At GTR’s annual export finance roundtable, we (virtually) gathered leaders across the market to discuss the impact of Covid-19 on the business, export credit agencies’ response measures and evolving product offerings, and the ways in which the pandemic is driving a new approach to sustainability.
Roundtable participants:
- Francesca Beomonte, global head of structured trade & export finance, UniCredit
- Jonathan Joseph-Horne, managing director, global trade finance department, SMBCE (chair)
- Yasser Henda, global head of export finance, BNP Paribas
- Richard Hodder, managing director, global head of export & asset finance and head of Emea infrastructure, HSBC
- Faruq Muhammad, global head of structured export finance, Standard Chartered
- Werner Schmidt, managing director, global head of structured trade & export finance, Deutsche Bank
- Richard Wilkins, Emea head of export finance, JP Morgan
Joseph-Horne: A few months into the Covid-19 pandemic and with some countries now easing out of lockdown measures, what has been the impact on the export finance market? What sectors and markets have been most affected? What is your impression on the response of export credit agencies (ECAs) to the pandemic?
Schmidt: There have obviously been many developments over the last few months. Initially the key focus for companies was trying to secure liquidity – that was of utmost importance to most of our clients. The ECAs stepped up quickly to tackle the liquidity shortage, and it was amazing how swiftly governments and lending institutions have moved. In terms of projects and export credit facilities we have seen deals closing, which is great, but we have also seen a lot of delays for three main reasons. Firstly, due to supply chain interruptions. Secondly, people were not able to move into project sites because of travel restrictions. Thirdly, investment decisions have been delayed because the priority has been on securing liquidity. Nevertheless, all parties were quickly aligned with their response, focusing on the core issues and challenges, and that was impressive.
Beomonte: Some of the project delays were also related to sovereign borrowers. A lot of countries, in Africa for example, are now looking to secure IMF funding – so the priority for investments is changing. In terms of transactions that were finalised during the first half of the year, many were originated before the crisis. We’re expecting a different story for the second half of the year due to the impact of lockdown measures, which will affect world trade and the generation of new projects in certain areas.
In terms of specific sectors, some – like the cruise industry, or any industry related to tourism, travel or transportation for that matter – have suffered a lot, whilst others, like infrastructure, medical, telecommunications and sustainable projects, are now developing better than before.
Henda: The first phase of the outbreak was that of survival, of finding liquidity and solutions to continue executing projects. Liquidity buffers were the priority for corporates and sovereigns in the very first weeks and months of Covid-19. ECAs in some countries, such as the UK, Spain and Italy, were involved in supporting the raising of this liquidity. Many companies and sovereigns received significant support through stimulus packages and the G20 Debt Service Suspension Initiative (DSSI). ECA support was particularly strong for the cruise sector, in terms of the cruise debt holiday.
The target for our export finance franchise was delivering what had been initiated pre-Covid-19, which wasn’t a straightforward exercise. Even though some transactions have been initiated in 2019, there was a risk that corporates had changed their minds, that their priorities had shifted, and that liquidity would be reserved for other purposes.
According to the league tables, the market is still down, but not by as much as one would expect in such a difficult context. My feeling is that the risk profiles of ECA transactions remain relatively solid, which is reassuring for our industry.
Muhammad: In terms of the corporate pipeline, the liquidity phase was a bit of concern in the immediate Covid-19 period. Most of H1 was spent on transactions originated pre-pandemic because of the general lead time that ECA transactions take. There were some positives there, particularly in the UK, where UK Export Finance (UKEF) stepped up to look at liquidity facilities for corporates, and with a quick turnaround.
Overall, ECA-supported financing has become more competitive compared to similar debt instruments, and so we are seeing the countercyclical benefit of ECA-supported transactions.
The issue really has been around some of the project delays, which have come on the back of contractors not being able to undertake projects. Similarly there have been some other force majeure conditions which came into play in some of the projects, resulting in delays. I believe that will continue to have knock on delays, which is one of the reasons why we will see lower volumes this year. I’m hoping things will start getting cleared up and, moving into next year, we will see that flow picking up again.
The risk profile is an interesting aspect. We have been tracking the G20 DSSI, which is impacting a lot of the countries that are traditionally ECA markets, particularly on the sovereign side. By and large this is considered a positive, and the responses from the ECAs that we have spoken to is that they continue to support those markets. Case in point is UKEF, which has increased its credit limits on some of these sovereigns, particularly in Sub-Saharan Africa. Other ECAs that we have spoken to have said that they will look at the project and, if it supports their economy, they will get involved.
In terms of deals, a lot of H1 was momentum. It is going to be interesting to see how many deals actually close in H2. Not because sponsors don’t want to do the projects, but because of the natural delays which have crept into the process as a result of the pandemic.
On the sovereign side, there are challenges in terms of commercial financing typically associated with this part of the business. On the corporate side, companies understand that they need to step up, so they are willing to put in more of their equity to get the associated financing from the ECAs. That will continue and hopefully offset some of the delays coming from the sovereigns.
Wilkins: It’s been incredibly busy for anyone involved in the export finance business, which shows how very connected our activities are to the real world. As everyone has said, the immediate focus was on liquidity, which is where it needed to be. If you look at the OECD Consensus, essentially we’re providing financing to the buyers of exports, but if exporters are unable to stay in business then that part of the equation disappears. So we did see a lot of focus on that, particularly out of Scandinavia, with products they already had on the shelf, and with UKEF.
The debt restructurings/moratoria that happened quite quickly in the aviation and cruise sectors were also very important. In relation to that, if you look at the sector understandings within the Consensus, you have fewer countries that are party to the aviation and cruise sectors, which made it a lot easier to come up with quick solutions there.
When you look at the working capital facilities and so on that have been rolled out, they do not come under the Consensus and therefore don’t have the WTO exemption. I think that made it a little bit more difficult for ECAs to react, immediately or in specific ways, and it’s why some of the off-the-shelf products that had been approved by the European Commission, for example in the last crisis, were the ones which were dusted off quickly. Where we find ourselves now, potentially between two waves of Covid-19, it’s going to be key to focus on change within the OECD Consensus.
Hodder: Our experience is very similar to what’s been said. There’s been a huge focus on liquidity in Europe, particularly March through April, and working with the ECAs on their schemes to support our borrowers. A lot of work has been trying to amend existing loan agreements, particularly where you’ve got a number of single asset financing, and the first two months of the crisis were focused on trying to get these issues sorted out. But as we’ve moved through the end of May, June, and July, the focus really has been much more on new business. I’m particularly pleased to see the Asian pipeline moving again. Nearly all the transactions that were in the pipeline have reactivated and are pushing forward. That has been very encouraging to see. Those projects that may have stalled or dropped out of the pipeline elsewhere in the world are being replaced by things that were certainly not on the agenda at the beginning of the year, such as financings with the support of SACE or UKEF, which have come as a response to the crisis to support liquidity in ways that we probably wouldn’t have seen six months ago.
Compared to three months ago, I’m now much more optimistic in terms of the overall budget for the year and more comfortable with the deal flows and evolution of the market, whether it’s through Covid-19 related schemes, new borrowers coming in to diversify their liquidity, or sovereigns looking at ways to try and stimulate their economies.
I think the market will continue to evolve in a way that we saw after the financial crisis. New things will emerge, and others will become less relevant. But it’s the nature of the ECA product that, in times of stress, it does present an opportunity. The fact that everybody’s been so busy demonstrates that we can move to address issues, but also that we can make new opportunities as well.
Joseph-Horne: One of the themes that is coming across loud and clear is both the speed and the breadth of the response from the agencies – ECAs as well as multilaterals. I’ve observed with interest the way that this response has included working capital solutions. What are your views on this? Are we seeing a paradigm shift in agencies’ product offerings? Will we see a strong, continued development of these kinds of products that sit outside of the OECD Consensus? Or will these products disappear when a sense of normalisation returns?
Beomonte: I would say that for some ECAs, this trend towards the broadening of products on offer began before the crisis, and Covid-19 accelerated the process even further. I believe it is something that will remain and that ECAs will continue to enhance their suite of products.
Wilkins: Just adding to that, if you look at Canada’s EDC, for example, over the last few months they’ve turned almost exclusively to domestic support. No doubt they’ll turn back at a certain point, but most of the ECAs have looked at domestic support. I suppose, generally, what we have is a debt product, and because the world will be more heavily indebted post-Covid, there are going to be questions around debt sustainability and so on. If you’re looking at the traditional buyer credit, some nations, for example in Sub-Saharan Africa, won’t be able to add levels of debt that they may have done previously. Perhaps that was the trend in any event. Maybe we will see exporters being asked to finance projects or to develop the working capital side of things a little bit more as part of the equation. Therefore, we may see more of that kind of support from ECAs.
The other point is the state aid issue. Governments will have different views on how much support they can give to the private sector through public sector guarantees. I believe we will see, for a period at least, these products that are outside of the Consensus being utilised a lot more, but in the long term it’s more a philosophical question as to whether that’s the best way for governments to support the private sector.
Henda: Some ECAs were supporting working capital before the crisis, but those structures were more project and end user-driven: the working capital was funding a transaction that supported the delivery of a given asset. Whereas, for me, the support that ECAs have provided recently has been more of a substitution of the state direct support and an expansion of the general purpose-type of support. In my view, it was consistent with what I call the survival phase. Is it sustainable for the next phase, the rebuild and expansion of activity? I’m not sure that would be a core target for the ECAs – to have a product focused on the support of general purposes – unless it is targeted towards the evolution of supply chains. If supply chains shift in the way that some people were predicting in April and May, the expansion of the ECA product to support that would be viable. But, if it is just ongoing working capital support, I see more ECAs and national authorities focusing on the end user, on projects, rather than injecting liquidity forever without seeing the light at the end of the tunnel, namely the return on that investment.
Wilkins: There is a gap in terms of supply chain products. That’s one thing we can identify coming out of this. If supply chains are going to be brought closer to home, then you’re going to need that kind of support.
Joseph-Horne: Moving on, the economic stimulus that we will have seen from governments to help drive recovery from the Covid crisis could create an opportunity to develop a completely new approach to sustainability and a new focus from governments on how they address and prioritise the topic. Do you think that is something that we’re going to see and, if it is, what do you think will be the reaction of the ECAs? Will the recovery from Covid-19 be part of a broader sustainability agenda?
Henda: I’m a firm believer that sustainability will be a major theme for most ECAs. The main hurdle, however, is the lack of a coherent and consistent framework. The existing rules do not allow the support of this new mindset and require an adjustment, perhaps similarly to the expansion we discussed earlier around working capital and liquidity, in terms of them being driven by the end user. Unless there is a buy-in to a framework our support of sustainability-related infrastructure needs in education, healthcare, renewables, housing, etc, would only be touching the tip of the iceberg as ECAs try to figure out solutions and tweak the rules for each individual project. But as an industry we require a deeper and more stable framework that everyone can support.
The other issue is the co-operation and alignment with the DFIs, because even a full relaxation of rules for the ECAs will not cover all the sustainability needs of sovereigns and corporates. You need the support of those who are focused on such projects as one of their main missions – the DFIs.
Also, it’s not only a question of emerging markets – there are massive requirements in the developed world as well, just look at Europe’s energy needs: it’s not only generation, it’s transmission and distribution. Because it’s a wider topic, it’s essential that these two issues are sorted out: a framework and the co-operation with DFIs.
Schmidt: From my perspective, the key question for ECAs is what is the mandate? For some of them, clearly what they do is driven by government policy, and so sustainability is a core goal. Some ECAs are seriously looking into how they can steer their portfolio towards sustainability, while others are still following their original mandate, which is to support exports. Secondly, although the priority is on overcoming the Covid-19 situation and any liquidity shortages, equally important is the influence of sustainability on assessing risk profiles, be it in the oil, gas, or automotive industries, which is very important for Europe, in particular Germany. So the question is, what do governments want to achieve? What is being demanded of the ECAs, and how can we make sure that we also make the right bet, so to speak, in terms of risk which, from my perspective, is connected to sustainability.
Muhammad: There’s also the issue of how do you commonly define sustainability, and how do differentiate a transaction that’s sustainable from one that’s not? In the OECD Consensus we have differentiated offerings for clean tech and green energy projects – different terms with varying tenors. In the context of Covid-19 there is a need for a differentiated approach for vital sustainability transactions: healthcare is very important, and doing hospitals ticks a lot of boxes. But, from an ECA perspective, there is no difference whether you finance a hospital or, say, a bridge in terms of what you can offer, either with regards to the terms you can put forward or any pricing differential. I think that’s where the realisation is that we need to have some sort of a common understanding with ECAs about what is ‘sustainable’ so that they can differentiate the terms for true sustainable financing. It’s something we need to continue to work towards.
Hodder: There’s a risk that we don’t get to the point where the ECAs are incentivising us as a market to do more in the space. There’s a risk that we will just end up merely tagging the transactions that we would have done anyway as being green: we’ve now signed the fourth green loan principles-compliant facility over the last four months. There’s clearly demand there from the borrowers to register their transactions as green or sustainable. Without that wider framework coming through from the ECAs to encourage us to actually do more transactions, the risk is that we will just carry on as we have been doing, but we will spend more time simply categorising and classifying at the bank level the transactions that we think are green or fall into the sustainability category. That’s a trap that we need to be careful to avoid. It’s important that we get the more general infrastructure around us to make sure that we can drive the products into the right transactions going forward.
Joseph-Horne: Moving to the final question, what do you envisage the key themes for the market will be over the next few years?
Hodder: In terms of how we see it mapping out over the next couple of years, clearly there’s a risk theme that needs to be addressed. Insolvency risk is likely to increase the longer the crisis goes on. There’s a high risk that the ECAs will see a number of claims coming through and those levels increasing significantly, even beyond the liquidity support that they have provided over the last six or so months. That has to be a key theme that is on the horizon of the agencies.
In terms of other themes, developed market borrowers are back in discussions and keen to understand the ways in which they can diversify their funding sources and access support. That may reduce the total volumes that were being directed into category 0 countries because of some of the support going into the cruise and aviation sectors in the future. But more general discussions with larger corporates in Europe and the Americas is one thing that we’re certainly seeing. I also see rising interest from sovereign borrowers from the Mena region in particular, where we expect – whether at the sovereign or SOE level – opportunities to borrow to develop infrastructure as part of a wider recovery and funding diversification plan to yield results. After the last crisis it took two to three years to reach the peak volumes. I think things will accelerate quite quickly as we move into 2021 if we see that the virus is more under control, and I think ECA financing will continue to play a massive role as the recovery continues.
Henda: Covid is also putting a spotlight on telecoms and information technology, and the importance of these developments for all countries, whether it is for educational purposes, homeworking or otherwise. That will continue, together with developments like 5G deployment and other new innovations.
Wilkins: More broadly, modernisation of the Consensus will also be a big theme. As you look at everything that’s happening outside of the Consensus as a consequence of Covid-19, and what was there before, it reinforces even more the need to really have the OECD and the ECAs start to look at it and make it more fit for purpose. Additionally, I think, unfortunately, Libor transition is going to be a theme over the course of the next 12 months and will take up a lot of people’s time to focus on that.
Debt sustainability has to be a theme. As I said earlier, we’re mainly a debt product; how do you manage that if you’ve got already heavily indebted borrowers seeking to borrow further? Certain sovereigns are going to find it difficult, certainly under the existing Consensus terms and conditions, which probably need to be extended towards other products. For example, maybe in relation to minimum premiums, there needs to be a ‘timeout’ in terms of the country and borrower ratings to allow people to get to a more sustainable level.
Elsewhere, the aviation sector is already picking up in terms of demand for ECA support. There are clearly discussions around deliveries, but I think going through the end of 2020, 2021 we’ll see a lot more ECA support in the aviation sector. Airlines will have to evidence their ability to steer through Covid-19 and a clear and realistic pathway post-Covid-19. The full impact of this crisis has not yet played out in this sector and airlines will need to have flexible and realistic plans in place to succeed – and the ECAs will be keen to see these if they are to provide support.
Beomonte: Export finance plays a key role in the development of the European economy, both as a vehicle for the safe and balanced provision of credit and through its contribution to employment. It is clear from my conversations with a number of ECAs that they expect to play a key role over the next couple of years, even more so than in the past, as we enter the crucial recovery phase.
Schmidt: One of the key questions, however, is what is going to happen in terms of globalisation? Will it be reversed as people turn back to their own countries? That would certainly affect our business and that of the ECAs. In the short to medium-term this may even create an opportunity for us because in order to localise production you have to build it. But, in the long run, it would be counterproductive. We will have to see whether politicians go down that route. Otherwise, I would fully agree with Francesca, that export credit agencies will play an important role in the recovery phase and there will be a lot of opportunities for us as well.
