Participants at GTR’s annual export finance roundtable in London assessed business growth and decline, the top export markets for 2017, the evolution of the use of capital markets, and the impact of ECA direct lending, amongst other key issues.
- Ashish Anand, director, head of ECA, trade and working capital, Barclays
- André Gazal, global head of export finance, Crédit Agricole CIB
- Yasser Henda, global head of export finance, BNP Paribas
- Jonathan Joseph-Horne, global co-ordinator and head of export & agency finance Emea, SMBCE (chair)
- Ralph Lerch, global head of export finance, Commerzbank
- Nigel Phillips, head of export & agency finance, UK, Santander
- Simon Sayer, head of structured trade & export finance Emea and global co-ordinator, Deutsche Bank
- Alex Taylor, managing director, Emea head of export & agency finance, Citi
- Gisela von Krosigk, global head of financial institutions, trade and commodity finance, KfW Ipex-Bank
Joseph-Horne: The last time we met for this annual roundtable, 12 months ago, we saw a general slowdown in our markets, but I don’t think any of us predicted or even got close to imagining what would happen in the political world. I don’t think any of us would have predicted that the UK would have formally started the process of exiting the EU and that Donald Trump would be in the White House. Perhaps a good place to start, therefore, would be a review of the past 12 months.
Sayer: My summary would be just how resilient the market has been in 2016. I thought 2015 was a slightly disappointing year. It was a little bit weak in terms of the export finance market. 2016 showed just how resilient the product set is and how relevant it is in the current market, in terms of world politics, world economics and the requirement for finance. 2016 was better than 2015 in terms of raw data. Markets did pick up. And the markets that picked up were much closer to home and most of our head offices – that is in the Middle East and Africa, and that has been the real hotspot for all of us, which has meant that our relevance internally has grown as well.
In terms of sectors, power has obviously been very dominant in the region. Oil and gas is back a little bit.
We deal with clients that require financing, and there have been an awful lot of those that previously weren’t clients who have come to the market, who have been keen on using these products, some of them for the first time, some of them for the first time after a long gap, and some old borrowers who have continued to be regular borrowers. So, resilience is my buzzword for looking back on 2016.
Henda: On the other hand, if one would look coldly at the figures for medium and long term ECA-backed finance, you would see two sets of figures for 2016. Overall, we have seen an increase and an expansion of the export finance market. The conventional banks’ involvement in the transactions and sectors that we look at has however seen a decline. So the market size has increased, however the commercial bank component has shrunk. And it is that gap and that difference that has been filled by direct lending from ECAs and policy institutions.
This being said, as an institution, 2016 was a great year. We saw variations between regions. Emea had booming growth. In particular, the GCC is seeing growth for almost three to four consecutive years now. This is probably the only sub-region where we saw consecutive years of growth. Asia was disappointing in terms of its potential versus what we see happening. The Americas is somewhere in between.
Lerch: Depending on the figures you are looking at, volumes for medium and long-term ECA business last year were not that robust – they have dramatically declined. Export finance is a diverse and fragmented market and each participant has a different view on it. But we can’t ignore that the investment climate in various emerging markets is rather weak.
Exporters, banks and ECAs are desperately looking for viable projects with investors or sponsors who are still confident to go for capex in a weak investment climate, and export finance is the perfect instrument to provide predictability in such uncertain times. There is a lot of demand for reliable financing offers and we see an impressive number of new enquiries for transactions and projects these days. But looking back, I wouldn’t fully agree that it was a good year for ECA business in general, especially from the commercial banking perspective.
Anand: On the ECA side, over the last 12 months we have seen two ECAs move in different directions. We’ve seen US Exim still determining its future and we’ve seen UKEF move forward in terms of showing real drive to make itself relevant in the environment in which it operates. We are finding an appetite for different products, different geographies and different currencies coming to the fore of those discussions.
The global changes in the political landscape, particularly within the US, have set a new protectionist tone. It’s worth thinking about the importance of markets remaining open, because that is exactly where trade becomes very relevant. Looking at how ECAs can play a role in that regard is critical. Over time, it will be interesting to observe how the markets either remain united or have a degree of fragmentation as the political scene continues to unfold.
Gazal: There are new entrants, both in terms of banks, and in terms of borrowers. We’ve seen an evolution of the product. It is always readjusting itself to the reality of the marketplace. As far as traditional borrowers are concerned, they don’t necessarily come to the market the same way they did before, be it for economic reasons or issues particular to their situation, such as the ability to raise alternative financing.
If we look back at what most of us were saying a couple of years ago, we thought there would be a contraction in the number of banks which would be active in this business. Well, today, we are not seeing that. We have instead seen some of the smaller banks becoming more interested in the ECA product, so it adds to the liquidity in the marketplace.
Sectorial-wise the most significant impact we have seen in 2016 is the reduction in telecom transactions: this is a cyclical business which is typically driven by technological evolution. Until operators invest in 5G backbones, I expect activity to remain low in this sector.
We are seeing a constant evolution in the ECA business, and we are also witnessing a lot more competition between ECAs, which is manifesting itself through the way they support their exports. Be it through government policies, be it the form of content rules, be it the introduction of direct lending – and all this is having an impact on where and how banks play in this space.
We have also seen the dynamic change between ECAs in terms of how much they support exports, and I think that if you look at the programmes of Euler Hermes, for example, they are pretty standard and stable. They have maintained their policy all along. You look at Sace or UKEF, or at some of the Asian ECAs, they’ve been more aggressive in going out and doing more business. I think this reflects the economic and trade policy of the country, but it also reflects the readiness of ECAs to be more adaptable and really go out to get business, sometimes directly from borrowers.
Von Krosigk: We had a brilliant year in 2015, and were pretty sceptical about 2016, but at the end of the day we were astonished at how well it went. ECA-covered business is one of our core businesses, and the volume of the business we did last year was more or less the same as the year before, but there were some far bigger transactions. The number of ECA transactions nearly halved compared to the year before. We are very busy in energy and cruise ship financing, and there was some extra business to be done in that sector last year.
Taylor: On the industry side, you mentioned cruise. We were seeing a tremendous amount in the prior year on the shipping side, and prior to that on the offshore. We’ve seen it really just gravitate very much towards the cruise space, and there being a tremendous amount of business on that side. We have seen aviation completely shut down.
Some of the traditional markets we look at, such as Russia and Turkey, were much, much weaker than we would have normally expected. But we are seeing a lot in developed markets: North America and Western Europe.
We’ve seen a number of borrowers that we wouldn’t have expected to come to market and raise ECA financing, suddenly be interested with the product. This is in happening in the oil and gas space, where we’ve seen companies of a credit standing that can access capital markets, access syndicated loan markets.
Phillips: When you talk about the size of the transactions from the sponsors, and new liquidity providers coming in or returning to the market, it’s very much a predominance of support for those names, rather than support for the exporters. So, the exporters might pick up on these mega transactions but the ECAs are out there, most of them actively pitching the business to the sponsors. Are people actually supporting the exporters to win new business, or will they succeed because the sponsors are the people who the ECAs and banks are spending time with? Has the market completely gone towards the buyer/borrower, where everyone thinks the business is going to be won, rather than supporting the exporters in the domestic markets?
Sayer: André mentioned competition amongst ECAs. I think it has been quite a dramatic year in 2016, in that having been on a level playing field sort of scenario five years ago, to then starting to compete with each other, I think 2016 saw very overt, focused, gloves-off competition between the ECAs to roll out new products, be more aggressive in new markets, beat each other into new markets, to open up for cover and set up new programmes.
It has been another year of great product development and advancement, and a real sea change towards where the competition is accepted as a sort of currency between the ECAs.
Henda: I would also add that the playing field is shrinking. There are a number of regions that are becoming more and more sensitive in light of increased geopolitical risk, hence why the competition is exacerbating.
Phillips: And to what extent do you think the financial institutions are helping that product evolution within the agencies?
Sayer: Banks are always driven by their clients. So, to the extent that banks are supporting their clients, trying to give their clients an edge, doing their best for their clients, then banks will end up pushing export credit agencies as well. I think the banks have played a very active part in that. I think our voice is not as strong as the exporter, who continues to be the real ECA client from the ECAs perspective, but of course you assist that process.
Joseph-Horne: I think the seeds for much of the product development we have seen were sown in a very different environment. I think they were sown when the market saw liquidity constraints, and I think it’s taken time for the market, and the agencies, to develop products to adapt to what the market experienced in the financial crisis.
My view is that, as a result, we see more sources of liquidity for ECA finance today than we’ve ever seen in the history of the product.
It will be very interesting to see how, in more benign market conditions, these products are delivered by the agencies and banks and by the alternative liquidity providers, whether they be multilaterals and development banks, insurance companies or hedge funds. So, looking forward to 2017, would anybody like to give any general thoughts on where they think the market is heading in a general sense?
Gazal: There is a lot of uncertainty out there. Considering the rhetoric of some elected officials, we don’t know if we’re heading towards a trade war of some sort, or if we’re going to operate in a normal environment. This unpredictability is impacting investment decisions. There’s a lot of wait-and-see out there.
In addition, energy prices are also going to impact the budgets and spending of a number of countries, and we don’t know yet where that’s going. With the geopolitical environment, which is relatively unstable, we could end up with wild fluctuations in oil prices, which could impact how countries will deploy their priorities and how they are going to access the financing markets.
In terms of the impact on export finance, other sources of financing will also impact the offer that is out there. We have seen Middle Eastern countries that were extremely active in the ECA market over the past year or so now accessing more the capital markets. Will this have an impact on ECA volumes? We will have to see how this pans out.
We are also seeing countries like Argentina open up. So that is potentially a market that is back on the map.
Africa is very dependent on commodity prices, oil prices, and, consequently, on budgets available for spending, and let’s not forget the IMF restrictions on a number of those countries as well. Many of them benefitted from IMF facilities which come with borrowing restrictions.
In Asia, I don’t see much growth for the product. There are some countries that will be active, but there are many that are not going to be borrowing from ECA markets. Vietnam is one of them.
Henda: We see a confirmation of positive trends in the cruise sector in 2017. We will continue to follow and analyse the dynamics of this sector going forward, whether in terms of the shipyards segment, or in terms of the niches in which the cruise companies are investing. We are still hopeful that the telecom sector will bounce back in the near future, although we are unlikely to see the same pace as in 2014/15.
Regarding Sub-Saharan Africa, the IMF is hopeful that the majority of countries that took part in the various programmes under implementation will be able to strengthen their finances and better prioritise key infrastructure sector projects. And hopefully there will be some quality opportunities coming out of that prioritisation for ECA-backed financing.
Turkey is a domestic market for us as a bank, for which we had a strong year in 2016. We will continue to closely follow this market.
Asia, and particularly Indonesia, is going at its own pace, but still delivering; and in Latin America, we are hopeful that Mexico will reach its potential in particularly the energy sector.
My perspective is that, depending on where the interest rate environment will be, and the currency, the competition between debt capital markets and our product will be very interesting to follow.
The volatility in 2016 meant that there was a window for capital markets where it would have been unreasonable not to go to the capital markets, and many issuers have taken advantage of that, and that was directly in competition with our asset class.
Joseph-Horne: Ten years ago, if we listened to what everybody was saying about capital markets, we would be sitting here today anticipating that all export finance would be financed through capital markets. I think the reality is that it is still a small percentage. It really hasn’t grown as a primary distribution route. Is it a product that suits export finance or not?
Sayer: I think yes, it is a product that is suitable for export finance. Nobody could have foreseen the great wave of liquidity that came into the market over the last 10-odd years. It was unimaginable to have scenarios where both the Fed and the European central bank were pumping so much liquidity into the market. That has been the real reason why capital markets have not taken off in our business to the extent that we would have expected, and the extent that was indicated by some of those early deals that did get done.
I think it’s still a very sensible proposition, and banks’ balance sheets are not the most efficient place to fund government-covered assets, where the assets that you are funding, in most cases, have a better rating than your own institution. That is probably untenable in the long run.
I think that there will be more one-off capital market solutions again in the future, and not just that, there will be programmes introduced into the market where it’s approached in a much more systematic fashion. We see more and more institutional investors interested in this asset class. The regulatory environment for insurance companies, in particular around Solvency II, has meant that it becomes very efficient for them in certain jurisdictions to hold this asset class with extremely low levels of capital allocated to it, and they’re desperate for long dated assets in particular. I think it’s down to us to play a role in helping to form a nexus between the asset class and those investors. The real catalyst will be when some of this liquidity starts to drain away. Which inevitably it will, but it will take time.
Taylor: If we view capital markets in terms of what has been done, which is the ECA-wrapped bond issuance, we’ve seen that a lot in the aviation space, and we’ve seen it undertaken elsewhere as well. The pricing benefit of the capital market issuance doesn’t always tally with where the bank market is. When you compare it on a like-for-like basis, the value is really the optionality they give to reduce the price to the borrower. That’s a benefit which is a free option that banks are giving to borrowers, where they are bridging and they are giving the option to take out to capital markets. That is interesting.
The actual pricing, at least to my mind, of where the capital markets are coming out, is a rational price. We see banks coming in under this level on many occasions, because banks have cross-sell or other rationales, which mean that the capital markets are not always competitive.
My personal view is that actual bond issuances will become less prevalent, and banks will start to extend loans and subsequently repackage, whether that will be through notes issuance or loan format sales. If we want that market to develop, we need to think about how we make the underlying product that investors purchase more liquid, and, there needs to be more volume. As that volume of liquidity increases, the pricing will come down and the capital market investor base will naturally grow.
The main non-bank investor consideration is the relative value of the ECA facility as compared to the relevant government issuance. They factor in a liquidity premium to address their perception of illiquidity of the ECA asset versus the relevant government bond. As we improve liquidity and demonstrate that this is actually a liquid asset class, we should see the price come down, permitting us to pass savings on to clients. The resultant price compression may be challenging for banks who have relatively large balance sheets, but I think that over time there will be a natural progression in this direction.
Phillips: It’s unlikely that one financial institution will have enough volume to be able to create that market and give the investors the sort of flow of new issues that are needed. It could perhaps be achieved on a structural or programme basis, where various institutions can pool assets into a programme which will then issue, rather than just on a sole basis.
Joseph-Horne: I think it will be interesting to see whether the product evolves and the capital market delivery of the product moves from it being a primary market distribution tool into a secondary market distribution tool. My guess is that nobody currently knows the volume of true liquidity from capital markets for ECA-backed paper.
Gazal: Today, the only ECA loans that can be issued in the capital markets are those backed by US Exim and UKEF, because they are 100% guaranteed. When you have a 95% insurance, which is mostly what European programmes offer, the product is not adapted to capital markets issuance. You have the refinancing or securitisation guarantee programmes, but this brings more liquidity than it does off-balance sheet treatment. There are some ECAs that can extend it to off-balance sheet treatment, but the gist of it is that we are talking about repackaging here, and I think repackaging is probably the way this is going to go. This will help you indirectly access the markets for these 95% insured loans, because most ECAs will not change their policies to adapt to the capital markets.
When it comes to using the capital markets through direct issuances, it is always a question of price and the returns that investors are seeking. What has happened over the last couple of years is that the bank market has been much more liquid and much more aggressive. Investors have expectations in terms of yields that were not met, and I think that we are going to see that, with time, this will probably change, but not to the extent where you are going to have a dramatic disintermediation of bank financing.
There is always going to be room for banks, because you’re talking about construction periods which are not adapted to the capital markets. These periods will have to be financed by banks. The role of banks is probably going to be different, and that’s why the repackaging makes more sense, once you have a funded deal.
Anand: The other point I’d make is the way in which some of those institutional investors that are interested in the DCM market are also talking directly to ECAs as well. I’m thinking about some of the European ECAs, where they are encouraging those institutional investors to talk directly with them and form part of the financing solution. From a primary perspective they’re trying to overcome some of the limitations around what happens in the DCM market by having those direct discussions.
I think there is going to be a possible role for institutional investors to play in the ECA space. But for primary financing, it has to be the right product. I’m not convinced that the DCM market has evolved to the point for it to be at the forefront of ECAs from a product perspective. Obviously there are two principal ECAs that back the DCM market, and I think the activity, particularly the refinancing product for one of those ECAs, has seen very limited appetite in terms of pickups. Unless the primary investors through the DCM model seek to change some of the basic guiding principles, then it will either be secondary market or through the direct discussions that are happening with some of the continental ECAs such as EKF and Giek.
Phillips: We mustn’t forget though that ECA is predominantly a relationship-driven business, and the relationship between a sponsor/issuer/borrower and the bank will be vastly different to that with the capital market investors. The cost advantage to the sponsor of having capital markets fund their debt must outweigh the relationship history with their banking group. Such relationship leverage is unlikely with the DCM. So I don’t doubt that it can be done, but it will be selective.
Gazal: Which is why the repackaging makes more sense, because otherwise, you’re talking about a US Exim or UKEF bond where the investor is directly facing the borrower. I think this is a big risk which borrowers have not yet fully grasped. Whereas, when you are repackaging, the bank still has a role. The bank is still the one who is fronting the deal and still has a role in it.
Sayer: One of the challenges with repack, I say with experience, is that the ECAs are mostly all incredibly busy at the moment. And in repack by definition, you’re talking about a deal that was done two or three years ago, and frankly is just not their priority when they’re trying to promote current-year exports. Getting the ECAs to concentrate on the required consents and approvals in order to go through a repack in our experience is a real challenge, because they understandably have got other things to do.
Henda: I am a strong believer that it will happen. Probably sooner rather than later.
Yes, there is ample liquidity in banks. Central banks have been strongly supportive over the past few years, but there are also significant amounts of liquidity with the institutionals and they are prospects for a significant need for financing infrastructure across the globe. So simplistically, significant liquidity with institutionals and significant capex driven opportunities. The channelling is, however, challenging today. But it was painful for the aviation sector at the beginning. And when people started testing the capital market institutions for aviation, it was painful. I think today we will continue seeing some opportunities, like in shipping. We’ve brought ourselves a couple of institutions to a mining and metals deal, we brought a couple of institutions to renewables, so these are still one-offs, but culturally the gap is narrowing between the loan format and the bond format.
Joseph-Horne: One of the areas where the ECAs and their related entities have been particularly busy is direct lending. I think it’s one of the areas where we have seen really quite significant product development and growth, so I’d like to ask a question on the impact of ECA direct lending, and whether it is changing the relationship between ECAs, borrowers, exporters and the banks?
Taylor: It depends very much how they’ve set it up. If you look at some of the programmes that are around, they very much embed a bank in the process, and it provides valuable liquidity. I don’t think that presents disintermediation. If you look at Export Credit Norway, you have a very different scheme where you have someone that is looking to take the whole asset and you don’t really have much of a role. And that can cause people to view them as more of a competitor. But then again, we have worked with them on a tremendous number of deals, and they’ve been an important partner.
In a time where there’s lots of liquidity, as banks we might feel that they are removing the opportunity to book an asset, but we have found them incredibly useful when there is a crisis. So it’s a balance across the two. At Citi we work across all of the agencies: we would look to involve them where we can, distribute to them, and we have found them to be quite beneficial, particularly in driving pricing.
On the funding schemes, at least, due to the absence of a true sale accounting treatment, we struggle to see the value in the approach.
Henda: The market is cyclical. So from that perspective, it is beneficial to have direct lending products. The initial objective was to weather the crisis, combined with an objective to fill gaps in jumbo transactions, and the flipside for the ECAs is that there is a need to make those direct lending structures workable and economically viable even at times where there is ample bank liquidity. As banks, we need to keep in mind this balanced approach.
Lerch: We also have to acknowledge that banks have different business models. From an ECA perspective, it would be wise to be on the safe side and to have different funding alternatives in place which are attractive for various business models of banks. ECAs have done a lot to widen the scope of such funding solutions in the last couple of years. Therefore, we cannot complain. Also direct lending schemes might be a valuable option as long as they are not crowding out commercial banks by undercutting margins, then it would be a sensitive issue. Banks have widely adopted these funding solutions in their structuring exercises and use them in favour of their clients.
Gazal: Clients love it. They have options, they have alternatives out there, and I think the governments in some way or other have adapted to the liquidity crisis of a few years ago and they came up with products which addressed that need. Some of them have used their direct lending programme a bit more than perhaps necessary. I think that it goes back to a point that we brought up in the discussion earlier. It’s the fact that they are now competing against each other. Those that have that direct lending capability are pushing the others to try and match that in some shape or form. And I think this is where you see a shift. The risk is that banks get squeezed out. At the end of the day, if I were a client, I would be very happy with this range of products, but buyer beware!