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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.

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.

Since inception, PEFCO has issued $17.6 billion aggregate principal amount of Secured Notes, of which $6.8 billion aggregate principal amount were outstanding at September 30, 2015, currently rated, Aaa, by Moody's and A+, by Standard & Poor's. In October 2014, Standard & Poor's downgraded its issue ratings on PEFCO's Secured Notes to A+ in light of increased risk to PEFCO's business model as a result of the short-term extension and ongoing debate in the U.S. Congress of Ex-Im Bank's charter. In November 2014, Fitch issued a rating of AAA on the long-term Issuer Default Rating for PEFCO, consistent with Fitch's U.S. sovereign rating.

Short-Term Borrowings

PEFCO raises short-term liquidity to finance loan commitments through the issuance of commercial paper. As of September 30, 2015, PEFCO received short-term ratings of P-1 by Moodys', A-1 by Standard & Poor's and F-1+ by Fitch. In 2015, PEFCO established a new $1.09 billion 364 day facility maturing in May 2016 and entered into a new $272 million three-year facility. In addition, PEFCO has an existing $280 million three-year facility maturing in May 2017. The combined total of all three facilities is $1.64 billion. Of the fifteen lenders across the three credit facilities, twelve are shareholders of PEFCO. The credit agreements contain a number of covenants, including a covenant that PEFCO comply with its contractual commitments with Ex-Im Bank, with customary exceptions. As of September 30, 2015, there were no amounts outstanding under any of the credit agreements. In addition, there were no amounts drawn under any of the credit agreements during fiscal year 2015.

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.