In the wake of the pandemic, export credit agencies shifted their offerings and increased their exposure to domestic transactions. Some are now looking to regear these programmes to support wider government policies, such as bolstering manufacturing or tackling the climate crisis. As they do so, concerns are growing about over-concentration in certain sectors and the neglect of developing markets. Felix Thompson reports.
The Covid-19 pandemic prompted a drastic change in the role of export credit agencies (ECAs). With exporters reeling from a sudden downturn in trade, as well as de-risking by commercial lenders and insurers, ECAs were called upon to step in and provide emergency domestic finance support.
This change was generally seen as temporary, and many ECAs are already winding down these programmes. However, research from the Berne Union suggests that the withdrawal of domestic offerings may be happening more slowly than expected, giving rise to suggestions that the role of the ECA could be shifting to one of wider support for government policy.
In its 2021 State of the Industry report, the Berne Union details how its members, including ECAs, private credit insurers and multilateral financial institutions, recorded US$2.7tn in new business last year, up 11% from the year before.
The vast majority of this surge in new commitments was driven by growth in short-term (14%) and medium to long-term (9%) export credits.
Yet for domestic support, where the assumed credit risk is not cross-border, significant appetite remained.
“While domestic support fell 6% [year-on-year] from the heights reached during peak pandemic in 2020, it remained substantially above the cover provided in 2019, almost a third higher,” says the analysis, published in August.
“This is especially due to continued utilisation of working capital products – as well as sole manufacturing cover – which continue to grow in significance as part of ECAs’ overall portfolios.”
There was acute demand for ECA working capital support during the throes of the pandemic as large buyers grappled with plunging demand while their suppliers faced order cancellations or a delay on payments. Hard hit by supply chain liquidity strains, even Fortune 500 companies turned to their ECAs for support. Gabriel Buck, managing director of boutique export finance consultancy GKB Ventures, says that some ECAs will have used domestic financing merely as a “stop gap” during the credit crisis caused by the pandemic.
“In particular, short-term domestic finance was not being provided at this stage. Look at the amount of facilities UK Export Finance (UKEF) provided to the aviation industry, for Rolls-Royce, British Airways and EasyJet. The banks lapped up this support because it de-risked their business.”
As he outlines, some ECAs are now pivoting to tailor their domestic support to grow export revenue in the long-term, or are deploying financing towards wider government trade policies, such as tackling the climate crisis, or fixing supply chain vulnerabilities.
“We are seeing ECAs moving towards a political agenda, rather than a pure financing agenda. It could be critical minerals, increasing competition with China or the manufacturing base in their country,” Buck tells GTR.
One way in which domestic financing is being wielded is to boost home-grown manufacturing capacity amid growing concern among major economies over a heavy reliance on other nations for key goods, such as semiconductors.
In June 2021, US President Joe Biden’s administration published a sprawling 250-page report documenting the findings of a government-wide review into the country’s supply chain vulnerabilities, spanning several departments.
The report laid out in detail the need to bolster supply chain resiliency as a matter of “national and economic” security, and focused on four key product areas: semiconductors, biotech and biomedical products, renewable energy, and energy storage.
It also included several recommendations, including for the Export-Import Bank of the United States (US Exim) to explore the possibility of creating a domestic finance programme to help build factories, or expand existing manufacturing facilities.
“The Covid-19 pandemic and recent global events have exposed long-standing holes in America’s supply chains, including insufficient manufacturing capacity, the erosion of the United States’ export industrial base, and competition with China and other countries,” said US Exim, when it formally launched the ‘Make More in America’ programme in April.
“Solving these challenges, fostering economic resilience, and revitalising America’s manufacturing and export capacity requires the United States to use all the tools in our toolkit – including the Export-Import Bank,” it added.
The new initiative empowers US Exim to provide a range of medium and long-term loans, guarantees and insurance in support of manufacturing projects, provided at least a quarter of the output is destined for foreign markets.
For small businesses and those in high-priority sectors – such as renewable energy technology, energy storage, biotech and semiconductors – the “export nexus” requirement is even less stringent, at just 15%.
Exporters and banks have long urged US Exim to adapt its offering in the face of competition from China as well as ECAs in friendly countries, such as Japan, Italy, the UK and Germany, all of which have grown their use of untied financing.
In response to a US Exim survey held last year, several lenders said that the export development guarantee (EDG) rolled out by the UK’s ECA, UKEF, was a “game changer”, with far greater flexibility than standard financing as outlined by the OECD Arrangement on Officially Supported Export Credits.
“With Exim, we haven’t seen that similar flexibility,” said one respondent.
Pat Gang, global head of export and agency finance at Bank of America, believes the development is “not entirely about competing” with other ECAs. “Rather, it’s to help the US to compete with other governments in courting companies and convincing them to establish attractive high-paying jobs in the US.”
“The question is, how does the United States and US Exim, as the country’s export credit agency, incentivise companies to onshore new export-oriented projects in the US, instead of other leading geographies around the world?”
Officials say the programme will be a particular boon for semiconductor manufacturing, with politicians in both Washington, DC and Brussels having become increasingly concerned with chip supply chains since a shortage emerged in mid-2020.
The programme could also be used by companies in other industries, including the automotive or metals and mining sectors, as well as those investing in the manufacture of exportable capital goods, such as farming equipment or aircraft, Gang tells GTR.
Backing innovative tech
ECAs are also turning inwards when it comes to supporting the development of renewable energy technologies, such as wind turbines or solar panels, adapting their offerings to boost local production – even in cases where projects may lack sufficient export capacity to qualify for traditional forms of support.
US Exim says in its 2021 competitiveness report that “numerous ECAs” have pivoted domestic programmes to build up their industrial base for climate-focused or green industries.
“The end result of this focus is building an export base that can meet the requirements for ECA support in buyer credit transactions and meet the high and urgent demand for the global transition away from high-emissions technologies.”
Last year, Sweden’s EKN launched a green guarantee to accelerate the energy transition, agreeing to cover loans of up to Kr500mn (US$57.6mn) and as much as 80% of a bank’s risk on financing, instead of the standard 50%, for environmentally friendly domestic projects linked to Swedish exports.
Similarly, in Q4 last year, Atradius DSB launched a product to cover bank loans for Dutch companies wanting to invest in new green technologies, or those seeking to boost production of green capital goods or projects.
Under the scheme, the Dutch ECA can cover up to 80% of a facility, where at least 20% of the investment is spent in the Netherlands, but says it may provide exceptions if this domestic quota “cannot be achieved”.
A spokesperson for Norway’s ECA Eksfin tells GTR that the agency is looking to diversify its offering to encourage climate-related investment in the country.
“In 2022 we will open for loans and various guarantees related to all kinds of offshore wind parks in the Norwegian Economic Zone,” they say.
In mainland Norway, Eksfin will also make its loans and guarantees available to companies seeking to make climate-related investments with “export potential” and will allow a “less obvious export linkage” than it has done previously.
Its more general investment guarantee covers loans from banks to Norwegian companies looking to invest in domestic export-focused projects, and mandates that 50% of the borrower’s revenue comes from foreign sales.
Elsewhere, both the UK and Canadian ECAs have rolled out transition guarantee products aimed at helping fossil fuel companies – generally medium and large-sized corporates – shift towards cleaner and greener activities.
UK engineering and consultancy firm Wood secured UKEF’s first ever green transition EDG in July last year. As part of the deal, UKEF is providing 80% cover for the £430mn commercial loan from a group of international banks, with the financing helping Wood capitalise on clean energy, hydrogen and decarbonisation opportunities. This includes providing working capital for deployment in clean growth projects globally, and putting in place funding for Wood’s research and development in clean growth sectors.
In May this year, Export Development Canada signed up Bank of Montreal to its new initiative for transitioning carbon-intensive companies, agreeing to cover 50% of the bank’s loans to heavy-emitting corporates, up to a maximum amount of US$60mn per obligor.
The initiative targets companies in the oil and gas, cement and aerospace sectors, and aims to support their carbon reduction efforts by financing projects in areas such as hydrogen, bioenergy, carbon capture and storage, carbon trading, as well as renewable energy infrastructure.
The agreement will support businesses that are either directly or indirectly involved in exports, or have plans to begin exporting.
While ECAs are increasingly touting the benefits of these more flexible, domestic-oriented solutions, there are concerns they could limit the level of support given to projects in the developing world, or to smaller companies, for whom access to finance is scarce. Critics fear this could result in concentration risks arising within ECA portfolios.
The International Trade Committee, a cross-party group of MPs in the UK, published a report in September 2021 warning that UKEF’s overall portfolio is heavily concentrated in certain sectors, and towards a handful of large firms.
The EDG looks to be following a similar pattern. Out of the near £12bn provided in guarantees between 2019 and June this year, roughly £7.4bn went to businesses in the automotive and aerospace industries, namely Rolls-Royce, British Airways, EasyJet, Nissan, Jaguar Land Rover and Ford.
GKB Ventures’ Buck says that UKEF already had substantial exposure to the aviation sector through medium to long-term financing prior to the pandemic. “Now they have doubled down. There is a risk of huge losses as a result,” he says.
An update to the EDG’s eligibility criteria in November last year means that support is also available to companies not yet based in the UK.
Buck argues that there is a risk banks could be incentivised to focus on short-term deals that have a lower cost of capture and are easier to secure, rather than projects in more challenging markets. “I can see why ECAs are making this shift towards domestic financing, but I am concerned about this trend,” he tells GTR.
“Why would a bank bother sending anyone anywhere, when they can tap their domestic network to do deals worth billions of dollars a year? On the buyer side, it can take two or three years to get a deal closed.”
Nonetheless, commercial banks in the UK and US have widely praised the roll out of domestic financing options in their countries.
UK exporters and high street banks told the International Trade Committee that UKEF’s EDG and general export facility – which provides support without the need for an export contract – were a welcome introduction, with one calling it an “enlightened move”.
Bank of America’s Gang says US Exim’s ‘Make More in America’ programme could help the ECA expand its untied offerings, though suggests there is room for improvement.
“We are optimistic about US Exim’s risk tolerance given these deals will be domiciled in the United States,” Gang says. “[But] we would like to see some flexibility built into the product. Currently, the level of guarantee is capped at 80% so it would be helpful to discuss the most efficient way to place this in the market.”