Faced with an ever-challenging regulatory environment, members of the GTR Americas editorial board discuss the shifts that they see in their business today and how they can continue to remain relevant to the market in the future.
- Maureen Sullivan, managing director, North America trade sales head, Bank of America Merrill Lynch (chair)
- Chris Bozek, managing director, global trade and supply chain product head, Bank of America Merrill Lynch
- Silvia Brudar, vice-president, product management and business planning, Scotiabank
- Vernon Darko, president, EquipXP
- Dennis Dubois, director, Latin America trade head, Bank of America Merrill Lynch
- Bob Dyckman, managing director, head of trade finance Americas, BNY Mellon
- Michael McDonough, global head of corporate trade and supply chain, JP Morgan
- Sandra Nolasco, head of global trade finance, South America, BBVA
- Mark Norris, partner, Sullivan & Worcester
Sullivan: Some of you were participants at last year’s roundtable, and I thought it would be useful to recap the themes that came out of that conversation, just to set a baseline for today’s conversation. It will be a good way for those of you who were not there to hear what was on the top of everyone’s mind in 2013 and see how things have since evolved.
Some themes from 2013 included: the impact of spread compression, so we’ll want to talk about whether that is a continued theme or not. There was a change underfoot around funding options in 2012. This was the first time we started to see debt capital markets come into play with some of our financing categories, especially in the medium to long-term. We’ll want to look at how we can deploy a more aggressive debt capital markets structure to help support the funding required for our growing short and medium-term trade finance portfolios.
Last year, there was a lot of conversation around LatAm trade lanes, especially between LatAm and Asia, as a result of the commodity boom that was happening. The interesting question is whether that is continuing now that China is not seeing the growth rate it once was. It is something we can give some thought to.
We touched on Basel III last year, although I am not sure, at that point, we knew how it would impact us as a trade finance business. There were a couple of different scenarios. The London Group was established to help drive some of the conversation with the regulators. Here we are, 12 months later, and the question is whether we have greater clarity and are prepared for the implications of Basel III. Everyone in the room is involved in the financial sector and most of us are in the global bank category, and we will have some challenges with the way Basel III will be interpreted in terms of its impact on our business, so we want to talk a
little about that.
During our previous roundtable, we discussed the ECA environment as some of us were experiencing challenges with the direction of the pricing typically, that means it is falling down, not up, especially in light of the tenor of some of these assets. How do we manage the compressed returns while insuring we continue to meet client demand?
I thought that would be a good backdrop in terms of what is different in 2014 versus the conversation we had in 2013. If you will, I would like to start this year’s roundtable with a dialogue around your client conversations. What are you hearing, either from your clients or from specific markets? Are we staying relevant from a trade finance perspective?
McDonough: Yes, we are absolutely staying relevant. When you look at the FI space, there has been more upheaval there in the last 12 months. The demand is certainly still there for clients. Growth of trade will continue to outpace growth of GDP. To the points you made earlier about the different funding structures coming in, is BPO going to play a role, and what kind of role? Will it be a niche or some type of game changer? The jury is still out.
We have to adapt to that, but we are certainly still relevant. The client needs are still there. The challenge for banks is how to stay profitable in a changing world. How do we stay relevant? How do we find the right client solutions?
Norris: One thing that is interesting about the current situation is the amount of political pressure building up. In the US, the UK and other developed economies, governments want to get their businesses exporting and are setting targets to double or triple the number of exports. The banks are key to that. You therefore have political pressure on banks but also regulatory pressure in addition to the point about staying relevant. You have continuing geopolitical uncertainties. In the space of a few weeks, we have had uncertainty over Iraq. When you look back over a year, we still have a lot of uncertainty but probably greater political pressure because many developed economies are still in the doldrums from a trade and manufacturing perspective.
Nolasco: From a European bank’s point of view, there was a big change from 2013 to 2014, especially because the liquidity costs of European banks finally went down again. That was a big difference. In 2013, most European banks were concentrating very much on their own markets, withdrawing from some of the key areas. For example, commodity trade finance was impacted in some of the key European banks. Now, we see them coming back. The liquidity the European Central Bank has put into Europe has been quite significant. A lot of systems and credit policies that were put in place during the crisis remain there, so I think banks and credit risk departments are still very much aware of how they focus the capital that remains. It is now more of an internal decision than a pricing issue.
On the other hand, the political pressure that you mentioned, for European banks, has benefited the trade finance areas. In fact, from where we stand, we have seen the big impact comes more from the enormous amount of information you need to give to the regulators, but there starts to be a general consensus that the impact in trade finance will be much less than we expected. People are now much more worried about the regulatory and compliance issues rather than the real effect in terms of capital constraints and profitability. In that sense, the political pressure, certainly in Spain, where exports have been the main drive for trying to get out of the crisis, meant there was a lot of support from the ECA and policy makers to boost those areas.
That has also impacted banks. For example, with CESCE and generally, there is political pressure to lend to the export business, which of course benefits the trade finance businesses. In that respect, this year there is clearly a better outlook for a European bank.
Brudar: With respect to emerging markets, we have been looking at spreads in the context of the latest developments and had expected more of an upward movement. We found that the spreads did not align with the types of discussions markets were having around Thailand, Turkey, Ukraine, Egypt and so forth. Spreads are stubbornly low, other than in China where some upwards movement has been happening.
The question of whether banks are relevant from a trade finance perspective is driven by many factors, including profitability and how we look at compliance these days. If you take a longer-term view, banks will continue to be selective because of all the regulatory and due diligence changes that increase the cost of doing business – either through higher capital requirements and different, more expensive, funding sources – or through more costly processes. My general observation in the market is that the funding void is on the longer-term side, as well as on the small business side, where the economics of coverage for these clients is just different. These are the funding opportunities that do not necessarily get covered through banks. These market dynamics are interesting to watch, and driven not only by how banks are looking at profitability, but also how they adjust their business models. In some cases it is about ‘back to basics’, in others, banks are assessing how global they can be, or should be, in support of their clients. At Scotiabank, our customers have always been our priority, which is why we have expanded globally – to help them reach markets that matter to them.
The relevance of banks is being impacted by all of these factors – the internal interpretation of the world and market dynamics, profitability, spreads, where banks want to be and the segments they can cover the best.
Dubois: From a Latin American perspective, banks are still very relevant. Because the economies are still growing, we see a huge demand in finance and supply chain requirements from our clients throughout the region. But over the last few years a few things have changed. We have seen large local banks become larger through mergers within the region. A decade ago there were not many large indigenous banks in certain markets. Today there are, and given the very low spreads you see in the market and a lot of liquidity, they now have the ability to fund transactions that they may not have had as recently as two or three years ago.
Going to the earlier point that was made, the other issue is profitability. We now have Basel III, which is applied very unequally among banks of different regions. Latin American banks have a totally different perspective on Basel III to what we, a US-based bank have, so a level playing field it is not. The second issue we have to address goes to core profitability as banks in Latin America become larger banks in their own right and build-out the ability to cross-sell more products in their market as well as internationally which previously was a challenge. So to a certain extent, while holistically the banking sector remains extremely relevant for the local clients, domestic banks become more relevant, and western banks become slightly less relevant other than in key areas such as equity raising and the more sophisticated upscale markets and products.
Sullivan: What about trends in terms of client demands? Are we seeing interest in coverage in new markets that were not so relevant or of concern? Are we seeing tenors of instruments being pushed out, at all, or are they getting shorter?
Brudar: We definitely see an increase in Latin American inter-regional trade, which aligns with our global footprint and customer focus. The more we can help facilitate inter-regional trade flows, the better it is for our business model. The increase in the last two years is very visible in infrastructure projects which drive cross-border movement of goods and services. Chilean retailers have also been really successful in the region. Some supply chains are becoming more inter-regional than ever before.
Bozek: It is a good point. Take supply chain finance, which, in effect, has grown up. Our clients are becoming increasingly sophisticated in how they can strategically leverage payments as a working capital tool through supply chain finance. Multinational clients that have a successful regional programme are now looking to expand globally. Executing on the global expansion significantly increases complexity and cost to the bank or provider. The challenge at hand for banks is how to maintain a profitable programme while facing the increasing costs of trade assets on the balance sheet, and the cost of successfully onboarding suppliers, regardless of where they are located around the world.
Nolasco: Supply chain finance is the name of the game; everybody talks about it; demand is growing very rapidly. We are discussing it internally. It demands a lot of technological investment. Will that be profitable with so many banks going into this, the amount of investment you need and the sort of spreads you have in this business?
McDonough: I will generally tell people it is not a technology play. You can go find the technology anywhere. It is a people investment. If you want to cover a large global mandate, it is people. How are you going to touch point a client’s subsidiaries and suppliers in Thailand, Vietnam, Brazil and South Africa?
Sullivan: I could not agree more. Mike, you are absolutely spot on. Technology is an avenue. It ensures that you do a certain level of scale, but that is not the way you bring value to your client, especially when it comes to a supply chain finance programme. It is your ability to embrace the supplier, not only to explain how the programme works but to maintain that relationship with the supplier across documentation, onboarding and ongoing customer service. That takes a network, and
that is so much more critical than the technology.
Nolasco: I agree totally with you that the value added is in the network. For example, for BBVA, with our network in South America, that is clearly something we are exploring, but it is something you cannot do without the platform. You are right; you can go and find it, but my point is: you need that investment, and it is a must, but it is not what can make you different. There are so many guys investing and going in that they have to try to and get their return on investment. Will we see too many people going in and out?
Sullivan: The model could be one where at a certain point it does not make sense to build your own, but it will make a lot of sense to participate in bigger programmes. That is probably the biggest trend evolving, as we all recognise. Once supply chain finance really takes off in the corporate environment and they begin to really see the value, the programme will be bigger and bigger. Some programmes will grow to a level that can almost be too large for any one bank, by itself, to handle. They really need partners to help in the funding of that process.
Dyckman: A lot of the buyers use multiple providers anyway. They have to split it out by region. What you find now, too, is that a lot of large-cap names, who two or three years ago would be dismissive of the whole supply finance concept, are adopting to it. Your point about having a global network and capability is very prudent, but you also have to understand that these programmes are going to be huge, so profitability will follow if you can do what’s necessary to onboard the supplier.
McDonough: Eight years ago, when I started doing supply chain finance, the model was if you needed US$500mn, you went to five banks, and they gave you US$100mn and you went through five implementations. Several years ago, the banks figured out: ‘We can start to distribute a little, and you do not need to have five implementations.’ Now, the market has advanced to where the clients come in and say: ‘I am going to use this to reward my banking group. These are the people that, as we get to scale, I want you to go out and approach,’ and the treasurers very much look at this as a reward for the banking partners.
Bozek: Credit is only one dimension of the discussion. Maintaining a global SCF platform requires a sustained investment commitment. With each programme, a new feature or twist requiring resources emerges, whether it is modifying documents to enter a new market, enhancing credit memo handling for a specific client need, or managing jurisdictional KYC. These factors should be considered when deciding whether to be the lead processor versus participating in a programme.
Norris: A particular opportunity for supply chain finance will be Africa. The African continent is the second fastest growing region in the world; seven of the top 10 fastest-growing countries are in Africa. Growth in Africa rather than being natural resource led is actually consumer led. Surveys show it is the most optimistic region in the world. On the trade and export finance side there is a lot of potential. There is a risk that some people think, if you have a presence in South Africa, Africa is covered. The African continent is a massive, very optimistic consumer market.
Nolasco: We see that a lot in Spain: the Spanish have replaced Portugal in terms of fulfilling the infrastructure requirements of Angola, for example. We have seen an enormous boom in exports from Spain to Angola. Our ECA activity towards Angola increased tremendously in the second half of last year and this year. Most of the infrastructure and construction companies in Spain with a big export activity will have channelled quite a few of their projects to Angola. We see that very much.
Sullivan: The oil field services business is the big driver between Texas and Angola. I look to some of my colleagues here who also cover North America corporates and commercial entities. We have not seen the groundswell where they have identified African countries as a place they want to set up operations or a sourcing flow, because the North America Africa flows are not very large. They are potentially larger out of parts of Latin America, certainly Europe, and we know the Chinese are very involved in Africa. It is probably a missed opportunity; it is not necessarily very forward thinking, but we have not seen an increase in those flows.
Norris: Last year, there were US$130bn of US exports to the Pacific Rim and little over US$12bn to Africa. The African continent is a massive opportunity. I am sure those clients and customers are going to wake up to this opportunity.
Nolasco: A lot of the flows to Africa are still government to government based, Chinese flows for example. Indeed, Spanish exports have also been 99% covered with ECA support from a risk perspective. It is true; it is a big opportunity, but in the context where banks have been so aware of risk management, retrenching into their core markets, I do not know whether it is your experience, but, in Europe, onboarding a new customer has been one of the most difficult things in the last year. In that context, I can understand that banks are not particularly looking to move into new markets.
Darko: What we have also seen in Africa, in terms of trade, is South African banks are moving to different areas in the region and expanding their trade activities. Also some of the local African banks, say in Nigeria, have expanded through mergers and acquisitions and are moving to other countries, expanding their trade activities and not necessarily using ECA finance. It is becoming more and more difficult to see USA banks interested in African trade. I understand Africa trade flows primarily through South Africa, Europe or Asian Bank. What are your thoughts on those?
McDonough: Ultimately, a lot of it comes down to your clients. What is your firm’s client footprint? For us to get involved somewhere, whether it is Africa or Ecuador, we have to figure out where we play. Then, on the corporate side, where can you support your exporters through confirmations? You have to figure out where you can touch point into those places, given that client selection process.
Sullivan: You raised an interesting point. Either you are in market or, historically, from a trade finance perspective, you will rely on the global FI network. That really propels trade as we know it. It is typically one or the other; both is ideal. Because of all the scrutiny around compliance, every bank is re-evaluating their international correspondent network. If you think about the implications, that does have some dramatic unintended consequences on how this could hurt the corporate sector of our client base, because they will still need us to be that funnel in and out of these markets where we have relied on FIs. Now we are having more challenges with how we co-operate with FIs in conjunction with more complicated compliance challenges which has the potential of creating a huge barrier.
Bob, you guys are big in the international FI space. Is there a change underfoot in how you are looking at it?
Dyckman: Absolutely. There is a lot more concern with compliance and balance sheet issues. We do not do much in Africa and I don’t believe we ever have. We retrench according to market activity. Turkey was a hot-spot a year ago; it is not now. The pricing in China looks a lot more attractive, but it is also a lot more difficult to do things there, so, yes, it is a very difficult balancing act for us, and we do not have a tremendous amount of credit risk appetite. In my opinion, there has to be return on the other end, or we just will not engage. We are not going to arbitrarily offer balance sheet support to do something that does not have – almost – an immediate return to it. It is a difficult balancing act to be under the scrutiny of KYC, to look at the types of transactions the banks facilitate, and we work hard to address that. We probably ask 10 more questions than anybody else; maybe we ask 100.
Bozek: I agree with Bob; compliance and KYC are at the forefront for all of us. Specific to FIs, though, equally as important is the need to understand the impact of LCR, the net stable funding ratio, and the related inflows and outflows. To the earlier question regarding whether FI trade will go away, it will remain an important component of global trade, but pricing will inevitably need to reflect these new cost realities.
Dyckman: There has to be a rationalisation of pricing.
Sullivan: Let us talk a little about the regulatory compliance environment. I think we all know, in the last 12 months since we were all here together, it has not become easier; it has become more complicated. I think the reality of the situation is that most banks have been in compliance, but now there is this level of rigour that I hope will not be disruptive to serving our clients, which is what the whole purpose of trade finance is. How are you guys dealing with it?
Nolasco: I would take more of an optimistic view there. First, yes, it is true; we all have a lot of pressure from that, and maybe, in European banks at least, the business people feel it a little less immediately than you would feel it here in the US. If I speak to my colleagues at BBVA here in the US, they would admittedly have a different view, but I go back to the political pressure. There are a lot of issues we will have to deal with, but, on the other hand, the political pressure to promoting trade will eventually ease the pressure off the compliance issues. The pendulum went far to one side; we will not go back to where we were before the crisis, but I think it will ease off, just like Basel III.
Sullivan: What is needed is some level of global oversight or uniform set of rules – maybe this is something Swift should get more involved in – but, if we have a set of rules in North America that do not align with the set of rules in Spain, it could hamper how we do business with each other, from one financial institution to another.
McDonough: I agree. As those of you who have to deal with anything that has to be booked in Hong Kong will know, KYC requirements of HKMA have increased. The best example is the need for passports. If you go to a Hong Kong-based entity, that is okay; that is how they have been operating for a long time. If you go to a US or a UK entity and tell the directors they need to provide passports, they run out of the room. The changing dynamics are hard. At the ICC in Dubai at the start of April, the big topic of conversation was: ‘Can you get to a standard so there is consistency for the client and for the banks operating with them?’ The differing models are very hard.
Norris: The risk is that the regulatory/compliance environment adversely affects trade in the meantime. A case in point is the UK. The UK has some of the toughest anti-bribery legislation in the world. Academic research has been carried out which looks at the impact of the UK’s Bribery Act. The Act has not been around that long but the research would seem to show that UK businesses have grown 6% less than their European competitors in those markets where there is a perceived high level of corruption. The risk with a lot of these regulations is that they adversely affect trade. It is a challenge not just for banks but also for the regulators. I am working on an initiative in relation to Basel III and the requirements around credit mitigation that is provided by export credit agencies. There are issues with how that is treated. These are being addressed but given the issues raised, resolving them takes time.
Dyckman: The question is how we recoup that cost, because it is not easy to do. You cannot go back out and say: ‘From now on, we will charge you an incremental US$100 because we have to do x.’ They will say: ‘No way, because Bank X is not charging me that, so I am not going to do that.’ It is very difficult; it is a tough balancing act.
Bozek: While I agree that cost of maintaining these programmes has increased due to regulatory compliance, and it will take time to market price these costs, however it is not all cloudy skies. Linking the earlier discussion on supply chain finance, banks must expand the pie by more closely coupling SCF with e-payments solutions, card based solutions, and broader cash management products. Assuming we deliver as expected, these are sticky products that can expand wallet share.
Brudar: Banks are investing in regulatory compliance, but some banks are more profitable than others. This differentiating factor is dramatically separating providers, and those at the top will stay in the business, and some will likely choose different business models.
McDonough: I am interested in Vernon’s opinion. You operate on the other side of the coin, in some cases. Do you see the cost of banking with your partners going up? Do you say: ‘That’s your problem? Deal with it.’ What are your thoughts from industry?
Darko: My cost has not actually gone up, so I can see where your pain is. We also try to cut the cost down by negotiating with the banks. The banks are also coming in and trying to find ways to cut costs by doing things such as slashing savings accounts, or recommending other services with fees. Overall, though, I am happy with our costs, especially in this economy, with the interest rates down and so forth. I have seen though, some changes in our credit lines, such as an increase in fees on unused monies.
Nolasco: Another way to increase the profitability of banks without increasing their costs would be to reduce the number of banks you work with.
Darko: We have done that. We have reduced the number of banks we are using from five or six banks now down
to three or four.
Nolasco: On both hands, everyone is cutting. On the one hand, banks are focusing very much on the customers that provide a bigger range of products and activities to the bank. On the other hand, the customers that have resisted decreasing spreads have done that by saying: ‘Okay, I will give you a bigger share of my wallet’ to fewer banks.
Darko: We usually pass on that cost to the buyer anyway. If the buyer is shopping with other competitors, then we start to negotiate, but, if not, we will pass on the bottom line costs on to the buyers.
Brudar: Over the last couple of years, many banks around the world have been adjusting their balance sheets in terms of asset classes, duration of assets, capital and leverage ratios and so on. Asset sales have been wide-spread and, in some cases, massive. As a result, there has been a lot of liquidity in the market chasing short-term trade transactions. I think we are coming to a point where that is levelling and balance sheets are pretty much adjusted now. Banks have found the optimal mixtures of asset classes they want to have on their balance sheet. As a result, I do not think this liquidity source will continue to play a major role in the future.
Sullivan: There will be an impact on liquidity as banks have to be more rational with their balance sheet. There are some new entrants, but, even so, I think banks are under an enormous amount of pressure to make sure they are rational with their balance sheet. Maybe, two years ago, they were not. On top of that, have we really modelled what will happen in a rising interest rate environment? Quantitative easing will go away, maybe in our lifetime, probably in the next couple of years. When it does, it will have an effect on interest rates, of course, and, for some of our products, when you look at supply chain in particular, we have to question whether we have really modelled how this impact, because it is all about an interest rate arbitrage, but there is an all-in cost as well.
Bozek: Coupling the end of quantitative easing with the impact of Basel III and the LCR will impact availability and pricing in the marketplace. It is interesting to note that last year’s roundtable spoke about the impact of ending QE and rising interest rates for trade. The timeline continues to get longer.
Dubois: On the flipside of the liquidity issue, I would take a slightly different view. More and more banks – everyone around this table – are focusing on providing alternative third party sources that will take assets off our balance sheets. Going to an earlier point, selling to each other is a zero-sum game from a liquidity perspective. But think of the pent-up liquidity that insurance companies and pension funds have, not only in the US but globally, and this absolutely has to be viewed in a global context.
We’re all aware that trade assets historically have had a very good track record in terms of defaults so there is investor interest there. Once third-party investors such as private or government pension funds can overcome hurdles set by regulators, government-set investment parameters, or their internal policies – they cannot invest in this or cannot invest in that – and a lot of them are trying to get more investment flexibility, we will see a new band of liquidity coming in from different markets we have perhaps not even thought of today that will continue to buoy the market and, perhaps unfortunately from the banks’ perspective, continue keep spreads down.
Bozek: I agree, institutional investing in trade is here. It is critical that FIs package and communicate the asset purchase opportunity to the institutional investor in a clear and simple manner. At the core, these investors must clearly understand what they are buying, and be comfortable buying it. It is early days, and both banks and non-bank investors are learning through each transaction.
Darko: In general, in North America or outside, are you seeing a certain percentage slowdown in trade from this year against last? I talked to a couple of banks, and they said: ‘We’re down maybe 20% or 30% in trade.’ That is in LC transactions. I wanted to see if that is the same consensus you guys have.
Sullivan: We classify trade slightly differently at our respective institutions, so it might be a little difficult to try to compare apples to apples. If I can speak for Bank of America, that is not our experience. Trade is growing fast this year across the board, in every region.
Dubois: In certain markets the mix may be changing with more focus on corporates and less on financial institutions as we talked about a bit earlier on. At least that is the case in Latin America. Corporates are extremely interested in pushing supply chain finance and that’s our focus. Our interest in banking financial institutions is slightly less today than it was two years ago due to the number of factors we talked about earlier on: regulation, low spreads and the like.
McDonough: That is a great point. Also, there is a volume/revenue play. Your volumes may be flat or growing, but, if spreads are down, your revenue may work out down, and that is just the cyclicality of it. Our business is growing, though. To your point, markets are operating differently, and we have seen disparity
in some places.
Sullivan: Do you have any insights or experience you want to share about when a supply chain finance programme has worked and when it has not for one of your clients. Are you seeing better or similar adoption compared to a year ago? I would like to hear some of your thoughts on where you have found success and areas of pitfalls that have not worked out as you planned.
McDonough: This is a general observation, but, overall, the clients are smarter. We do fewer meetings of supply chain 101. I went out to see a client a couple of weeks ago, and it was what I would categorise in my head as a third stage meeting. One and two they already knew, so, more and more, we see the right people in the room. We have seen clients who have done their homework; they know this; maybe they have done it in another company, so the clients are sharper. That is reducing the lead time, which is fantastic for all of us. We certainly have got better in how we respond to those; everybody has.
Dyckman: The other thing we all need to consider is that, although pricing is relative to the buyer’s creditworthiness, the jurisdictional pricing does not have to be the same, and supplier size and activity do not have to dictate the same price. You need to be flexible and understand that, if people in the room do not buy into all that, or do not hear the story they want to hear, the chances of its failing are pretty high.
Bozek: I agree, we are working with smarter and more sophisticated clients. Increasingly clients are converging treasury payments and SCF, melding both into the same ERP payment processes. The mainstreaming of SCF as a core payments and working capital tool is a positive development.
SCF touches so many areas in the company. Clients that have had successful SCF programme understand the need to assign an executive sponsor that has a strong bias to change the status quo, and can reach across and call the leaders in accounts payable, IT, treasury and procurement and sell the business case
Brudar: I agree with all these statements, however what I have observed is that there also needs to be internal alignment in terms of legal and documentation reviews and costs, understanding of local market enforceability and regulatory requirements, speed of credit underwriting and delivery time. Until you have internal alignment and understanding, you cannot implement an optimal delivery and execution model. Being efficiently organised internally translates into better client service and support.
Sullivan: On BPO, what kind of interest are you guys seeing? Are you talking about it to your clients?
Brudar: We have a client advisory board which meets on a quarterly basis, and we have asked that question and found that there is little to no interest from the clients. The uptake appears to be very slow.
Dyckman: Unfortunately, my history with this is there is a lot of noise about the things they do, but some of it just does not go anywhere. I think the concept is great; I really do. I agree that it has application, but you have to get critical mass, and that does not seem to happen very easily.
McDonough: There has been more traction in the last eight months than the last two or three years. There is a pocket of customers that get it and think it would make sense.
Sullivan: Another topic we wanted to touch on is the role of export credit agencies. What is going on in the market? We talked earlier about the implication of some of the balance sheet constraints that a lot of the banks are experiencing with longer term assets. Although ECA transactions are viewed very attractively from a risk perspective, given the cover that an ECA can provide, they are very chunky deals and they take up big portions of balance sheets, so we then have to keep in the back of our minds how we want to walk into a transaction like that with the necessary cross sell to justify a US$500mn or US$200mn position in an ECA deal.
Luckily, there is an alternative with the debt capital markets, but that is still a very nascent alternative. We all know what is happening with US Exim and their re-authorisation. Have we thought about what will happen if there is not a US Exim down the road?
Let us first talk about the debt capital markets. Again, if I reflect on where we were a year ago, there were probably a handful of deals that had gone to the debt capital markets this time last year. We know they were primarily supported by the export credit agencies, even in the aircraft sector. We have seen a couple of other transactions; Pemex would be one. Do you guys also feel that this is a growing trend? Is this something that your institutions are looking at as a way to help provide the liquidity needed for some of these deals?
Norris: I think it is definitely going to continue to be a growing trend. You will continue to see not only trade and export finance transactions going into the debt capital markets but credit linked notes issued with banks and institutions setting up special purpose vehicles to repackage the debt. There are a lot of investors out there. Trade and export finance is an ideal asset. One of the challenges will be to ensure that investors actually understand the underlying products. There is an education process externally but also internally given the new regulatory frameworks.
McDonough: Very quickly, the capital markets option has become par for the course in the ECA space. The question is probably not ‘Is it coming?’ but ‘It is here. What happens next?’
Bozek: The increasing cost of holding long-term assets will see more of these deals heading to the capital markets. Certain deals such as aircraft fundings are better suited to selling on the secondary market. Project finance is more challenging, as significant draw-downs on the underlying transaction might not occur until 36 or 48 months out. If deal approvals are conditioned on a profitable secondary markets takeout, the challenge is estimating with confidence the ability to profitably sell the asset three or four years out.
Brudar: Looking overall at the region, the inter-regional FDI is driven more by local dynamics than it is by ECAs. It is a good domestic story – demographic and income statistics or growth rates that drive FDI into the region. ECAs are supporting longer-term projects and the large corporates, but much more can be done to stimulate the SME sector and inter-regional trade. It is not just a German, Spanish or Chinese investment anymore; it is actually local. Colombia and Peru are benefitting from construction companies from Brazil, Colombian companies are investing in Central America, etc. The whole region is learning to play their own game and with alliances such as the Pacific Alliance (which includes Mexico, Colombia, Peru and Chile) that embrace free trade and have legal systems that are open to foreign investment, the message is clear – we are open for business.