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Ex-Im Bank, Case Study Example

Pages: 1

Words: 1420

Case Study

Executive Summary

The following is the analysis to determine whether EX-IM should participate in the notes issuance that would finance the sale of three 777s to Emirates by guaranteeing the interest and principal payments. In addition, the analysis will attempt to evaluate the procedure EX-IM uses to determine the costs of making loan guarantees. Aircraft licensing’s were popular to Export-import bank, the reason being it brought in large amount of profit after transactions, The probable financing plan required a note issuance to fund the acquisition of three Boeing 777 aircraft to Emirates. Emirates, being a company set up by Crown Prince and Deputy Ruler of Dubai with limited liability and a government owned company. The company was intercontinental airline of the United Arab Emirates and has become the central part of Emirates group. It also has business activities in hotel and travel management services.

Morin and his team who worked with bankers at Credit Agricore CIB, its broker-dealer house Credit Agricore Securities, and Goldman Sachs to engineer a substitute source of funds plans for a specific occasion to export aircraft. Credit Agricore had skilled power in designing and dispersal of ECA-backed debt to fund aircraft, and Goldman Sachs who had mastery in organizing and dissemination of government-guaranteed debt.

Introduction

Aircraft licensing’s were popular to Export-import bank, the reason being it brought in large amount of profit after transactions, The probable financing plan required a note issuance to fund the acquisition of three Boeing 777 aircraft to Emirates. Emirates, being a company set up by Crown Prince and Deputy Ruler of Dubai with limited liability and a government owned company. The company was intercontinental airline of the United Arab Emirates and has become the central part of Emirates group. It also has business activities in hotel and travel management services.

Morin and his team who worked with bankers at Credit Agricore CIB, its broker-dealer house Credit Agricore Securities, and Goldman Sachs to engineer a substitute source of funds plans for a specific occasion to export aircraft. Credit Agricore had skilled power in designing and dispersal of ECA-backed debt to fund aircraft, and Goldman Sachs who had mastery in organizing and dissemination of government-guaranteed debt.

Case Presentation

Morin and bankers needed some factors to be addressed in the financing agreement. A bank would need to finance the sale of the aircraft temporarily until the last plane was delivered, which was plan to happen in late September. Credit Agricore accepted to offer and show capital in July and get an Export-Import guarantee on the loan it raised. Instead of Emirates purchasing the aircraft directly, Ex-Im and the Bankers needed Emirates to build a specific purpose company that would purchase the aircraft. The company would be based in Cayman Islands. This country provides strong creditor security and would force no notable other costs or additional taxes. Emirates appealed that the bank facility be designed as a “back up” facility with a previously agreed interest rate.

This guaranteed the presence of funding for twelve years for these aircraft, even if Amal reached a point where they could not issue notes in the capital market. After delivery of the aircraft, Amal would issue notes and use the revenue to buy the bank notes from Credit Agricore and modify and restate the bank notes as a capital market instrument. This was done to conserve Ex-Im bank’s original security lines and package hence keeping away from costs and expenses of re-perfecting the security interests and the peril resulting from a new preference period. The revenues from the notes would fund for almost 85 percent of the value of the aircraft and the remainder would be catered for by Amal using a non-refundable advance payment of rent by Emirates under the tenancy. The lease payments by Emirates would support the quarterly settlement by Amal to the note holders. Goldman Sachs and Credit Agricore Securities would act as primary buyers of the notes, evenly dividing the contribution and planning to market the notes to other buyers.

As the transport measures started to take place, a remaining agenda was the exposure fee Ex-Im would ask for payment for its guarantee. Airport businesses were exempted and the exposure fee was made to be risk-based. After crosschecking the business transaction and estimating Ex-Im bank’s anticipated losses under the guarantee, Morin Transportation drew a conclusion that exposure fee of about three percent was enough to protect the credit peril of Emirates and the aircraft secured structure of the negotiation.

Should EX-IM participate in the notes issuance that would finance the sale of three 777s to Emirates by guaranteeing the interest and principal payments?

The proposed issuance would be for about $413,735,523 in secured notes, a sale at face value with coupon rate of approximately 3.5%, while making quarterly payments of principal and interest. Since the exposure fee would be funded, $400 would be thrown into funding the aircraft acquisition, while the remaining amount would fund the exposure fee.

This kind of financing plan shares many attributes with enabled equipment trust certificate transactions, which were used to fund the purchase of aircraft. As the logistics team set out the details of the prospective deal, Horchberg’s decision on whether to brace it or let the deal go through.

Evaluate the procedure EX-IM uses to determine the costs of making loan guarantees. Assume the beta of the scheduled payments from Amal to Wells Fargo is 0.2 and that the market risk premium is 5%.

Upon each delivery, Agricore makes loan to Amali in trading with Ex-Im guaranteed bank note, commercial bank financing product, to fund in the purchase of the aircraft. Upon delivery of the three aircraft, The Ex-Im guaranteed notes are traded for global notes.

  Of authorizations  Amount Authorized Estimated Export value Program Budget Used
Programs 2009 2008 2009 2008 2009 2008 2009 2008
LOANS                
Long-term loans 16 2 3,025.5 356.0 3,205.2 501.7 0.1
Medium-Term Loans
Tied-Aid 16 7.8 3,205.2 7.8
Total Loans 16 2 3,033.3 356.0 3,205.2 5001.7 7.8 0.1
Guarantees
Long-Term guarantees 57 79 9,628.4 8,101.5 9,858.2 9,409.9 0.6
Medium-term guarantees 89 135 315.3 697.0 360.3 740.0 10.2 12.1
Working capital guarantees 473 459 1,531.0 1,380.9 6,487.3 5,035.9
Total guarantees 619 673 11,474.7 10,179.4 16,705.8 15,185.8 10.2 12.7
Export-Credit Insurance  
Short-term 2153 1879 6,275.8 3,635.5 6,275.8 3,635.5 3.5 1.0
Long-term 103 150 237.3 228.0 254.0 274.2 15.5 11.6
Total Insurance 2256 2029 6513.1 3863.5 6,529.8 3,909.7 19.0 12.6
Grand Total 2,891 2,704 21,021 14,398.8 26,440.8 19597.2 37.0 25.4

Recommendation / Managerial Decision  

From the look of things, it is inappropriate for Ex-Im Bank to offer support to Emirates, a Dubai based Airline Company, at the expense of the American airlines. By so doing, emirates is being offered a good chance to compete with American based carriers. The first recommendation I would suggest is for Ex-Im Bank to ensure that foreign companies such as emirates access loans with a higher interest rates compared to the US carriers. My suggestion would be that, Ex-Im Bank should ensure that foreign exports are given loans that include transactional risk, to cater for such unfortunate incidences such as the great depression that occurred sometimes back. The lending conditions should be tightened, to ensure competition is retained in the US exports.

Another recommendation is for Ex-Im Bank to engage in finance cutting, a strategy that other banks such as the Royal Bank of Scotland Group Plc did in a bid to push the airlines to look for an optional financing option. In its context, Ex-Im Bank continues to offer bank loans to overseas companies to purchase products made in the United States ranging from jetliners to bulldozers. While this is a good move, the management should always consider that, in the event the credit markets freeze, bonds issued by airlines should be used to finance the loans issued. As seen, after crosschecking the business transaction and estimating Ex-Im bank’s anticipated losses under the guarantee, Morin Transportation drew a conclusion that exposure fee of about three percent was enough to protect the credit peril of Emirates and the aircraft secured structure of the negotiation. As the transport measures started to take place, a remaining agenda was the exposure fee Ex-Im would ask for payment for its guarantee. Airport businesses were exempted and the exposure fee was made to be risk-based.

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