Faced with new players in the market, members of GTR Americas‘ editorial board discuss opportunities in LatAm, spread compression, the evolution of supply chain finance, and the role of ECAs in the region.
- Jeff Abramson, vice-president, head of trade finance, US Exim
- John Ahearn, global head of supply chain finance, export & trade finance, Citi (co-chair)
- Silvia Brudar, vice-president, product management & business planning, Scotiabank
- Vincent Galloni, managing director, trade processing products, BNY Mellon
- Angela Martins, regional Manager, Latin America, National Bank of Abu Dhabi (NBAD)
- Jon Richman, head of trade and financial supply chain Americas, global transaction banking, Deutsche Bank
- Stuart Roberts, global head of trade sales, Citi (co-chair)
- Rogier Schulpen, global head structured trade & commodity finance, Santander Global Banking & Markets
- Maureen Sullivan, managing director & North American trade sales head, Bank of America Merrill Lynch (BofAML)
- Jim Thomas, senior vice-president & regional manager, Americas, Zurich Credit & Political Risk
- Bryen Zimmerman, director, head of trade finance origination, Americas, RBS
Ahearn: I look at trade right now as the best of times and the worst of times. It is a product that, for Citi, has done very well through the crisis. There were exceptionally high spreads at the end of 2011 into the beginning of 2012. We now seem to have competitors of every shape and form coming into the market. We have all seen, I would imagine, some pretty dramatic spread compression.
I think the conversation today is around where we are now and where we go over the next year to 18 months.
What are you seeing in Latin America? Is Latin America really tied to China? Are those flows really material? What are you seeing from the financing points of view there? How do you see that business for your region going forward?
Martins: I am one of those new competitors. I think there is a huge change happening in Latin America, especially because, when we say ‘Latin America’, we put everybody in the same basket, yet the countries are so different. Here, we are talking about the same countries when we say that Latin America is doing fine. We are not talking about Argentina, Venezuela or Bolivia. Everybody is talking about the usual suspects: Brazil, Chile, Colombia, Peru and Mexico. These countries are definitely doing very well, which is the reason why a bank like NBAD started doing business in them.
What is also interesting is that it is not only the new banks that are coming to the market to compete with the usual players, but there is life beyond trade funding. Something that is changing – and perhaps it was already like that in other countries but not in Latin America – is that we are seeing more and more syndicated loans and debt capital markets transactions funding the main players – both banks and companies – in Latin America. I think that the remaining business is really becoming the pure trade-related deals, like letters of credit or guarantees, etc. In the past, Brazil was fully funded by pre-exports; now, it has been discovered that there are are ways of funding with a longer tenor. To give you an idea, I started my activities in February, and I am already in several syndicated loans; always as mandated lead arranger. You are inviting me, so you are facilitating my life: Citi, JP Morgan and Deutsche Bank.
All of you are also interested in having a bank with capital, with the capacity to leverage itself, with a lot of funding, and with the capability of participating in deals with you. In the past, you may remember that there were only a few banks that had the capacity to do more aggressive pricing deals; now, there are others, like us.
The idea of a bank like NBAD is not only as a naïve newcomer in the market. It intends to become – and it already is, in a way – an international bank present in 19 countries and interested in being in 43 countries in 10 years.
I used to head the international division of ABC Brasil for 15 years and then Banco Pine, a mid-sized Brazilian bank. I am used to being on the other side of the table and, talking to my friends on the other side, I notice that they are eager for new players. I also know that many of you, who are getting mandates in the primary market, have requests from these issuers who are saying: ‘You have the mandate but I want new banks participating in my deal. I do not want my usual bankers in it.’ It is, then, further evidence of the changing scenario.
I know that a major Brazilian bank is funding a lot of trade dues with certificates of deposits (CDs), which are mainly placed with Asian investors such as Taiwanese banks, which lend at prices that are comfortable for use for trade finance. That is why one of my questions was whether we were prepared for that, as a group which is more oriented to trade finance, whether we are able to offer something else that will bring trade finance back to this specific niche, or whether it is really a new trend? Will funding generally be raised and used by banks in Latin America to replace the usual pre-exports?
Ahearn: The Citi view may be a little different. I agree: you have to break the markets up; they are not all the same. The countries that are having trouble, like Venezuela and Argentina, are much more politically-driven situations than economically-driven situations. I have my doubts about the Latin American market and whether it is sustainable. A major Brazilian company comes to us all the time to do another US$500mn or US$1bn – whatever it happens to be. They are trying to push the tenors out further and further. They tried to get a pre-export off the ground for eight years, for which there was not much appetite, because, in our minds, that really is bond territory. They then tried to get everybody to come in at the pricing that that was from two years ago. In most instances, it was below their credit default swaps (CDS) pricing. Today, that deal will work, because there is so much liquidity in the market, but when that liquidity starts to exit – and it will exit – I think we will go back to a more stable trade business.
When you look around the rest of the region, for us Chile is challenging to compete in. Chilean banks are raising funds at Libor plus 15. It just does not make sense at those price points. What you are seeing is banks starting to pull back.
In terms of the products that are doing very well for us, we have a business called channel finance, which is really supply chain finance; however, it also has a receivables component to it. That business is doing very well. It has grown quite dramatically for us and at very good margins, so that is a business that we
The other part of the business that we like is the export credit agency (ECA) part of the business; maybe not so much the aircraft business anymore, because, again, that is becoming very thin-margin and being taken out into the capital markets, etc, but we will still compete in those sectors.
Mexico is a difficult market for us, because the Mexican market does not differentiate, from a pricing point of view, between trade finance and working capital loans, so you really have to bring intellectual property to the transaction if you are going to do it. If you are going to do a plain-vanilla trade finance: ‘Here is the money, let us go,’ the client would do better to just make it a working capital loan; they are going to get the exact same price. We are, then, trying to embed intellectual property.
From an economic point of view, we are being very watchful in places like Brazil. The fundamental economics in Brazil do not look well, yet it really has not distorted the pricing. The other problem in Brazil and many countries down there is that there is the potential, at least in our mind, for a pretty significant energy shock, depending on how well the US does with fracking and getting all the natural gas and oil, because a lot of those economies are still very much oil-based economies. Mexico is in a very good position, because almost all its oil and natural gas is in shallow water; in Brazil, however, they really have to go quite deep offshore. If you start oil prices dropping into the 70s and 80s, there could be some pretty big economic impact, and there is the potential for that, depending on how much comes online in the US.
Hopefully, we do not overreact either way. We did not overreact when the markets got really tight; hopefully, we are not going to overreact when the markets are very loose, which is where they are today. My view is that the markets always go back and forth, and the key is to make sure you maintain the client relationships in both the good times and the bad. We are pulling some capital out of Latin America now, not because we do not like Latin America from an economic point of view, but just because the pricing does not make sense at this point.
Richman: Deutsche Bank’s view is similar in some respects. Markets are flush with liquidity from a variety of sources. Tenors are getting longer and prices are getting thinner. We are finding that, like the evolution of many markets, you need to provide more added value than may have been required in the early stage of a country’s economic development. As consumer economies are developing in places like Brazil, it is helping these economies to diversify, and it is also assisting with the establishment of new forms of trade finance that did not really exist before.
John, you mentioned channel finance. We think all forms of supply chain finance, where we can help our clients better manage their working capital metrics, adding value with different types of structures beyond the plain-vanilla trade, is how you can get some leverage in this market, how you can be more important to your clients, and also pick up the plain-vanilla business as you go.
Hopefully, we will see the pendulum swing back and make the economics better, but we are bullish on the Latin American region and Deutsche Bank is investing.
Brudar: I think the pendulum will inevitably swing. What we see, to your point, John, is that Chilean corporates expect 20 basis points on letter of credit on China risk. On the same risk, we can get 80, 90 or 100 elsewhere, so why bother? That is the shift that will inevitably happen since the liquidity pouring into these markets eventually looks at worldwide opportunities, not just at those in Latin America. But companies don’t look too far in the future. The short-term horizon can also be observed at various levels: at corporate level and almost at a policy level as well. In countries that are so driven by commodities – and Canada is an example – what inevitably happens is that you ride the wave of commodity prices and growth elsewhere. In that space, it is impossible to overstate the importance of China. It goes without saying that we all monitor China growth projections and importing patterns. An overreliance of any economy on the commodity element without a proper attention given to the manufacturing side is an issue that could hurt a country in the long run. Latin American countries will eventually need to address that key question: where is our manufacturing relative to commodity production?
An example is Mexico, which has a relatively strong manufacturing sector. For this reason, Mexico did not bounce back as quickly as other commodity countries, but that is also the beauty of its market. Canada has the same thing. We are historically focused on exports. Everybody talks about exports, but importing for purposes of adding value, increasing your productivity, and then re-exporting is equally, if not more, important. So, it is that second wave that these markets need to start thinking about and getting ready for. Corporates need to look at the world from that angle too, rather than, in the short term, enjoying the wave of strong liquidity as it is today.
Ahearn: Another thing that I am seeing – and I would love other people’s views – is an enormous strategic mismatch in the market that I do not think is sustainable. I will move out of Latin America for a second. One of the things that I am looking at and spending more time on is how much we are paying for deposits. Around the world, at least in my mind, a lot of people are paying up for deposits. If you go to a market like Taiwan, what we are paying on deposits versus what we are lending out in trade finance is pretty close to parity. I do not understand how that business model survives in the long term.
What I also find really amazing is, we are in the most liquid market that we have ever been in, with all these central banks pumping in all this liquidity. At some point, they are going to start draining that liquidity. There are conversations now in the US around whether QE3 is over with and whether the Fed is going to start draining some of that liquidity out. What I think is really interesting is when you start seeing that liquidity leave. We have spent a lot of time in Citi looking at Basel III, and I think I got it wrong. We have really been looking at it from the capital point of view: it is going to require more capital, etc. The capital rules are pretty much known already and it has not priced through. What I really think is going to constrain the balance sheet is going to be the liquidity. When the liquidity starts to come out of the market and you cannot make those liquidity coverage ratios (LCRs), that is what I think is going to pump pricing. I do not think it is going to be the capital any longer.
Schulpen: I´m not sure if the LCR will have a large impact on the Latin American market. Most of the corporate debt is raised through the bond market and through local banks and to a lesser extent through international banks that have to adhere to Basel III. Especially in trade finance, I am not sure if the market itself, and the pricing of the market, is that constrained by the liquidity ratios of the international banks.
Ahearn: The correspondent banking model no longer works, at least in my mind. We tend to lend banks US dollar liquidity, because they need dollar liquidity, and in return we get their balances and cash management. When you look at the LCR model, theoretically there is a very high potential that those balances are going to be worth zero to us, which is the big cross-sell. If they are worth zero to us, I am either going to have to get a much better return on the lending I am doing or I am going to have to find some other strategic cross-sell to offset that price.
Zimmerman: I want to turn to something that we have seen in the market, which has been instructive for us. In trade finance it is important to understand the deposit side, because it is tied together. In terms of this whole issue that John brought up of LCRs and how the bank is going to view assets and liabilities, etc, historically the folks in trade have looked at it and said: ‘This is a cash thing. We do not really need to pay much attention to it.’ That, however, is to our detriment right now under Basel III, and I think we need to be focused on how the deposits are viewed. At RBS, we are looking at the behaviour of deposits. For example, we analyse how long this money is going to remain with us, which counts towards the capital buffer, etc. This is important, and we are starting to see increased client awareness, at least in the US corporate sector, of why this is relevant. It is a big deal for positioning things, both internally and with customers.
Galloni: Before we leave the Latin American conversation, John mentioned that he saw demand for receivable-type products in Latin American. At BNY Mellon, we are seeing the same thing: we are seeing a demand for receivables and collection-type products in Latin America. That is one area that we see growing. From a credit perspective, we are very selective in our lending.
You raised a good point about the traditional finance revenues drying up because of the spreads between deposits and loans.
Ahearn: I am not sure that it is drying up.
Galloni: It is becoming lower.
Richman: To the original question, a fundamental strategic shift is likely to happen over the next few years, as Basel III begins to get priced in and as liquidity starts to come out of the system. While pricing will probably increase for regulatory reasons, we expect that, net-net, trade finance will be a winner relative to other lending products. Demand continues to intensify as the supply chain finance base continues to grow above normal market rates. How do you fund all of that when there is less liquidity in the market, or liquidity becomes more expensive due to regulatory rules? We think that that fundamental shift will be related to linkages to capital markets, and we are all going to have to learn how to package our products better in order to create credit capacity to meet that growing demand and to adhere to the regulatory requirements. That shift is starting to happen already, but we believe we have only seen the beginning of it.
Ahearn: That is a whole conversation around the London Group and the different issues. Trade cannot be a book-and-hold asset anymore for every trade bank in the world. It just cannot, because the potential size of the assets is just going to get too big, and everybody just keeps on putting it on their balance sheet. As an industry, we have absolutely no discipline, so now we are trying to get into ways of securitising it, but there is a lot of work still to be done. The asset class that I use as a proxy is credit cards. Credit cards have been being securitised since the 1990s, and we in the trade world just learned the word ‘securitise’ two weeks ago, so we have a long way to go.
Schulpen: Can we come back to liquidity in Latin America and the developments in the different countries? Everybody is saying that there is so much liquidity and that countries and companies are flush with liquidity right now. I think that that is very true for certain countries and for certain companies. I do not think, however, that smaller Latin American producers would agree that there is a lot of liquidity; in fact, these companies are suffering quite a bit, yet you still see pricing of Libor plus 4% or 6%. Everybody wants to finance the bigger producers. To be honest, they get pricing at the moment that no longer makes sense for banks to get into those deals.
These are also typically companies that have access to the capital markets and therefore do not need to raise financing through trade facilities anymore. In the past, they financed through pre-export finance loans, which mitigate country risk. But local banks do not need to mitigate country risk. So as soon as the fiscal advantages for trade loans disappear, our expectation is that trade will be replaced by clean working capital, which we have already seen happening in countries such as Chile.
For the smaller companies, where you see healthy margins, the risks are higher. The traditional commodity banks still finance these companies with tight structures in order to mitigate the risk. There is an opportunity but you really have to know what you are doing and how to structure around the physical flows. For the larger companies, the opportunity is more through working capital structures, because the discipline from the capital markets is putting pressure on the financial management to optimise their balance sheet and financial ratios. Those companies are currently asking how they can manage their working capital, and within Santander we see a clear opportunity here.
Roberts: While we agree that there are benefits in moving towards a more capital markets-type model, how much are you tapping into alternative investors off the back of that? The primary and secondary markets are often the banks, but how much are you going to non-bank investors? I think you mentioned Taiwanese investors coming into CDs, etc, for Brazilian banks. How are we tying that into liquidity which is more excessive in Asia? Are you tapping into that alternative investment class? Are you matching Asian investors to key commodity flows? And the last question I would like to pose to the group is regarding Latin America: is Latin America inextricably linked – with the exception of Mexico, which I understand is more linked to the US economy – to Asia? If liquidity evaporates in Asia, is that more problematic for Brazil than liquidity moving away from the US?
Schulpen: In terms of alternative investments, specifically with regard to individual transactions, it is very difficult to bring in an Asian investor.
On individual deals, you might have one or two transactions, but it is very difficult to do that on a structural basis. If you look at hedge funds, they require high yields that can normally not be met by trade transactions. And then you have the securitisation structures, where you securitise a wide portfolio of trade assets. Because of the ‘AAA’ rating of the senior tranche, you tap a wide range of investors at attractive pricing. The problem is that the diversification criteria dictate that individual exposures cannot be too large. If you go into the real short-term flow trade business where individual amounts are not so large, we think that securitisation is the future.
For the larger trade transactions it is very complicated to bring in alternative investors. We spoke with one of the larger Dutch pension funds and the problem is that there is a mismatch in tenor, the required yields are high and the fund has a very low allocation for these kinds of trade assets. For the larger deal, the syndicated loan market is probably still the best solution.
Richman: I agree, in large part, with what Rogier is saying. The industry created almost a Catch 22 for us. Private risk insurance has been the most economic way for us to de-risk transactions. It has slowed down the development of trade as an alternative investment class to these other types of alternative investors. The CLOs work and they are out there. Most of the major trade banks have them as a diversified asset pool for investors. They are reasonably economic and are becoming more so.
At some point, we just have to find a way to continue to make progress. There are long and difficult conversations with hedge funds, but they are getting better. The commercial paper markets and others did not develop overnight either, so this too will take time. The impetus needs to be there. As trade financing, and supply chain finance in particular, grows to such a point where we can no longer be so reliant on private risk insurance, our own balance sheets or syndicated markets, we are going to have to do this. The tipping point will be reached and, while we do not know when that is, we think it will happen within the next few years. The yields they demand will go down and we will be able to originate more – in a more economic way than we do today.
Sullivan: Part of the challenge is that supply chain finance programmes get to be very large and are very sticky. Over time, a small bank or syndicate of banks struggle with trying to keep up with the growth of the programme, so they have to find alternative ways to bring in funding, whether it is through hedge funds or taking it to the market – that would probably be the most efficient.
Abramson: We have spent a lot of time trying to find new sources of capital on the ECA side, particularly right after the crisis, when a lot of the commercial lending was not there. We have had some success but it has been somewhat narrow. Our aircraft portfolio is where we have had about 40 capital market issuances. The reason why Citi is maybe not so interested in this structure anymore is because it’s really pushed spreads down. It is a success that cuts both ways. We have had some of the same conversations with hedge funds and have spent a lot of time talking to sovereign wealth funds. It is an educational process. I think the key is when we get to the tipping point of realising what the appropriate return for this kind of risk is. We are somewhat unique in that we are talking about, ultimately, US government-guaranteed paper, but I agree that, at some point, it is bound to get some traction, whether it be hedge funds, private equity, sovereign wealth funds, pension funds or other pools of capital.
Schulpen: In terms of these alternative investments – for instance, these securitisation vehicles – do you do them because of the liquidity ratios that are being imposed by Basel III or because it is just a cheaper alternative funding source?
Roberts: There are a number of reasons we are doing it. The financial crisis caused us to start thinking increasingly about returns and delivering consistent returns, not just on a risk-weighted basis or a return-on-risk-adjusted-capital basis, but now on a Basel III risk-weighted asset basis and now on straight return on assets (ROA), which is making a comeback.
Schulpen: I´m not sure I understand that you´re securitising trade assets from a liquidity ratio point of view. The liquidity ratios generally dictate that you need to match your funding with your assets – even under stress scenarios. Trade assets are typically short-term and contrary to plain-vanilla loans, the European regulators recognise this short-term and self-liquidating nature of trade assets. So from a liquidity ratio point of view we believe we have an opportunity within trade – especially having a model of independent subsidiaries with a large local client base.
Roberts: As a global bank with different branches in different cities, we are required to pay competitive deposit rates to attract certain self-funding for our own individual regulators in each country. We are in a slightly different model, so in terms of the LCR, we are asking what the optimum size of the balance sheet is. Do we keep growing the balance sheet assets and deposits, and is that the most sensible way to do it, or would we be better off shrinking the balance sheet, taking potentially less revenue and boosting the returns? All of that is being factored into the equation.
Brudar: It becomes what John referred to: selling your intellectual property. That is the model that not every bank can afford, or for that matter, execute on. This largely depends on their origination, processing and risk expertise, scale and capability. Originating to hold or to sell is a decision that depends on so many things internally and is a decision normally made at a very senior and strategic level.
Roberts: How important and how much are you focusing on intra-regional trade? Mexico, Chile, Peru and Colombia are working together to improve trade flows. What is the impact of burgeoning free trade zones, and how is that and the growth of intra-regional trade – or lack thereof – affecting you?
Thomas: If you look at the reason why you would pursue a trade bloc, it is primarily to obtain better terms of trade and to provide a vehicle to diversify your exports. The question is whether Latin America and Brazil are inextricably linked with China. I think the answer is yes, as long as it is primarily a commodity export economy. We touched on the need to go further up the value chain. That is happening in Brazil but it needs to happen quite a bit more before you can realistically talk about the net gains of a trading bloc and the real potential for diversifying exports. It is not so much about being tied to China or to Asia, but about being tied to where the growth is. The growth has been in Asia; previously, Latin America was tied to Europe and North America. That is the key to extracting the gains and true benefits from any free-trade bloc or bilateral or multilateral trading entity.
Schulpen: That is why I think the free-trade bloc is so important. In Latin America, there is local production, but it is not sufficient yet. A large part of the flow is commodities to Asia, and finished products back from Asia into Latin America. In order to develop production within, for instance Brazil, it helps if their market is much bigger. Mexico is producing a lot of products for the United States, which is to a large extent due to NAFTA. If Brazil can produce products for Argentina, Chile or Colombia, it would have a much bigger market which would definitely be an incentive to develop products in Latin America itself.
Thomas: This trend is happening. Japanese foreign direct investment (FDI) to Brazil increased 30% last year, and the two main sectors were mining and automotive. It is not surprising, but people are recognising this trend. That goes back to going up the value chain. You are going to see more manufacturing of all sorts – heavy equipment and cars. Embraer is not only manufacturing in Brazil but also in China, which is amazing.
Roberts: As an adjunct to that, many of the banks around this table have strong branch networks across the region. Are you seeing a strong increase in terms of trade flows, even within your own branch network, across the region?
Brudar: Some, but not enough. In terms of intra-regional trade, I wish that Latin America has what we see in intra-Asia regional flows. From the perspective of what can enable it, it is about the openness of economies and about the institutional development levels. Latin American countries could benefit from advancing agendas on these two fronts to grow their intra-regional trade prospects. They have had to work on that. That is one of the region’s big stumbling blocks. ECAs, government and financial institutions have a role to play, but how to get to what Asia currently has should be something that regional CEO forums, for example, could table. From where we sit, we want more attention to intra-regional trade, more programmes that will support it and more economic and political push behind it to enable the execution.
Roberts: Is that a fundamental prerequisite to a sustained growth pattern across the board in Latin America?
Richman: Moving away from the reliance on commodity prices and volumes, which is happening, is a prerequisite.
Thomas: Latin America is doing so well on the back of the commodity boom, but the challenges go so far beyond the need for technical, vocational skills that lend to the value chain. When your economy is based on a commodity boom, it increases the pressure on the currency and depresses other parts of the export sector. What needs to happen is that manufacturing needs to grow. For 200 years now, we have seen this vicious cycle.
Perhaps a truly functional trade bloc that transcends these vast political differences within the bloc is the way to do it. We hear a lot about south-south trade, but an interesting dynamic is also south-south investment. We are seeing so much of that coming from Latin America. So many Brazilian companies have transcended the Latin model of intra-regional trade. I mentioned Embraer, which is manufacturing in China. Marcopolo, the large bus company, is manufacturing in China and, I believe, Vietnam. Those are just two examples. They are transcending the cultural and historical ties of Portuguese-speaking West Africa and the rest of South America to go to wholly new markets. Over the last five years, I have seen so many more of these Latin companies go abroad, which to me is such a fascinating change.
Schulpen: Latin America itself does not have a very big production history. You don’t see lots of Latin American products over the world. It is a bit optimistic to think that production will start in Asia. They must first produce a brand in Latin America and, once it is successful, you can take it abroad. Intra-regional trade has a crucial role to play in that. Latin American countries generally speak the same language and they have a relatively similar culture. Before you go to Asia with your products, first try to sell them to your neighbours.
Roberts: I want to switch gears and go to supply chain finance, particularly as it relates to an Americas context. I think it has developed very well in the US, in US-Asia and Asia-US flows across the Pacific, and within Europe. How would you say supply chain finance has developed in the Americas? I think that ties into the pockets of liquidity, with people looking for new asset classes. How has it broadened the reach of the number of companies you deal with through something like distribution finance and supplier finance? Have you seen a lot of intra-Americas, US-Latin America supply chain finance-type interaction or has it been more an east/west-type trade?
Richman: The motivation is not so much around where the trading lanes are, but really around optimising working capital. In North America, supply chain finance programmes have become mainstream, be it supplier finance programmes to extend days payable outstanding, establishing distributor finance programmes or receivables programmes in emerging markets in order to grow the top line. It is pervasive now. In the early days, we had issues around what the accounting treatment should be, what the technology should look like, or even figuring out onboarding processes and supplier segmentation. There are still some challenges there but they have largely been overcome. The new frontier is now about getting better and better and creating credit capacity to meet the growing client demand.
In Latin America, we are seeing the same trends at perhaps an earlier stage of development, but they are very interested in working capital metrics too. It is a way to pay down debt and to become more efficient. Treasury functions are being measured on how they manage operational efficiency, including working capital metrics. The good news there is that, as an industry, we have done a good job of making this mainstream and educating the broader audience. We now need to move to develop this as a new investment class in order to create capacity. We remain optimistic.
Sullivan: Our experience with our clients is that, now that they are much better educated on the value proposition of supply chain finance, they are finding innovative ways to use that value exchange. It is not only about terms extension. For example, they are looking at it as a potential investment for themselves, with self-funded programmes. We have seen interest in utilising that value again; instead of being a balance sheet play, it is a P&L play by reducing costs of goods sold. There are even more ideas out there that have yet to come to the surface. The growth in our portfolio of supply chain finance programmes has grown dramatically recently. Clients have been talking about it for the last three to five years, and now they are actually ready to execute. The concept has very much become viral, whereby many of our buyers using supply chain finance were won over by the programme after having been suppliers on other supply chain finance programmes.
Zimmerman: We are seeing that too, specifically for Latin America. We are doing a lot more targeted individual, large ticket-type things with our multinational clients here in the US. It is very US-driven for us. We have certain pools of receivables in certain countries and clients ask us to help them, more on an individual basis. We are seeing US companies taking a look at a very narrow P&L on a certain customer relationship and say: ‘I can really improve this. Can you help me with that?’ That is good business for us to be in.
Brudar: The Canada-US trade space is almost exclusively done on open account, as you can imagine and we see a substantial client need there. When it comes to Latin America, we see it with larger, better-rated companies, again related predominantly to the Asia-Latin America corridor. That seems to be the theme in supply chain as well as in traditional trade products.
Roberts: Has anyone used the multilateral agencies in supply chain finance in Latin America?
Sullivan: The International Finance Corporation (IFC) and the Inter-American Development Bank (IADB) have programmes that we have tapped into to support some of that activity.
Martins: Banco Pine used to use the Overseas Private Investment Corporation (Opic) but it became too expensive. Supply chain within Brazil, in reals, between Brazilian banks, is very usual. It is a product that all banks do. What is very difficult, if not impossible, is the international. You can do forfaiting, but international factoring has been tried in many ways and there is always a problem with regulation that presents an additional risk that you cannot accommodate. Lately, when working for a smaller bank, I saw that the cost of using this made the transaction too expensive, due to the huge liquidity. It was no longer adding value.
Abramson: I do not mean to speak for the multilaterals, but we have had enough conversations with them that I know it is an area of interest for them in trying to develop some additional programmes. Because of our mandate, we do have a programme in the US for supply chain but we do not have the ability to translate that into foreign markets. We have seen this with the dealer-distributor angle. There is a lot of interest there.
Roberts: With the large global mandates for the multinational clients, we are required to bring a supply chain finance capability to bear across all regions and markets. And with large multinational clients in Latin America using supply chain finance programmes, local companies have begun to think more about it.
In terms of export agency finance, what are we seeing from US Exim in Latin America?
Abramson: We have definitely seen some rebalancing in our portfolio big picture-wise – not dramatically but, if you go back three to five years, we had more weighting towards LatAm than Asia and the Middle East. Our portfolio has about 20% exposure to Latin America and the Caribbean together. My concern is with the credit risk profile and how we manage being forced down the risk curve in some products areas. In some ways, that is very much in keeping with our mandate, and we really are focused directly on supporting US small-business exports. Latin America is in our backyard and a natural destination market, but a lot of those transactions are SME to SME. The risk profile is what it is. It has been quite a challenge.
I was just looking at a compilation of our deal list from last year, and it is somewhat unbalanced. We have facilities with Petrobras, Ecopetrol and Reficar. We have a lot of activity and exposure with the airlines. Beyond that, it is a lot of SME business, and we are really focused on trying to find the larger middle market – not the blue-chips but the large middle-market corporate that has an ongoing flow of US import requirements, be it capital equipment or short-term commodities or parts. Right now, there has not been as much demand. There is really a focus – and I think this applicable to our whole book of business – on the big-ticket infrastructure projects. That is where we have seen the uptick in activity. Capital-intensive, long-dated dollar liquidity is where we have added the most value, but it seems like we have perhaps reached an inflexion point.
Roberts: Are you seeing anything in the automotive industry, where there are large middle-market dealerships across the region that may be importing?
Abramson: We have talked to several auto manufacturers over the last couple of years about exactly that. I think there is opportunity there. Some of it is scale and it is a little idiosyncratic driven by particular models that may be popular in certain markets, but the Middle East has been a big focus of that. We have had some conversations in Latin America as well.
From the perspective of US exporters, the natural attributes of Latin America are its geography and traditional trade ties. Those persist, so, as an ECA, it is about where we can fit in trying to incrementally enhance what are going to be those regular trade flows. There are existing relationships, and it is about how we can be helpful in facilitating a business to enhance that. I certainly do not have any blinding flashes of insight into how we best do that.
Brudar: EDC has had big success in that space. That is the backbone of the success of Canadian exports.
The point was raised earlier around not enough liquidity in the small and medium-sized space. Intra-regional trade is not only a Latin American problem
but a bigger one, and is also linked to how strong the SME sector is to bring these economies to a level of successful and well-diversified local, intra-regional and global competition. The IFC is not the answer to everything. They operate in that space, and thank god they do – we need more of them – but that is not the only answer. I do not know what the answer is, because global banks also tend to have different models and do not necessarily go as deeply as what would be required by local markets. Perhaps an answer lies in exploiting and co-ordinating the efforts of ECAs, IFC, global banks and smaller regional banks. One thing is for sure, that is where the engine of growth happens.
Richman: That will be a big challenge. It will need to be determined how to support the SMEs, beyond just supply chain finance, as the Basel III regulations really start to get pressed in, and markets become less liquid.
Martins: Through the local banks. You have to extend lines to mid-size banks, which will run the risk of the smaller companies in their countries.
Brudar: Supported by strong ECAs. If ECAs really focused on that, a joint effort could lift those economies very nicely.
Martins: In Brazil, all banks have huge lines from the BNDES. In order to apply for lines from the BNDES to do business with large companies, you have to commit at least x% to small and medium-size companies. This is a way of doing that. The IFC’s programme really works.
Abramson: These programmes will need to be bigger and will need to do more in order to make finance sufficiently available and affordable at the SME level. I think this will be an increasing challenge.