JLS Capital Strategies, LLC

Thought Leadership

Industry news and trends

Agency Lenders – Both Sides Now Side 2 –The Trouble with Agencies

Agency lenders do not get the respect they deserve from a market too quick to point to their deficiencies. Hence I give you Side 2 of this two part series on agency lenders – The Trouble with Agencies – a title inspired by the Alfred Hitchcock film The Trouble with Harry. The film uses the focal point of Harry, who in typical Hitchcock fashion is dead, but it’s not a murder mystery.   Rather, Harry’s corpse is a plot device used to motivate a love story between Shirley MacLaine’s and John Forsythe’s characters.  

Unlike Harry, agencies aren’t dead, but many do seem quick to want to bury them[1].  The favorable aspects of agencies, highlighted in Part 1, come with baggage that often makes life difficult for agencies and those who work with them.   However, a description of the agencies’ troubles is not the article’s goal.  Rather, I wish to convey how a better understanding of agencies will facilitate working with them more effectively.

What IS the Trouble with Agency Finance?

“Side 1” cited the overall success of agency lenders and the factors contributing to their success. Each of these advantages comes with an underlying cost or “trouble”.

  1. Efficient Risk Management Should Not Be Agency Lenders’ Primary Goal

Part 1 provided evidence of agencies’ impressive risk management, touting DOE’s unfairly maligned and now sound loss record, Ex-Im Bank’s and OPIC’s impressive profits, and the World Bank group’s strong loss and collection record.   It’s all very impressive, except that profitability and loss avoidance are not intended to be agencies’ primary goals and measures of success.   The vision behind DOE’s loan guarantee program was to promote renewable technologies by taking risks private lenders wouldn’t take, with an expectation of far greater losses.   Ex-Im Bank doesn’t need to generate over $400 million in profits, and would do a better job of leveling the playing field for U.S. exporters whose competitors have support from less profitable ECAs, by taking more risk than it historically has.  The goal of the World Bank Group is not to exploit its official standing to enforce collections, but to take development risks and leverage investment from other debt and equity sources. 

  1. Maybe Agencies SHOULD Syndicate loans

Agency lenders usually cannot by statute or tradition, syndicate loans, which does make them more responsible than lenders who syndicate everything. However, responsible lending is very possible with partial syndication. A zero syndication policy gets in the way of cost and risk management, leading agencies to concentrate exposure in a sector or a country, or run up against exposure or lending caps, and then pull back from certain markets and sectors or even stop lending completely.

  1. Power is a Two-Edged Sword

Sovereign, institutional, or other types of power are all boons to collecting loans and are net plusses for agencies, but there is a price – that agencies are often less reasonable, realistic, or commercial.   A recurring anecdote involving the phrase “reasonable” illustrates this point.  Borrowers would insert the word at various points in agreements to formalize that agencies would be reasonable, only to see agencies strike it, retorting, “You can count on my being unreasonable”.   That’s a minor problem compared to unrealistic perceptions some agencies have.   Agencies have been known to seek sovereign or corporate guarantees when they are legally impossible, security rights from borrowers who don’t have the security being sought, or credit support for amounts that exceed loan exposure.  For borrowers who sought agency support in risky environments, this can be frustrating. 

  1. Write Downs and Compromises Are Often Necessary

Holding out for 100 cents on the dollar and holding firm IS almost always the right strategy in a recovery, but it is not always possible, and can get in the way of practical solutions.   Agencies can and have been pragmatic, but can be slow to accept helpful compromises after things go wrong.      Lending “good money after bad” – to increase debt exposure after problems arise – is hard for agencies to accept, but sometimes it’s the only way to complete a project and preserve the asset’s long-term value. After all, a power plant without a working turbine or an incomplete satellite that is never launched can’t generate any money to pay debt.

  1. Agency processes take too long.

Borrowers are almost always frustrated by everything in the agency process that takes time, from extensive and exacting due diligence, to inflexible lending positions, to complicated policy requirements.   Agencies usually drive a hard bargain and are tough negotiators, which is good, but has a cost.  Borrowers have been known to take high cost deals from other lenders to avoid agency processes, and   maybe that’s OK, as agencies shouldn’t step in where private lending is available.  However, agencies often have more flexibility than they admit, and faster action would support causes they support (e.g., export, development, or technology).

  1. Bonuses Aren’t All Bad

As a veteran of nearly 16 years at the U.S. Ex-Im Bank, I could see how bonuses led some private lenders to make bad loans, but that didn’t stop me from wanting a bonus.   A lack of bonus potential makes it more difficult for agencies to attract, keep, and motivate the experienced and talented professionals they need.  Civil service rules in many governments mean poor incentives for excellent performance. Fortunately, an interest in public service and a stimulating work environment have helped agencies attract good people, but bonus opportunities in the private sector do influence people‘s job choices. . 

  1. Life under the Microscope Is Challenging

Political pressure from the press, legislative bodies, and other sources that put decisions under a microscope make working at agencies difficult and are often counterproductive. No one would be surprised to learn that politicians responsible for the microscope are often not well informed and sometimes have poor intentions. Too often they focus on the wrong issues and create an environment that only makes agency processes more difficult without making them better. 

What To Do – How to Manage Agency Processes – Remember Harry?

Quite surprisingly, there are similarities about what to do – and what not to do –about the above problems and poor departed Harry.   First, talking about the problem directly is awkward and difficult.   No one really wants to talk about dead Harry, and no one should tell an agency to get over itself and take more risk.   No one at any institution will ever respond favorably to a direct request to lower its standards.  More constructive approaches include working with agencies to find creative structures and solutions, and to remind agencies about how a potentially risky deal can support agency missions.

If an agency is legally barred from syndicating loans, complaining is not helpful. However, there might be alternatives such as export credit agency co-finance or terms that facilitate re-financing.  Over time, agencies might try to syndicate more, and that should be supported, but it’s often beyond their control.

Telling an agency to deviate from what it considers to be policy is difficult, but one can avoid policies and precedents that aren’t real or relevant to a loan by asking questions and probing deeper – engaging in a process to understand the facts and the interests underlying positions.   There is a fundamentally different way to negotiate with an agency and it’s frustrating to most, but this softer and more intellectual approach can allow parties to avoid the most unreasonable and uncommercial positions agencies may assert and will always yield better results. 

That agency processes take longer is sadly inevitable – like Harry’s death. Again, complaining is not helpful. One can, however, try to work with agencies to do advance planning for due diligence, to “multi-task” (i.e., arrange different processes to proceed simultaneously), and to expedite the process as much as possible. 

There is little that can be done about poor agency pay, improper incentives, or difficult political environments. One can only exercise patience or have sympathy for your agency counter-part.  He or she is likely concerned about the same things you are and would welcome support and cooperation.

This article cannot solve every problem parties may have with agencies, as experience has shown that there is no one set of answers.   Every agency is different and no two deals are the same.  There is no substitute for detailed and specific knowledge of agency processes and substantial deal and market experience, which are the keys to engaging with agencies in an informed, sensitive, and constructive way.   One should not expect agencies troubles to go away any more than one would expect Harry to get up and walk around, nor should anyone expect a movie love story with any agency.   However, greater understanding and knowledge will diminish most agency troubles and lead to better results.


[1] Unlike Harry in the movie, who seems to sit out.

Miki Flamenbaum