GTR and Arthur J Gallagher gathered industry experts on the sidelines of the GTR West Coast Trade and Working Capital Finance Conference in November 2015 to talk trade finance needs, trends and opportunities for mitigating risk.
Roundtable participants:
- Thomas Burr, director, transactional trade finance, Union Bank
- Hamed Farhadi, director – GTS structured solutions, Bank of the West
- Don Harkey, managing director, trade credit and political risk division, Arthur J Gallagher
- Shannon Manders, editor, GTR (chair)
- Ken Rosenberg, senior vice-president, group manager, Bridge Bank
- Brenda Santoro, head of trade services, Silicon Valley Bank
GTR: What is the current focus of your portfolio in the trade finance space?
Santoro: Silicon Valley Bank has been in existence for 30-plus years, focused on lending to the hardware/software, life science and premium wine industries. Most of our trade business is focused on supporting our core client base through delivery of standard trade products both in the US and around the globe from our international offices. Within the trade team, there are also trade-like structures that exist within the asset-based lending (ABL) group, reflecting the fact that they are more open account.
Our global offices are comprised of a 50/50 joint venture in China with Shanghai Pudong Development Bank, which just received a renminbi licence. There is also a Hong Kong office, a branch in London and an office in Israel.
Burr: Union Bank has been around in various forms since 1864, beginning with the founding of Bank of California and is a combination of a lineage of Japanese banks starting with Yokohama Specie Bank, founded in 1947. In terms of trade, our focus is mostly traditional trade finance. Union Bank does not have any overseas offices, but our parent, of course, has a worldwide footprint. Our focus is on traditional trade in the middle-market and mid-corporate space. We also are able to deliver to corporate clients products of the Bank of Tokyo‑Mitsubishi UFJ group in New York, which are more related to the payables and receivables business.
Rosenberg: Bridge Bank is probably the smallest one at the table. Until July 1, we were about a US$2bn bank that had had an international banking group for nearly 10 years, focused on a combination of foreign exchange, US Exim guarantees, working capital lines, and the traditional documentary‑type credits, such as letters of credit (LCs) and documentary collections. We have no overseas offices and are really focused on the tech sector, working with very early-stage companies. Many of the companies that we are financing are pre-profit but generating revenue. We are looking at their assets as the basis for our ability to provide them credit.
We were acquired on July 1 by Western Alliance Bank in Phoenix, which effectively brought us up to a US$15bn bank. They had no international department, so we are now the international banking group for the entire organisation. My challenges at the moment are figuring out how to roll out all our services to all the rest of those banks.
Farhadi: Bank of the West is a wholly-owned subsidiary of BNP Paribas and is present all over the US. We focus on small businesses as well as middle-market and large corporates. In the working capital management space, we offer specific receivables and payables management solutions. For middle-market companies that want to pay their suppliers, we offer a trade cycle finance working capital line that is transaction-based. Bank of the West also offers all of the traditional trade finance products such as LCs and documentary collections.
GTR: Where are you currently seeing the biggest demand for trade finance?
Farhadi: There is always demand for traditional products, but where we think we can grow is with the working capital management products.
Rosenberg: We do not see a big demand for the traditional products. The technology is moving toward alternative methods of payment. They are not in place yet but that is where the market is probably going. Blockchain is working hard to try to come up with a solution to step in to the trade finance role, but we have not seen that happen yet. There is a lot of noise around it and a lot of banks involved in trying to figure out how to make that work, but no one has quite done it yet.
GTR: In terms of trade credit insurance in this part of the world, Don, what are the big themes that you are currently seeing?
Harkey: I still believe that there are a lot of traditional banking opportunities that exist in the marketplace: lending money, confirming LCs and providing refinancing. I would call those core products. My thought over the last couple of years has been to focus on talking to financial institutions in the US$5bn‑US$50bn asset range. The thought is to try and find a way of using insurance to do more and to bring not necessarily a traditional solution to the table, but rather a solution that expands the traditional lines.
For example, when I talk to financial institutions – and we have been very active in Europe with European banks for quite some time – we have an insurance solution that will support commercial and industrial loans. We began to push that barrier of trade versus non-trade. We have historically been a very trade‑driven marketplace that did not fit in the trade bracket, but I think that we are now moving beyond trade into more non-trade transaction structures. I believe it is a pretty good fit for banks in that specific asset class.
GTR: Do the banks around the table make use of trade credit insurance solutions?
Farhadi: We do. I would like to continue with what Don was saying: when we talk trade finance, most people think export or import finance. With working capital management, however (especially in the US, which is a very big market) our business is between the buyer and the supplier. Either one or both could be domestic companies. We do use credit insurance. We like to use it when we have a portfolio of account debtors that is diversified, or account debtors we don’t know. However, since we have a global network, provided that our group knows an account debtor in any country, we can take that risk without credit insurance cover, so we have a little advantage here over banks that do not have a bigger network. The other thing we see is when we manage trade payables, we could use credit insurance to cover the single buyer. That allows us to take more exposure and better help our client.
Santoro: Credit insurance is really managed by our relationship teams on an as-needed basis. I think that there are still international financing opportunities as opposed to traditional trade embedded in open-account transactions, and that is where we try to create solutions for our clients, leveraging credit insurance where needed. If a LC underpins a transaction, we also want to be engaged but would not typically use insurance in this structure. In terms of our broader business, we are focused on servicing our core client markets rather than going out and looking for additional ancillary business through financial institutions, for example. Therefore, our business is smaller in scope in terms of what we will do, but we also work with lenders in helping to structure transactions.
GTR: How did the lack of reauthorisation of US Exim affect your business?
Rosenberg: Here is what we have done: first, when we anticipated that this was going to happen, we went to any of our clients that were going to have their guarantee expire within a few months and renewed them early, so that we took care of the potential of it running off during the hiatus with US Exim. We then also started looking into the private insurance market with the credit insurance capability as an alternative, and that has really driven us to look at that product as maybe being one that we want to develop anyway. That may come along in the future.
We have three clients lined up waiting for the US Exim approval to take place, so that we can move them on to that platform. For our client base, it is probably the most attractive method of guaranteeing or insuring that, because of the performance-guarantee component of it. You are getting the guarantee of the client’s performance as well as the ability to collect on the receivables, which makes a big difference for the client base that we have. They are often pre-profit and they are rapidly growing companies that are focused on market growth rather than profit growth. There is always the risk that something is going to go haywire with that kind of company, and with the performance-guarantee element of the US Exim programme, it makes it much more attractive.
Burr: When US Exim was not able to consider new deals due to its authorisation lapsing, what it did create were some new innovative companies that were figuring out ways of financing exports using credit insurance on receivables. There are ways that you can cut and paste different risk mitigation products and techniques to mitigate export credit risk that I have heard about as a ‘substitute’ for US Exim programmes but, in the end, what non-banking critics are not looking at is risk and profitability aspects of financing exporters that, in the banks, focus on pricing models and loss-given default rates. When they look at the loss-given default in the terms of the credit – not just the credit rating of the customer – US Exim credit administrators are very comfortable having the US government guarantee standing behind the credit because the reliance of getting paid is very high. When credit administrators step outside of having this government guarantee they do not continue to have the same comfort level, so not only does the pricing tend to go up but the liquidity of export finance credit goes down. The credit administrators are somewhat familiar and comfortable with trade, but that US Exim guarantee is the warm blanket that allows them to sleep at night.
In theory, therefore, you can cut and paste together an export finance substitute for US Exim financing – and I think it is a good idea to do that under the circumstances – but, in practice, when you go to ‘get the money’, that solution, as logical as it can be, is still not a warm blanket. That government guarantee is what keeps loan growth moving. Ken says he has three deals he is waiting to book; I have two I am waiting to book. People are asking whether there is another way of doing export financing outside of US Exim, and there is. When we show credit administrators how we can create a similar working capital facility and what they have to approve they are not so sure that they are going to be comfortable with that alternative structure and risk profile. When US Exim gets reauthorised, I think there will be a big spike in Washington of new working capital and insurance deals. It is this aspect of how banks view and accept risk that is not figured into the discussion about the need for US Exim. Critics are looking too much at the surface logic of it: they believe banks can substitute risk mitigation tools A for B to put a functional facility together, and it effectively does the same thing, but it is the underwriting, the profitability and the risk that are not going to pass the sniff test in the bank. It’s simply not the same. Without the bank credit authorities being on board with the risk, no alternative solutions are going to provide the same level of comfort when it comes to financing export inventory and accounts receivable as US Exim.
GTR: Don, can you talk us through some of the products that are out there more on the private side?
Harkey: I think it starts, as we talked about earlier, with a lot of the traditional products remaining. If you want to confirm LCs, that product is there; if you want to finance your client’s buyer, there are plenty of buyer-credit structures out there. I see this domestically as well as internationally: we do about as much domestic business as we do international business. In terms of the supply chain structures where you see credit capacity start to build up in banks, whether that is driven by Basel III or by the legal lending limit or by ‘That is our sweet spot and now we are beyond it’, according to the credit manager or what have you, there are plenty of insurance solutions out there that are designed to help manage credit capacity.
As I indicated earlier, however, in terms of where our industry is trending, we are working on a lot of non-trade-related business. If you talk to a financial institution, we start talking about commercial and industrial loans, and you can use your imagination a little and stretch that trade connection somehow, in some way, but the definition is not quite as rigid as it used to be. In terms of ‘banks as the insured’, when you get involved in the ABL business or receivables insurance, you will find that a lot of insurance companies will be quick to make you the insured party now as opposed to letting your client become the insured under a supplier credit multi‑buyer/single debtor‑type transaction, and you become a loss payee. That is an interesting trend.
From an insurer point of view, we have five Lloyd’s syndicates that have moved into the US in the last two or three years. To me, that is pretty overwhelming, and I am not sure whether they moved here because they felt like it was a land of opportunity or whether they thought that some domestic insurers were being a little complacent. Lloyd’s, being who they are, felt like they could make a play and I think they have all done a very good job. They certainly understand the single debtor‑type approach to the business, and are pretty good business partners, I would say. There are lots of things going on in the marketplace but, from my point of view, they are all designed to bring new and interesting solutions to credit capacity in all ranges of the scale, from the SME to the large multinational.
GTR: Looking at tech companies in the US, are their working capital needs unique?
Rosenberg: Maybe I could describe what I see as the path of some of these companies. They start out, early stage, working just in the US but, because of the nature of the product or service – and usually service – they are forced into overseas markets very early. You will find that they establish some sort of outpost in Europe or Asia – or both – and the first thing that they have to do is to figure out how to manage the foreign exchange issues. Eventually, they get to the point where they are invoicing and delivering products, which is when we start using the traditional trade or US Exim-type programmes to support them. Eventually, they get to the point where they have revenue generated and staying in that foreign location, so you are following all of that process. Different products fit at different times, so our challenge is keeping the product available that is necessary for them at that particular stage.
Santoro: From my perspective for the companies that we bank, they have different working capital requirements. They are scaling for market share, so that presents a different financial picture and metrics against which you lend and, therefore, different ways of structuring a credit. It is hyper-growth so it requires a unique credit view.
Harkey: I would just add a comment in terms of alternative finance. What we see on the east coast are a lot of private equity (PE) companies and investment banks that run consulting practices and are looking for ways to create funding. It is all about taking liquidity and employing it for a yield or getting a dividend, etc, and everybody is in the game. The interesting part – and I have been involved in a number of discussions – is that these guys take a lot of pride in being deregulated, because they can lend money tomorrow. They do not have the compliance challenge or the back‑office issues. We just took a cursory view and I think the top 20 or 25 management companies, fund managers or PE companies have US$240bn of excess liquidity that they can put towards financing international business. I see a lot of it going to capital equipment such as ships.
They want to put it out in big chunks and leave it out there for long periods of time. They are lending at Libor plus 8-10%, which they get. A lot of times, it is not because it is a risk-reward but because there is no commercial bank in that space. It is just that they are the only game in town and it is a good credit. It is just supply and demand.
