Conditions for trade finance are to a certain extent normalising in Asia. But it is a new kind of ‘normal’, with structured trade finance products beginning to grow in popularity, says Ravi Saxena at Citi.

The trade environment in Asia seems to be stabilising, and for many the rollercoaster journey of the last 18 months already seems like a distant memory.

Country import/export volumes have been steadily climbing across the Asia Pacific region (though still off the pre-crisis highs of Q3 2008), spreads have dropped to reasonable levels and there is considerable liquidity in the banking systems to support the short-term credit needs of clients.

Furthermore, there is growing recognition of the importance of Asia as a growth region for multinational corporations and we are seeing a strong rebound of attention and investment in this region. Asian markets offer vast potential given the region’s population, the relative low base to grow from and the lower levels of household credit – which contrasts with the pressures in many of the home markets of these global companies.

The larger Asian companies are also expanding beyond their domestic borders and increasing their focus on neighbouring Asia Pacific markets and international markets.

Structured trade in focus

However, the recent volatility in the credit markets and sustained concerns about risk and risk mitigation, have led to heightened demand for structured trade instruments in the region.

There are a number of attributes that make structured, as opposed to vanilla, trade transactions increasingly appealing.

Large transaction size: Asia Pacific has a high number of large projects that need financing. With access to long-term syndicated, and usually unsecured, financing still relatively limited, the financing gap is being more frequently filled by structured trade finance (STF) products.

Balance sheet-friendly transaction structures: Limited recourse receivable discounting structures are being seen as important forms of financing in the region. Such structures improve the flow of working capital, provide needed liquidity and free up capital.

Risk mitigation structures: Risk is a topic that is still very much a priority for bankers. Export credit agencies (ECAs) and multilaterals have been stepping up their game, becoming great partners with trade banks in Asia and helping deliver financing to clients.

End-to-end deal execution: Many deals and solutions need a high degree of coordination across different geographies. Structured trade deals can support a transaction along every stage of the client’s global supply chain.

Primary/secondary market asset distribution: Large structured trade deals need an ‘originate-to-distribute’ strategy to be able to build scale and become capital efficient. There is now an increasing hunger for assets that promise the right returns for measured risk.

Citi’s role in Asia

Intra-Asian trade flows are also influencing how structured trade products are developing.

WTO figures show that Intra-Asia trade accounted for 55.9% of the region’s global trade in 2008 compared with 50.3% in 2005 and 46.6% in 1999. The introduction of Intra-Asia free trade agreements and ongoing pacts between regional nations and economic zones suggests that volumes will continue to grow.

In particular, export-driven economies in China, Hong Kong, Korea and Taiwan are seeing large annual gains in intra-regional trade. To support these flows end-to-end, cross-border trade and supply chain solutions are required.

Citi has proactively taken value-added measures by establishing a North Asia structured trade team focusing on cross-border and intra-regional solutions.

In response to recent regulatory moves such as the China-ASEAN free trade agreement, we also see our ASEAN structured finance team in South East Asia primed to better leverage credit through asset distribution and end-to-end solutions that clients of structured trade require.

For example, in January this year, Citi arranged a syndicated club transaction for a major Korea-based corporation, issuing a performance bond to finance an expansion project.

The unique structure included a three-tier recourse involving the client, participating banks and a major export-import bank. The performance bond was guaranteed by counter guarantees from several banks in Korea, which resulted in a longer tenor being provided to the client than a standard trade transaction could allow.

In late December 2009, we delivered as lead arranger, a US$600mn club facility for a limited recourse receivable financing for a large Asian retailer covering over 20 of its largest US clients.

The deal had an insurance wrap and provided the client liquidity, risk mitigation on its buyers, working capital reduction, and it was executed in a space of 45 days.

For structured trade to increasingly benefit Asia Pacific’s large corporations, expertise and local knowledge is required. With credit and liquidity likely to remain an issue within regional trade for some time, the relevance of structured trade will remain in Asia Pacific.

Citi continues to set the market standard in the deals we execute, in our dedication to solutions and our knowledge of regional trade patterns and behaviours.