OREANDA-NEWS. Expiration of the US Export-Import Bank's (Ex-Im) charter would marginally reduce the competitiveness of the US manufacturers but likely not enough to affect credit ratings in isolation, according to Fitch Ratings. Some manufacturers might need to raise debt levels to provide greater amounts of customer financing, but the debt increase would be limited by the relatively small percentage of exports financed by Ex-IM as well as the current availability of third-party financing.

Many of the larger manufacturers already have global footprints and Fitch expects that over time those companies would adjust to a new financing environment by considering the relocation of some facilities outside the US. Smaller companies and companies with less geographic flexibility would be most affected by changes in the US's export credit policies.

The aerospace sector is most exposed to the potential expiration of the charter, with Boeing (A/Stable Outlook) and other US aviation manufacturers left as the only global players without export credit agency (ECA) support. Lack of Ex-Im reauthorization would be felt most during a market downturn or credit crisis, with aircraft and engine manufacturers likely stepping in to provide some funding. Even during strong markets, the likely increase in financing costs from market providers could have an incrementally negative impact on aircraft purchasers and therefore on aerospace demand from US manufacturers.

In the current market, the impact of Ex-Im expiration would be mitigated by the growth in non-US aviation capital markets in the past several years, partly driven by the New Aircraft Sector Understanding (NASU) and the continued spread of the Cape Town Convention. Export credit backed aircraft financing should continue to fall in 2015, reaching 10%-15% of deliveries from Airbus and Boeing, less than one-half of the level seen as recently as 2012. Ex-Im expiration would likely be felt in 2016 and beyond as the bank meets existing commitments, then winds down, absent reinstatement of its charter.

Fitch believes Boeing has the financial strength to add customer financing assets to its balance sheet while maintaining its current ratings. Boeing's consolidated cash at the end of the first quarter was \\$9.6 billion, compared to \\$9.0 billion of debt. Free cash flow (cash from operations less capex and dividends) was \\$4.5 billion in 2014 and Fitch expects free cash flow will be flat to down modestly in 2015 as a result of higher capex and dividends.

Boeing Capital Corporation (BCC), which is fully consolidated into Boeing, has substantially reduced its portfolio over more than a decade as a result of its successful transition from being a capital provider to a facilitator of third-party financing. BCC had assets of approximately \\$4.1 billion at the end of the first quarter, compared to \\$12.6 billion at the end of 2002. A return to historical portfolio levels at BCC could negatively affect Boeing's ratings, but Fitch believes this is not a likely scenario and BCC could add several billion of assets without affecting Boeing's ratings.

Boeing had approximately \\$15.9 billion of backstop financing commitments at the end of 1Q15, representing less than 4% of Boeing's \\$435 billion commercial backlog. The commitments are spread out, with \\$1.8 billion of commitments through the end of 2015 and \\$3.4 billion in 2016. Fitch estimates that much of these amounts would not qualify for Ex-Im support. Historically, the bulk of these commitments have not been called because of the availability of third-party financing on more favorable terms. Fitch expects this to continue given the attractiveness of most of Boeing's aircraft as lending collateral. The 747-8 is one aircraft model that Fitch believes has been challenging to finance, but Fitch estimates the value of 747-8 deliveries from Boeing will be only a bit more than \\$2 billion in 2016, a small part of Boeing's commercial revenues.

The NASU's impact on aircraft financing is a part of the Ex-Im debate that Fitch feels has received less attention than it deserves. As highlighted above, even with re-authorization Fitch expects the percentage of aircraft financed with ECA guarantees to decline, partly because of the NASU, which has raised ECA fees and made ECA funding costs more in line with market rates for stronger credits. Ryanair (BBB+/Stable) is a good example of an airline that has shifted its debt financing to the public markets, partly in response to the NASU.

The NASU, agreed through the OECD, may have already achieved a middle-ground solution that reduces the reliance on ECAs over time in the aviation sector. It has fostered an aircraft finance market more focused on market-based pricing while preserving the benefits of ECA financing in downturns and it illustrates the benefits of multiparty negotiations rather than unilateral actions.