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Stable.
Secure.
Guaranteed.
40 Years of Financing American Exports
Private Export Funding Corporation Annual Report 2010
Private Export Funding Corporation
Annual Report 2010
Table of Contents:
Chairman’s Letter 20
Business Year in Review 40
Summary of PEFCO’s Business 80
PEFCO’s Relationship with Ex-Im Bank 17
Management’s Discussion & Analysis 21
Report of Independent Auditors 25
Consolidated Financial Statements 26
Management’s Report 45
Five Year Financial Data & Independent Audit Fees 47
Board of Directors & Officers 48
Advisory Board & Exporters’ Council 51
Small Business Lender Council 51
PEFCO Shareowners 52
Additional Information 53
CHAIRMAN’S LETTER
$25 billion
“In the ensuing 40 years, PEFCO has made over $25 billion
in loan commitments, ensuring financing to meet the needs
of American exporters and jobs for the American market.”
To: PEFCO Shareowners,
On April 9, 2010, PEFCO celebrated its 40th year of
incorporation to finance U.S. exports. PEFCO commenced
operations on May 26, 1971, and, by year-end 1971, had loan
commitments exceeding just over $100 million. In the ensuing
40 years, PEFCO has made over $25 billion in loan commitments,
ensuring financing to meet the needs of American exporters and
jobs for the American market. In today’s economy, PEFCO’s
mission as a supplemental lender to the Export-Import Bank of
the United States is more important than ever, as doubling U.S.
exports over the next five years is a stated national priority.
of our total commitments for 2010, compared to $369 million
and 20%, respectively, in 2009. The $547 million represents the
highest amount of commitments since we started the small and
medium term program in 1996. We were very pleased that the
White House announced in July that PEFCO would be providing
a $250 million working capital loan to a major corporation
for exports to Mexico and Canada. These increased loan
commitments and broader mix of loan activity in the latter part of
fiscal 2010 will put us in a stronger position this coming year.
This year UPS Capital Corporation, a shareowner, increased
slightly its ownership percentage with an additional purchase of
new shares. We will continue to seek additional capital as we see
the growth of our business model being more important over the
foreseeable future. Mindful of our goal of capital preservation, our
Board has accepted management’s recommendation not to pay a
dividend for fiscal year 2010.
Recently, the need for PEFCO programs had grown substantially.
In 2008 and 2009, our loan commitments averaged $1.9 billion.
As the financial markets improved at the end of the third quarter
of 2009, however, aggressive competition for Ex-Im Bank loans,
including the introduction of a capital markets structure for
aircraft financing, dramatically reduced the number of aircraft
transactions brought to PEFCO. The result was a slow start to our
2010 fiscal year. In January 2010, we began to see an increase in
transactions and also a greater diversity in the types of assets to
be financed. In addition to our traditional aircraft transactions we
financed: gas turbines; telecommunications satellites; oil drilling
and oil refining equipment; wind power and solar panel projects.
We expect this diversification in exports we finance to continue,
resulting in a more balanced loan portfolio for PEFCO.
During the past year three of our directors retired from our Board
of Directors: Torry Berntsen, Senior Executive Vice President
of Bank of New York Mellon and a Director since 2007; Brian
J. Brille, Managing Director of Bank of America Securities and
a Director since 2007; and Walter E. Skowronski, President
of Boeing Capital Corporation, a Director since 2001. Both
Torry and Brian were members of the Compensation and
Risk Committees and Walter was a member of the Executive
Committee and also served on the Audit and Risk Committees.
We are grateful for their invaluable advice and guidance to
PEFCO’s management. In September we welcomed three new
Board members who bring a wealth of expertise and experience
to the Board: Catherine P. Bessant, Global Technology and
Operations Executive, Bank of America Merrill Lynch; Michael J.
Cave, President, Boeing Capital Corporation; and Karen B. Peetz,
Vice Chairman, Bank of New York Mellon.
Loan commitments at September 30, 2010 were $1.6 billion, but a
slower start in the first quarter dramatically reduced our net profit
for the year to $1.4 million compared to $14.5 million in 2009.
Our return on equity was 1.45% and our earnings per share was
$94 in 2010. This compared to 16.32% and $983, respectively, in
2009. Financing of Direct and Secondary Long-Term programs
totaled $1.1 billion, compared to $1.5 billion in 2009. Small and
Medium-Term business was $547 million and represents 33.29%
2
CHAIRMAN’S LETTER
Sincerely yours,
With the loyal support and dedicated work of our staff and the
valuable assistance of the members of our Board of Directors,
we were able to meet the challenges which faced us this year.
PEFCO’s management also acknowledges, with appreciation, the
constructive cooperation received from Ex-Im Bank, especially
the leadership by its Chairman, Fred Hochberg, in promoting
U.S. exports during the year. In addition, I would like to thank our
customers and shareholders for the business they direct to us.
Don B. Taggart
Chairman, President and CEO
$250 million
“We were very pleased that the White House announced
in July that PEFCO would be providing a $250 million
working capital loan to a major corporation for exports to
Mexico and Canada.”
3
business year in review
4
Committed to Growing
Opportunities for America’s
Export Businesses
We are focused on the growth of U.S. Exports.
By helping our country compete, we open more
markets and create more opportunities to grow our
economy.
5
Outstanding Loans by Product were: (in millions)
Equipment
16
Environmental
32
Telecommunications
34
Other
46
Infrastructure
146
Energy
270
Small Business
543
Aircraft
3,438
Total $4,525
OPIC
EXIM
World-wide
PEFCO’s programs have enabled the world-wide export
of various U.S. products. Outstanding Export Loans
guaranteed or insured by EX-IM Bank and OPIC
as of September 30, 2010.
Outstanding Loans by Country were: (in millions)
Australia
Brazil
Cayman Islands
Chile
Croatia
Japan
Mexico
Nigeria
Norway
Panama
Philippines
Saudi Arabia
Taiwan
Turkey
Other
Total $4,525
344
963
126
562
120
116
130
161
170
334
88
175
72
289
875
OPIC
6
EXIM
LENDING
FUNDING
Private Export Funding Corporation (“PEFCO”) had new loan
commitments in 2010 totaling $1,643 million, compared to
new loan commitments of $1,857 million in 2009. 2010 also
witnessed a significant diversification in the mix of PEFCO assets
away from aircraft toward a more balanced portfolio of energy
and other industrial sectors. New commitments in the Short and
Medium – Term Loan Programs and under our Small Business
Programs were a record $547 million in 2010.
During the year, PEFCO issued a total of $400 million of Secured
Notes under a $1.5 billion issuance limit as approved by Ex-Im
Bank and the Board of Directors. Issuances included one original
issue series, BB, and the reopening as detailed in the following table:
Series
BB
BB reopen
EARNINGS
Total (in millions)
PEFCO’s net income in 2010 was $1.4 million compared to net
income of $14.5 million in 2009. Net financing income decreased
to $6.5 million in 2010 from $33.2 million in 2009. The average
balance of financing assets increased in 2010 by $447 million
and the average balance of financing liabilities increased by $403
million in 2010. The average financing revenue interest rate
decreased by 1.07%, while the average financing expense interest
rate also decreased .95%.
No. of Loan Commitments
4
3
1
150
Amount
Lead Underwriter
$300
BofA ML/Citi
100
BofA ML
$400
DIVIDEND
The Board of Directors voted not to declare a dividend for the
fiscal year ending September 30, 2010. The Board’s decision
was based on this year’s financial performance and the belief that
the retention of earnings is in the best interest of PEFCO and its
shareowners as PEFCO builds its capital base.
Products
Amounts (in millions)
ENERGY
AIRCRAFT
OTHER
SMALL BUSINESS
$ 655
291
150
547
$1,643
158
Committed
Committed to Growing Opportunities for America’s
Export Businesses
7
summary of pefco’s business
Introduction:
PEFCO was incorporated on April 9, 1970 under
Delaware law and is principally engaged in making
U.S. dollar loans to foreign importers to finance
purchases of goods and services of United States
manufacture or origin. PEFCO’s shareowners
include most of the major commercial banks involved
in financing U.S. exports, industrial companies
involved in exporting U.S. products and services, and
financial services companies.
operation of PEFCO through various agreements
described under “PEFCO’s Relationship with Ex-Im
Bank” and in the “Notes to the Consolidated Financial
Statements.”
Since all loans made by PEFCO are guaranteed
or insured as to the due and punctual payment of
principal and interest by Ex-Im Bank or other U.S.
government institutions, such as the Overseas Private
Investment Corporation (“OPIC”), whose obligations
are backed by the full faith and credit of the United
States, PEFCO relies upon this U.S. government
support and does not make evaluations of credit
risks, appraisals of economic c onditions in foreign
countries, or reviews of other factors in making
its loans.
PEFCO was established with the support of the
United States Department of the Treasury and the
Export-Import Bank of the United States (“Ex-Im
Bank”) to assist in the financing of U.S. exports
through the mobilization of private c apital as a
supplement to the financing already available through
Ex-Im Bank, commercial banks and other lending
institutions. Ex-Im Bank has cooperated in the
8
PEFCO’S LENDING PROGRAMS
Short and Medium-Term Programs
Short-Term Program
PEFCO offers to purchase short-term loans under its Working
Capital Facility and Short-Term Insured Loan Facility.
These programs are a dependable source of liquidity for lenders
using Ex-Im Bank short and medium-term insurance and
guarantee programs. The lender is always our customer; PEFCO
does not finance exporters directly. The PEFCO Short and
Medium-Term Programs include our Standard Programs, our
Special Initiatives and our Small Business Initiative.
Working Capital Facility: PEFCO purchases participations in
working capital loans guaranteed against non-payment under an
Ex-Im Bank Working Capital Guarantee. PEFCO will purchase
the 90% guaranteed portion of each loan. The lender funds and
retains the risk of the 10% non-guaranteed portion. PEFCO will
purchase transaction specific or revolving loans, and can include
participations in standby letters of credit included under the Ex-Im
Bank guarantee.
PEFCO will purchase loans from lenders who have demonstrated
an understanding of, and ability to work with, Ex-Im Bank
insurance and guarantee programs. Loan amount, exporter size,
borrower’s country, and the underlying item financed are not
factors in our decision to purchase. All loans are purchased by
PEFCO on a non-recourse basis. While defaulted loans must
and will be assigned to Ex-Im Bank upon its payment of a claim,
performing loans are held by PEFCO in its portfolio to maturity.
By selling to PEFCO, a lender achieves its financial objectives
– improved profitability, removal from the balance sheet of lowyielding assets, a freeing up of capacity for borrowers, reduced loan
portfolio size while maintaining its lending relationship with
the borrower.
Short-Term Insured Loan Facility: PEFCO purchases participations
in short-term loans insured against non-payment under an Ex-Im
Bank “documentary” or small business “enhanced” policy. The
lender can (i) lend directly to the overseas buyer or foreign bank
or (ii) purchase insured buyer obligations. PEFCO purchases
the Ex-Im Bank insured portion of each loan (90%, 95%, 98% or
100%). The lender or exporter retains the risk of the non-insured
portion. PEFCO’s interest rate is typically LIBOR plus a spread.
Other features of PEFCO’s Short-Term Facilities:
• All purchases are governed by a master loan participation
agreement between the lender and PEFCO.
Standard Programs
Loans disbursed by a lender may be subsequently sold to PEFCO
under one of our Standard Facilities. The loans must be insured
or guaranteed against non-payment by Ex-Im Bank under a
documentary insurance policy or a guarantee. PEFCO will only
purchase the amount covered by the Ex-Im Bank insurance
or guarantee.
• There is no minimum per loan amount.
• P EFCO will purchase a participation in any short-term loan or
letter of credit structure acceptable to Ex-Im Bank.
• Th
e lender retains responsibility for servicing the loan and
maintaining the Ex-Im Bank guarantee or policy.
2010 PEFCO Programs
Long Term:
Short/Medium Term:
$1,096 million
547 million
(8 transactions)
(150 transactions)
Total:
$1,643 million
(158 transactions)
9
For lenders
For lenders not able to make a loan directly, PEFCO will
“stand-in” as direct lender on behalf of the originating lender.
Medium-Term Program
documentation and maintaining the borrower relationship.
Lenders ask PEFCO to be the Stand-In Lender for a variety of
reasons including loan size or because a borrower may be located
outside the lender’s marketing area.
PEFCO offers four medium-term secondary market facilities and
a medium-term direct loan facility: the Guaranteed Note Facility;
the Discount Facility; the Insured Note Facility; the Guaranteed
Lease Facility; and the Stand-In Lender Facility.
Other features of PEFCO Medium-Term Facilities:
• All purchases are governed by a master note purchase agreement.
Guaranteed Note Facility: PEFCO purchases medium-term loans
guaranteed against non-payment under an Ex-Im Bank mediumterm guarantee (“ECP-MGA”). Interest rates can be floating
or fixed. Fixed rates can be set in advance of the PEFCO
purchase date.
• Note amounts range from $10,000,000 to $100,000 and
possibly smaller.
• P EFCO will fund any note structure acceptable to Ex-Im Bank.
Discount Facility: PEFCO offers a special program under the
Guaranteed Note Facility used for guaranteed loans requiring a
fixed interest rate to be set prior to shipment of the items. Once
set, the fixed interest is held constant until the final disbursement,
even when the note has multiple disbursements over many
months, without payment of an up front fee.
• P EFCO will purchase single notes or portfolios, new notes
or partially repaid notes, single-disbursement or multipledisbursement notes, buyer credits or supplier credits, and
financial leases.
• E xcept for the Discount Facility and the Stand-in Lender Facility,
the lender retains responsibility for servicing the loan and
maintaining the Ex-Im Bank guarantee or policy. PEFCO holds
the original note.
Insured Note Facility: PEFCO purchases medium-term loans
insured against non-payment under an Ex-Im Bank medium-term
policy, including the hybrid distributor policy. Interest rates can be
floating or fixed. Fixed rates can be set in advance of the PEFCO
purchase date.
• F or the Discount Facility and the Stand-In Lender Facility
PEFCO always assumes responsibility for collecting payments
and maintaining the Ex-Im Bank guarantee. PEFCO holds the
original note.
Guaranteed Lease Facility: PEFCO purchases medium-term leases
guaranteed against non-payment under an Ex-Im Bank ECPMGA. Interest rates can be floating or fixed. Fixed rates can be set
in advance of the PEFCO purchase date.
Stand-In Lender Facility: For lenders not able to make a loan
directly, PEFCO will “stand-in” as direct lender on behalf of
the originating party. The originating lender must participate
in preparing the application to Ex-Im Bank, acquiring related
10
Special Initiatives
Short-Term
Small Note Program: For exporters of small-value products or
services, PEFCO will work with the exporter’s lender, or a reliable
lender is introduced by PEFCO, to enable the exporter to
obtain financing.
Extended Loan Program: For lenders with a borrower temporarily
unable to repay an existing working capital loan but which
could repay if the loan is rescheduled. Ex-Im Bank must agree to
reschedule the loan.
Trade Association Program: A service for organizations with
exporting members (e.g., trade associations and City/State
agencies). PEFCO will work with the organization to provide its
members with access to financing from reliable sources.
Small Loan Program: For exporters of small value items with a
Small Business Policy. PEFCO will work with the exporter’s
lender, or a reliable lender i ntroduced by PEFCO, to facilitate
obtaining access to financing.
Small Business Initiative
The PEFCO Small Business Initiative is a direct result of our
strong commitment to assist small business exporters (as defined
by the U.S. Small Business Administration) in obtaining access to
reliable lenders for financing their exports.
Medium-Term
Accessible Lender Program: A referral service for exporters. PEFCO
will introduce the exporter to a reliable lender willing to p rovide
medium-term export financing on a transactional basis.
The cornerstone of the Small Business Initiative is the PEFCO
Small Business Lender Council (the “Council”). The Council
is a network of lenders committed to supporting Ex-Im Bank’s
outreach to small business exporters. Members of the Council
include banks and trade finance companies. Ex-Im Bank
participates on the Council as an ex-officio member. The Council
has two principal functions; as a funding source for small business
exporters and as a forum where Ex-Im Bank can have frank
discussions with lenders on subjects of common interest.
Committed Purchase Program: For lenders needing certainty
of access to PEFCO funding over extended periods. PEFCO
provides a written commitment to purchase an aggregate amount
over a specified term (typically one year) on defined terms and
interest rates. Actual loan commitments are made individually.
Emerging Markets Lender Program: For foreign lenders with
their own Master Guarantee Agreement (“MGA”) that finance
importers in their own and other countries, but which lack access
to competitively-priced U.S. dollars.
The Council’s dedicated website is located at:
http://www.pefco-smallbusinesslenders.com
Small Lender Program: For small U.S. and foreign lenders with their
own MGA that specialize in financing small exporters and smallvalue loans but which fail to meet PEFCO’s minimum standards
for financial strength.
Small Business Commitments
Short & Medium Term
Long Term Commitments
2010 $547 million
2009 $369 million
2008 $343 million
2010 $1,096 million
2009 $1,488 million
2008 $1,610 million
The Council
The Council is a network of lenders committed
to supporting Ex-Im Bank’s outreach to small business
exporters.
11
Long-Term Loan Programs
Direct Loan Program PEFCO may also charge commitment fees calculated on the
undisbursed and uncancelled amount of the loan commitment.
Under the Direct Loan Program, PEFCO acts as the original
lender making loans directly to borrowers (as opposed to buying
loans made by other lenders) to finance their purchases of U.S.
goods and services. All such loans benefit from Ex-Im Bank’s
comprehensive long-term guarantee to PEFCO, dated December
15, 1971, as amended (see “PEFCO’s relationship with Ex-Bank”).
PEFCO Direct Loans are available for transactions which have
an Ex-Im Bank guaranteed value of $10 million or more and a
repayment term of five years or more. The PEFCO Direct Loan
Program is typically limited to borrowers seeking a fixed rate of
interest on the Ex-Im Bank guaranteed loans. Ex-Im Bank also
allows PEFCO to make its Direct Loans available on a floating rate
basis to borrowers located in Sub-Saharan Africa and borrowers
engaged in the purchase of “environmental” exports from the U.S.
or exports from U.S. small business exporters.
Once the fixed rate has been established, a borrower may only
cancel or prepay a portion of a loan or loan commitment by
paying PEFCO a “make-whole” fee equal to the present value of
the reinvestment loss, if any, that would be incurred by PEFCO as
a result of such prepayment or cancellation.
Secondary Loan Program The purpose of the Secondary Loan Program is to provide
liquidity to lenders participating in the Ex-Im Bank guaranteed
loan market. PEFCO will support lenders making long-term
Ex-Im Bank guaranteed loans by buying such loans from the
originating lender. As with the Direct Loan Program, such loans
typically have an original value of $10 million or more and were
originally scheduled to be repaid in five years or more. As with the
Direct Loan Program, the rates (yields) at which PEFCO is willing
to buy such loans will be a function of PEFCO’s estimated cost of
funds at the time of such purchase.
The interest rates on Direct Loans (whether fixed or floating)
are based on PEFCO’s estimated cost of funds at the time the
rate is calculated, taking into account the disbursement and
repayment characteristics of the loan. PEFCO’s estimated cost
of funds is a function of the then current U.S. Treasury yield for a
maturity similar to the average life of the loan being funded, plus
the estimated margin over the Treasury yield required to place
PEFCO Secured Notes with investors, warehousing and hedging
costs, if any, and a modest margin for expenses, risk and return
to shareholders.
Lenders are also able to obtain commitments from PEFCO to
purchase loans in the future (in advance of disbursement of such
loan by the originating lender). Moreover, by agreement with ExIm Bank, as of September 29, 2009, PEFCO is no longer limited to
purchasing floating rate loans in connection with “environmental”
transactions and from sub-Saharan borrowers. PEFCO is now
free to purchase both floating and fixed rate long-term loans for
which Ex-Im Bank gave its guarantee commitment on or after
September 29, 2009 without restriction.
In the case of fixed rate loans, PEFCO allows a great deal of
flexibility with respect to the timing of the rate fixing. Borrowers
are able to set forward rates in advance of any disbursement under
the loan facility or, if they prefer, borrowers may elect to wait up to
one year after disbursement of the loan to set the fixed rate.
Many bank and non-bank lenders which had previously not been
active under Ex-Im Bank’s long-term guarantee program have
used this program to support their exporting customers’ financing
needs. Some of these lenders were introduced to PEFCO’s LongTerm Loan Programs through PEFCO’s Short and MediumTerm Program.
Floating interest rates are set by determining a fixed spread
to LIBOR, based on PEFCO’s estimated cost of funds
described above.
PEFCO Direct
PEFCO Direct Loans are available for transactions
which have an Ex-Im Bank guaranteed value of
$10 million or more and a repayment term of
five years or more.
12
We believe this new grant of authority with respect to the purchase
of floating rate loans by PEFCO represents a significant addition
of liquidity and value to the market by allowing banks to remain
active in the Ex-Im Bank guaranteed loan market, providing
valuable services to their borrower and exporter clients without
adding long-term assets to their balance sheets. As a result of this
value proposition, we expect to see the volume of activity under
PEFCO’s Secondary Loan Program to increase in 2011.
This approach allows for flexibility in accommodating a range of
disbursement schedules. The impact of warehousing may reduce
earnings during the warehousing period prior to disbursement of
funds, which is incorporated into the loan pricing.
Secured Note Issuances
For longer term U.S. dollar funding requirements, PEFCO issues
secured notes in public markets through underwriters. The
Secured Note Program is issued through a trust arrangement
on the books of Private Export Funding Corporation under the
Indenture, dated June 15, 1975, as supplemented and amended
(the “Indenture”). The principal repayments for the Secured
Notes are backed by foreign importer notes—export loans
guaranteed by Ex-Im Bank—and investment securities explicitly
backed by the full faith and credit of the U.S. For each Secured
Note issue, the principal cash flows backing the principal must
mature prior to the maturity date for redemption of the Secured
Note principal. Pledged assets are assigned to and held by The
Bank of New York Mellon (a shareowner of PEFCO), as Trustee,
as collateral for the benefit of the holders of PEFCO Secured
Notes. Foreign importer notes pledged against the notes are
backed by the 1971 Guarantee Agreement between Ex-Im
Bank and PEFCO. Interest paid on the Secured Note Program
is explicitly guaranteed by Ex-Im Bank, as specified in the 1971
Guarantee & Credit Agreement.
PEFCO’S FUNDING ACTIVITIES
PEFCO manages the liquidity and interest rate exposures arising
from loan assets and unfunded loan commitments through the
combination of short term funding, secured note issuances and
interest rate derivatives. This approach allows for targeting the
proper liquidity profile, while controlling exposure to market
fluctuations. For fixed rate loan commitments, PEFCO hedges
the loan pricing at the time that a borrower accepts a fixed rate
loan offer, either through specific hedging actions or within the
context of managing the interest rate risk in the overall book. In
cases where a derivative hedge is utilized, PEFCO hedges the
fixed rate loan commitments using interest rate swaps in advance
of loan funding to immunize the interest rate exposure. In cases
where a cash hedge is utilized for fixed rate loan commitments,
PEFCO issues term funding and investments in U.S. Government
Securities for the warehousing period prior to loan funding.
As of September 30, 2010, PEFCO had issued $12.4 billion
aggregate principal amount of Secured Notes, of which $3.5
billion aggregate principal amount were outstanding, currently
rated, Aaa, by Moody’s and AA+,by Standard & Poor’s.
13
For interest rate
For interest rate risk, Management routinely measures
the net present value and duration of interest-sensitive
assets and liabilities and maintains current schedules
which show asset/liability mismatches and simulation
of future income.
Short-Term Borrowings
by issuing Collateralized Notes pursuant to a separate indenture
dated as of June 24, 1998, as supplemented and amended,
between PFC and The Bank of New York Mellon, as Trustee
(the “Trustee”). The operations of PFC have consisted solely
of the issuance of such Collateralized Notes and the purchase
of Ex-Im Bank-guaranteed export loans and U.S. government
obligations from PEFCO, which were then assigned to and held
by the Trustee to secure both the principal and interest on the
Collateralized Notes.
PEFCO raises short term liquidity to finance loan commitments
through issuance of commercial paper. As of September 30, 2010,
PEFCO received short term ratings of P-1 by Moody’s and A-1 by
Standard & Poor’s. In 2010 , PEFCO established a new $1 billion
364 day syndicated credit facility maturing on June 11, 2011. In
addition, PEFCO issued a $250 million three year s yndicated
credit facility maturing on June 11, 2013. Of the thirteen lenders
under these two credit agreements, nine are shareowners of
PEFCO. The credit agreement contains a number of covenants,
including a covenant that PEFCO will comply with its contractual
commitments with Ex-Im Bank, with customary exceptions. As
of September 30, 2010, there were no amounts outstanding under
either credit agreement.
An election had been made by PFC to treat itself as a financial
asset securitization investment trust (“FASIT”) for U.S. federal
income tax purposes. The FASIT rules were repealed as the result
of tax legislation enacted in 2004. Pursuant to the transition rules,
any Collateralized Notes issued by PFC before October 22, 2004,
will continue to qualify as regular interests in PFC as long as they
remain outstanding in accordance with their original terms. PFC,
however, will not issue any additional Collateralized Notes since
PFC is inactive.
Certain underwriters of PEFCO Secured Notes, certain dealers
of PEFCO short-term notes, and certain participants in the 364
day and three year syndicated credit agreements are shareowners
(or their affiliates are shareowners) of PEFCO. Certain officers
of certain shareowners also serve as Directors of PEFCO as
described herein. Certain shareowners have provided and
presently provide a variety of commercial banking services
to PEFCO.
PEFCO FINANCE CORPORATION
PEFCO created PEFCO Finance Corporation (“PFC”), a wholly
owned subsidiary, to assist it in the financing of purchases of
long-term debt obligations issued by foreign importers of U.S.
goods and services. These obligations are guaranteed as to the
timely payment of principal and interest by Ex-Im Bank. PFC
has obtained funds to purchase such long-term debt obligations
14
As of September 30, 2010, PFC had issued $425 million aggregate
principal amount of Collateralized Notes, which were rated Aaa
by Moody’s and AAA by Standard & Poor’s. As of September 30,
2010, $42 million aggregate principal amount of Collateralized
Notes were outstanding.
Management routinely measures the potential interest rate
exposure associated with outstanding fixed-rate loan offers.
Management limits total fixed-rate loan offers awaiting acceptance
at any time to $700 million and close-out interest rate exposure
from outstanding fi xed-rate offers whenever the potential “loss
of date” exceeds the “spread income” in respect of fixed-rate loan
offers probability of acceptance.
PEFCO POLICIES REGARDING
RISK MANAGEMENT
As a position limit on investments, Management will not allow
non-core business investments (those investments that are not
required to cover secured or collateralized note installments in the
trust estates and that are unrelated to pre-funding of guaranteed
export loans) with a maturity of more than 90 days to exceed $150
million and will mark these investments to market daily.
PEFCO manages risk exposures for interest rate risk, liquidity
and counterparty risk using guidelines approved by its Board of
Directors. Management reports twice a year to the Risk Policy
Committee of the Board.
For interest rate risk, Management routinely measures the net
present value and duration of interest-sensitive assets and liabilities
and maintains current schedules which show asset/liability
mismatches and simulation of future income. Management will
not place at risk a 100 basis point movement in interest rates in
more than 10% of the pre-tax net present value of capital.
To mitigate liquidity risk, the amount of short-term funding due
to mature within a two-week period, including commercial paper
will not exceed the unutilized portion of the credit facility. In
addition, a balance of unencumbered assets will be maintained
to equal the level of outstanding unsecured borrowings less the
unutilized portion of the credit facility.
Management may use derivative contracts, such as interest
rate swaps, in fair value and cash flow hedge s trategies as part
of the process to mitigate risk exposure to changes in market
interest rates. However, management will not use swaps or
other derivative financial instruments for speculative purposes.
For managing capital leverage, Management operates under a
leverage ratio limit that caps guaranteed assets to shareowners’
equity to a level no greater than 75 to 1.
15
For management of counter-party risk on derivative transactions,
PEFCO utilizes an approach based upon the “Standardized
Method” detailed in the Basel II capital accords (see page 18
of “The Application of Basel II to Trading Activities and the
Treatment of Double Default Effects” issued July, 2005,
www.bis.org). Two important changes are included in this
methodology. First, the required capital against a risk weighted
exposure is 20%, a limit level that is 2.5 times the 8% limit typical
of Bank regulatory requirements. Second, the maximum use of
risk capital for counterparty risk is limited to 16% of PEFCO’s
equity. Maximum market value per counterparty is $30 million
and the minimum credit rating per counter-party is A.
As of September 30, 2010 the counterparty risk capital
usage was $7.7 million against a maximum of $16.1 million.
Exposure at Default (EAD) was $90.1 million distributed over
7 counterparties. The maximum counterparty market value
exposure to any single counterparty was $17.3 million versus a
maximum of $30 million.
PEFCO has had a long and significant relationship with the
Export-Import Bank of the United States since its inception,
providing liquidity support for certain of its guarantee financing
facilities. These arrangements are set forth in various agreements
that are described herein.
This approach integrates both the current net market value per
counterparty and the price risk associated with the durations of
the positions. Risk weights take into account credit ratings, with
AA rated counterparties weighted 20% and A rated counterparties
rated 50%.
Ex-Im Bank
PEFCO has had a long and significant relationship with
the Export-Import Bank of the United States since its
inception, providing liquidity support for certain of its
guarantee financing facilities.
16
pefco’s relationship with ex-im bank
Under the terms of a
Guarantee Agreement,
dated December 15, 1971, as amended, between
PEFCO and Ex-Im Bank, due and punctual
payment of the principal of and interest on all
foreign importer notes (“Guaranteed Importer
Notes”) evidencing loans made by PEFCO with
the approval of Ex-Im Bank will be fully and
unconditionally guaranteed by Ex-Im Bank.
17
GUARANTEE AGREEMENT
Dated 12/15/1971
the Indenture, will be sufficient to ensure that, before the dates
of any mandatory payments of principal on all Secured Notes
outstanding under the Indenture, the Trustee will be provided
with cash sufficient to make such payments. In consideration
of Ex-Im Bank’s guarantee of the Guaranteed Importer Notes,
a one-time front-end exposure fee is payable to Ex-Im Bank by
PEFCO at a rate determined by Ex-Im Bank. Such fee is normally
paid directly to Ex-Im Bank by the borrower on behalf of PEFCO.
Under the terms of a Guarantee Fee Guarantee Agreement dated
as of September 15, 1988 between PEFCO and Ex-Im Bank,
Ex-Im Bank guarantees PEFCO’s reimbursement by borrowers of
all amounts of guarantee fees paid by PEFCO to Ex-Im Bank. The
Indenture provides that no failure by PEFCO to pay the required
guarantee fee will affect Ex-Im Bank’s obligation under any
Guaranteed Importer Note subject to the lien of the Indenture.
Under the terms of a Guarantee Agreement, dated December 15,
1971, as amended, between PEFCO and Ex-Im Bank, due and
punctual payment of the principal of and interest on all foreign
importer notes (“Guaranteed Importer Notes”) evidencing loans
made by PEFCO with the approval of Ex-Im Bank will be fully
and unconditionally guaranteed by Ex-Im Bank. At its option,
PEFCO (or a trustee acting for the benefit of noteholders with
which PEFCO may pledge Guaranteed Importer Notes under
the Indenture, dated as of June 15, 1975, as supplemented and
amended (the “Indenture”), among PEFCO, Ex-Im Bank and The
Bank of New York Mellon, as Trustee (the “Trustee”)) may, after
an event of default under any loan agreement pursuant to which
PEFCO shall have acquired any Guaranteed Importer Note, elect
(i) to have Ex-Im Bank service such Guaranteed Importer Note
by continuing the payment of interest and principal in accordance
with the terms thereof or (ii) to accelerate the maturity of such
Guaranteed Importer Note and have Ex-Im Bank pay the entire
amount of such Guaranteed Importer Note plus accrued interest
to the date of payment. If PEFCO or the Trustee should exercise
the option described in clause (ii) of the preceding sentence, ExIm Bank has the right to substitute another Guaranteed Importer
Note with a yield to PEFCO at least equal to the yield on, and
with approximately the same remaining stated maturities as, the
Guaranteed Importer Note in default. The Indenture provides
that any Guaranteed Importer Note substituted by Ex-Im Bank
must have remaining stated maturities which, together with the
stated maturities of the other collateral then subject to the lien of
In September 2008, PEFCO entered into an agreement with
Ex-Im Bank pursuant to which certain loans purchased by PEFCO
that had been guaranteed by Ex-Im Bank under the Ex-Im Bank
Master Guarantee Agreement would be eligible to be approved
by Ex-Im Bank for coverage under the 1971 Guarantee Agreement
and, as a result, could then be eligible to be pledged as collateral
in connection with issuances of Secured Notes. PEFCO believes
that this new arrangement with Ex-Im Bank will help
expand its business.
18
1971 GUARANTEE AND
CREDIT AGREEMENT
PEFCO and not pledged to secure any other obligations of
PEFCO plus (ii) the aggregate amount which PEFCO can
call pursuant to subscription agreements with its shareowners
(see Note 8 of the Notes to PEFCO’s Consolidated Financial
Statements) to reimburse Ex-Im Bank for such payments.
Moreover, if PEFCO has net income in any subsequent semiannual period, it must apply the amount of such net income to
repay Ex-Im Bank for any unreimbursed payments made by Ex-Im
Bank under its guarantees of interest on PEFCO debt obligations.
Finally, any amounts paid by Ex-Im Bank p ursuant to its
guarantees of interest must be repaid by PEFCO within one year
after payment in full of the last maturing PEFCO debt obligation
on which interest is guaranteed by Ex-Im Bank. Amounts paid
by Ex-Im Bank under its guarantee of interest will bear interest
at the prevailing rate of interest charged by Ex-Im Bank on direct
loans made in the ordinary course of business on the date of
such payment by Ex-Im Bank. Such interest is to be payable
semiannually.
In 1971, in order to assist PEFCO in its objective of mobilizing
private capital to finance U.S. exports, Ex-Im Bank entered into
a Guarantee and Credit Agreement (the “Agreement”) with
PEFCO. Pursuant to the Agreement, among other things,
Ex-Im Bank agreed, when requested by PEFCO, to guarantee
the due and punctual payment of interest on debt obligations of
PEFCO approved for issuance by Ex-Im Bank, which currently
are PEFCO’s Secured Notes. The Agreement also provides that
Ex-Im Bank will make any required payments under its interest
guarantees directly to any trustee acting for the benefit of the
holders of debt obligations so guaranteed, that any claims Ex-Im
Bank may have against PEFCO for any payments made by Ex-Im
Bank under such guarantees will not be collected from assets
pledged to secure such obligations, unless and until the holders
thereof have been paid in full, and that Ex-Im Bank will enter into
an agreement with any such trustee to evidence the foregoing
understandings. The Indenture contains provisions of the nature
described in the foregoing sentence. A semi-annual guarantee
fee on the total interest accrued by PEFCO during the preceding
semi-annual period on securities on which interest payments have
been guaranteed by Ex-Im Bank is payable to Ex-Im Bank under
the Agreement. Such fee is computed at the rate of 1/4 of 1% on
the first $10,000,000 of such interest expense, 3/16 of 1% on the
next $10,000,000 of such interest expense and 1/8 of 1% on the
balance, if any, of such interest expense.
The Agreement gives Ex-Im Bank a broad measure of supervision
over PEFCO’s major financial management decisions. In
particular, the Agreement requires the approval of Ex-Im Bank
before PEFCO can issue certain debt obligations, make direct
loans guaranteed by Ex-Im Bank, purchase its long-term debt
obligations prior to their originally stated maturity date, invest
its s urplus funds in assets other than Ex-Im Bank approved
investments, declare or pay dividends on its capital stock, transfer
all or substantially all of its assets or engage in any business
other than the financing of exports of U.S. goods and services.
Additionally, the Agreement gives Ex-Im Bank the right to have
representatives present at all meetings of PEFCO’s Board of
Directors and the right to receive information as to PEFCO’s
budgets, financial condition and operating results.
If Ex-Im Bank makes any payments pursuant to its guarantees
of interest on PEFCO’s Secured Notes, the Agreement requires
PEFCO, if its net worth exceeds 25% of its paid-in and callable
capital, immediately to apply (i) cash and securities held by
In 1971
In 1971, in order to assist PEFCO in its objective of
mobilizing private capital to finance U.S. exports, Ex-Im
Bank entered into a Guarantee and Credit Agreement
(the “Agreement”) with PEFCO.
19
The Agreement, which, as originally executed, was scheduled
to terminate on December 31, 1995, has been extended by
agreement between Ex-Im Bank and PEFCO to December 31,
2020. PEFCO may also terminate the Agreement as of December
31 in any year on 60 days prior written notice if it is not indebted
to Ex-Im Bank at the time. No termination will affect any then
outstanding guarantees of Ex-Im Bank or PEFCO’s obligations
to pay the guarantee fee on, or to reimburse Ex-Im Bank for any
payment by it under, any such guarantee. Under the Agreement,
Ex-Im Bank has agreed that no failure by PEFCO to pay the
required guarantee fee will affect Ex-Im Bank’s obligations under
any outstanding guarantees and that Ex-Im Bank will not exercise
any right to terminate, cancel or rescind the Agreement so long
as any debt obligations of PEFCO are held by persons other than
Ex-Im Bank.
The Agreement provides that Ex-Im Bank will, if necessary to meet
its obligation, make payments which may be required under its
guarantee of interest on all notes outstanding under the Indenture,
and to the extent that funds are available in accordance with
Section 6 of the Export-Import Bank Act of 1945, as amended,
apply to the Secretary of the Treasury for a loan or loans in
amounts which, together with other funds available to Ex-Im Bank
for such purpose, shall be sufficient to make such payments.
Except for the Guarantee Agreement and the Guarantee and
Credit Agreement, PEFCO’s guarantees and insurance policies
with Ex-Im Bank have additional requirements that must be
observed in order to receive payment under the relevant
guarantee or policy.
Various other provisions governing the relationship between
Ex-Im Bank and PEFCO are contained in the Agreement, a copy
of which is on file and available for inspection during normal
business hours at the offices of PEFCO.
20
Management’s Discussion and Analysis
Operations
credit of the United States, or by purchasing from commercial
bank lenders participating interests in such obligations. PEFCO
finances these purchases through the sale of its own securities
to investors in private transactions. PEFCO also assists small
businesses in financing U.S. exports and provides support for
certain securitized, guaranteed financing facilities of Ex-Im Bank.
The following discussion should be read in conjunction with
PEFCO’s Consolidated Financial Statements and the Notes
thereto found elsewhere in this report.
PEFCO’s mission is to assist in the financing of U.S. exports
by mobilizing private capital as a supplement to the financing
already available through Ex-Im Bank, c ommercial banks and
other lending institutions. PEFCO accomplishes this objective
primarily by purchasing medium– and long–term debt
obligations issued by foreign importers of U.S. goods and services
which are g uaranteed or insured as to the timely payment of
principal and interest by Ex-Im Bank, or by other U.S. government
institutions whose obligations are backed by the full faith and
Since PEFCO’s creation, the volume of its export loan business
has been subject to the initiation of financing transactions
involving PEFCO by commercial banks and other lending
institutions (including the shareowners of PEFCO), the approval
by Ex-Im Bank of PEFCO’s participation in each such transaction,
the volume of U.S. exports, and the requirements and policies of
Ex-Im Bank with respect to the financing of those exports.
The following table is an analysis of net financing income (in thousands) for the years ended September 30,
2010
2009
Interest
Revenue
2008
Average
Balance
Average
Rate
Average
Balance
Average
Rate
$42,372 $2,389,000
2.83%
Interest
Revenue
Average
Balance
Average
Rate
Interest
Revenue
$2,374,000
1.79%
$ 67,507 $2,108,000
4.77%
$100,604
215,000
0.79%
1,688
301,000
2.30%
6,922
403,000
4.45%
17,947
Fixed-rate
906,000
2.26%
20,460
408,000
3.68%
Floating-rate
473,000
0.76%
3,587
516,000
2.12%
15,004
382,000
4.76%
18,174
10,940
455,000
4.24%
19,289
357,000
1.68%
5,991
415,000
2.85%
11,834
442,000
4.59%
20,302
66,000
1.50%
990
66,000
3.13%
2,065
20,000
4.99%
998
Long-Term
170,000
1.10%
1,875
186,000
2.68%
4,991
192,000
4.96%
9,518
Medium-Term
138,000
1.30%
1,795
184,000
2.25%
4,133
158,000
4.35%
6,871
4,699,000
1.68%
78,758
4,465,000
2.76%
123,396
4,160,000
4.66%
193,703
767,000
1.23%
9,416
554,000
2.00%
10,874
652,000
3.12%
20,351
$5,466,000
1.61%
88,174 $5,019,000
2.68%
134,270 $4,812,000
4.45%
214,054
Financing Revenue
Interest Income
Export loans guaranteed or
insured by Ex-Im Bank:
Primary Long-Term
Loan Program
Fixed-Rate
Floating-Rate
Secondary Long-Term
Loan Program
Short-Term &
Medium-Term Programs
Medium-Term
Working Capital &
Short-Term Insurance
Loans Insured by OPIC
Lending Activities
Investment Securities
Total
Commitment and prepayment fees
Financing Revenue
591
21,414
9,581
$88,765
$155,684
$223,635
21
The following table is an analysis of net financing income (in thousands) for the years ended September 30,
2010
2009
2008
Average
Balance
Average
Rate
Interest
Expense
Average
Balance
Average
Rate
Interest
Expense
Average
Balance
Average
Rate
Interest
Expense
Long-Term Notes
$3,590,000
1.91%
$68,553
$3,060,000
3.17%
$ 97,024
$2,798,000
4.75%
$132,937
Short-Term Notes
1,821,000
0.54%
9,763
1,948,000
1.18%
22,928
1,934,000
3.56%
68,944
$5,411,000
1.45%
$78,316
$5,008,000
2.40%
$119,952
$4,732,000
4.27%
$201,881
Financing Expense
Interest Expense
Total
Commitment and other fees
Financing Expense
Net Financing Income
3,933
2,505
1,623
82,249
122,457
203,504
$ 6,516
$ 33,227
$ 20,131
2010 Compared to 2009
Short Term-Insurance $66.0 million and 1.5% in 2010 compared
with $66.0 million and 3.13% in 2009.
PEFCO’s net income was $1.4 million in 2010 compared to net
income of $14.5 million in 2009. The decline in net income
was the result of decrease in margins, reduction of gains on
prepayment of loans, incremental gains on sale of security less
losses on sale of secured notes and sale of loans, and additional
fees paid on bank lines of credit as stated below.
The average balances and yields of loans insured by OPIC were:
Long-Term $170.0 million and 1.10% in 2010 compared with
$186.0 million and 2.68% in 2009.
Medium-Term $138.0 million and 1.30% in 2010 compared with
$184.0 million and 2.25% in 2009.
For the year ended September 30, 2010, financing revenue
decreased to $ 88.8 million from $155.7 million in 2009. The
primary reason for the decrease in financing revenue was the
decline in short-term and long-term interest rates. Short-term
interest rates (LIBOR) are the basis for pricing the floating-rate
portfolio while long-term interest rates (Treasury Notes) are the
basis for pricing the fixed-rate portfolio. The average balances and
yields in the Primary Long-Term Loan Program were:
The overall average balance of the lending portfolio was at
$4,699.0 million and 1.68% in 2010 compared with $4,465.0
million and 2.76% in 2009. PEFCO is using interest rate swaps
contracts designated as fair value hedges of certain fixed rate loans.
In 2010 the net interest expense of these contracts was $92.8
million ($ 58.9 million in 2009) and this amount was reported as
an adjustment to the interest income of fixed rate loans.
Fixed Rate- $2,374.0 million and 1.79% in 2010 compared to
$2,389.0 million and 2.83% in 2009.
The Investment Securities portfolio had an average balance of
$767.0 million and 1.23% in 2010 compared with $554.0 million
and 2.00% in 2009.
Floating Rate- $215.0 million and .79% in 2010 compared to $301
million and 2.30% in 2009.
Accumulated other comprehensive income (loss) decreased to
$(4.6) million, net of tax in 2010, compared to $(9.8) million net
of tax in 2009, as a result of market valuation adjustments to the
carrying value of investment securities, cash flow hedges, pension
and post retirement adjustments.
The average balances and yields in the Secondary Long-Term
Loan Program were:
Fixed Rate-$906.0 million and 2.26% in 2010 compared with
$408.0 million and 3.68% in 2009.
Commitments and prepayments were $591 thousand in 2010
compared to $21.4 million in 2009. The decrease was primarily
due to the receipt in 2009 of approximately $21.1 million
prepayment make-whole payments from one borrower which
prepaid the remaining balances of loans. It is PEFCO’s policy
to permit borrowers to prepay loans only if the borrower makes
PEFCO whole for the economic loss incurred as a result of
such prepayment.
Floating Rate-$473.0 million and .76% in 2010 compared with
$516.0 million and 2.12% in 2009.
The average balances and yields of the Small Business and
Medium –Term Program were:
Medium –Term $357.0 million and 1.68% in 2010 compared with
$415.0 million and 2.85% in 2009.
22
2009 Compared to 2008
For the year ended September 30, 2010, financing expense
decreased to $82.2 million from $122.5 million in 2009. The
decrease in short-term and long-term interest rates. Short-term
interest rates (Commercial Paper) are the basis for pricing the
short-term notes issued by PEFCO while long-term interest
rates (Treasury Notes) are the basis for pricing the long-term
notes issued by PEFCO. The average balance and effective cost
for Long-Term Notes was $3,590.0 million and 1.91% in 2010,
compared to $3,060.0 million and 3.17% in 2009.
PEFCO’s net income was $14.5 million in 2009 compared to
net income of $6.5 million in 2008. The increase in net income
was the result of an increase in margins, incremental gains on
prepayment of loans, gains on sale of securities less losses on sale
of secured notes and sale of loans, additional fees paid on bank
lines of credit and operating expenses as stated below.
For the year ended September 30, 2009, financing revenue
decrease in short-term and long–term interest rates. Short–term
interest rates (LIBOR) are the basis for pricing the floating-rate
portfolio while long-term interest rates (Treasury Notes) are the
basis for pricing the fixed-rate portfolio. The average balances and
yields in the Primary Long–Term Loan Program were:
PEFCO is using interest rate swap contracts designated as fair
value hedges for certain long term notes and interest rate swap
contracts designated as cash flow hedges of certain short term
notes. In 2010 the net interest income of the interest rate swaps
designated as fair value hedges was $96.8 million ($58.4 million
in 2009) and this amount was reported as an adjustment to the
interest expense of the long term notes. Furthermore the net
interest expense of the interest rate swaps designated as cash flow
hedges was $ 4.6 million in 2010 ($5.0 million in 2009) and this
amount was reported as an adjustment to the interest expense of
the short term notes.
Fixed Rate - $2,389.0 million and 2.83% in 2009 compared to
$2,108.0 million and 4.77% in 2008.
Floating Rate - $301 million and 3.68% in 2009 compared with
$403.0 million and 4.45% in 2008.
The average balances and yields in the Secondary Long-Term
Loan Program were:
The margin of the overall portfolio was at 16 basis points in 2010
(assets 1.61% less liabilities 1.45%) compared to 28 basis points
(assets 2.68% less liabilities 2.40%) in 2009.
Fixed Rate - $408.0 million and 3.68% in 2009 compared with
$382.0 million and 4.76% in 2008.
Commitments and other fees paid were $3.9 million in 2010
compared with $2.5 million in 2009, mainly due to fees paid on
liquidity back up lines of $1.3 million.
Floating Rate - $516.0 million and 2.12% in 2009 compared with
$455.0 million and 4.24% in 2008.
PEFCO’s net financing income was $6.5 million in 2010,
compared to $33.2 million in 2009.
The average balances and yields of the Small Business and
Medium–Term Program were:
In 2010 net securities transactions, which are the result of sales of
investment securities available for sale, resulted in a gain of $1.7
million and sales of investment securities held to maturity resulted
in a gain of $2.4 million. In 2009 sales of investment securities
available for sale resulted in a gain of $180 thousand and sales of
investment securities held to maturity resulted in a gain of
$438 thousand.
Medium–Term $415.0 million and 2.85% in 2009 compared with
$442.0 million and 4.59% in 2008.
Short Term–Insurance $66.0 million and 3.13% in 2009
compared with $20.0 million and 4.99% in 2008.
The average balances and yields of loans insured by OPIC were:
Long–Term $186.0 million and 2.68% in 2009 compared with
$192.0 million and 4.96% in 2008.
In 2010 PEFCO did not repurchase any of its long term secured
notes. However in 2009, PEFCO repurchased $33.9 million of its
long term secured notes at a loss of $2.4 million.
Medium–Term $184.0 million and 2.25% in 2009 compared with
$158.0 million and 4.35% in 2008.
General and administrative expenses were $8.7 million in 2010, as
The overall average balance of the lending portfolio was $4,465.0
million and a yield of 2.76% in 2009 compared with $4,160.0
million and 4.66% in 2008. PEFCO is using interest rate swaps
contracts designated as fair value hedges of certain fixed rate loans.
Provision for income tax decreased to $587 thousand in 2010
from $7.8 million in 2009. Non-taxable insurance proceeds
of $293 thousand received by PEFCO in 2010 resulted in the
reduction of the tax statutory rate from 34% to 30%. Net income
decreased to $1.4 million in 2010 from $14.5 million in 2009.
23
PEFCO’s net financing income was $33.2 million in 2009,
In 2009 the net interest expense of these contracts was $58.9
million ($13.8 million in 2008) and this amount was reported as
an adjustment to the interest income of fixed rate loans.
In 2009, net securities transactions, which are the result of sales
of investment securities, resulted in a gain of $618 thousand.
In 2008, sales of investment securities resulted in a gain of
$411 thousand.
The Investment Securities portfolio had an average balance of
$554 million and a yield of 2.00% in 2009 compared with $652.0
million and 3.12% in 2008.
In 2009, PEFCO repurchased $33.9 million of its long–term
Secured Notes at a loss of $2.4 million compared to repurchase of
$52.9 million in 2008 for a loss of $3.6 million.
Accumulated other comprehensive income (loss) increased to
($9.8) million, net of tax in 2009, compared to ($6.3) million,
net of tax in 2008, as a result of market valuation adjustments to
the carrying value of investment securities, cash flow hedges and
pension and post retirement adjustments.
General and administrative expenses were $8.8 million in 2009
as compared to $7.1 million in 2008. The increase in general
and administrative expenses was the result of an increase in
compensation of $647 thousand (mainly due to an increase in
staff ) and increase in benefits, $738 thousand (mainly due to
pension expense), an increase in administration expenses of $138
thousand, and an increase in professional fees of $189 thousand.
Commitments and prepayments increased in 2009 to $21.4
million from $9.6 million in 2008, primarily due to the receipt in
2009 of approximately $21.1 million prepayment make–whole
payments from one borrower which prepaid the remaining
balances of loans. It is PEFCO’s policy to permit borrowers to
prepay loans only if the borrower makes PEFCO whole for the
economic loss incurred as a result of such prepayment.
Provisions for income tax increased to $7.8 million in 2009 from
$3.3 million in 2008. The effective tax rate is 35.0%. Net income
increased to $14.5 million in 2009 from $6.5 million in 2008.
For the year ended September 30, 2009, financing expense
decrease in short–term and long–term interest rates. Short–term
interest rates (commercial paper) are the basis for pricing the
short–term notes issued by PEFCO while long–term interest
rates (Treasury Notes) are the basis for pricing the long–term
notes issued by PEFCO. The average balance and effective cost
for Long–Term Notes was $3,060.0 million and 3.17% in 2009,
compared to $2,798.0 million and 4.75% in 2008.
Liquidity and Capital Resources
The principal source of capital during the year were funds
generated from the issuance of PEFCO’s short term notes and
long term Secured Notes totaling $400 million.
As of September 30, 2010 PEFCO had approximately $5.8 billion
of total obligations, of which approximately $1.9 billion (33%) was
short term and $3.8 billion (66%) was long term. The long-term
debt, which includes portions due within one year, had amounts
maturing of $132 million in 2011, $400 million in 2012, $700
million in 2013, $ 0 million in 2014, $730 million in 2015, and
$1,500 million in 2016 and thereafter.
PEFCO is using interest rate swap contracts designated as fair
value hedges of certain long–term notes and interest rate swap
contracts designated as cash flow hedges of certain short–term
notes. In 2009, the interest income of the interest rate swaps
designated as fair value hedges was $58.4 million ($17.7 million
in 2008) and this amount was reported as an adjustment to the
interest expense of the long–term notes. Furthermore, the net
interest expense of the interest rate swaps designated as cash flow
hedges was $5.0 million in 2009 ($2.32 million in 2008) and this
amount was reported as an adjustment to the interest expense of
the short–term notes.
As of September 30, 2010, PEFCO had net shareowner’s equity of
$100.1 million, total capitalization (calculated as the sum of total
debt and net shareowner’s equity) of $5.9 billion and a total of
debt to capitalization ratio of 98.3%.
PEFCO entered in 2010 into a new one year $1 billion revolving
credit facility maturing in June 2011. PEFCO in 2010 issued a
three year $250 million credit facility expiring in June 2013. The
combination of the two facilities is an aggregate amount of $1.25
billion. The credit agreements contain a number of covenants,
including a negative pledge covenant and a covenant that PEFCO
will comply with its contractual commitments with Ex-Im Bank.
As of September 30, 2010, there were no amounts outstanding
under this credit facility.
The margin of the overall portfolio increased to 28 basis points
in 2009 (assets 2.68% less liabilities 2.40%) from 18 basis points
(assets 4.45%, liabilities 4.27%) in 2008.
Commitments and other fees paid were $2.5 million in 2009
compared with $1.6 million in 2008, mainly due to fees paid on
liquidity back up lines of $745 thousand.
24
Report of Independent Auditors
To the Board of Directors and Shareowners of Private Export Funding Corporation
In our opinion, the accompanying consolidated statements of financial condition and the related consolidated statements of o perations,
changes in shareowners’ equity and cash flows present fairly, in all material respects, the financial position of Private Export Funding
Corporation (the “Company”) and its subsidiary at September 30, 2010 and September 30, 2009, and the results of their operations and
their cash flows for each of the three years in the period ended September 30, 2010, in c onformity with accounting principles generally
accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our respon
sibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall financial statement p resentation. We believe that our
audits p rovide a reasonable basis for our opinion.
New York, New York
November 4, 2010
25
Consolidated Statements of Financial Condition
Assets (Amounts in thousands, except share amounts)
September 30, 2010
Cash
$
September 30, 2009
29,065
$
65,834
Repurchase Agreements
145,000
72,000
Investment securities available for sale
715,645
542,669
Investment securities held to maturity
—
79,148
83,011
81,354
Interest and fees receivable
Export loans guaranteed or insured by Ex-Im Bank
Loans insured by OPIC
Total lending
4,497,347
4,642,873
295,132
366,405
4,792,479
5,009,278
90,651
60,322
$5,855,851
$5,910,605
$1,814,941
$2,051,996
Interest payable
60,485
57,170
Accrued expenses and other liabilities
60,370
52,368
Long-term Collateralized Notes
42,000
42,000
Long-term Secured Notes
3,777,945
3,613,665
Total Liabilities
5,755,741
5,817,199
and 14,793 shares at September 30, 2010 and September 30, 2009 respectively
17,401
17,289
Retained earnings
87,347
85,956
Accumulated other comprehensive loss
(4,638)
(9,839)
Other assets and deferred charges
Total Assets
Liabilities and Shareowners’ Equity
Liabilities
Short-term notes
Shareowners’ Equity
Common stock-no par value; authorized 40,000 shares; outstanding 14,811 shares
Total Shareowners’ Equity
Total Liabilities and Shareowners’ Equity
See Notes to Consolidated Financial Statements
26
100,110
93,406
$5,855,851
$5,910,605
Consolidated Statements of Operations
Year Ended September 30,
Financing RevenuE (Amounts in thousands, except per share amounts)
2010
2009
2008
$88,174
$134,270
$214,054
591
21,414
9,581
88,765
155,684
223,635
(78,316)
(119,952)
(201,881)
(3,933)
(2,505)
(1,623)
(82,249)
(122,457)
(203,504)
Net financing income
6,516
33,227
20,131
Net securities gain
4,139
618
411
Interest
Commitment and prepayment fees
Total Financing Revenue
Financing Expense
Interest
Commitment and other fees
Total Financing Expense
Debt repurchases loss
—
(2,370)
Loss on sale of loans
—
(284)
General and administrative expenses
(3,636)
—
(8,677)
(8,805)
(7,093)
Income before income tax
1,978
22,386
9,813
Provision for income tax
(587)
(7,848)
(3,326)
Net Income
$ 1,391
$ 14,538
$ 6,487
$ 93.92
$ 982.76
$ 461.54
Net Income Per Share
Net Income
27
Consolidated Statements of Changes in Shareowners’ Equity
(Amounts in thousands, except share and per share amounts)
Common
Stock
Retained
Earnings
Balances at September 30, 2007
$14,189
$65,726
Accumulated
Other
Comprehensive
Loss
$(3,267)
Total
Shareowners’
Equity
$ 76,648
Comprehensive income:
Net income
6,487
6,487
Unrealized gains on investment securities – AFS
(Net of tax of $29)
51
51
Cashflow hedges loss
(Net of benefit of ($1,713))
(3,326)
(3,326)
Reclassification adjustment for net gains
included in net income
(Net of tax $277)
538
538
Pension and Post Retirement Adjustment
(Net of benefit of ($133))
(259)
Comprehensive income
(259)
3,491
Dividend declared ($25 per share)
(351)
14,189
71,862
(351)
(6,263)
79,788
Common Stock
738 shares issued
3,100
3,100
Net income
14,538
14,538
(Net of tax of $270)
502
502
(Net of benefit of ($1,745))
(3,241)
(3,241)
357
357
(1,194)
(1,194)
10,962
Dividend declared ($30 per share)
(444)
17,289
85,956
(444)
(9,839)
93,406
Common Stock
18 shares issued
112
112
Net income
1,391
1,391
(Net of tax of $3,152)
6,118
6,118
(1,828)
(1,828)
1,346
1,346
(435)
$17,401
(435)
6,592
28
$87,347
$(4,638)
$100,110
Consolidated Statements of Cash Flows
Year Ended September 30
Operating Activities (Amounts in thousands)
2010
Net Income
$
1,391
2009
$
14,538
2008
$
6,487
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization
(5,377)
4,988
Net gain on investment securities
(4,139)
(618)
(411)
—
(21,143)
(9,207)
—
2,370
3,636
(279)
(720)
Net gain on prepayment of loans
Debt repurchases loss
Deferred income tax benefit
(Increase) Decrease in interest and fees receivable
(1,657)
5,811
(3)
8,452
17,202
Increase (Decrease) in interest payable
3,314
706
Decrease in accrued expenses and other liabilities
1,008
3,002
759
317
—
—
Leasehold Incentives
Other, net
257
Net cash (used in) provided by operating activities
(66)
(3,706)
1,067
7,869
25,275
23,424,000
9,216,000
1,542,997
1,069,430
712,657
635,531
178,490
132,928
(5,165)
Investing Activities
Proceeds from maturities of repurchase agreements
Proceeds from maturities of investment securities
Proceeds from sales of investment securities
Investments in repurchase agreements
(23,497,000)
Purchases of investment securities
92,147
(9,288,000)
(1,535,997)
(1,325,254)
(969,890)
(630,027)
Principal collected on loans
1,078,410
1,509,036
1,064,459
Principal disbursed on loans
(740,667)
(2,001,002)
(1,188,033)
Investments in Leasehold Improvements
(431)
Net cash (used in) provided by investing activities
—
186,978
—
(688,271)
(18,923)
Financing Activities
Proceeds from issuance of short-term notes
Repayments of short-term notes
7,428,790
10,903,996
$10,531,872
(7,665,844)
(11,003,136)
(10,294,059)
(21,801)
(10,716)
400,418
996,216
480,422
(381,614)
(318,339)
(532,791)
Repayments and repurchases of long-term
Collateralized Notes
—
Proceeds from issuance of long-term Secured Notes
less issuance costs
Repurchases of long-term Secured Notes
Issuance of common stock
Dividends paid
Net cash (used in) provided by financing activities
(Decrease) increase in cash
Cash at beginning of year
Cash at end of year
112
3,100
—
(444)
(351)
—
(218,582)
559,685
174,728
(36,769)
(120,717)
181,080
65,834
186,551
5,471
$
29,065
$
65,834
$
186,551
Interest paid
$
168,759
$
171,702
$
215,292
Income taxes paid
$
750
$
8,000
$
3,389
Supplemental Disclosures
29
Notes to Consolidated Financial Statements
1. organization
3. Summary of Significant
Accounting Policies
Private Export Funding Corporation (“PEFCO”)
was incorporated on April 9, 1970 under Delaware law and
is principally engaged in making U.S. dollar loans to foreign
importers to finance purchases of goods and services of United
States m
anufacture or origin. PEFCO’s shareowners include most
of the major commercial banks involved in financing U.S. exports,
industrial companies involved in exporting U.S. products and
services, and financial services companies.
Basis of Presentation
The consolidated financial statements include the accounts
of PEFCO and its wholly owned subsidiary, PEFCO Finance
Corporation (“PFC”). These Consolidated financial statements
are prepared in accordance with accounting principles generally
accepted in the United States of America (“U.S. GAAP”).
Use of Estimates
The preparation of financial statements in conformity with U.S.
GAAP requires management to make estimates and assumptions
that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenue and
expenses during the period. Actual results could differ from
those estimates.
PEFCO was established with the support of the United States
Department of the Treasury and the Export-Import Bank
of the United States (“Ex-Im Bank”) to assist in the financing
of U.S. exports through the mobilization of private capital as a
supplement to the financing already available through Ex-Im Bank,
commercial banks and other lending institutions. Ex-Im Bank has
cooperated in the operation of PEFCO through
various agreements.
Cash
Cash consists of deposits held at banks and highly liquid money
market account balances.
Since all loans made by PEFCO are guaranteed or insured as to
the due and punctual payment of principal and interest by Ex-Im
Bank or other U.S. government institutions, such as the Overseas
Private Investment Corporation (“OPIC”), whose obligations are
backed by the full faith and credit of the United States, PEFCO
relies upon this U.S. government support and does not make
evaluations of credit risks, appraisals of economic conditions in
foreign countries, or reviews of other factors in making its loans.
Securities Purchased Under Agreement to Resell
PEFCO has agreed to purchase securities from financial
institutions, subject to the seller’s agreement to repurchase them
at an agreed-upon time and place (“repurchase agreements”). The
financial institutions with which PEFCO enters into repurchase
agreements are banks which PEFCO considers credit worthy. The
sellers under a repurchase agreement are required to maintain
the value of the securities as collateral subject to the agreement,
at no less than the repurchase price plus accrued interest. Default
by or bankruptcy of the seller would, however, expose PEFCO
to possible loss because of adverse market action or delays in
connection with the disposition of the underlying securities.
2. Agreements with Ex-Im Bank
PEFCO has agreements with Ex-Im Bank which provide that
Ex-Im Bank will:
1. g uarantee the due and punctual payment of principal and
interest on all export loans made by PEFCO; and
Investment Securities
Investment securities that PEFCO has the positive intent and
ability to hold to maturity are classified as securities held to
maturity and recorded at amortized cost.
2. g uarantee the due and punctual payment of interest on
PEFCO’s long-term Secured Notes in return for a fee paid
by PEFCO.
Under its agreements with PEFCO, Ex-Im Bank retains
a broad measure of supervision over PEFCO’s major financial
management decisions. The approval of Ex-Im Bank is required
on the terms of PEFCO’s individual loan commitments and on
the terms of PEFCO’s long-term debt issues. Surplus funds may
be invested only in Ex-Im Bank-approved types of assets. Ex-Im
Bank is entitled to r epresentation at all meetings of PEFCO’s
Board of Directors, Advisory Board, and Exporters’ Council.
PEFCO furnishes Ex-Im Bank with full information as to budgets,
financial condition, and operating results.
Investment securities that may be sold in response to changes
in market interest rates, needs for liquidity, changes in funding
sources and terms or other factors are classified as securities
available for sale. These securities are carried at fair value with
unrealized gains and losses, net of income taxes, reported as a
component of accumulated other comprehensive income (loss).
The classification is determined at the time each security is acquired.
At each reporting date, the appropriateness of the classification
is reassessed.
30
Derivative financial instruments are recorded in the balance sheet
as either an asset or liability measured at fair value. If the derivative
is designated as a fair value hedge, the changes in fair value of
the derivative and the hedged item are recognized in earnings. If
the derivative is designated as a cash flow hedge, changes in the
fair value of the derivative are recorded in other comprehensive
income (loss) and are recognized in the income statement when
the hedged item affects earnings.
Interest income on investment securities, including amortization of
premiums and accretion of discounts, is recognized when earned
using the interest method. Security transactions are accounted for as
the date these securities are purchased or sold (trade date). Realized
gains and losses are reported on an identified cost basis (FIFO).
Loans, Interest and Fees
Loans are reported at their principal amounts outstanding.
Interest income is recognized when earned using the interest
method. Fees are received from securitization support
transactions and from the u ndisbursed balances of loan
commitments. Fee income is recognized over the period the
service is provided. A borrower may cancel all or any portion
of an unused fixed-rate loan commitment or prepay a fixedrate loan by paying PEFCO a fee equal to the p resent value of
the reinvestment loss, if any, incurred by PEFCO. Cancellation
and prepayment fees are recorded as income by PEFCO
upon receipt.
PEFCO formally documents all relationships between hedging
instruments and hedged items. Also, PEFCO formally assesses
whether the derivatives used in hedging transactions have been
highly effective in offsetting changes in the fair value or cash flows
of hedged items and whether those derivatives may be expected to
remain highly effective in future periods.
PEFCO adopted amended accounting principles related to
disclosures about derivative instruments and hedging activities
as of October 1, 2008. This amendment is intended to improve
financial reporting about derivative instruments and hedging
activities by requiring enhanced disclosures to enable investors to
better understand their effects on the entity’s financial position,
financial performance, and cash flows.
Other Assets and Deferred Charges
Debt issuance costs incurred in connection with the issuance of
long-term debt are deferred and amortized to interest expense
straight–line over the life of each issue.
Fair Value Measurement
PEFCO adopted fair value measurements as of October 1,
2008. This guidance defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair value
measurements. This guidance clarifies that the term fair value is
intended to mean a market-based measure, not an entity-specific
measure. In measuring fair value for a financial statement item,
the guidance sets forth a fair value hierarchy that prioritizes the
inputs to valuation techniques used to measure fair value into three
broad levels. The highest priority is given to quoted prices in active
markets and the lowest priority to unobservable inputs. Additional
disclosure requirements are required for the lowest priority level. At
PEFCO fair value measurement is calculated using prices from data
providers and dealers.
Equipment and leasehold improvements are carried at cost
less accumulated depreciation and amortization. Depreciation
and amortization are computed using the straight-line method
over the estimated u seful life of the owned asset and, for leasehold
improvements, over the estimated useful life of the improvement
or the lease term, whichever is shorter.
Derivative Financial Instruments
In connection with PEFCO’s asset/liability management process,
the purpose of which is to manage and control the sensitivity of
PEFCO’s earnings to changes in market interest rates, PEFCO
may enter into derivative financial instruments including interest
rate swap contracts that are designated as hedges of specific assets
or groups of similar assets or similar liabilities and anticipated
debt issuance transactions. Interest rate swaps are transactions in
which two parties agree to exchange, at specified intervals, interest
payment streams calculated on an agreed-upon notional amount
with at least one stream based on a specified floating-rate index.
The credit risk inherent in interest rate swaps arises from the
potential inability of counterparties to meet the terms of
their contracts.
Dividends and Distribution to Shareowners
Dividends and distributions to shareowners are recorded on the
ex–dividend date.
31
Income Taxes
Income taxes are recorded based on the provisions of enacted tax
laws, including the tax rates in effect for current and future years.
Net deferred tax assets are recognized to the extent that it is more
likely than not that these future benefits will be realized.
Accounting Standards Update 2010-11, Scope Exception Related
to Embedded Credit Derivatives (Topic 815)
Issue Date: March 2010
Clarifies that the only exception to the requirement that an
embedded credit derivative feature should be assessed for
potential bifurcation and separate accounting applies to the
transfer of credit risk in the form of subordination of one financial
instrument to another. In addition, this update provides guidance
for determining whether other credit derivatives features qualify
for the scope exception. The amendments in this update are
effective at the beginning of the fiscal quarter beginning after
June 15, 2010. Early adoption is permitted at the beginning of
each entity’s first quarter beginning after issuance of this update.
Adoption of this standard did not have a material impact on
PEFCO’s consolidated financial statements.
The Company adopted FASB guidance which addresses the
recognition and measurement of tax positions taken or expected
to be taken and guidance on derecognition, and classification,
of interest and penalties as of October 1, 2010. A tax position is
recognized as a benefit only if it is “more likely than not” that the
tax position would be sustained in a tax examination, with a tax
examination being presumed to occur. The amount recognized
is the largest amount of tax benefit that is greater than 50% likely
of being realized on examination. For tax positions not meeting
the “more likely than not” test, no tax benefit is recorded. The
adoption has no material effect on the Company’s financial
statements.
Accounting Standards Update 2010-18, effect of a Loan
Modification when the Loan Is Part of a Pool That Is Accounted
for as a Single asset (Topic 310)
Recently Issued Accounting Pronouncements
Accounting Standards Update 2010-01, Accounting for
Distribution to Shareholders with Components of Stock
and Cash
Issue Date: July 2010
Provides guidance concerning whether an individual loan that
is part of a pool of loans accounted for as a single asset should
be removed from the pool upon modifications that would
otherwise qualify as a troubled debt restructuring. The guidance
in this update is effective (and applied prospectively) for any
modification of a loan accounted for within a pool occurring in
interim or annual periods beginning on or after July 15, 2010, with
earlier application permitted. Upon adoption, a one-time election
may be made to terminate prospectively (on a pool-by-pool basis)
accounting for loans as a pool; note, though, that such an election
does not preclude accounting for future loan acquisitions as a
pooled unit of accounting. Adoption of this standard will not have
a material impact on PEFCO’s consolidated financial statements.
Issued Date: January 2010
These amendments clarify that the stock portion of a distribution
to shareholders, which allows them to elect to receive cash or
stock with a potential limitation on the total amount of cash that
all shareholders can elect to receive in the aggregate, is considered
a share issuance, will be reflected in EPS prospectively and is not
a stock dividend for purposes of applying Topics 505 and 260
(Equity and Earnings Per Share). These amendments are effective
for interim and annual periods ending on or after December 15,
2009, and should be applied on a retrospective basis. Adoption
of this standard did not have a material impact on PEFCO’s
consolidated financial statements.
Accounting Standards Update 2010-06, Fair Value Measurements
and Disclosures (Topic 820)
Issue Date: January 2010
This update enhances disclosures about (1) different classes
of assets and liabilities measured at fair value, (2) valuation
techniques and inputs used, (3) transfers between Levels 1, 2, and
3, and (4) activity in Level 3 fair value measurements. Disclosure
of activity in Level 3 fair value measurements is effective for fiscal
years and interim periods beginning after December 15, 2010.
Adoption of this standard will not have a material impact on
PEFCO’s consolidated financial statements.
32
4. Investment Securities
September 30, 2010 (000’s)
Amortized
Cost
Available for Sale
U.S. Treasury Securities
Maturity in one year or less
$334,665
U.S. Guaranteed Securities
Maturity in one year or less(c)
Gross
Unrealized
Gains
$
Gross
Unrealized
Losses
6
$
1
Fair
Value(a)
Average
Yield(b)
$334,670
0.25%
45,031
728
29
45,730
3.08%
Maturity after one year through five years(c)
245,845
8,794
181
254,458
2.66%
Maturity after five years through ten years
73,058
1,907
38
74,927
2.21%
5,673
38
104
5,607
1.08%
173
100
20
253
—
$704,445
$11,573
$ 373
$715,645
1.48%
(c)
Maturity after ten years(c)
Equity Securities
Total Available for Sale Securities
September 30, 2009 (000’s)
Available for Sale
Maturity in one year or less
Maturity in one year or less(c)
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
$311,931
$ 32
—
Fair
Value(a)
Average
Yield(b)
$311,963
0.26%
4.25%
30,042
447
—
30,489
Maturity after one year through five years(c)
173,577
679
1,253
173,003
3.75%
Maturity after five years through ten years(c)
22,976
216
136
23,056
4.21%
4,083
—
149
3,934
3.26%
175
68
20
224
—
$542,784
$1,442
$1,558
$542,669
1.78%
Maturity after ten years(c)
Equity Securities
Total Available for Sale Securities
There were no investment securities in the Held to Maturity
category at September 30, 2010.
September 30, 2009 (000’s)
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Maturity after one year through five years
$79,148
$2,253
$0
$81,401
4.11%
Total Held to Maturity Securities
$79,148
$2,253
$0
$81,401
4.11%
Held to Maturity
Fair
Value(a)
Average
Yield(b)
(a) The fair value of PEFCO’s portfolio of investment securities is based on independent dealer quotations.
(b) The average yield is based on effective rates on carrying values at the end of the year.
(c) The weighted average term has been used for U.S. Guaranteed Securities that have scheduled payments through final maturity.
33
Cash proceeds from the sales of available for sale securities during
2010, 2009, and 2008 were $102.9 million, $33.2 million, and $92.1
million respectively. Net gains from available for sale securities sold in
2010 amounted to $1.7 million (gross gains of $1.7 million and gross
losses of $1 thousand). Net gains from available for sale securities
sold in 2009 amounted to $180 thousand (gross gains of $194
thousand and gross losses of $14 thousand). Net gains from available
for sale securities sold in 2008 amounted to $411 thousand (gross
gains of $413 thousand and gross losses of $2 thousand).
The following table provides the gross unrealized losses and fair
value, aggregated by investment category and length of time the
individual securities have been in a continuous unrealized loss
position, at September 30, 2010:
Cash proceeds from the sales of held to maturity securities during
2010 and 2009 were $80 million and $100.4 million respectively.
Gross gains from held to maturity securities sold in 2010
amounted to $2.4 million. Gross gains from held to maturity
securities sold in 2009 amounted to $438 thousand. There were
no sales of held to maturity securities in 2008.
12 months
or more (000’s)
Fair Unrealized
Value
Losses
Fair Unrealized
Value
Losses
$204,990
$1
-
-
$14,474
88
$51,276
$284
$219,464
$89
$51,276
$284
Total temporary
impaired securities
Less Than
12 months (000’s)
These investment securities are U.S. Guaranteed Securities.
The unrealized losses on these investments resulted from the
movement in the yield curve and are not credit related. PEFCO
has the ability and intent to hold these investments for a period
of time sufficient to collect all amounts due according to the
contractual terms of the investments.
Securities purchased under agreements to resell averaged
approximately $94.8 million in 2010 and 38.9 million in 2009
($7.8 million in 2008). The average yield on repurchase
agreements for the year ended September 30, 2010 was .07% and
.06% in 2009 (2.27% in 2008). In 2010, maturities ranged from
one to five days.
5. Lending Programs
Loans outstanding at September 30, 2010, and related undisbursed commitments are classified as follows:
Outstanding Loans (000’s)
Direct & Secondary Long-Term Loan Programs
Fixed-rate
Floating-rate
Amount
Undisbursed Commitments (000’s)
Average Rate
Amount
$3,240,427
582,830(a)
4.67%
$ 793,335(b)
452,038(c)
64,967
342,009(c)
$4,230,233
4.89%
26,293(b)
376,990(c)
$1,648,656
Short-Term & Medium-Term Loan Programs
Fixed-rate
Floating-rate
Long-Term Floating Rate
Medium-Term Fixed Rate
Medium-Term Floating Rate
Total
159,650(c) (d)
7,583(d)
127,899(c) (d)
5.78%
56,192(c) (d)
$ 295,132
$
56,192
$4,525,365
$1,704,848
(a) The base interest rate on $201,949 is the 90-day London Interbank Offered Rate (“LIBOR”). The base rate on $380,881 is the 180-Day LIBOR
(b) The interest rate will be determined upon pricing (Direct and Secondary) / disbursement (Small Business & Medium Term)
(c) The base interest rate is the 180-Day LIBOR
(d) These transactions are unconditionally guaranteed by the sovereign governments involved and are fully insured by OPIC against the non honoring
of such sovereign guarantees.
34
Outstanding loans are scheduled for repayment at September 30, 2010 as follows:
(in 000’s of USD)
Outstanding loans are scheduled for repayment at September 30, 2009 as follows:
(in 000’s of USD)
2011
$ 832,110
2010
$ 830,982
2012
641,972
2011
696,189
2013
577,079
2012
584,510
2014
466,354
2013
499,427
406,557
2014
2015
2016 and thereafter
1,601,293
390,116
2015 and thereafter
Total before Fair Value Hedge Adjustment
1,861,884
Total before Fair Value Hedge Adjustment
and Unamortized Discount
$4,525,365
and Unamortized Premium
$4,863,108
Fair Value Hedge Adjustment
267,255
146,209
Unamortized Discount
Total Carrying Value
(141)
Unamortized Premium
$4,792,479
(39)
$5,009,278
Loans outstanding at September 30, 2009, and related undisbursed commitments are classified as follows:
Outstanding Loans (000’s)
Direct & Secondary Long-Term Loan Programs
Fixed-rate
Floating-rate
Amount
Average Rate
Undisbursed Commitments (000’s)
Amount
$3,237,327
789,091(a)
4.82%
$729,390(b)
40,124(c)
50,803
419,482(c)
4.34%
52,508(b)
65,428(c)
Short-Term & Medium-Term Loan Programs
Fixed-rate
Floating-rate
$4,496,703
$887,450
Long-Term Floating Rate
180,150(c) (d)
Medium-Term Fixed Rate
Medium-Term Floating Rate
7,800(d)
178,455(c) (d)
Total
5.78%
26,330(c) (d)
$ 366,405
$ 26,330
$4,863,108
$913,780
(a) The base interest rate on $220,950 is the 90-day London Interbank Offered Rate (“LIBOR”). The base rate on $568,141 is the 180-Day LIBOR
(b) The interest rate will be determined upon pricing (Direct and Secondary) / disbursement (Small Business & Medium Term)
(c) The base interest rate is the 180-Day LIBOR
(d) These transactions are unconditionally guaranteed by the sovereign governments involved and are fully insured by OPIC against the non honoring
of such sovereign guarantees.
6. Short-Term Notes
Under the liquidity support program, PEFCO supports both
medium- and long-term U.S. Agency-guaranteed financing
facilities by providing liquidity support during the waiting period
prior to payment by the agency under its guarantee and by funding
interim notes until securitization of the agency-guaranteed debt is
effected. PEFCO’s liquidity support advance, if any, will be repaid
and is secured by the agency’s guarantee and, in certain instances,
by deposits held by a trustee. As of September 30, 2010, PEFCO
supported one transaction amounting to $43 million in agencyguaranteed financing facilities. PEFCO’s maximum e xposure to
advance funds in its support of these t ransactions on any given day
was $5 million.
At September 30, 2010, PEFCO’s short-term notes consisted of
commercial paper in the amount of $1.8 billion. Commercial
paper is generally issued in amounts not less than $100,000 and
with maturities of 270 days or less.
Short-term notes averaged approximately $1.8 billion in 2010
($1.9 billion in 2009), with an average interest rate of .29% in
2010 (.92% in 2009). At September 30, 2010, the cost of the
commercial paper after adjusting for the impact of the interest rate
swaps (cash flow hedges) is .54% (1.18% at September 30, 2009).
35
PEFCO has in place two syndicated revolving credit facilities with
13 banks, of which nine are shareowners, split between a three
year $250 million facility, and a 364 day facility for $1 billion. At
September 30, 2010, there were no amounts outstanding under
any facility.
Remaining Maturities of long-term Secured Notes at September 30, 2009 are
as follows: (000’s of USD)
7. Long-Term Secured Notes
400,000
2013
700,005
2014
0
2015
2016 and thereafter
Total Outstanding Principal Amount
Unamortized Premium
132,445
2012
400,000
2013
700,005
Total Outstanding Principal Amount
0
1,830,000
$3,444,064
155,787
13,814
$3,613,655
In 2010, PEFCO had no repurchases. For comparison, there
were repurchases of $13.9 million in 2009 at a premium for an
aggregate loss of $569 thousand and repurchases of $42.9 million
in 2008, at a premium for an aggregate loss of $2.9 million.
As noted above, the principal cash flows arising from the collateral
pool backing each Secured Note series must mature before the
due date when the Secured Note principal is due. The principal
cash flows are segregated between designated installments
(pledged in the trust against existing Secured Note issuances)
and free installments (pledged in the Trust arrangement but not
designated currently against any existing Secured Note issuances).
Designated installments in excess of a Secured Note principal
redemption are available to back the next scheduled Secured Note
redemption. Free installments are available collateral for pledging
against future Secured Note issuance, or transferring out of the
trust if held as current cash.
The pledged collateral backing the Secured Notes consists of
$3,247 million in foreign importer notes backed by the 1971
Guarantee and $365 million in U.S. Treasuries and other U.S.
Government guaranteed securities. Total pledged assets including
cash are $3,634 million against the balance of Secured Notes
outstanding of $3,462 million. For designated installments at
September 30, 2010, the amount of principal installments in
excess of Secured Note principal redemption amounted to $19
million. For free installments at September 30, 2010, principal
installments available after May 1, 2020 amount to $153 million.
Remaining Maturities of long-term Secured Notes at September 30, 2010 are
as follows: (000’s of USD)
2012
2011
2015 and thereafter
In 2010, PEFCO issued $400 million of Secured Notes. The
average balance of long-term Secured Notes was approximately
$3,548 million in 2010 ($3,010 million in 2009), and the average
interest cost for the year ended September 30, 2010 was 4.64%
(5.10% in 2009). A summary of the Secured Note maturities
appears below.
$ 132,445
$ 381,614
2014
Secured Notes typically have original maturities of five years or
longer and are sold through underwriters. Lead underwriters
are often also shareowners of PEFCO. The principal of all
Secured Notes is fully backed by collateral assets held in a trust
arrangement residing on the books of Private Export Funding
Corporation. Collateral assets include U.S. Treasury Securities
or other obligations unconditionally guaranteed or fully insured
by the United States or agencies or instrumentalities of the
United States, and foreign importer notes supported directly by
export loan guarantees by Ex-Im Bank under the 1971 Guarantee
Agreement. The securities and notes are assigned to, and held
by, The Bank of New York Mellon (a shareowner of PEFCO),
as Trustee. The collateral includes scheduled maturities which
ensure that, before the date on which payment of principal of each
Secured Note is due, the Trustee will have cash from maturing
collateral sufficient to pay the principal of the Secured Notes.
Payment of interest on the Secured Notes is fully guaranteed by
Ex-Im Bank in return for a fee paid by PEFCO, which is expensed
as incurred.
2011
2010
730,000
1,500,000
$3,462,450
305,515
14,667
(4,687)
$3,777,945
36
Long-term Secured Notes outstanding as of September 30, 2010 (in thousands USD):
Original
Principal
Amount
Principal
Amount
9/30/10
Series O
$ 150,000
$ 132,445
6.07%
Series V
150,000
150,000
4.90%
Issue
Designation
Coupon
Rate(b)
Maturity
Schedule
Designated
Collateral
Installments
6.07%
Apr-11
3.97%
Dec-11
Effective
Rate(a)(b)
As a % of
Principal
9/30/10
Principal
Due Within
One Year
$495,921
374%
$132,445
707,043
471%
—
Series P
250,000
250,000
5.69%
5.47%
May-12
713,730
285%
—
Series Y
450,000
450,000
3.55%
3.47%
Apr-13
852,694
189%
—
Series R
300,000
250,005
4.97%
4.80%
Aug-13
520,415
208%
—
Series AA
400,000
400,000
3.05%
3.07%
Oct-14
677,156
169%
—
Series T
330,000
330,000
4.55%
4.47%
May-15
455,084
138%
—
Series U
350,000
350,000
4.95%
4.61%
Nov-15
361,207
103%
—
Series W
100,000
100,000
5.00%
5.01%
Dec-16
331,602
332%
—
Series X
250,000
250,000
5.45%
5.47%
Sep-17
439,223
176%
—
Series Z
400,000
400,000
4.38%
4.43%
Mar-19
573,258
143%
—
Series BB
400,000
400,000
4.30%
4.29%
Dec-21
418,907
105%
—
$3,530,000
$3,462,450
4.50%
4.39%
(a)
(b)
$132,445
Forward gains and losses and original issue discounts are reflected in the effective interest rate.
Weighted average
Long-term Secured Notes outstanding as of September 30, 2009 (in thousands USD):
Issue
Designation
Series I
Original
Principal
Amount
Principal
Amount
9/30/09
Coupon
Rate(b)
Effective
Rate(a)(b)
Maturity
Schedule
Designated
Collateral
Installments
As a % of
Principal
9/30/09
Principal
Due Within
One Year
$ 200,000
$ 181,614
7.20%
7.21%
Jan-10
$470,619
259%
$181,614
200,000
Series K
200,000
200,000
7.25%
7.26%
Jun-10
510,174
255%
Series O
150,000
132,445
6.07%
6.07%
Apr-11
666,750
503%
—
Series V
150,000
150,000
4.90%
3.97%
Dec-11
852,759
569%
—
Series P
250,000
250,000
5.69%
5.47%
May-12
839,085
336%
—
Series Y
450,000
450,000
3.55%
3.47%
Apr-13
952,829
212%
—
Series R
300,000
250,005
4.97%
4.80%
Aug-13
606,177
242%
—
Series AA
400,000
400,000
3.05%
3.07%
Oct-14
750,974
188%
—
Series T
330,000
330,000
4.55%
4.47%
May-15
505,202
153%
—
Series U
350,000
350,000
4.95%
4.61%
Nov-15
360,865
103%
—
Series W
100,000
100,000
5.00%
5.01%
Dec-16
302,480
302%
—
Series X
250,000
250,000
5.45%
5.47%
Sep-17
386,192
154%
—
Mar-19
418,218
105%
Series Z
(a)
(b)
400,000
400,000
4.38%
4.43%
$3,530,000
$3,444,064
5.17%
4.72%
—
$381,614
Weighted average
37
8. Long-Term
PFC’s long-term Collateralized Notes are not debt obligations
of PEFCO and are not guaranteed by Ex-Im Bank. The
Collateralized Notes are separate and distinct from the Secured
Notes and are issued pursuant to a separate indenture. The principal of and interest on the long-term Collateralized Notes
are fully secured by foreign importer notes related to export loans
guaranteed by Ex-Im Bank and U.S. Treasury Securities, which
are assigned to, and held by, The Bank of New York Mellon (a
shareowner of PEFCO), as Trustee. The scheduled m
aturities
of this collateral ensure that before the date on which p ayments
of principal and interest on the Collateralized Notes are due, the
Trustee will have sufficient cash to pay such amounts due.
An election had been made by PFC to treat itself as a financial
asset securitization investment trust (“FASIT”) for U.S. federal
income tax purposes. Under enacted tax legislation, the FASIT
rules were repealed. Under the transition rules provided, any
Collateralized Notes issued by PFC before October 22, 2004
will continue to qualify as regular interests in PFC, as long as they
remain outstanding in accordance with their original terms. PFC,
however, may not issue any additional Collateralized Notes.
Long-term Collateralized Notes outstanding at September 30, 2010 (in thousands USD):
Issue
Designation
Original
Principal
Amount
Principal
Amount
9/30/10
Coupon
Rate
Series 2001-1
$100,000
$42,000
5.66%
(a)
Effective
Interest
Rate(a)
Maturity
Schedule
5.66% September 2011
In 2010, there were no long-term Collateralized Notes repurchases. In 2009, $20 million of PFC’s long-term Collateralized Notes were
repurchased at a premium for an aggregate loss of $1.8 million. In 2008, $10 million of PFC’s long-term Collateralized Notes were
repurchased at a premium for an aggregate loss of $716 thousand.
Long-term Collateralized Notes outstanding at September 30, 2009 (in thousands USD):
Issue
Designation
Original
Principal
Amount
Principal
Amount
9/30/09
Coupon
Rate
Series 2001-1
$100,000
$42,000
5.66%
(a)
Effective
Interest
Rate(a)
Maturity
Schedule
5.66% September 2011
9. Shareowners’ Equity
Each share of common stock outstanding is subject to an
additional assessment of $1,000 upon call by the Board of
Directors. Net income per share of $93.92 has been calculated
based on 14,811 shares o utstanding.
equity of PEFCO, after giving effect to such dividend, is
maintained at a minimum of $55 million (excluding the impact
on shareowners’ equity of market value accounting for investment
securities and for cash flow hedges); (ii) PEFCO maintains, after
giving effect to such dividend, a leverage ratio of guaranteed assets
to shareowners’ equity not in excess of 75 to 1; and (iii) PEFCO
maintains a guideline that permits fixed-rate export loan offers
outstanding at any one time to aggregate at least $500 m
illion.
The Board of Directors voted not to declare a dividend for the
fiscal year ending September 30, 2010. As of September 30, 2010,
dividends comprised 63% of cumulative net income, shareowners’
equity excluding accumulated other comprehensive income (loss)
was approximately $105 million, leverage was 43 to 1 and the
maximum fixed-rate export loan offer guideline was $700 million.
During the year PEFCO sold to UPS Capital Business Credit, a
current shareowner, 18 shares of PEFCO’s common shares for
112 thousand. In 2009 PEFCO sold to an affiliate of Natixis S.A.,
a French bank, 738 shares of PEFCO’s common shares for
$3.1 million.
Under an agreement with Ex-Im Bank effective October 1, 2007,
PEFCO has approval to declare or pay dividends of up to 50% of
annual net income, subject to the following: (i) the shareowners’
38
10. Income Taxes
The provision for income taxes is as follows for the years ended September 30,
2010
2009
2008
Federal-current
641
7,952
3,195
Federal-deferred
(54)
(104)
587
7,848
$3,326
2010
2009
2008
Tax at statutory rate
34.0%
35.0%
34.0%
Effective income tax rate
29.7%
35.0%
34.0%
131
A reconciliation from the U.S. Federal statutory tax rate to the
effective income tax rate is as follows for the years ended September 30,
plan and ($3,385) thousand for the non-qualified plan. The
estimated net loss and prior service costs for the qualified plan
that will be amortized from accumulated other comprehensive
income into the net periodic pension cost over the next fiscal year
is $77 thousand and $22 thousand, respectively. The estimated
net loss and prior service costs for the nonqualified plan that will
be amortized from accumulated other comprehensive income
into the net periodic pension cost over the next fiscal year is
$35 thousand and ($4) thousand respectively. The employer
contributions for the qualified plan were $457 thousand in 2010
($517 thousand in 2009). The PBO is based on a discount rate of
5.16%. Pension expense for the qualified plan was $457 thousand
in 2010 ($267 thousand in 2009). Pension expense for the
nonqualified plan was $371 thousand in 2010 ($597 thousand
in 2009).
Included in other assets and deferred charges at September 30,
2010 is a deferred tax asset of $3,984 thousand ($6,608 thousand
in 2009). The deferred tax asset consists of unrealized losses
on cash flow hedges, unrealized losses on investments, and
future tax benefits regarding certain employee benefits. PEFCO
determined that, as it was more likely than not that such deferred
tax asset would be r ealized in the future, no valuation allowance
was required as of September 30, 2010 and 2009. Non-taxable
life insurance proceeds of $293 thousand received by PEFCO in
2010 resulted in the reduction of the tax statutory rate from 34%
to 29.7%.
The Company has not recorded any uncertain tax positions
as of September 30, 2010. The Company does not expect its
unrecognized tax liability balance to change significantly in the
next 12 months.
11. Employee Benefit Plans
PEFCO has a funded, noncontributory qualified defined benefit
pension plan covering all full-time employees and an unfunded,
noncontributory, nonqualified pension plan which provides
defined pension benefits to certain employees. Pension benefits
are based p rimarily upon the participants’ compensation and
years of credited service. The measurement date of both plans is
September 30, 2010. At this date, the fair value of the qualified
plan’s assets was $4,330 thousand. The projected benefit
obligation (“PBO”) was $5,495 thousand for the qualified plan
and $3,385 thousand for the nonqualified plan. The funded status
at September 30, 2010 was ($1,166) thousand for the qualified
39
present value of PEFCO’s capital, which is the acceptable specified
limit authorized by PEFCO’s Board of Directors.
The plan assets are currently invested in a balanced fund. The
asset allocation of the balanced fund consists of approximately
70% in equity securities and approximately 30% in debt securities.
At September 30, 2010 all plan assets were invested in Level I asset
classes. The funding objectives of the pension plan are to achieve
and maintain plan assets adequate to cover the accumulated
benefit obligation and to provide competitive investment returns
and reasonable risk levels when measured against appropriate
benchmarks. The expected long-term rate of return on plan assets
was 7% at September 30, 2010 (7.50% at September 30, 2009)
and will be adjusted annually to take into account changes in
historical returns on the appropriate indices and any changes in
the plan’s investment allocation strategies.
Derivatives Instruments designated as hedges
(in thousands)
Interest Rate Swaps
Fair Value Hedge
Cash Flow Hedge
Total
2010
Credit Exposure
2009
2010
2009
$5,367,329 $4,992,918
$305,515
$174,393
90,000
0
0
$5,457,329 $5,082,918
$305,515
$174,393
90,000
Effect of master
netting agreements
(244,773) (140,992)
Total Credit Exposure
$ 60,742
$ 33,401
Interest rate swap contracts are transactions in which two parties
agree to exchange, at specified intervals, interest payment streams
calculated on an agreed-upon notional amount with at least one
stream based on a specified floating-rate index. The notional
principal amount of interest rate swap contracts do not represent
the market or credit risk associated with those contracts but
rather provide an indication of the volume of the transactions.
The credit risk inherent in interest rate swaps arises from the
potential inability of counterparties to meet the terms of their
contracts. PEFCO performs credit reviews and enters into netting
agreements to minimize the credit risk of interest rate swaps.
There were no counterparty default losses in 2010 and 2009.
Pursuant to accounting standards, PEFCO must recognize the
cost of health care and life insurance post-retirement benefits
during the periods employees render service, with such costs
being recognized in full by the eligibility date. The periodic postretirement benefit cost for 2010 was $259 thousand. PEFCO
contributed $27 thousand in 2010 towards the cost of healthcare
and life insurance benefits.
The accumulated post-retirement benefit obligation (“APBO”) for
the unfunded plan at September 30, 2010 was $2,472 thousand.
The “APBO” is based on a discount rate of 5.16% and assumed
health care cost trend rates for medical, pre-65 at 10% and post-65
at 8% and prescription drugs at 9%. These rates will gradually
decrease to 5% by 2015. The impact of a 1% change in the health
care cost trend rate assumption would amount to approximately
$61 thousand.
The following table summarizes the notional amount and credit
exposure of PEFCO’s derivative instruments at September 30,
2010 and 2009.
PEFCO has interest rate swap contracts designated as fair value
hedges, which hedge certain fixed-rate long-term loans and certain
fixed-rate long-term secured notes (debt).
PEFCO has a defined contribution 401(k) plan in which all
full-time employees, after completing six months of service, are
eligible to participate. This plan allows employees to make pre-tax
contributions to tax-deferred investment portfolios. Employees
may contribute up to 12% of their compensation subject to
certain limits based on federal income tax laws. PEFCO matches
employee contributions up to 6% of an employee’s compensation.
The contribution expense was $137 thousand in 2010 ($155
thousand in 2009).
The objective of the fair value hedge is to protect the fixed-rate
long-term loans and the fixed-rate long-term debt against changes
in LIBOR which is the designated benchmark interest rate
by PEFCO.
Certain fair value hedges are considered to be 100% effective
as each meets shortcut method accounting requirements and,
accordingly the changes in fair values of both the interest rate swap
contracts and related debt are recorded as equal and offsetting
gains and losses in the Consolidated Statements of Financial
Condition. As a result, regarding these fair value hedges, there was
no gain or loss recognized in current period earnings.
12. Derivative Financial
Instruments
PEFCO uses derivative financial instruments, including interest
rate swap contracts, as part of its asset/liability management
activities. The objective of the asset/liability management process
is to manage and control the sensitivity of PEFCO’s earnings
to changes in the market interest rates. The process seeks to
maximize earnings while not placing at risk of a 100 basis point
movement in interest rate more than 10% of the pre-tax net
Notional
Certain fair value hedges do not meet shortcut accounting
requirements and accordingly, the extent to which these
instruments are effective at achieving offsetting changes in fair
40
value must be assessed at least quarterly. Any ineffectiveness must
be recorded in current period earnings.
Ineffectiveness related to derivatives and hedging relationships
was recorded in net financing income as follows:
PEFCO has interest rate swap contracts designated as cash flow
hedges, which offset the variability in cash flows arising from the
rollover of short-term notes (liabilities). The cash flow hedges
are considered to be highly effective and accordingly, the changes
in the cash flows of the interest rate swap contracts have been,
and are expected to continue to be, highly effective at offsetting
the changes in the cash flows of the short-term liabilities. Any
ineffectiveness must be recorded in the current period earnings.
The gains and losses deemed to be effective are recorded in
Accumulated Other Comprehensive Income (Loss), net of
applicable Income Taxes.
PEFCO does not enter into interest rate swap contracts or other
derivatives not designated as hedging instruments.
Year ended September 30,
Ineffectiveness (in thousands)
Interest Rate Swaps
2010
2009
2008
Fair Value Hedge
$ 71
$155
$ 2
Cash Flow Hedge
0
Total
(41)
$ 71
$114
(109)
$(107)
The following table presents the effect of PEFCO’s derivative instruments on the Consolidated Statements of Financial Condition: (in thousands USD)
Asset Derivatives Fair Value (1)
Derivatives designated as hedging
Liability Derivatives Fair Value (2)
2010
2009
2010
2009
Interest Rate Swaps
$305,515
$174,393
$293,228
$182,276
Total
$305,515
$174,393
$293,228
$182,276
Effect of master netting agreements
(244,773)
(140,992)
(244,773)
(140,992)
Total Reported on the Consolidated Statements
of Financial Condition
$ 60,742
$ 33,401
$ 48,455
$ 41,284
(1) Reported as “Other Assets and Deferred Charges” on the Consolidated Statements of Financial Condition
(2) Reported as “Accrued Expenses and Other Liabilities” on the Consolidated Statements of Financial Condition
(3) Fair Values are on a gross basis, before consideration of master netting agreements as required by SFAS Interpretation No. 39; PEFCO received/paid no cash collateral in connection with the derivative transactions
The following table presents the effect of PEFCO’s derivative instruments in cash flow hedging relationships on the Consolidated Statements of Operations:
(in thousands USD)
Loss Recognized in
Other Comprehensive
Income (OCI) on Derivatives,
net of tax (Effective Portion)
Interest Rate Swaps
41
Loss Reclassified
from OCI into
Total Financing Expense
2010
2009
2008
2010
2009
2008
$1,828
$3,241
$3,326
$ 309
$ 363
$ 396
13. Fair Value measurements
1. Level 1 – Quoted unadjusted prices for identical instruments
in active markets to which PEFCO has access at the date of
measurement. Level 1 securities include U.S. Treasury and
Equity Securities.
As of October 1, 2008 PEFCO adopted, “fair value
measurements.” The changes to current generally accepted
accounting principles from the application of this statement
relate to the definition of fair value, the methods used to
measure fair value, and the expanded disclosures about fair value
measurements.
2. Level 2 – Quoted prices for similar instruments in active
markets; quoted and model-derived valuations in which all
significant inputs and significant value drivers are observable
in active markets. Level 2 inputs are those in markets for
which there are few transactions, the prices are not current,
little public information exists or instances where prices vary
substantially over time or among brokered market makers.
Level 2 securities consist of U.S. Guaranteed Securities.
PEFCO has performed an analysis of all existing investments,
debt instruments and derivative instruments to determine
the significance and character of all inputs to their fair value
determination. Based on this assessment, the adoption of
this guidance did not have any material effect on PEFCO’s
Consolidated Statements of Financial Condition and
Consolidated Statements of Operations. However, the adoption
of this guidance does require PEFCO to provide additional
disclosures about the inputs used to develop the measurements
and the effect of certain measurements on changes in assets and
liabilities for the reportable periods as included in PEFCO’s
annual report.
3. Level 3 – Model derived valuations in which one or more
significant inputs or significant value drivers are unobservable.
Unobservable inputs are those inputs that reflect PEFCO’s
own assumptions that market participants would use to price
the asset or liability based on the best available information.
The guidance establishes a fair value hierarchy that prioritizes the
inputs to valuation techniques used to measure fair value into the
following three broad categories.
September 30, 2010 (000’s)
Asset Fair Value
Quoted Prices
in Active
Market (Level 1)
Available-for-sale securities
$334,923
$380,722
—
—
305,515
—
(244,773)
60,742
$334,923
$686,237
—
(244,773)
$776,387
Unrealized appreciation on interest rate swaps
Total Assets at Fair Value
Prices w/Other Prices w/Significant
Observable
Unobservable
Inputs (Level 2)
Inputs (Levels 3)
Netting(a)
—
Total
$715,645
Liabilities Fair Value
Unrealized depreciation on interest rate swaps
—
$293,228
—
(244,773)
$ 48,455
Total Liabilities at Fair Value
—
$293,228
—
(244,773)
$ 48,455
September 30, 2009 (000’s)
Asset Fair Value
Quoted Prices
in Active
Market (Level 1)
Available-for-sale securities
$312,187
Unrealized appreciation on interest rate swaps
Prices w/Other Prices w/Significant
Observable
Unobservable
Inputs (Level 2)
Inputs (Levels 3)
$ 230,482
—
Netting(a)
—
Total
$ 542,669
—
174,393
—
(140,992)
33,401
$312,187
$ 404,875
—
(140,992)
$ 576,070
Unrealized depreciation on interest rate swaps
—
$ 182,276
—
(140,992)
$ 41,284
Total Liabilities at Fair Value
—
$ 182,276
—
(140,992)
$ 41,284
Total Assets at Fair Value
Liabilities Fair Value
(a)
P EFCO has elected to net unrealized gains (receivables) and unrealized losses (payables) when a legally enforceable master
netting agreement exists.
42
PEFCO did not have any assets or liabilities that were measured
at fair value on a recurring basis using significant unobservable
inputs (Level 3) during the year ended September 30, 2010 and
September 30, 2009. PEFCO did not have any assets or liabilities
that were measured at fair value on a non-recurring basis during
the years ended September 30, 2010 and September 30, 2009.
The following table presents the carrying amounts and estimated fair values of financial instruments as of September 30, 2010 and 2009 (in thousands USD)
2010
2009
Carrying
Amount
Assets
Cash
$
29,065
Estimated
Fair Value
$
29,065
Carrying
Amount
$
65,834
Estimated
Fair Value
$
65,834
Repurchase Agreements
145,000
145,000
72,000
72,000
Investment securities
715,645
715,645
621,817
624,070
83,011
83,011
81,354
81,354
4,792,479
4,919,158
5,009,278
5,136,307
60,742
60,742
33,401
33,401
$1,814,941
$1,814,941
$2,051,996
$2,051,996
60,485
60,485
57,170
57,170
Interest and fees receivable
Loans
Interest rate swaps
Liabilities
Short-term notes
Interest payable
3,777,945
3,814,240
3,613,665
3,649,055
42,000
44,191
42,000
45,570
Interest rate swaps
48,455
48,455
41,284
41,284
43
14. Related Party Transactions
PEFCO has derivative contracts with certain shareholders broken
out as follows (000’s):
Certain shareowners (or their affiliates) have provided and
presently provide a variety of commercial banking services to
PEFCO. In 2010, PEFCO paid $1,388 thousand in underwriting
fees ($1,863 thousand in 2009) related to the issuance of longterm Secured Notes. Fees paid for liquidity back up lines in 2010
were $2,873 thousand ($1,574 thousand in 2009). In 2010,
PEFCO also paid $337 thousand for other commercial banking
services ($279 thousand in 2009).
September 30, 2010
September 30, 2009
Receivable
$ 60,742
$ 33,401
Payable
(35,438)
(28,368)
Net Receivable
$ 25,304
$ 5,033
15. General And Administrative Expenses (000’s)
The breakdown of the General and Administrative Expenses are as follows:
Year Ended September 30,
Compensation and Benefits
Administration
Professional Fees
Total
2010
2009
2008
$5,441
$5,709
$4,324
2,413
2,186
2,048
823
910
721
$8,677
$8,805
$7,093
16. OPERATING LEASE
PEFCO has executed as lessee an operating lease for the rental of
office space through fiscal 2020. Rent holidays and rent escalation
clauses are recognized on a straight-line basis over the lease term.
Leasehold improvements incentives are recorded as leasehold
improvements and amortized over the shorter of their economic
lives or the term of the lease. For the years ended September 30,
2010, 2009 and 2008, PEFCO recorded lease expense related
to these agreements of $646.6 thousand, $580.7 thousand
and $563.4 thousand, respectively, which is included in the
accompanying Consolidated Statements of Operations.
Future minimum lease payments under the lease as of September 30, 2010
are as follows (in 000’s)
$ 581
2012
581
2013
581
2014
581
2015
625
Thereafter
Total
17. Subsequent Events
In accordance with current accounting literature, subsequent
events were evaluated through November 4, 2010.
2011
44
2,643
$ 5,592
Management’s Report on Responsibility for Financial Reporting
To the Board of Directors and Shareowners of Private Export Funding
Corporation
Private Export Funding Corporation (“PEFCO”) maintains a system of internal control over financial reporting which is designed to
provide reasonable assurance regarding the preparation of reliable published financial statements. The system contains self-monitoring
mechanisms, and actions are taken to correct deficiencies as they are i dentified. Even an effective internal control system, no matter how
well designed, has inherent limitations – including the possibility of the circumvention or overriding of controls – and therefore can
provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, internal
control system effectiveness may vary over time.
PEFCO’s management assessed its internal control over financial reporting as of September 30, 2010, in relation to criteria for effective
internal control described in “Internal Control-Integrated Framework” issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Based on this assessment, PEFCO believes that, as of September 30, 2010, its system of internal control over
financial reporting met those criteria.
Don B. Taggart
chairman, president & chief executive officer
November 4, 2010
Spiros Tsaketas
vice president & controller
November 4, 2010
45
Report of Independent Auditors
To the Board of Directors and Shareowners of Private Export Funding
Corporation
We have examined management’s assertion, included in the accompanying Management’s Report on Responsibility for Financial
Reporting, that Private Export Funding Corporation (“PEFCO”) maintained effective internal control over financial reporting as
of September 30, 2010, based on criteria established in “Internal Control-Integrated Framework” issued by the Committee
of Sponsoring Organizations of the Treadway Commission (“COSO”). PEFCO’s management is responsible for maintaining effective
internal control over financial reporting. Our responsibility is to express an opinion on management’s assertion based
on our examination.
Our examination was conducted in accordance with attestation standards established by the American Institute of Certified Public
Accountants and, accordingly, included obtaining an understanding of internal control over financial reporting, testing and evaluating
the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the
circumstances. We believe that our examination provides a reasonable basis for our opinion.
Because of inherent limitations in any internal control, misstatements due to error or fraud may occur and not be d etected. Also,
projections of any evaluation of internal control over financial reporting to future p eriods are subject to the risk that the internal
control may become i nadequate because of changes in conditions, or that the degree of compliance with the p olicies or procedures
may deteriorate.
In our opinion, management’s assertion that PEFCO maintained effective internal control over financial reporting as of September 30,
2010 is fairly stated, in all material respects, based on criteria established in “Internal Control-Integrated Framework.”
New York, New York
November 4, 2010
46
Five-Year Financial Data and Independent Audit Fees
Year ended September 30,
In thousands, except per share amounts and Independent Auditors Fees
2010
2009
2008
2007
2006
$1,643,000
$ 1,857,000
$1,953,000
$ 828,087
$ 842,745
$
759,651
$ 678,422
$ 608,082
$ 530,172
4,497,347
4,642,873
4,016,942
3,819,964
3,957,475
295,132
366,405
375,379
395,388
290,000
$1,814,941
$ 2,051,996
$2,151,136
$ 1,913,323
$2,007,995
3,777,945
3,613,665
2,832,149
2,832,579
2,614,920
42,000
42,000
62,000
72,000
146,000
Loan Commitments
Commitments for year
Commitments, cumulative
from inception
25,233,000
Selected Assets
Cash and investment securities
$ 889,710
Export loans guaranteed
or insured by Ex-Im Bank
Selected Liabilities
Short-term notes
Other Financial Data
Net income (loss)
Net income (loss) per share
$
1,391
14,468
$
6,487
$
585
($
1,949)
93.92
982.76
461.54
41.14
—
444
351
—
—
95,907
89,100
77,650
76,960
80,248
1.45%
16.24%
8.35%
0.80%
Dividends
Average shareowners’ equity
$
$
(137.05)
Return on average
shareowners’ equity
Independent Audit Fees
Service
PEFCO utilizes the services of PricewaterhouseCoopers LLP
for audit, tax and other non-audit services. PEFCO’s Audit
Committee is responsible for the pre-approval of all audit and
permitted non-audit services performed by the independent
auditors. The fees incurred in 2010 and 2009 were as follows:
(2.4%)
2010
2009
$ 202,000
$ 214,000
Secured Note issuances
49,400
120,000
Substitutions of collateral
27,000
81,000
278,400
415,000
58,000
61,000
—
—
$ 336,400
$ 476,000
Audit
Audit related:
Total Audit related
Tax
Other
Total
47
Board of Directors and Officers
Directors
Don B. Taggart(1) (3) (5) (6)
Richard S. Aldrich, Jr.(1) (4)
Robert J. Bernabucci (2) (3)
Mary K. Bush (3)
Michael J. Cave (2)
Benjamin M. Friedman (1) (3) (5)
Chairman, President & Chief
Executive Officer
PEFCO
President
bush international, llc
Partner
skadden, arps, slate,
meagher & flom, llp
President
ups capital
corporation
President
Boeing Capital
Corporation
Catherine P. Bessant (5)
Global Technology & Operations
Executive
Bank of America
Merrill Lynch
William Joseph Maier Professor of
Political Economy
harvard university
(1)
Member of the Executive Committee
(4)
Member of the Compensation and Management Development Committee
(2)
Member of the Audit Committee
(5)
Member of the Risk Policy Committee
(3)
Member of the Nominating and Corporate Governance Committee
(6)
r. Taggart is an ex-officio member of the Audit Committee and
M
Compensation and Management Development Committee
48
Board of Directors and Officers (cont’d)
Joseph C. Guyaux (2) (4)
S. Todd Maclin (2) (3)
Rita M. Rodriguez (2) (3) (5)
George J. Vojta (1) (4)
President
pnc financial services
group, inc.
Senior Fellow
woodstock theological
center at georgetown
university
Karen B. Peetz
Executive Vice President
jpmorgan chase & co.
CEO
chase commercial
banking
Vice Chairman
The Bank of New York
Mellon
William R. Rhodes (2) (4)
Senior Advisor
citi
Chairman
financial standards
foundation
49
Board of Directors and Officers (cont’d)
Officers
Timothy C. Dunne
Vincent J. Herman
Ann Marie Milano
John J. Neblo
Francoise M. Renieris
Melinda A. Scott
Don B. Taggart(1) (3) (5) (6)
Spiros Tsaketas
Richard E. Youtz
Senior Vice President & Treasurer
Senior Vice President
Chairman, President & Chief
Executive Officer
Vice President
Vice President and Secretary
Assistant Vice President
Assistant Vice President
Vice President & Controller
50
Advisory Board and Exporters’ Council & Small Business Lender Council
The Advisory Board and the Exporters’ Council advise the management of PEFCO on loan policy, lending rate policy, scope of activities,
relationships with borrowers, commercial banks, other co-lenders, Ex-Im Bank and on such other m
atters as management may request.
Their guidance and strong support contribute greatly to the success of PEFCO and are h ighly appreciated. We are also appreciative of the
active participation of Ex-Im Bank.
Advisory Board
Exporters’ Council
Stephen Atallah
Managing Director
Deutsche Bank AG
Terina A. Golfinos
Managing Director
ING Capital LLC
Ae Kyong Chung
Managing Director
Citigroup Global Markets, Inc.
Phillips Lee
Managing Director
Société Générale
Michael K. Clare
Managing Director
J.P. Morgan Securities Inc.
Robert P. Mayer
Vice President and Manager
PNC Bank, N.A.
Marcia M. Davis
Bank of America, N.A.
Christan McCormick
CEO
Natixis Transport Finance
James G. Fortsch
Head of ECA Finance
UPS Capital Business Credit
Bruno J.M. Mejean
Managing Director and Deputy
General Manager
Nord/LB
Marguerite M. Gill
Vice President
JPMorgan Chase Bank, N.A.
James S. Cox
Managing Director
Project and International Finance
Northrop Grumman Corporation
Robert O. Draggon
Associate Managing Director
Bechtel Enterprises
Ronald J. Glover
Managing Director
Boeing Capital Corporation
Gary Groom
Principal
Finance Specialists
Robert R. Simonini
Managing Director
Siemens Financial Services
Skip A. Warner
GE Capital Markets Corporate
John C. Sapoch
Managing Director
Wells Fargo Bank, N.A.
The PEFCO Small Business Lender Council is a network of lenders that work with PEFCO in support of Ex-Im Bank’s outreach to small
U.S. exporters. The Council has two principal functions: as a funding resource for small exporters and as a forum where Ex-Im Bank can
have frank discussions with lenders on subjects of common interest. The Council is a PEFCO endeavor and is open only to lenders that
have an established relationship with the PEFCO Small Business Program. The Council began activities in 2006. We appreciate the
cooperation provided by Ex-Im Bank, in particular Diane Farrell and John Richter.
Small Business Lender Council
Joseph T. Barrett
President
Barrett Trade & Finance
Group, LLC
Fernando Diaz
Vice President
Hencorp Becstone
Capital, LLC
Gregory J. Bernardi
President
London Forfaiting Americas
James G. Fortsch
Head of ECA Finance
UPS Capital Business Credit
Sergio J. Cordero Blanco
Managing Director
Cofine S.A. de C.V.
SOFOM ENR
Jorge Garza
CEO
Interfinanciera, S.A.
Ralph Clumeck
President
CFS International Capital Corp.
Carlos Gonzalez Juanes
Banking Executive Director
Banco Monex, S.A.
Brett N. Silvers
President
WorldBusiness Capital, Inc.
Richard H. Lopez
Managing Principal
Drake Finance Group, Inc.
Peter Swain
Managing Director
Chancery Export Finance, LLC
Gustavo Rosas
Director
New Continent Finance, Inc
Jamie Zamudio
Vice President
Republic Federal Bank
William M. Schoeningh
President
Centre Merchant Finance, Inc.
Steven M. Greene
COO International Trade
Atrafin, LLC
www.pefco-smallbusinesslenders.com
51
PEFCO Shareowners
PEFCO’s stock is owned by 23 commercial banks, six industrial companies and two financial services c ompanies. In the case of the
commercial banks, the shares are owned directly or through an affiliate. Ownership and transferability of the common stock of PEFCO
are restricted to “Qualified Investors.” As defined in the By-laws, a “Qualified Investor” is a financial institution or a corporation engaged
in producing or exporting United States products or services. Under PEFCO’s By-laws, no shareowner may own more than 18% of the
outstanding shares. The following is a list of shareowners as of September 30, 2010:
Commercial Banks
Number of Shares
Bank of America, Charlotte
1,924
The Bank of Miami, N.A.
280
The Bank of New York Mellon, New York
702
Bank of the West, California
79
Brown Brothers Harriman & Co., New York
38
Citibank, N.A., New York
1,066
Deutsche Bank, New York
1,066
ING Capital LLC, New York
JPMorgan Chase & Co., New York
165
Natixis Transport Finance, S.A.
738
PNC Bank Corp., Pittsburgh
503
Regions Bank, Birmingham
20
Silicon Valley Bancshares
100
300
Sterling National Bank & Trust Company of New York
UBS AG, New York
Union Bank N.A., San Francisco
39
93
UPS Capital Business Credit, Hartford
284
U.S. Bank, Minneapolis
500
Wachovia Corporation, Winston-Salem
375
52
80
984
40
General Electric Company
200
Halliburton
113
United Technologies Company
200
PEFCO Treasury Stock (purchased in 2008)
137
Number of Shares
Cessna Aircraft Company
Total
42
Standard Chartered Bank, Los Angeles
212
The Boeing Company
1,549
Société Générale, New York
366
Radian Asset Assurance Inc.
Industrial Companies
2,496
Number of Shares
Island Capital Ltd.
ABB, Inc.
120
Key Bank, Cleveland
The Royal Bank of Scotland, New York
Financial Services Companies
14,811
166
ADDITIONAL INFORMATION
Private Export Funding Corporation
For Specific Inquiries Concerning
PEFCO’s Lending Programs, Contact:
280 Park Avenue, New York, NY 10017
Telephone: (212) 916-0300
Facsimile: (212) 286-0304
John Neblo
(212) 916-0352
j.neblo@pefco.com
Internet
www.pefco.com
www.pefco-smallbusinesslenders.com
Richard E. Youtz
(212) 916-0304
r.youtz@pefco.com
Common Stock
PEFCO is its own transfer agent and registrar for its common
stock, and a ccordingly, all transfers of stock must be coordinated
through PEFCO. For inquiries, contact
Ann Marie Milano, Vice President & Secretary
(212) 916-0314
a.milano@pefco.com
Vincent J. Herman
Vice President
(212) 916-0327
v.herman@pefco.com
Independent Auditors
Financial Information About PEFCO, Contact:
PricewaterhouseCoopers LLP
300 Madison Avenue
New York, NY 10017
Spiros Tsaketas
Vice President & Controller
(212) 916-0317
s.tsaketas@pefco.com
Legal Counsel
Shearman & Sterling LLP
599 Lexington Avenue
New York, NY 10022
Long-Term Secured Notes and
The Bank of New York Mellon is trustee, registrar, transfer agent
and paying agent for all outstanding issues of PEFCO’s Secured
Notes and PFC’s Collateralized Notes.
Annual Meeting
7:15 a.m., Friday December 3, 2010
280 Park Avenue, 4th Floor
New York, NY 10017
Short-Term Notes
JPMorgan Chase Bank is the issuing and paying agent for
PEFCO’s c ommercial paper.
To Contact Any of the Board of Directors
Please Mail Correspondence to:
For inquiries regarding Long-Term and
Short-Term Notes, Contact:
PEFCO
Attention (Board Member)
Office of the Secretary
280 Park Avenue, 4th Floor
New York, NY 10017
Timothy Dunne
Senior Vice President & Treasurer
(212) 916-0323
t.dunne@pefco.com
53
PRIVATE EXPORT FUNDING CORPORATION
280 Park Avenue, New York, NY 10017
www.pefco.com

Untitled

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