Ex-Im, the official ECA of the United States, is an independent agency operating under the Export-Import Bank Act of 1945, as amended. Its mission is to support the export of U.S. goods and services overseas, thereby supporting U.S. jobs. Official ECAs are organizations that provide export credits with explicit government backing, where either the government or the government-owned ECA assumes all or a portion of the risk. Export credits are financing arrangements designed to mitigate risks to buyers and sellers associated with international transactions. Buyers and sellers in international transactions face unique risks, such as foreign exchange risk, difficulties in settling disputes when damages to shipments occur, or instability in the buyer’s country. For these reasons, private lenders may be reluctant to finance a buyer’s purchase of foreign goods or finance a seller’s operations. Export credit products are meant to facilitate international transactions by mitigating these risks. An international agreement, the Organisation for Economic Cooperation and Development (OECD) Arrangement on Officially Supported Export Credits (the OECD Arrangement), governs various aspects of U.S. and other member countries’ ECAs. The OECD Arrangement aims to provide a framework for the use of officially supported export credits; promote a level playing field, where competition is based on the price and quality of the exported goods and not the financial terms provided; and provide transparency over programs and transactions. For example, the OECD arrangement sets minimum transaction fees. Participants include Australia, Canada, the European Union, Japan, South Korea, New Zealand, Norway, Switzerland, and the United States. The OECD Arrangement applies to officially supported export credits with repayment terms of 2 years or more. Congress has placed specific requirements on Ex-Im’s operations. For example, Ex-Im’s charter states that it should not compete with the private sector. Rather, Ex-Im’s role is to assume the credit and country risks that the private sector is unable or unwilling to accept. In addition, Ex-Im must submit annual reports to Congress on its actions to provide financing on a competitive basis with other ECAs, and to minimize competition in government-supported export financing. Furthermore, Ex- Im must make available at least 20 percent of its authorized aggregate loans, loan guarantees, and insurance (export financing) each fiscal year for the direct benefit of small businesses. Congress also has given Ex-Im instructions on the share of its financing for environmentally beneficial exports, including renewable energy, and to expand the promotion of its financing in sub-Saharan Africa. Ex-Im offers a number of export financing products, including direct loans, loan guarantees, and export credit insurance. Ex-Im makes fixed-rate loans directly to international buyers of goods and services. These loans can be short-term (up to 1 year), medium-term (more than 1 year up to 7 years), or long-term (more than 7 years). Ex-Im also guarantees loans made by private lenders to international buyers of goods or services, promising to pay the lenders if the buyers default. Like direct loans, loan guarantees may be short-, medium-, or long-term. Additionally, Ex-Im provides export credit insurance products that protect the exporter from the risk of nonpayment by foreign buyers for commercial and political reasons. This allows U.S. exporters the ability to offer foreign purchasers the opportunity to make purchases on credit. Credit insurance policies can cover a single buyer or multiple buyers and can be short- or medium- term. Insurance policies are also available to cover lenders and exporters that finance purchases by foreign buyers. Ex-Im’s short-term insurance covers a wide range of goods, raw materials, spare parts, components, and most services on terms up to 180 days. Medium-term insurance policies protect longer-term financing to international buyers of capital equipment or services, covering one or a series of shipments. Financing under medium-term insurance policies generally can extend up to 5 years. Some of Ex-Im’s short-term products are geared toward U.S. small businesses that have the potential to export but lack sufficient funds to support export efforts and include direct loans and loan guarantees to provide these businesses with working capital. Working capital loans are fixed-rate loans that provide exporters with 6- or 12-month revolving lines of credit. Working capital guarantees generally cover 90 percent of the principal and interest on a loan made to an exporter by a private lender. The guarantees are typically 1 year, but can extend up to 3 years and be used on a single transaction or on a revolving basis. Ex-Im delegates the authority for underwriting most of these transactions directly to Ex-Im- approved private-sector lenders. Ex-Im’s long-term products are often used in project finance transactions, what Ex-Im terms “structured finance” transactions, and aircraft transactions. These transactions involve complicated financing arrangements, and Ex-Im has separate divisions to handle them. These transactions also generally involve a direct loan or loan guarantee and their value is usually greater than $10 million. Project finance is an arrangement in which Ex-Im lends to newly created project companies in foreign countries and looks to the project’s future cash flows as the source of repayment instead of relying directly on foreign governments, financial institutions, or established corporations for repayment of the debt. The projects involve a large number of contracts for completion and operation. Project finance transactions have repayment terms up to 14 years (18 years for renewable energy transactions) and typically include the financing of development of a new facility in a foreign country, such as a factory or power plant, or significant facility or production expansions. Most of Ex-Im’s project finance transactions have been oil and gas and power sector projects. In structured finance transactions, Ex-Im provides direct loans or loan guarantees to existing companies located overseas based on these companies’ balance sheets plus credit enhancements, such as escrow or reserve accounts, subject to Ex-Im’s control; special insurance requirements; and letters of credit pledged to Ex-Im through a bank or other third party. Structured finance transactions generally have repayment terms of 10 years (12 years for power transactions). Among others, Ex-Im has completed structured transactions for oil and gas projects and air traffic control, telecommunications, and manufacturing entities. Finally, Ex-Im provides long-term direct loans and loan guarantees that support the purchase of aircraft. Ex-Im uses external advisers to assist in arranging project finance, structured finance, and aircraft transactions. These advisers can include financial, legal, technical, insurance, market, and environmental consultants. Ex-Im faces multiple risks when it extends export credit financing. These risks include credit, political, market, concentration, foreign-currency, and operational risks, which are defined as follows: Credit risk. The risk that an obligor may not have sufficient funds to service its debt or be willing to service its debt even if sufficient funds are available. Political risk. The risk of nonrepayment resulting from expropriation of the obligor’s property, war, or inconvertibility of the obligor’s currency into U.S. dollars. Market risk. The risk of loss from declining prices or volatility of prices in the financial markets. Market risk can arise from shifts in macroeconomic conditions, such as productivity and employment, and from changes in expectations about future macroeconomic conditions. Concentration risk. Risk stemming from the composition of a credit portfolio. Concentration risk comes into being through an uneven distribution of credits within a portfolio. Ex-Im faces three types of concentration risk: Industry concentration. The risk that events could negatively affect not only one obligor but also many obligors in the same industry simultaneously. Geographic concentration. The risk that events could negatively affect not only one obligor but many obligors simultaneously across a country or region. Obligor concentration. The risk that defaults from a small number of obligors will have a major adverse impact on the portfolio because they account for a large share of the portfolio. Foreign-currency risk. The risk of loss as a result of appreciation or depreciation in the value of a foreign currency in relation to the U.S. dollar in Ex-Im transactions denominated in that foreign currency. Operational risk. The risk of loss resulting from inadequate or failed internal processes, people, and systems, or from external events. In 1990, to more accurately measure the cost of federal credit programs, Congress enacted FCRA, which requires agencies that provide domestic or international credit, including Ex-Im, to estimate and request appropriations for the long-term net losses, or subsidy costs, of their credit activities. Credit programs incur subsidy costs when estimated payments by the government (such as loan disbursements or claims paid on defaulted loans) exceed estimated payments to the government (such as principal repayments, fees, interest payments, and recoveries), on a net present value basis over the life of the direct loan or loan guarantee, excluding administrative costs.when the present value of estimated payments by the government exceeds the present value of estimated payments to the government (collections). When credit programs have a positive subsidy cost, they require appropriations. Conversely, negative subsidy programs are those in which the present value of estimated collections is expected to exceed the present value of estimated payments. Credit programs have a positive subsidy FCRA requires that agencies have budget authority to cover credit subsidy costs before entering into credit transactions. For their annual appropriation requests, agencies estimate credit subsidy costs by cohort. To estimate their subsidy costs, credit agencies estimate the future performance of direct loans and loan guarantees. Agency management is responsible for accumulating relevant, sufficient, and reliable data on which to base these estimates. To estimate future credit performance, agencies generally have models that include assumptions about defaults, prepayments, recoveries, and the timing of these events and are based on the nature of their credit programs.