News of potential changes to crystallisation clauses was heard at the US Exim Bank’s annual conference. John Richter, US Exim’s regional director for Africa made the comments at a panel, ‘Meeting Africa’s Electricity Needs”, during the bank’s annual conference, held in Washington DC in April.
His comments came in response to remarks made by one of the panelists, Richard Hodder, HSBC’s regional director, export finance – namely that more European ECAs have been striking the clause from their contracts.
The subject is being discussed internally at the bank, Richter said at the end of the panel. “I won’t project what the decision will be, but it is being discussed.”
A crystallisation clause typically requires that if there is a default and the insured makes a claim, the loan automatically reverts to foreign currency at the current spot rate.
The fact that US Ex-Im is even considering it is significant. Only a handful of ECAs will waive this clause, usually on a case-by-case basis. The US Exim charter – not to mention US politics – would make it difficult for the bank to take on currency risk.
In many ways, though, even if US Exim were to move in this direction it would be almost an academic exercise. In reality, there have been only a handful of local currency finance deals over the last decade. In 2007 Coface – one of the more active ECAs in this area – closed three local currency deals: a four-year loan in Algerian dinars equaling US$137.5mn for the extension of a mobile telecom network; a seven-year credit totaling €10mn-equivalent in the electricity sector; and €8mn in Australian dollars, for seven years.
When the ECAs began offering local currency financing, admittedly on limited basis, in the 2000s, explains Johan Fredriksson, senior country policy advisor for Sweden’s EKN, ECAs were initially not prepared to waive crystallisation clauses in their local currency transactions for a few reasons.
“There is the foreign exchange risk itself, particularly if the currency is a volatile one,” he says. “Without the clause, the ECA would be exposed to claims in a local currency that might well be dropping particularly if the debtor’s default coincided with a wider economic crisis.”
Also, potential regulatory obstacles to repatriating recovered amounts out of the country is another concern, in particular, in currencies with very limited convertibility, he adds.
However, over the past few years pressure has been increasing on the ECAs to
waive the crystallisation clause, Fredriksson says. It made life easier for banks and in the last few years as more liquidity entered the market, competitive pressures to do away with the clause increased. Also in certain countries there are questions whether it would be legally viable to use a crystallisation clause as it was perceived that other creditors would not be treated equally. Indeed, the Berne Union report 2008 notes that crystallisation may not be legal in certain markets in Latin America.
Today, “we have a situation where some ECAs are willing to consider waiving the clause on a case-by-case basis, notably in emerging market currencies with a relatively high degree of convertibility,” Fredriksson says.
Chris Vermont, head of Debt Capital Markets at GuarantCo, a London-based firm that specialises in the local currency finance of infrastructure, believes there is an expectation in the market that local currency finance will become more prevalent as the dollar strengthens. Its weak valuation for the last several years has been one of the reasons why local currency finance has been largely a one-off affair, he says.
Vermont tells of a recent conference at which he spoke. There, he informally polled the audience asking them to vote on certain questions. One was how important will local currency be in the future. “80% said very important – but only 10% said they were doing it right now.”
Vermont believes the dollar has bottomed out and a rise in value will begin eventually. When that happens, he says, more banks and ECAs will step up and offer the necessary financing. And the questions about crystallisation clauses will not be quite so academic as they are now.