October 5, 2015

Ex-Im Bank freeze creates trade barriers for CT firms

PHOTO | Contributed
PHOTO | Contributed
APS Technology, which makes drilling parts with its Integrex machine (show left), has relied on EX-IM Bank to finance some its foreign deals.
PHOTO | Contributed
An APS drilling test facility rig.

Congress's failure to reauthorize the U.S. Export-Import Bank is affecting more Connecticut companies than just General Electric, according to a trade official in the state.

Uncertainty has been cast over export financing and insurance for other in-state firms as well, forcing some to consider alternative options.

The bank, known as EX-IM, is not processing new applications or engaging in new business since its charter expired at midnight June 30. Its services include loans to foreign companies buying American exports, export-credit insurance against foreign companies' failure to pay, and loan guarantees for U.S. banks providing working capital to exporters to meet foreign orders.

The bank continues to service existing loans and policies in place before July 1, so some Connecticut companies aren't feeling a pinch yet.

But the bank's freeze on new business has complicated a couple multimillion-dollar deals for Wallingford-based APS Technology Inc., which manufactures measurement while drilling (MWD) technology that communicates to crude oil exploration companies exactly what direction they are drilling in and what kind of substances are around the drilling bits.

The deals — one involving a former Soviet country, another with a large national oil company in the Americas — had received preliminary approval for EX-IM financing, said Paul Seaton, vice president of marketing.

The export sales could be prejudiced by the lack of EX-IM support, he said, noting that the financing environment now is more challenging with the oil industry downturn.

"In the good days, when we were flying high, we could finance a smaller purchase," Seaton said. "But we'd rather be doing that at the moment with the help of EX-IM."

That leaves APS trying to figure out some other methodology for the foreign sales.

If APS can successfully introduce its equipment to the large national oil company, the potential for future business could be enormous, he said.

Trickle effect

GE cast a spotlight on EX-Im Bank's status recently when it said it planned to move about 500 U.S. jobs overseas as a result of the bank no longer processing new applications. GE said it's bidding on $11 billion in projects that require export financing.

GE customers often require guaranteed financing from an export credit agency in order to submit a bid, but with no U.S. export financing available, GE must pursue non-U.S. options, it said in a statement. Many export-credit agencies have requirements similar to the Export-Import Bank's — that production and jobs must be invested in-country to qualify for financing. This will result in the loss of thousands of U.S. jobs — both at GE and at its suppliers, GE said.

"Most other countries have [entities similar to] EX-IM Bank and it makes it difficult for U.S. companies to compete when we don't have the same tools other countries have," said Anne Evans, district director of the U.S. Department of Commerce in Connecticut.

"When GE's talking about it, that's sort of the very big-ticket items," Evans said. "But you have to understand something about big-ticket items — big-ticket items are made up of a lot of small-ticket items."

She estimated about 1,000 companies in Connecticut supply big manufacturers like GE.

"A good portion of those could lose that potential for supplying for those export items because they're no longer going to be in any kind of proximity to the final assembly," she said, adding she wasn't implying other big manufacturers would move offshore. "This affects everybody, it's not just GE."

That includes firms that rely on EX-IM for things like export-credit insurance, which is used by the majority of smaller companies Evans works with in Connecticut.

The insurance allows Connecticut companies to sell products abroad on more of an open-account basis, knowing that if a customer doesn't pay, insurance will reimburse the company for much of its cost, she said. Companies that have to go to the private market for insurance will pay more, which hurts their competitiveness, Evans said.

Businesses that insure their accounts receivable through EX-IM are reimbursed 85 to 95 percent of their invoice amount if the foreign buyer doesn't pay.

That insurance is important to Beauty Enterprises Inc. in Hartford, a wholesale distributor of health and beauty aids, including cosmetics and hair-care and skin-care products geared for the African American, multicultural consumer. The company, with about 30 percent of its business overseas, uses the bank's insurance to secure accounts receivable on some of its overseas accounts, said Larry Sussman, vice president of finance, who said the insurance is a means of getting new business.

With EX-IM not doing any new business, "It certainly curtails any potential existing customer to increase insurance for now until our policy expires, which is in March, and it precludes new customers who would want to get credit with us through EX-IM Bank to obtain it," Sussman said.

The company has had to make three claims over the years, two for deals in Ghana, one in South Africa, he said, noting that while there's a 95 percent reimbursement, there's also a large deductible.

If the bank isn't reauthorized, "it's going to reduce the amount of shipments we can make to particular customers and that's why we're going to be looking in the secondary markets" for insurance, he said.

Richard Laurenzi, president of Prospect Machine Products Inc. in Prospect, which makes metal stampings for markets that include automotive, medical device, sealing technologies and bearings, also uses the insurance for products shipped outside the U.S.

"We're using it every month because of our shipments to Mexico, Brazil and Italy," he said.

Laurenzi is quoting a company in the Czech Republic, but its decision is further out, so he hasn't been compelled yet to find other sources of export insurance.

EX-IM has grandfathered his company's existing accounts in, "but we would not be able to open a new account with them for the product insurance," he said. So to get insurance for a new customer likely means entertaining bids from private providers, he said.

Capital crunch

Working capital loan guarantees also are popular EX-IM products, Evans said.

A small manufacturer in Connecticut, for example, might get a foreign order that requires the company to buy raw materials or equipment to fulfill the order. When the company goes to its own bank, EX-IM will guarantee the loan needed for those purchases, she said.

"The banks are much more willing to lend when they have the federal government guaranteeing the repayment," Evans said.

EX-IM provides a 90 percent loan-backing guarantee.

"What is difficult is that we're out here competing in the international economy and we need to give our companies every tool that's possible to make sure that they can compete," Evans said.

In many cases, Connecticut companies' competition isn't in another state, she said.

"It's in Germany or Japan, or someplace overseas where those tools are provided to them and we need to make sure that we're giving our companies every tool possible for them to grow their business," Evans said.

Congressional opponents to the bank's reauthorization have called EX-IM corporate welfare, citing its use by large companies like GE and Boeing, which also has said it could move work offshore without EX-IM's reauthorization.

U.S. Rep. John B. Larson, (D-Conn.) supports bank reauthorization.

"I applaud Speaker [John] Boehner for considering all options when it comes to renewing the Export-Import Bank," Larson said in a written statement to the Hartford Business Journal. "He, like so many of our members on both sides of the aisles, understands what the Ex-Im Bank means to so many of our manufacturers and businesses to have a level playing field. Whether on the highway bill or as a standalone bill, we must take it up this year. Ex-Im bank is one issue that has broad bipartisan support. With the news of Speaker Boehner's resignation, I hope his successor will see the importance of reauthorizing Ex-Im swiftly."

Several Republicans said on Sept. 25 that Boehner will likely work to pass a transportation bill before Oct. 29 that includes an extension of EX-IM, according to a Washington Post story. The Senate passed a six-year bill in July that attached a bank reauthorization, the Post said.

EX-IM said in a report last year that 62 percent of the Connecticut companies it helped from 2009 to 2014 were small businesses.

In its fiscal 2014 annual report, EX-IM said it supported $27.5 billion worth of U.S. exports and 164,000 export-related American jobs, adding that over the past six years, the bank has supported more than 1.3 million jobs in communities across the country.

It put its active default rate as of Sept. 30, 2014, at 0.175 percent.n

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