The Association of Trade and Forfaiting in the Americas’ (ATFA’s) annual conference 2017 revealed positivity in the sector, despite concerns over rising populism, regulatory changes and uncertainty in Latin America. GTR attended the event to report on the main topics.
As the Bermudan sun set in the background of the Hamilton Princess Hotel on April 26, an emotional Brendan Herley presented the programme of his last annual conference as president of ATFA. Overall, speakers and delegates were hopeful about the future of trade and trade finance in the Americas, despite the now common concerns over US President Donald Trump’s somewhat isolationist agenda, as well as Brexit and the future of the European Union (EU). Trade finance pricing was also raised as an issue, amid too much liquidity chasing limited borrowing demand, particularly in Latin America.
By the end of the conference, Harpreet Mann, the new president, had taken over. Mann, an underwriting counsel at QBE North America, was previously the association’s secretary.
Bright prospects for insurers
The trade credit and political risk insurance sector is one that has grown exponentially in the past few years. “Before the [financial] crisis we had somewhere between US$500mn and US$750mn-worth of capacity [in the Americas], and now we’ve almost doubled that to around US$1.5bn in capacity, so the market has evolved a lot and with the new Basel III rules as well as the Federal Reserve guidelines, banks are using the product a lot more,” Donnie DiCarlo, senior vice-president, credit and political risk group, Latin America, at Marsh, said.
He explained that the financial crisis was a great test for the insurance market, which came out of it stronger and, in his mind, with more credibility. “It was a true time to test the market and see if it actually performed, if claims got paid out and if the insurance really did what it was supposed to do, and fortunately for us, it did. There were somewhere between US$3bn and US$3.5bn-worth of claims that got paid out back to banks. They were paid out in a very short period of time. So the product was tested, banks loved the way it performed, and then it was used a lot more after that financial crisis.”
According to DiCarlo, banks have been using insurance in a much broader range of transactions than in the past, including project finance, securitisations and bonds. Furthermore, insurers and brokers have been working in conjunction with law firms to make policies clearer under Basel III. “You can use the product to get credit relief, but it has exponential benefits if you get capital relief with it. Using the wording to qualify as an eligible guarantee under the US Federal Reserve guidelines which were passed in 2013 benefits clients a lot,” he tells GTR.
Another new development in the US insurance market is the growing use of syndication. According to Lila Rymer, head of US underwriting for trade credit and political risk at Beazley, the practice has always been popular in the London market, and more recently has become very common in the US, spurred in part by the arrival of insurers from London, who are encouraging syndication for various reasons.
“For the clients, there are some key benefits of syndication. For one, the client would have relationships with multiple insurance carriers and this is beneficial over time. While the client might find a single insurer to cover its good risks, they might struggle to find capacity if that single insurer does not want to cover the next more challenging deal. If instead the client spread those good risks amongst a few carriers, they would have multiple carrier relationships, so when that challenging deal comes in, there are multiple carriers to approach for a participation. I think the relationship piece and experience working together are key,” she tells GTR.
She adds that syndicating with multiple carriers also makes claims easier to stomach for insurers, as they each have to cover a smaller amount than if they were alone on the transaction. Furthermore, it helps develop expertise in the industry, with insurers having the opportunity to join a transaction they are not specialised in and learn from the lead carrier.
(Un)sustainability of Brazil’s recovery
Brazil’s future post-presidential elections in 2018 left speakers divided: a presentation by an included an expectation that President Michel Temer’s liberal reforms would be reversed once he leaves office.
But others were more optimistic. Ana Firmato, a partner at KPMG in São Paulo, explains: “There’s always a risk of things going back to the way they were. Apparently Lula [Luiz Inácio Lula Da Silva], our former president, is going to run again for president next year. Of course, he’s also implicated in the Lava Jato [Car Wash] scandal so he may not be able to. I really do think that it’s unlikely for that to happen.
“As a country, I think we’re leaning more towards liberal ideas now. We used to be very paternalistic in our view of politics. The population used to like big governments with a lot of state-owned companies and civil servants, so a lot of people out of college always wanted to move towards the civil service because of all the benefits. Because of all the reforms, it’s becoming a little bit less interesting, so maybe there will be an opportunity to get into a more liberal mindset, with more entrepreneurship, less government, maybe some privatisations.”
She expects the recession to end this year with positive economic signals emerging. For example, interest rates and inflation are on a downward trend, which is expected to boost consumption. For Firmato, the fact the Temer doesn’t intend to run for re-election is helping him pass the unpopular reforms that are so desperately needed to redress the Brazilian economy, namely labour and social security laws.
“You have to get the tough things done and almost get in destructive mode in order to get improvements. All of these reforms are for the long-term good of the country but are of course very unpopular. But at the end of the day they will show the sustainability of the country as a whole,” she says.
For his part, Marsh’s DiCarlo believes that while the drop in commodity prices undeniably hurt Brazil, recessions can never last too long in a country built on commodities. “People are always going to need gasoline, copper, steel, etc. As we see commodity prices start to come up it’s really going to benefit Brazil. A lot of the Lava Jato [investigation] is behind them, so [Brazil is] going to have a chance to grow and hopefully they’ll get a chance to export business as well, whether it be to Asia or some new opportunities in Sub-Saharan Africa.”
ITFA’s lobbying role
In a case study, Paul Coles, International Trade and Forfaiting Association (ITFA) board member, showed how ITFA intervened to prevent Moody’s from reclassifying supply chain finance programmes as on-balance sheet lending after the collapse of Spanish renewables giant Abengoa at the end of 2015. Spanish and international banks had large exposures with the company: according to a Bloomberg article based on a document compiled by one of the creditors, Abengoa’s total debt was estimated at around €20bn (US$21.2bn), including a large portion of supply chain finance.
In December 2015, Moody’s published a report saying that reverse factoring had debt-like features and should therefore be considered on-balance sheet lending rather than trade payables – which would have eliminated one of the biggest advantages of supply chain finance for banks and corporates. ITFA organised a roundtable (which took place in December 2016) with Moody’s and the trade and supply chain finance heads of major banks to discuss the ratings agency’s concerns. This resulted in Moody’s reverting supply chain finance’s classification to “non-standard adjustment” and a commitment to look at this type of financing scheme on a case-by-case basis.
This type of example should serve as motivation for those who haven’t yet decided to join such associations. As of mid-April 2017, ATFA counted 64 institutions as members, a drop from 77 at the end of 2016. However, nine new members joined in the past year, including BNP Paribas, Brickell Bank, Clifford Chance, Equinox Global, Gerald Metals, III Corp, Lone Star Capital, Talbot Underwriting and TD Bank.