How to Get Put Out of Business by Government Guarantees

Government management of the economy is clumsy at best, and it often backfires, harming those it is ostensibly helping.

In many ways, my company, AeroThrust Corporation, should be a poster child for the government's efforts to revive the economy and the small businesses that create two-thirds of the jobs in America. It is one of the ironies of our time that my company is being put out of business precisely because of government programs such as bailouts and guarantees.

Located in Miami and in business for over sixty years, AeroThrust Corporation maintains and overhauls jet engines for many airlines around the world and for the U.S. Government. Our highly skilled employees produce a sophisticated, high-tech product. Most of our customers are outside the United States, so we are exporters who help the nation's balance-of-payments deficit. At our peak, our diverse workforce numbered over three hundred people, many of whom are represented by the International Association of Machinists (IAM). You would think that this is precisely the sort of company that the president was thinking of when he said, "Jobs must be our number-one focus in 2010."

By way of background, I bought AeroThrust from Saab AB of Sweden in November 2001. The company was unprofitable, and the industry situation was unfavorable post-9/11. I restructured management, cut costs, increased marketing, and over the next five years tripled sales and increased AeroThrust's net worth tenfold. We got close to doing an IPO on the AIM market in London. Things began to change in 2008, however.

When oil peaked at $147 a barrel in 2008, it did great harm to many of our airline customers. Compounding the problem was the Great Recession of 2009, which caused further cutbacks by airlines. In late December we had to seek protection by filing a Chapter 11 petition.

Our experience has been a little different from those of companies like General Motors, Chrysler, Bear Stearns, AIG, and others that received bailouts when they ran into trouble. We got no bailout, but we have had a number of dealings with firms that did get government bailouts.

For example, one of our competitors is General Electric, which got over $70 billion in funds from the U.S. government last year through direct government purchases of its commercial paper. In 2009 we lost a contract with a major airline that could have provided us with several hundred million dollars in revenue. We understand that GE offered to sell new engines at a steeply discounted price to this customer -- a price that was not much higher than we charge for an overhaul of an engine. GE made them an offer they couldn't refuse. We're not saying that the $70 billion in U.S. government funding made that deal possible, but it certainly couldn't have hurt.

Another example is our senior secured lender, PNC Bank, which got almost $8 billion in TARP funds from the government to do an acquisition. None of those funds have trickled down to us! We owe PNC about $10 million, but so far we have not been successful in our efforts to restructure our finances on a satisfactory basis.

Undoubtedly the greatest irony in our story comes from an agency of the government itself. The Export-Import Bank of the United States guarantees some of our foreign accounts receivable in an arrangement the Ex-Im Bank has with our bank, PNC. We are a significant exporter, and, as the Ex-Im Bank's website proclaims, "When the U.S. exports ... America works." Or maybe not. We have been told that because of the nature of the guarantee agreement between Ex-Im and our bank, there is an incentive for the bank to cause the liquidation of AeroThrust if there is not enough cash offered to our senior secured creditor as part of the overall acquisition price. Though the creditors of AeroThrust have received serious offers to purchase the company from parties we deem credible, none have offered enough cash to PNC to give it an incentive to let the company live and once again prosper. So it looks like we are on the road to liquidation -- all because of government programs whose intentions might have been good, but whose consequences bode ill for our employees, customers, and vendors.

As a CEO and owner, I draw a couple of lessons from the perverse incentives of several of the government programs. Though I have had good experiences with the Ex-Im Bank, obviously it makes sense to have backup plans with other organizations that do not incentivize banks to liquidate businesses because the U.S. government will then make the bank whole. Next time around, we need to imagine the unimaginable -- we never thought it possible that a government guarantee, with the taxpayers ultimately on the hook, could be used by an American financial institution as an incentive to cause the liquidation of another American company, along with the jobs it creates and the taxes it pays. Thus, no matter how hard it is to do, every CEO needs to convene working groups at the senior management and board levels whose job it is to periodically spend time trying to imagine the unimaginable. If we had done so three years ago, our outcome might have been different today.

John F. Risko is the Chairman and CEO of AeroThrust Corporation. Previously, he was President and CEO of National Airmotive Corporation, a similar company that was taken public in 1995 and subsequently sold to Rolls-Royce. Mr. Risko has a B.A. from Yale College and an MBA from Harvard Business School.
Government management of the economy is clumsy at best, and it often backfires, harming those it is ostensibly helping.

In many ways, my company, AeroThrust Corporation, should be a poster child for the government's efforts to revive the economy and the small businesses that create two-thirds of the jobs in America. It is one of the ironies of our time that my company is being put out of business precisely because of government programs such as bailouts and guarantees.

Located in Miami and in business for over sixty years, AeroThrust Corporation maintains and overhauls jet engines for many airlines around the world and for the U.S. Government. Our highly skilled employees produce a sophisticated, high-tech product. Most of our customers are outside the United States, so we are exporters who help the nation's balance-of-payments deficit. At our peak, our diverse workforce numbered over three hundred people, many of whom are represented by the International Association of Machinists (IAM). You would think that this is precisely the sort of company that the president was thinking of when he said, "Jobs must be our number-one focus in 2010."

By way of background, I bought AeroThrust from Saab AB of Sweden in November 2001. The company was unprofitable, and the industry situation was unfavorable post-9/11. I restructured management, cut costs, increased marketing, and over the next five years tripled sales and increased AeroThrust's net worth tenfold. We got close to doing an IPO on the AIM market in London. Things began to change in 2008, however.

When oil peaked at $147 a barrel in 2008, it did great harm to many of our airline customers. Compounding the problem was the Great Recession of 2009, which caused further cutbacks by airlines. In late December we had to seek protection by filing a Chapter 11 petition.

Our experience has been a little different from those of companies like General Motors, Chrysler, Bear Stearns, AIG, and others that received bailouts when they ran into trouble. We got no bailout, but we have had a number of dealings with firms that did get government bailouts.

For example, one of our competitors is General Electric, which got over $70 billion in funds from the U.S. government last year through direct government purchases of its commercial paper. In 2009 we lost a contract with a major airline that could have provided us with several hundred million dollars in revenue. We understand that GE offered to sell new engines at a steeply discounted price to this customer -- a price that was not much higher than we charge for an overhaul of an engine. GE made them an offer they couldn't refuse. We're not saying that the $70 billion in U.S. government funding made that deal possible, but it certainly couldn't have hurt.

Another example is our senior secured lender, PNC Bank, which got almost $8 billion in TARP funds from the government to do an acquisition. None of those funds have trickled down to us! We owe PNC about $10 million, but so far we have not been successful in our efforts to restructure our finances on a satisfactory basis.

Undoubtedly the greatest irony in our story comes from an agency of the government itself. The Export-Import Bank of the United States guarantees some of our foreign accounts receivable in an arrangement the Ex-Im Bank has with our bank, PNC. We are a significant exporter, and, as the Ex-Im Bank's website proclaims, "When the U.S. exports ... America works." Or maybe not. We have been told that because of the nature of the guarantee agreement between Ex-Im and our bank, there is an incentive for the bank to cause the liquidation of AeroThrust if there is not enough cash offered to our senior secured creditor as part of the overall acquisition price. Though the creditors of AeroThrust have received serious offers to purchase the company from parties we deem credible, none have offered enough cash to PNC to give it an incentive to let the company live and once again prosper. So it looks like we are on the road to liquidation -- all because of government programs whose intentions might have been good, but whose consequences bode ill for our employees, customers, and vendors.

As a CEO and owner, I draw a couple of lessons from the perverse incentives of several of the government programs. Though I have had good experiences with the Ex-Im Bank, obviously it makes sense to have backup plans with other organizations that do not incentivize banks to liquidate businesses because the U.S. government will then make the bank whole. Next time around, we need to imagine the unimaginable -- we never thought it possible that a government guarantee, with the taxpayers ultimately on the hook, could be used by an American financial institution as an incentive to cause the liquidation of another American company, along with the jobs it creates and the taxes it pays. Thus, no matter how hard it is to do, every CEO needs to convene working groups at the senior management and board levels whose job it is to periodically spend time trying to imagine the unimaginable. If we had done so three years ago, our outcome might have been different today.

John F. Risko is the Chairman and CEO of AeroThrust Corporation. Previously, he was President and CEO of National Airmotive Corporation, a similar company that was taken public in 1995 and subsequently sold to Rolls-Royce. Mr. Risko has a B.A. from Yale College and an MBA from Harvard Business School.

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