guidelinesrdquo to be applied to both
goods and services (a) is commodity to be produced surplus or likely to compete with US‐produced surplus (b) will Bankrsquos
assistance cause substantial injury to US producers of competing commodity (c)
will injury to US producers of competing commodity outweigh the short‐ and long‐
term benefits to US industry and employment If answer is no then no
further economic impact analysis
1988 Congress establishes test for ldquosubstantial injuryrdquo if the amount of capacity for production established or amount of increase in such capacity expanded by Bankrsquos credit or guarantee exceeds 1 of US production
Bankrsquos Board recognizes requirement to balance (a) possibility of substantial harm
to US production and employment with (b) being responsive competitive and efficient New economic impact procedures ask (a) will the project be in direct competition with US production (b) is the Bankrsquos support significantly associated with the project (c) will the output of the project
cause substantial injury to US producers of the same similar or competing
commodity If answer is no then no further economic impact analysis is required
33
Year Congressional Action Ex‐Im Bank Response
1998 Bank revised procedures involving countries against which trade sanctions were pending or imposed
2001
2006 ‐2007
1 Bank required to determine whether extension of credit or guarantee is likely to produce same or other commodities and whether the production may cause substantial injury to US producers
2 Bank prohibited from providing a loan or guarantee that will facilitate circumvention of trade law order or determination
3 Bank required to designate sensitive commercial sectors and products for which Bank financing deemed unlikely due to potential for adverse economic impact on US
4 Bank required to aggregate financial thresholds on rolling 24‐month basis
Bank develops ldquoexportable goods screenrdquo Does Ex‐Im Bank support result in production of exportable good from the foreign buyerrsquos country If not no further economic impact analysis is required Notice and request for comments were published in the Federal Register US airline industry did not respond
Bank issues 2007 Economic Impact Procedures ldquoExportable goods screenrdquo is modified Will the transaction (capital goods and services) result in either new or additional production capacity of an exportable good
34
ldquoLIBORrdquo is the London Inter‐bank Offering Rate It is commonly used as a reference rate in loan transactions that have floating or adjustable interest rates LIBOR reflects the rate at which banks will lend money to each other LIBOR is set for various loan terms (eg 3 months 6 months etc) and is widely published making it a convenient rate to use as a reference rate
ldquoNet pricerdquo is the price paid after all discounts have been deducted The net price is the actual price paid for a piece of equipment In aircraft transactions pursuant to the ASU Ex‐Im Bank will only support up to 85 of the net price of an aircraft EETC transactions on the other hand often support the nominal purchase price of an aircraft and thus result in a significantly higher amount financed
ldquoOECDrdquo see the Organization for Economic Cooperation and Development Open Skies Agreement Is a type of bilateral agreement between countries that govern the
rights of airlines from the two countries to fly into the other country Open Skies Agreements generally allow free access to fly as many routes to a country as an airline may choose but then usually restrict the ability to fly within the other country Generally it is a ldquofly in and outrdquo rule although there are exceptions
ldquoOrganization for Economic Cooperation and Developmentrdquo
also known as the OECD is an organization comprised of 34 member countries that work together to promote development The United States is a member With regard to Ex‐Im Bank the OECD is the organization through which the US Government negotiates an agreement among Export Credit Agencies known as the Arrangement and the ASU (and its predecessor the LASU)
ldquoPass Through Certificaterdquo also known as a PTC is a group of Equipment Trust Certificates pooled together to form the basis for a bond issuance
ldquoPTCrdquo See Pass Through Certificate ldquoRyanairrdquo is a low‐cost Irish airline that began business after European
deregulation of airlines in 1997 Ryanair rapidly expanded during the first decade of the 2000s creating significant competition for other airlines
ldquoScreensrdquo are a type of filter used by Ex‐Im Bank in its Economic Impact Procedures Screens are designed to identify those transactions which are not likely to cause an adverse economic impact to US industries or US jobs so that such transactions can be processed more quickly and efficiently as required by the Bank Act
ldquoSubstantial Injuryrdquo is a term defined in Ex‐Im Bankrsquos Charter to be applied in connection with the Bankrsquos economic impact procedures 12 USC sect635(e)(4) The Charter states ldquohellipthe extension of any credit or guarantee by the Bank will cause substantial injury if the amount of the capacity for production established or the amount of the increase in such capacity expanded by such credit or guarantee equals or exceeds 1 percent of United States productionrdquo
ldquoTPCCrdquo see Trade Promotion Coordinating Committee ldquoTrade Promotion Coordinating Committeerdquo
also known as the TPCC is an interagency committee of the US Government chaired by the Secretary of Commerce It was established under the Export Enhancement Act of 1992 to provide a
29
unifying framework to coordinate the export promotion and export financing activities of the US government and to develop a government‐wide strategic plan for carrying out such programs
ldquoTrade Sanctionsrdquo refers to any of a number of sanctions imposed by the US Government against companies countries industries or products usually as a result of an accusation of adjudication of a violation of an international trade agreement The Bank Act requires Ex‐Im Bank to take certain trade sanctions into account in its economic impact procedures
30
Table A ndash Congressional Actions and Ex-Im Bank Responses
Year Congressional Action Ex‐Im Bank Response
1968 Bank directed to take into account the possible adverse effect [of its loans and guarantees] upon the United States economy
Bank adds this transactions
factor to analysis of
1975 1 Standard refined to take into account any serious adverse effect of loans and guarantees on competitive position of US industry availability of scarce materials in US and employment in US
2 Bank directed to be competitive with rates terms and conditions offered by principal countries whose exporters compete with US exporters
3 Bank directed to submit semi‐annual report on competitiveness and conduct survey of US exporters and lenders to determine experience in meeting financing competition
Bank adds these of transactions
considerations to analysis
Year Congressional Action Ex‐Im Bank Response
1978 ‐ 1979
1 Bank directed to take into account any serious adverse effect of loans on competitive position of US industry and scarce materials Bank directed to emphasize strengthening competitive position of US exporters and expanding total US exports
2 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [From Appropriations Act Restated in Bank Charter in 1986]
3 Bank directed to implement regulations and procedures to insure full consideration of extent to which loan or guarantee is likely to have adverse effect on industries and employment in US either by reducing demand for US produced goods or increasing imports to the US
Bank develops framework and set of written economic impact procedures
1 Exclude exports the use of which remained localized in foreign country This
is first ldquoforeign localized goods and services screenrdquo
2 ldquoIntent and stimulus for projectrdquo examined to determine likelihood of substantial adverse economic impact Does transaction involve ldquorunaway industryrdquo
(leaving US for cheaper foreign labor)
3 Does export of capital equipment result in ldquobuy backrdquo of product being imported into the US
4 Is net impact on US economy and jobs positive or negative and to what degree
32
Year Congressional Action Ex‐Im Bank Response
1986 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [Originally from 1978 Appropriations incorporated into Bank Charter in 1986]
Senate Report recognizes knowledge and experience of Bank and need to respond to exportersrsquo requests for support in a timely and confidential fashion Economic impact procedures are to be practical and workable and not reduce Bankrsquos competitiveness and flexibility nor ignore positive aspects of export sale
Bank develops ldquoSummary of Adverse Economic Guidelinesrdquo to be applied to both
goods and services (a) is commodity to be produced surplus or likely to compete with US‐produced surplus (b) will Bankrsquos
assistance cause substantial injury to US producers of competing commodity (c)
will injury to US producers of competing commodity outweigh the short‐ and long‐
term benefits to US industry and employment If answer is no then no
further economic impact analysis
1988 Congress establishes test for ldquosubstantial injuryrdquo if the amount of capacity for production established or amount of increase in such capacity expanded by Bankrsquos credit or guarantee exceeds 1 of US production
Bankrsquos Board recognizes requirement to balance (a) possibility of substantial harm
to US production and employment with (b) being responsive competitive and efficient New economic impact procedures ask (a) will the project be in direct competition with US production (b) is the Bankrsquos support significantly associated with the project (c) will the output of the project
cause substantial injury to US producers of the same similar or competing
commodity If answer is no then no further economic impact analysis is required
33
Year Congressional Action Ex‐Im Bank Response
1998 Bank revised procedures involving countries against which trade sanctions were pending or imposed
2001
2006 ‐2007
1 Bank required to determine whether extension of credit or guarantee is likely to produce same or other commodities and whether the production may cause substantial injury to US producers
2 Bank prohibited from providing a loan or guarantee that will facilitate circumvention of trade law order or determination
3 Bank required to designate sensitive commercial sectors and products for which Bank financing deemed unlikely due to potential for adverse economic impact on US
4 Bank required to aggregate financial thresholds on rolling 24‐month basis
Bank develops ldquoexportable goods screenrdquo Does Ex‐Im Bank support result in production of exportable good from the foreign buyerrsquos country If not no further economic impact analysis is required Notice and request for comments were published in the Federal Register US airline industry did not respond
Bank issues 2007 Economic Impact Procedures ldquoExportable goods screenrdquo is modified Will the transaction (capital goods and services) result in either new or additional production capacity of an exportable good
34
unifying framework to coordinate the export promotion and export financing activities of the US government and to develop a government‐wide strategic plan for carrying out such programs
ldquoTrade Sanctionsrdquo refers to any of a number of sanctions imposed by the US Government against companies countries industries or products usually as a result of an accusation of adjudication of a violation of an international trade agreement The Bank Act requires Ex‐Im Bank to take certain trade sanctions into account in its economic impact procedures
30
Table A ndash Congressional Actions and Ex-Im Bank Responses
Year Congressional Action Ex‐Im Bank Response
1968 Bank directed to take into account the possible adverse effect [of its loans and guarantees] upon the United States economy
Bank adds this transactions
factor to analysis of
1975 1 Standard refined to take into account any serious adverse effect of loans and guarantees on competitive position of US industry availability of scarce materials in US and employment in US
2 Bank directed to be competitive with rates terms and conditions offered by principal countries whose exporters compete with US exporters
3 Bank directed to submit semi‐annual report on competitiveness and conduct survey of US exporters and lenders to determine experience in meeting financing competition
Bank adds these of transactions
considerations to analysis
Year Congressional Action Ex‐Im Bank Response
1978 ‐ 1979
1 Bank directed to take into account any serious adverse effect of loans on competitive position of US industry and scarce materials Bank directed to emphasize strengthening competitive position of US exporters and expanding total US exports
2 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [From Appropriations Act Restated in Bank Charter in 1986]
3 Bank directed to implement regulations and procedures to insure full consideration of extent to which loan or guarantee is likely to have adverse effect on industries and employment in US either by reducing demand for US produced goods or increasing imports to the US
Bank develops framework and set of written economic impact procedures
1 Exclude exports the use of which remained localized in foreign country This
is first ldquoforeign localized goods and services screenrdquo
2 ldquoIntent and stimulus for projectrdquo examined to determine likelihood of substantial adverse economic impact Does transaction involve ldquorunaway industryrdquo
(leaving US for cheaper foreign labor)
3 Does export of capital equipment result in ldquobuy backrdquo of product being imported into the US
4 Is net impact on US economy and jobs positive or negative and to what degree
32
Year Congressional Action Ex‐Im Bank Response
1986 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [Originally from 1978 Appropriations incorporated into Bank Charter in 1986]
Senate Report recognizes knowledge and experience of Bank and need to respond to exportersrsquo requests for support in a timely and confidential fashion Economic impact procedures are to be practical and workable and not reduce Bankrsquos competitiveness and flexibility nor ignore positive aspects of export sale
Bank develops ldquoSummary of Adverse Economic Guidelinesrdquo to be applied to both
goods and services (a) is commodity to be produced surplus or likely to compete with US‐produced surplus (b) will Bankrsquos
assistance cause substantial injury to US producers of competing commodity (c)
will injury to US producers of competing commodity outweigh the short‐ and long‐
term benefits to US industry and employment If answer is no then no
further economic impact analysis
1988 Congress establishes test for ldquosubstantial injuryrdquo if the amount of capacity for production established or amount of increase in such capacity expanded by Bankrsquos credit or guarantee exceeds 1 of US production
Bankrsquos Board recognizes requirement to balance (a) possibility of substantial harm
to US production and employment with (b) being responsive competitive and efficient New economic impact procedures ask (a) will the project be in direct competition with US production (b) is the Bankrsquos support significantly associated with the project (c) will the output of the project
cause substantial injury to US producers of the same similar or competing
commodity If answer is no then no further economic impact analysis is required
33
Year Congressional Action Ex‐Im Bank Response
1998 Bank revised procedures involving countries against which trade sanctions were pending or imposed
2001
2006 ‐2007
1 Bank required to determine whether extension of credit or guarantee is likely to produce same or other commodities and whether the production may cause substantial injury to US producers
2 Bank prohibited from providing a loan or guarantee that will facilitate circumvention of trade law order or determination
3 Bank required to designate sensitive commercial sectors and products for which Bank financing deemed unlikely due to potential for adverse economic impact on US
4 Bank required to aggregate financial thresholds on rolling 24‐month basis
Bank develops ldquoexportable goods screenrdquo Does Ex‐Im Bank support result in production of exportable good from the foreign buyerrsquos country If not no further economic impact analysis is required Notice and request for comments were published in the Federal Register US airline industry did not respond
Bank issues 2007 Economic Impact Procedures ldquoExportable goods screenrdquo is modified Will the transaction (capital goods and services) result in either new or additional production capacity of an exportable good
34
Table A ndash Congressional Actions and Ex-Im Bank Responses
Year Congressional Action Ex‐Im Bank Response
1968 Bank directed to take into account the possible adverse effect [of its loans and guarantees] upon the United States economy
Bank adds this transactions
factor to analysis of
1975 1 Standard refined to take into account any serious adverse effect of loans and guarantees on competitive position of US industry availability of scarce materials in US and employment in US
2 Bank directed to be competitive with rates terms and conditions offered by principal countries whose exporters compete with US exporters
3 Bank directed to submit semi‐annual report on competitiveness and conduct survey of US exporters and lenders to determine experience in meeting financing competition
Bank adds these of transactions
considerations to analysis
Year Congressional Action Ex‐Im Bank Response
1978 ‐ 1979
1 Bank directed to take into account any serious adverse effect of loans on competitive position of US industry and scarce materials Bank directed to emphasize strengthening competitive position of US exporters and expanding total US exports
2 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [From Appropriations Act Restated in Bank Charter in 1986]
3 Bank directed to implement regulations and procedures to insure full consideration of extent to which loan or guarantee is likely to have adverse effect on industries and employment in US either by reducing demand for US produced goods or increasing imports to the US
Bank develops framework and set of written economic impact procedures
1 Exclude exports the use of which remained localized in foreign country This
is first ldquoforeign localized goods and services screenrdquo
2 ldquoIntent and stimulus for projectrdquo examined to determine likelihood of substantial adverse economic impact Does transaction involve ldquorunaway industryrdquo
(leaving US for cheaper foreign labor)
3 Does export of capital equipment result in ldquobuy backrdquo of product being imported into the US
4 Is net impact on US economy and jobs positive or negative and to what degree
32
Year Congressional Action Ex‐Im Bank Response
1986 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [Originally from 1978 Appropriations incorporated into Bank Charter in 1986]
Senate Report recognizes knowledge and experience of Bank and need to respond to exportersrsquo requests for support in a timely and confidential fashion Economic impact procedures are to be practical and workable and not reduce Bankrsquos competitiveness and flexibility nor ignore positive aspects of export sale
Bank develops ldquoSummary of Adverse Economic Guidelinesrdquo to be applied to both
goods and services (a) is commodity to be produced surplus or likely to compete with US‐produced surplus (b) will Bankrsquos
assistance cause substantial injury to US producers of competing commodity (c)
will injury to US producers of competing commodity outweigh the short‐ and long‐
term benefits to US industry and employment If answer is no then no
further economic impact analysis
1988 Congress establishes test for ldquosubstantial injuryrdquo if the amount of capacity for production established or amount of increase in such capacity expanded by Bankrsquos credit or guarantee exceeds 1 of US production
Bankrsquos Board recognizes requirement to balance (a) possibility of substantial harm
to US production and employment with (b) being responsive competitive and efficient New economic impact procedures ask (a) will the project be in direct competition with US production (b) is the Bankrsquos support significantly associated with the project (c) will the output of the project
cause substantial injury to US producers of the same similar or competing
commodity If answer is no then no further economic impact analysis is required
33
Year Congressional Action Ex‐Im Bank Response
1998 Bank revised procedures involving countries against which trade sanctions were pending or imposed
2001
2006 ‐2007
1 Bank required to determine whether extension of credit or guarantee is likely to produce same or other commodities and whether the production may cause substantial injury to US producers
2 Bank prohibited from providing a loan or guarantee that will facilitate circumvention of trade law order or determination
3 Bank required to designate sensitive commercial sectors and products for which Bank financing deemed unlikely due to potential for adverse economic impact on US
4 Bank required to aggregate financial thresholds on rolling 24‐month basis
Bank develops ldquoexportable goods screenrdquo Does Ex‐Im Bank support result in production of exportable good from the foreign buyerrsquos country If not no further economic impact analysis is required Notice and request for comments were published in the Federal Register US airline industry did not respond
Bank issues 2007 Economic Impact Procedures ldquoExportable goods screenrdquo is modified Will the transaction (capital goods and services) result in either new or additional production capacity of an exportable good
34
Year Congressional Action Ex‐Im Bank Response
1978 ‐ 1979
1 Bank directed to take into account any serious adverse effect of loans on competitive position of US industry and scarce materials Bank directed to emphasize strengthening competitive position of US exporters and expanding total US exports
2 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [From Appropriations Act Restated in Bank Charter in 1986]
3 Bank directed to implement regulations and procedures to insure full consideration of extent to which loan or guarantee is likely to have adverse effect on industries and employment in US either by reducing demand for US produced goods or increasing imports to the US
Bank develops framework and set of written economic impact procedures
1 Exclude exports the use of which remained localized in foreign country This
is first ldquoforeign localized goods and services screenrdquo
2 ldquoIntent and stimulus for projectrdquo examined to determine likelihood of substantial adverse economic impact Does transaction involve ldquorunaway industryrdquo
(leaving US for cheaper foreign labor)
3 Does export of capital equipment result in ldquobuy backrdquo of product being imported into the US
4 Is net impact on US economy and jobs positive or negative and to what degree
32
Year Congressional Action Ex‐Im Bank Response
1986 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [Originally from 1978 Appropriations incorporated into Bank Charter in 1986]
Senate Report recognizes knowledge and experience of Bank and need to respond to exportersrsquo requests for support in a timely and confidential fashion Economic impact procedures are to be practical and workable and not reduce Bankrsquos competitiveness and flexibility nor ignore positive aspects of export sale
Bank develops ldquoSummary of Adverse Economic Guidelinesrdquo to be applied to both
goods and services (a) is commodity to be produced surplus or likely to compete with US‐produced surplus (b) will Bankrsquos
assistance cause substantial injury to US producers of competing commodity (c)
will injury to US producers of competing commodity outweigh the short‐ and long‐
term benefits to US industry and employment If answer is no then no
further economic impact analysis
1988 Congress establishes test for ldquosubstantial injuryrdquo if the amount of capacity for production established or amount of increase in such capacity expanded by Bankrsquos credit or guarantee exceeds 1 of US production
Bankrsquos Board recognizes requirement to balance (a) possibility of substantial harm
to US production and employment with (b) being responsive competitive and efficient New economic impact procedures ask (a) will the project be in direct competition with US production (b) is the Bankrsquos support significantly associated with the project (c) will the output of the project
cause substantial injury to US producers of the same similar or competing
commodity If answer is no then no further economic impact analysis is required
33
Year Congressional Action Ex‐Im Bank Response
1998 Bank revised procedures involving countries against which trade sanctions were pending or imposed
2001
2006 ‐2007
1 Bank required to determine whether extension of credit or guarantee is likely to produce same or other commodities and whether the production may cause substantial injury to US producers
2 Bank prohibited from providing a loan or guarantee that will facilitate circumvention of trade law order or determination
3 Bank required to designate sensitive commercial sectors and products for which Bank financing deemed unlikely due to potential for adverse economic impact on US
4 Bank required to aggregate financial thresholds on rolling 24‐month basis
Bank develops ldquoexportable goods screenrdquo Does Ex‐Im Bank support result in production of exportable good from the foreign buyerrsquos country If not no further economic impact analysis is required Notice and request for comments were published in the Federal Register US airline industry did not respond
Bank issues 2007 Economic Impact Procedures ldquoExportable goods screenrdquo is modified Will the transaction (capital goods and services) result in either new or additional production capacity of an exportable good
34
Year Congressional Action Ex‐Im Bank Response
1986 Bank prohibited from providing loans or guarantees for transactions for production of commodity for export by another country if (a) commodity is likely to be surplus and (b) financing assistance will cause substantial injury to US producers of same or similar commodity provided prohibition shall not apply if Bankrsquos Board of Directors determines that benefits to industry and employment in US outweigh injury to US producers of commodity [Originally from 1978 Appropriations incorporated into Bank Charter in 1986]
Senate Report recognizes knowledge and experience of Bank and need to respond to exportersrsquo requests for support in a timely and confidential fashion Economic impact procedures are to be practical and workable and not reduce Bankrsquos competitiveness and flexibility nor ignore positive aspects of export sale
Bank develops ldquoSummary of Adverse Economic Guidelinesrdquo to be applied to both
goods and services (a) is commodity to be produced surplus or likely to compete with US‐produced surplus (b) will Bankrsquos
assistance cause substantial injury to US producers of competing commodity (c)
will injury to US producers of competing commodity outweigh the short‐ and long‐
term benefits to US industry and employment If answer is no then no
further economic impact analysis
1988 Congress establishes test for ldquosubstantial injuryrdquo if the amount of capacity for production established or amount of increase in such capacity expanded by Bankrsquos credit or guarantee exceeds 1 of US production
Bankrsquos Board recognizes requirement to balance (a) possibility of substantial harm
to US production and employment with (b) being responsive competitive and efficient New economic impact procedures ask (a) will the project be in direct competition with US production (b) is the Bankrsquos support significantly associated with the project (c) will the output of the project
cause substantial injury to US producers of the same similar or competing
commodity If answer is no then no further economic impact analysis is required
33
Year Congressional Action Ex‐Im Bank Response
1998 Bank revised procedures involving countries against which trade sanctions were pending or imposed
2001
2006 ‐2007
1 Bank required to determine whether extension of credit or guarantee is likely to produce same or other commodities and whether the production may cause substantial injury to US producers
2 Bank prohibited from providing a loan or guarantee that will facilitate circumvention of trade law order or determination
3 Bank required to designate sensitive commercial sectors and products for which Bank financing deemed unlikely due to potential for adverse economic impact on US
4 Bank required to aggregate financial thresholds on rolling 24‐month basis
Bank develops ldquoexportable goods screenrdquo Does Ex‐Im Bank support result in production of exportable good from the foreign buyerrsquos country If not no further economic impact analysis is required Notice and request for comments were published in the Federal Register US airline industry did not respond
Bank issues 2007 Economic Impact Procedures ldquoExportable goods screenrdquo is modified Will the transaction (capital goods and services) result in either new or additional production capacity of an exportable good
34
Year Congressional Action Ex‐Im Bank Response
1998 Bank revised procedures involving countries against which trade sanctions were pending or imposed
2001
2006 ‐2007
1 Bank required to determine whether extension of credit or guarantee is likely to produce same or other commodities and whether the production may cause substantial injury to US producers
2 Bank prohibited from providing a loan or guarantee that will facilitate circumvention of trade law order or determination
3 Bank required to designate sensitive commercial sectors and products for which Bank financing deemed unlikely due to potential for adverse economic impact on US
4 Bank required to aggregate financial thresholds on rolling 24‐month basis
Bank develops ldquoexportable goods screenrdquo Does Ex‐Im Bank support result in production of exportable good from the foreign buyerrsquos country If not no further economic impact analysis is required Notice and request for comments were published in the Federal Register US airline industry did not respond
Bank issues 2007 Economic Impact Procedures ldquoExportable goods screenrdquo is modified Will the transaction (capital goods and services) result in either new or additional production capacity of an exportable good
34