GTR speaks to five global export finance heads to get a sense of how the Covid-19 pandemic is impacting their business, and what we’re likely to observe in the market during the second half of the year.
Sekete Mokgehle, head of export credit finance, Nedbank CIB
How has Covid-19 impacted the export finance market?
Covid-19 has adversely impacted lending in several ways – and the export finance market was not spared – through various factors and, in a sense, created a domino effect:
Cost of funding. It all started with US dollar liquidity drying up, as corporates feared the worse and began a series of drawing in full unutilised lines to give themselves cash buffers for an uncertain future. While increased cost of funding (CoF) spiked globally, the impact was felt more on emerging market banks: taking South Africa as an example, not only did the sovereign suffer a series of downgrades, but the banks did too. The cost of obtaining US dollar funding soared to as much as 200 basis points in certain tenor bands. The real challenge was on deals already approved but not drawn, and where the CoF was yet to be locked in, as well as all those uncommitted lines. Having to reprice these deals led to tough discussions between lender and client.
- Distressed portfolios. Certain sectors have been hit hard by lack of revenues, including airports, airlines and sovereigns, which resulted in clients seeking repayment holidays, waiver requests in respect of covenant breaches, and several other indulgences. These, coupled with consequential portfolio downgrades, saw heightened risk profiles in lending portfolios, creating an environment where considering increased risk appetite on new deals became challenging.
- Reduced risk appetite. Several export credit agencies (ECAs) and multilateral agencies stepped up to offer assistance with flexible terms to enable clients to withstand the challenges being faced. Some agencies developed programmes to directly respond to the impact. However, challenges in executing these programmes remained, given lockdown restrictions limiting the ability to transact. On the insurance side, our observation has been a mixed bag of certain jurisdictions/sovereigns being off-limits, with limited capacity on others, but the sector is still honouring non-binding indications provided pre-pandemic. This was evident in financial closures achieved and commitments followed, for example, in two deals in which Nedbank CIB participated: the Tanzania Standard Gauge Railway and Mozambican Area 1 LNG projects.
What do you envisage the key themes for the market will be for the rest of 2020? Will it be a return to business as usual or will it be a wait-and-see approach?
In my opinion, three key themes will emerge offering a profile sandwiched between ‘business-as-usual’ and the ‘wait-and-see’ approach.
Firstly, in efforts to rebalance their fiscal priorities, several sovereigns will reduce spending and therefore cut their capital expenditures. This will be in response to reduced fiscal revenues and ballooning debt profiles.
Fewer projects, those deemed critical, will stay. For the African continent, we expect increased healthcare-related projects and those helping sovereigns to diversify their economies taking centre stage.
Secondly, project sponsors will delay making final investment decisions to those projects they deem difficult to push through in this uncertain climate.
Lastly, given that projects that lend themselves to ECA financing are typically those with long gestation periods, both investors and lenders are on a business-as-usual mode continuing with desktop due diligence processes, therefore building deal pipelines for 2021.
Jonathan Joseph-Horne, global co-head of structured export finance, SMBC
How has Covid-19 impacted the export finance market?
The Covid-19 pandemic has had a material impact on all markets and the export finance market is no exception. It is important, however, not to generalise. There will be borrowers whose credit-worthiness is negatively impacted but there will also be borrowers able to attract strong liquidity into new deals. In part, this is because the origins of the crisis are different to what was seen in the global financial crisis. The 2008-12 crisis was largely liquidity-led, whereas Covid-19 has been more economic supply and demand-led. As a result, we have seen some deals in some sectors continue to progress and attract liquidity, while at the same time others face challenges. The picture is demonstrably uneven.
It is fair to say that we have seen impressively swift action from many governments, export credit agencies and multilaterals. This has demonstrated a good level of understanding of the type of actions that can have a materially positive impact, such as enhancing access to working capital schemes and short-term debt relief programmes. It is very welcome to have seen these in many cases co-ordinated with regulatory and government-level clarity on how to treat support programmes from a reporting and capital perspective.
What do you envisage the key themes for the market will be for the rest of 2020?
Key themes include the very clear relevance of export finance products, both in providing immediate support for working capital and, where appropriate, debt payment holiday schemes, and in having a clear and vital role in supporting the economic recovery phase. Export finance is a classic counter-cyclical product and in many respects is specifically designed to support and help stimulate the recovery phase of a crisis such as this.
A further key theme that is already evident is the broad relevance of export finance. While it has a well understood and important role to play in supporting developing market borrowers, it is also highly relevant to developed market borrowers, especially at this time. The three-pronged benefits inherent in export finance of risk mitigation, tenor extension and enhancing liquidity make it highly relevant to a broad range of borrowers across diverse industries and regions. We should anticipate an interesting mix of borrowers and exporters who are new to the product as well as those who are seasoned users. We should anticipate an acceleration of the trends seen in recent years towards flexibility in how export finance is applied as the inherent benefits of the asset class have broader appeal.
Chris Mitman, head of export and agency finance, Investec Bank
How has Covid-19 impacted the export finance market?
The impact has been quite immediate and dramatic in some sectors, such as aviation, of course. For others, such as renewables, we have not seen much change and some good transactions closing. For sovereign borrowers in Sub-Saharan Africa, access to the private risk mitigation market is extremely limited for commercial loans, so this traditionally bank-funded market has effectively dried up; new sources of commercial finance will be required for some transactions to proceed this year absent a return of private risk mitigation capacity.
What do you envisage the key themes for the market will be for the rest of 2020?
After the immediate focus of banks on portfolio management and delivering on current pipeline we believe this is an opportunity for banks and ECAs to find new ways to work together to contribute to the sustainability agenda coming out of Covid-19, and for the export finance product to fulfil its much larger potential in this area.
Changes to the OECD rules would, of course, be welcome but that conversation seems to have disappointingly slowed down. Notwithstanding, we expect the work of the ICC Export Finance Sustainability working group, the emergence of LMA Green Loan export credits and the entrance of impact investors should help catalyse increased sustainable activity against a backdrop of increasing industry stakeholder pressure to reduce support of carbon-emitting projects.
Faruq Muhammad, global head of structured export finance, Standard Chartered
How has Covid-19 impacted the export finance market?
Covid-19 has affected the world economies and global trade in a way, in my view, not experienced since possibly WWII. What started off as a health crisis has developed into a financial crisis with constraints on liquidity and rising credit yields, particularly in emerging markets.
With a flight of capital to quality, the emerging markets have seen a spike in their credit spreads. This, combined with the economic slowdown and the stress in market liquidity, is significantly impeding these economies from raising financing for the key infrastructure projects required either for direct response to fighting Covid-19, such as hospitals, or for overall economic and social development. A number of these projects rely on export credit agency-supported financing to raise the long-term funding required. Furthermore, the heightened risk perception is also making it difficult for buyers in these economies to raise the 15% down payment financing typically required for ECA-supported transactions.
The ECAs have reacted swiftly and in different measures to the Covid-19 crisis. It’s been interesting to note the response has largely been on an individual basis rather than a collective one. While the ECA community has responded quickly to the crisis, the measures look to have been focussed primarily on the exporters in support of their working capital requirements. There’s an argument that the impact could be more lasting for measures to support the buyers, particularly in emerging markets, where the need is critical for financing key infrastructure projects and capital expansion projects.
The ECA community has a key role to play in developing a co-ordinated and timely approach to address the issues being faced by emerging market buyers. These measures could be in the form of temporary or permanent relaxation of certain OECD consensus rules, such as the local content rule which would increase the ECA eligible component of projects or the ECAs expanding their coverage to the 15% down payment as well until such time as market normality returns.
What do you envisage the key themes for the market will be for the rest of 2020?
The market does expect to see the liquidity situation easing as we head into H2. However, the credit environment remains uncertain and lenders will continue to be risk averse. Given the countercyclical nature of the ECA product, there will still be opportunities for buyers to raise financing with ECA support. As buyers reassess the priorities of their various projects, deal volumes will remain subdued for the rest of 2020.
ECA-supported financing has been the go-to product in times of crisis and as the buyer economies start reopening I expect to see the transaction volumes picking up. However, the lenders will be more selective – they will be more client relationship-driven and for projects deemed highly critical – in how they will deploy their risk capacity.
Yasser Henda, global head of export finance, BNP Paribas
How has Covid-19 impacted the export finance market?
In its initial stages, the Covid-19 pandemic significantly impacted the liquidity of corporates and sovereigns, caused by disruptions to supply chains, production facilities and construction sites, but also as a result of the impact on demand and prices. A number of sectors have been impacted, including leisure, transportation and automotive, all of which have been under severe stress. While not entirely the consequence of Covid-19, the oil and gas sector has also been significantly challenged.
Countries have reacted to this first phase by supporting the contributors to their economies with strong stimulus packages, in particular guaranteeing liquidity lines, with some export credit agencies extending such support. On the medium and long-term side, ECAs have been particularly proactive and supportive with, for example, the cruise debt holiday, a sector which is a regular, heavy user of export credit as well as a contributor to employment in the shipbuilding business.
The G20 Debt Service Suspension Initiative has provided a certain relief to some sovereigns in connection with official debt. A number of initiatives by development finance institutions have also been launched, aimed at offering support to countries in order to meet expenditures they are facing during the crisis, and/or purchases directly connected with the pandemic.
The speed in delivery of responses to the crisis has been variable.
What do you envisage the key themes for the market will be for the rest of 2020?
One natural area of vigilance in the current context is the evolution of risks for corporates, sovereigns, financial institutions and investors.
Beyond the debate on the shape of the recovery – V, U or W – and while there are specificities, there is a wider view that we are transitioning to a reconstruction, rebuild phase, with the aim of accelerating as much as possible the return to a ‘normalised’ situation.
Purpose-led financings are expected to be a focus for economies: in healthcare, sustaining and upgrading existing facilities and investing in new capacities; in education, looking at universal distance learning and the configuration of educational facilities; and in up-tiering the standard of living of populations in terms of housing, water, sanitation, etc. Energy will remain a key consideration with a focus on sustainable paths, transition, networks and transmission.
The technology, media, and telecommunications sector has been reasonably protected. The deployment of 5G and the significant needs for data, capacity and speed is expected to keep the stakeholders of the sector in the spotlight.
The upcoming phase will require flexibility in deploying support tools, as well as a much-needed sustainability finance framework for ECA-backed business.
All stakeholders of the export finance market will need to work together in order for development finance institutions’ roles to act as an effective catalyst in emerging market infrastructure financing.
