The export finance market has faced challenges and changes amid the Covid-19 pandemic; deals have been delayed, restructurings have taken place, and bankers continue to debate the suitability of the OECD Arrangement as countries look to export their way out of the crisis, reports Maddy White.


Deal delays and pandemic programmes

At the start of the year, many new export finance deals were pushed back because of the Covid-19 pandemic, with little hope of fresh prospects arising as investment decisions stalled.

“The pandemic had an immediate impact on activity levels. There has been a slowdown in the execution of transactions,” says André Gazal, global head of export finance at Crédit Agricole CIB. While he tells GTR that the bank is “confident” that most of these transactions will be completed and are only being delayed because of the virus, Gazal adds that few new opportunities are occurring because investment decisions have “pretty much come to a halt”.

As well as causing some projects to be postponed, the pandemic also triggered billions of dollars in government support packages to be mobilised by export credit agencies (ECAs). Around the world, ECAs threw lifelines to domestic businesses in the form of working capital and insurance schemes and payment deferrals.

In France, export credit agency Bpifrance collaborated with the banking sector to offer state-guaranteed loans worth a total of €300bn. Meanwhile, in Germany, Euler Hermes and other credit insurers were granted a guarantee for indemnification payments worth a total of €30bn by the German government. In the UK, UK Export Finance (UKEF) expanded its credit insurance policy to cover transactions with the EU, Australia, Canada, Iceland, Japan, New Zealand, Norway, Switzerland and the US, backing up to 95% of the value of an export contract. Elsewhere, US Exim revealed a raft of relief measures, including waivers and deadline extensions for exporters impacted by Covid-19.

Richard Wilkins, Emea head of export finance at JP Morgan, tells GTR that there was “a lot of finding one’s way” during the course of the second quarter. He explains that while some support schemes have been successful, others were less so, as it was difficult for borrowing companies to work out if they fitted schemes’ relevant criteria. He adds: “There is definitely more of a sense of getting back to normal now.”


Where are deals closing?

There are projects being carried out in some parts of the export finance business, says Erik Hoffmann, global head of export and agency finance at Santander. “Machinery and renewable energy are picking up, as well as satellites and telecoms, which have always been good.” When it comes to other industries that have been hard-hit by the crisis, such as aviation, the prospect for new business is minimal.

In aviation, as well as the cruise sector, JP Morgan’s Wilkins explains that the ECAs reacted very quickly to allow for payment holidays and/or debt restructurings in order to assist borrowers through the crisis.

In May, for example, global cruise company Norwegian Cruise Line Holdings deferred US$385mn of payments related to finance guaranteed by Euler Hermes through April 2021. At the time, the company also said that it is finalising the deferral of payments worth US$155mn through March next year with its other ECA lenders. Deferrals are to be repaid in eight semi-annual instalments following the debt holiday, states the cruise company.

In another trend, Crédit Agricole’s Gazal highlights that new borrowers are coming to the market, ones that have not traditionally made use of ECA finance. He references a deal that the bank closed with the Saudi Arabian ministry of finance in July alongside Euler Hermes and HSBC.

The deal, worth US$258mn, was for the procurement of buses from Germany. HSBC acted as a mandated lead arranger (MLA), the agent bank and a lender of the facility, alongside Crédit Agricole as structuring bank, MLA and lender. Backed by German ECA Euler Hermes, the loan covers the purchase of 842 German-made buses destined for Riyadh’s public transport system.

Elsewhere in the Middle East, Manav Futnani, head of export finance, Middle East and Africa at HSBC, tells GTR that public infrastructure, industrial, and oil and gas deals are closing. “Investment in the oil and gas sector has not really slowed down. There has also always been a reasonably good flow of projects that come from diverse industrial sectors – for example agriculture, cement, or the pulp and paper industry. These deals tend to be smaller but are still an important source of deal flow,” he says.

Futnani also explains that there have been changes in how corporates are approaching ECA finance. While typically clients approach ECAs prior to the signing of contracts, a growing number of clients are now going to the agencies for support having already signed contracts or made commitments, he says. “This has been done in the past, but the Covid-19 situation has increased the number of inquiries that we’re getting from clients asking to help them explore ECA finance for ongoing contracts.”


Rules revamp and flexible finance

The suitability of the Organisation for Economic Co-operation and Development (OECD) Arrangement in its current form continues to be a much-debated topic, says JP Morgan’s Wilkins.

“When you look at competition from non-OECD agencies, there are many European exporters in particular that believe there is no longer a level playing field. Those that operate outside of the OECD consensus, for example, have more flexibility with the financing terms they can offer. That has led to more of the OECD ECAs offering products which are not consensus-based in order to be able to support their exporters more competitively,” he says.

ECAs in several countries, such as China, India and Russia, do not follow the OECD Agreement, established in 1978, which provides a steer on the use of export credits to encourage competition among exporters based on quality and prices of goods and services exported, rather than on the most favourable financial terms.

In 2019, China, which has two export credit agencies, Sinosure and Cexim, provided more than three times the official medium and long-term (MLT) export credits than the next closest provider, according to the annual US Exim competitiveness report published in June. China shelled out US$33.5bn in MLT export credit, ahead of Italy at US$11.1bn, Germany (US$10.5bn) and India (US$7bn).

Wilkins explains that it is a slow-moving process to change the OECD rules, but how far any changes go will influence how relevant the arrangement will be in the future. In a global recession, where countries may be looking to exports as a means of boosting their economies, agencies may require more flexibility. “As it is a consensus, that also means all member countries need to agree, which is not a simple thing to do. However, in harder economic times like we have now, it may be easier,” he says.

Gazal agrees that there is a need for more flexibility within the consensus. “Rules that ECAs follow are quite strict and don’t always reflect the needs of the marketplace – there’s a need to adapt some of the conditions of the arrangement that are quite dated.”

Direct lending schemes by governments through their ECAs are another sticking point, says Hoffmann. “If you look at this year’s league tables for the projects which have been executed, the Japanese and the Chinese have done a lot of direct lending again. This is influencing the market, and the question remains, are they helping out where there is a market disruption? Or are they competing against commercial banks? In a lot of cases, not all, they are competing. It is a little bit in the grey zone of their mandate.”


What to expect now?

“I’m optimistic for the years to come, though the next year is going to be difficult because we have to see how the pandemic pans out in terms of the impact on the global economy – investment decisions have to be made for the ECA market to be active,” says Gazal.

If these decisions are not made, either because of a slowdown in the economy or because of the debt sustainability of some countries or borrowers, then that would likely impact the volume of activity, he explains.

Only months before the pandemic hit, the International Monetary Fund (IMF) warned of debt distress in low-income developing countries, revealing that two-fifths of them were at high risk of, or already in, debt distress. Emerging economies now face an unfolding global recession in a more vulnerable position than they were in previous downturns.

“Compared to the last cycle, sovereigns in emerging markets are probably more indebted, so there is going to be a debt sustainability question that arises,” says Wilkins. “Does there need to be a more concessional element to ECA finance in order for additional debt to be more manageable from a sustainability perspective? Is it something that any modernisation of the OECD Arrangement should seek to address?”

Futnani says that he is “fairly certain” that the next couple of years will be a period of growth for ECA activity. He explains that the product is actively being looked at and that he is optimistic in terms of deal flow in the Middle East and Africa. “Egypt is firing on all cylinders, there are a lot of discussions in Saudi Arabia, and the UAE remains important.”

Whether or not the export finance market will recover to its post-Covid-19 volumes in the near future remains to be seen. But it is clear that while deals are closing, particularly in public infrastructure and less impacted industries like telecoms, bankers are calling for more flexibility when it comes to the regulating of official export credits, which could be key for firms and countries looking to export their way out of this crisis.