Export credit agency (ECA) financing is enjoying a renaissance in Nigeria. Richard Hodder, director, Sub-Saharan Africa at HSBC Bank, reports on a growing pipeline of transactions.

The market for export credit agency (ECA)-supported finance in Nigeria has grown massively during the course of 2008.  At present the project and export finance division of HSBC Bank is arranging loans with a combined value in excess of US$750mn and expects to sign 15 individual loans with Nigerian counter-parties with ECA support in 2008. This represents a significant increase on previous years where the combined value of the export finance loans arranged by the top 10 ECA arranging banks into Nigeria was US$337mn in 2006 and US$147mn in 2007, according to Dealogic.

The growth in demand for ECA financing is being spearheaded by the Nigerian banking sector which is responding to the needs of a rapidly expanding private sector within the country.  The corporate clients of the local banks are embarking on significant capital expenditure programmes which necessitate the imports of equipment, capital goods and services from overseas.  The banks are therefore being inundated with requests to provide hard currency financings to facilitate the investment programmes.

In 2007, the Nigerian banks had access to a range of sources from which they could secure hard currency funding to on-lend to their clients.  Some banks undertook bond and GDR issuances whilst others increased their core funding by taking up syndicated loans or private placements with offshore investors.
However, as we have moved into 2008, the impacts of the credit crunch started to restrict these sources of finance and it has become progressively harder and more expensive for the banks to access funding through these routes.  The institutional investors and hedge funds which dipped their toes into the Nigerian market last year have bid a hasty retreat during the course of this year.
As the hard currency liquidity position has tightened, the local banks have increasingly sought to fund transactions which involve elements of offshore procurement with the support of ECA loans.  The product currently has two key characteristics which makes it extremely attractive to the banks.

In the first instance, the product presents a readily available source of liquidity in a market in which liquidity is an increasingly scarce commodity.  The product enables the Nigerian banks to lend to their clients and then exactly match their funding commitments on a deal by deal basis.  They have been keen to either act as direct borrowers under ECA loans, and then on-lend the funds to their clients, or have sought to guarantee the repayment obligations of their clients who are acting as the borrowers under the ECA loans.
Secondly, the product remains extremely competitive in the Nigerian context where hard currency packages in the local market can command interest rates well into double digits. Whilst the challenging market conditions have led to a general upward trend on the interest rate margins charged by international banks on ECA loans, the levels of premium charged by the ECAs for Nigeria has actually improved in the last 12 months.
Nigeria’s OECD country classification was upgraded in October 2007 leading to a reduction in the charges applied by the agencies.  The all-in costs of the financing therefore remain attractive to the Nigerian banks and this could be further enhanced if the OECD opt to a further upgrade for the country at their next meeting where Nigeria will be eligible for a further review.

Over the last 12-18 months, the position of the ECAs towards Nigeria has also changed dramatically. The removal of Nigeria’s name from the Financial Action Task Force list of non-co-operating countries, the resolution of the outstanding Paris Club debt and the ‘business as usual’ ethic which emerged following the April 2007 presidential election have all paved the way for the ECAs to restore cover to the market.
At the same time, the forced consolidation of the banking sector has led to the development of a number of large creditworthy financial institutions which are deemed as acceptable risks for the ECAs.  A number of the banks have also obtained foreign country ratings which provided an additional level of comfort for the ECAs.

The most aggressive position has been adopted by US Ex-Im which established a pre-approved line for transactions of US$10mn or less with 14 of the top tier Nigerian banks.  The facility has recently been extended to US$1bn and US Ex-Im Bank has also been working on many larger transactions with the local banks which exceed the US$10mn threshold.  Such transactions fall outside the pre-approved limits and are subject to individual approval by Ex-Im Bank’s board.

Sinosure, the Chinese ECA, has also been active in Nigeria, but reached its country ceiling at the end of 2007 and is now seeking an extension to the limit from the Chinese government.  Individual transactions can be progressed outside the limit, but these will require the specific approval of the Chinese State Council which can add considerable time to the financing process.
The majority of European agencies restored cover for Nigeria at the end of 2007 and we have witnessed a surge in demand for ECA financing for goods and services being imported from Europe.  HSBC is currently in the process of finalising loans with the support of ECGD (UK), Coface (France), Euler Hermes (Germany) and Sace (Italy). The agencies have considerable capacity for Nigeria and, as their knowledge and experience of the country improves, they appear increasingly keen to expand their activities to support their national exporters.
However, it is worth noting that the agencies have indicated a preference to diversify exposure across a number of the local banks rather than accumulating significant exposure with a single institution.

As we move into 2009, we expect to see continued demand for ECA financing from the likes of Diamond Bank, Fidelity Bank, First Bank of Nigeria, GTBank, Intercontinental Bank, Skye Bank, Union Bank of Nigeria, United Bank for Africa and Zenith Bank.
The key issue will be for these institutions to deliver competitive hard currency financing packages in a timely manner to their corporate clients.  We believe that the ECA pricing remains attractive for the banks, but the issue of deliverability can be more challenging from an ECA perspective, where the lead times on securing the support of the agencies and declaring a loan effective can be relatively long.

HSBC has actively sought to address this issue by leveraging its correspondent banking relationships with the banks.  We have therefore sought to offer short-term bridge financing facilities to the local banks to enable the funding of the underlying contract to proceed whilst the ECA application process is taking place.  The short-term financing can then be taken out upon the effectiveness of the affiliated ECA loan.
The ECA business will continue to be dominated by loans to the oil & gas, telecoms, aviation and manufacturing sectors.  The transactions that HSBC has worked on in the oil and gas sector have been small to medium-sized financings to support the purchase of equipment by domestic Nigerian companies.  This sector has expanded rapidly following changes in the Nigerian law which state that the international oil companies have to outsource a portion of their business to domestic firms.  We expect to see regular requests for imports of rigs and drilling equipment from the US and Europe over the next 12 months.    The telecoms sector continues to grow as the principal mobile operators expand their coverage into a market where penetration rates remain relatively low.  The lion’s share of the equipment is likely to originate from China and the increase in Sinosure’s Nigerian country limit will be essential to enable the mobile operators to secure competitively priced funding for their capex programmes.

Whilst we anticipate that the majority of ECA financings will require local banks to support the debt obligations, it is likely that the ECAs will be open to assume direct risk on some of the larger corporates in Nigeria.  In particular, we expect that the principal diversified conglomerates are likely to be acceptable to the agencies and these companies are also embarking on significant capex programmes across a range of sectors.  In addition, we expect a number of limited recourse project financings will come to the market in 2009, particularly in the power and oil and gas sectors, and the financing structures for these projects are likely to be highly dependent on ECA support being in place for the offshore contracts.  We believe that the agencies will be increasingly willing to look at such projects as their familiarity and experience with the Nigerian market continues.

HSBC will continue to rank Nigeria as one of its key ECA markets and, with the opening of our representative office in Lagos later this year, we expect to be well placed to support the needs of the rapidly expanding Nigerian private sector.