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Uncle Sugar and His Welfare Queens
05/18/2012 8:30 am EST
If it takes a branch of the US government to get companies business, perhaps these companies aren't worth keeping around, observes Ari Charney of Investing Daily .
The normally obscure US trade finance entity known as the Export-Import Bank has garnered attention recently from politicians and pundits over the manner in which its policies potentially distort the marketplace.
The timing of this debate had been driven by the reauthorization of the institution’s lending authority, which was set to expire at the end of May and effectively cap its financing ability at $100 billion. Last week, the US House of Representatives passed legislation to boost the institution’s lending authority over each of the next three years, initially by 20% to $120 billion in 2012, and ultimately by 40% to $140 billion in 2014.
Like many investors, I’d prefer our policymakers to err on the side of free enterprise. But the fact is that America’s vaunted free-market system is more of a hybrid of market-based actors and government enablers.
While our government isn’t known for being particularly adept at picking winners and losers (ahem, Solyndra), if “Uncle Sugar” is favoring particular firms with its largesse, it behooves us as investors to consider whether those firms merit our consideration.
After all, if a firm is shrewdly using the government’s coffers to its advantage, that should ultimately aid its bottom line—especially when it’s already a well-established firm, as opposed to a tiny renewable energy startup (cough, Beacon Power).
The Export-Import Bank (ExIm Bank) is an independent federal agency that provides export credit to foreign buyers of American goods via loans at below-market rates. Additionally, it provides loan guarantees to banks that agree to lend at favorable rates to a US company’s end buyers in foreign countries.
The ExIm Bank is self-sustaining, which means that the fees it collects more than offset its expenditures. Since 1990, the bank has returned $4.9 billion to the US Treasury in excess of what was appropriated for its operating costs. Of course, the US taxpayer would still be on the hook to bail it out in the event it suffered financial distress.
Despite Its Small Business Mandate, the ExIm Bank Favors the Big Boys
Although only a subset of House Republicans voted against the bank’s reauthorization earlier this week, it has faced criticism from members on both sides of the aisle.
In the past, Democrats have inveighed against the bank for providing “corporate welfare” to large firms that already have myriad sources of private-sector financing. To that end, since 2002, Congress has mandated that at least 20% of the bank’s annual financing be steered toward small businesses.
Although the ExIm Bank touts the fact that over 85% of its transactions facilitated small-business exports, the cumulative dollar amount involved in these deals is dwarfed by similar deals made on behalf of giant firms such as Boeing (BA) and General Electric (GE).
To be sure, small business financings have averaged 21.7% of the ExIm Bank’s total lending authorization over the past five years, with the dollar amount of transaction volume rising to just over $6 billion for fiscal-year 2011 from $3.4 billion in 2007. By contrast, Boeing alone secured $11.7 billion in long-term loan guarantees for buyers of its commercial aircraft, which accounted for 75.5% of the ExIm Bank’s $15.5 billion in total long-term loan guarantees.
The United Kingdom’s Inmarsat (London: ISAT) also received a $700 million long-term loan to finance the purchase of Boeing’s satellite technology. That loan accounted for 11.1% of the ExIm Bank’s $6.3 billion in long-term loans.
In sum, Boeing’s foreign trading partners received financing that accounted for 37.9% of the ExIm Bank’s $32.7 billion in 2011 funding authorizations.
From a taxpayer perspective, that’s a tremendous amount of exposure to a single firm. But from an investor perspective, one can’t help but marvel at Boeing’s ability to singlehandedly dominate a government agency.
Boeing’s Chief Competitor Is Also Heavily Subsidized
Critics contend that subsidizing Boeing’s sales to overseas buyers puts other US companies at a disadvantage, particularly a US airline industry whose purchase of commercial aircraft from Boeing is not subsidized in the manner of its foreign competitors. Indeed, Delta Air Lines (DAL) says that had it been eligible for such subsidies, it could have saved $100 million a year in financing costs.
Of course, supporters of ExIm Bank policies note that Airbus, a subsidiary of the European Aeronautic Defence and Space Company (EADS) and Boeing’s primary competitor, receives even larger subsidies than Boeing. Although it can be difficult to determine the extent to which foreign firms are subsidized, the World Trade Organization recently found that Boeing’s subsidies from the US government were greatly exceeded by the subsidies Airbus received from European nations.
That suggests that any potential advantage Boeing receives from the ExIm Bank’s financings could be more than offset by the fact that its chief competitor is even more heavily subsidized. Nevertheless, Boeing outperformed the S&P 500 by 2.2 percentage points annually over the trailing ten-year period
That Was the Winner, Here Are the Losers
After Boeing, GE is the next major beneficiary of the ExIm Bank’s attentions.
The conglomerate’s foreign buyers received $255 million in long-term loan guarantees and $1 billion in long-term loans, the latter of which accounted for 15.9% of the ExIm Bank’s total long-term loans last year. GE shareholders have lagged the S&P 500 by a substantial 5.7 percentage points annually over the trailing ten-year period.
Although Boeing’s shares have performed well, it may be ill-advised to build a portfolio based on which firms the ExIm Bank tends to favor. That’s further underscored by the fact that last year the ExIm Bank financed deals for at least three troubled companies, two of which have already filed for bankruptcy.
The aforementioned Solyndra was involved in a deal where a foreign buyer received a $10.3 million long-term loan guarantee from the ExIm Bank in mid-February last year, a little more than six months before the solar panel manufacturer filed for bankruptcy.
And Hawker Beechcraft, which manufactures business jets and is owned by a consortium that includes Goldman Sachs (GS) and Onex Corp (Toronto: OCX), was involved in deals that included $83.7 million in long-term loans and a $7.8 million long-term loan guarantee. The firm filed for Chapter 11 bankruptcy protection late last week.
Finally, beleaguered solar panel maker First Solar’s (FSLR) foreign trading partners received $447.6 million in long-term loan guarantees and $100.1 million in long-term loans. The firm now trades toward the bottom of its 52-week range, down roughly 89% from its 52-week high.
Although Boeing remains a clear winner, the results for some of these other firms are dismal. Sadly, the government’s ability to “pick winners and losers” may reside solely in its ability to confer advantage, and not in its ability to tip us to a portfolio of market-beating investments.
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