There is a sense of positivity in the air in the Asia Pacific markets, helped by the effects of the Chinese stimulus package, local bank liquidity and a relatively healthy pipeline of deals, writes Rebecca Spong.
The powerhouse exporting nations in the North Asia and Asia Pacific regions have been hard hit by the credit crisis.
Singapore has seen falling export levels, a 4.8% unemployment rate among local workers, and a 3.2% unemployment rate among foreign workers.
In Japan, between October and December 2008, the country’s GDP contracted by 12.1% year-on-year.
The South Korean market has also been causing a few headaches. In April, exports fell by 19% compared with the previous year. This is the sixth month in the row of falling exports.
China has also been somewhat battered by the crisis. In March it was revealed that the country’s exports fell for the fifth consecutive month.
However, there are signs that the massive government stimulus packages are softening the crash. Korea’s government has poured money into infrastructure projects and shipbuilding, which may in part explain the slight first quarter growth seen in the country’s economy.
At the end of April, the Japanese government reported that production at Japanese factories and refineries was moving in an upward direction for the first time in six months.
China’s US$585bn stimulus package is also beginning to take effect, as investment in bridges, roads and housing helps tackle unemployment and has a positive impact on other industries.
In March, it is reported the China’s exports rose by almost 8% compared to February figures.
Although still firmly in the grip of an economic downturn, there is some optimism in market, and a sense that this region was the last to be hit by the crisis and likely to be the first to escape.
A rebound in production levels bodes well for the trade, export and commodity finance markets, with many expecting to see an upswing in activity.
Jonathan Soloman, partner at law firm Denton Wilde Sapte, based in Singapore, comments: “Many clients we are speaking to are talking about new deals and that there is an appetite for doing new deals – this appears to be ahead of the curve with the position in Europe, the CIS or in Latin America.
‘There are bad news stories almost every day regarding the financial position of Singapore but generally clients we talk to are positive about the short term and medium term in terms of liquidity.”
He adds: “The pipeline over the new few months looks good.”
There are other signs of recovery too, with anecdotal evidence suggesting that generally pricing on trade finance deals is flattening out.
Patrick Lang, head of GTS Asia Pacific, at BNP Paribas observes: “It is always diffficult to give a general viewpoint since each domestic market is different, but pricing seems to have found a more stable point of balance.”
However, despite these small signs of hope, there is still a sense of heightened risk aversion in the market, and banks, although perhaps becoming more eager to lend, are being increasingly selective on whom they lend to.
Masahiro Goda, general manager, FIs, commodities, structured trade finance and ECA, at Mizuho Corporate Bank in Singapore, comments: “Due to the current market climate and our bank’s policy, we are looking at deals selectively, and potential deals must have a well-organised security package such as an off-take contract, pledge over the cargo, and export credit agency (ECA) support from JBIC or Nexi.”
The days of large unsecured multi-million credit lines are over, and banks are keen to incorporate greater security into their financing packages. On the corporate side, market sources suggest that there is a distinct rise in demand for risk mitigation trade finance instruments such as the traditional letter of credit.
ECA deals back in demand
In line with global trends, the role of export credit agencies (ECAs) in Asia has been growing, and demand for their services is on the up.
One of Mizuho Corporate Bank’s most recent ECA-backed deals was a relatively small transaction of US$60mn, in support of a joint-venture entity between a Japanese firm and an Indian company. The loan was arranged under JBIC’s overseas investment support programme. Financing will support the construction of a ship that will be used to transport coal from Indonesia to India.
Commenting on the precedent set by this deal, Goda remarks: “I think there should be more of these types of deals over the next year in order for us to encourage more banking business.”
Société Générale has been very active in the ECA-backed export finance markets in Asia. Michelle Ling, managing director and regional head, export finance, Asia, comments: “We closed 20 ECA transactions last year. Usually only five or six are closed.”
She notes that there is huge potential for ECA finance, particularly in the telecoms sector, as well as shipping and aircraft transactions.
Yet, in line with general trends, she is selective about which customers receive certain financing packages.
She explains: “For the top tier clients, we are able to do ECA finance plus tied commercial loan packages, whereas with the smaller clients we tend to only do pure ECA-backed loans unless for projects with strong security packages or the right structure.”
In terms of regions, there are some countries where the demand for export finance has been particularly high. “In Korea, we have seen a lot of transactions, but some banks are reaching their capacity limits.”
Some of the landmark deals Ling worked on in recent months include a US$30mn loan facility for a telecom infrastructure project in Ghana. The lead arrangers on this deal were Société Générale and China Ex-Im. Chinese telecoms firm Huawei was running the project, and the borrower was the Ghanaian government. An ECA guarantee was provided by Coface.
Potential deals for 2009 include transactions in Indonesia’s power sector.
Last year, Société Générale and a consortium of banks signed a US$592mn Sinosure-backed deal for the country’s state-owned electricity supplier PLN. The deal was financing the Indramayu plant, which is just one of a series of coal-fired power plants being built under a government fast track programme. This programme aims to build 10 new coal-fired plants by 2010 in the Java region, and 25 to 30 plants outside of Java.
It is expected that PLN will be back in the market looking for financing in 2009, and will likely involve Sinosure cover again.
Cautious insurance market
Before the crisis, the need for ECA cover or private insurance was not particularly acute among Asian corporates. Indeed, most companies in the region were happy to self-insure.
One insurer remarks that this tends to be a cultural issue, where Asian firms have been traditionally more tolerant of risk and extremely price-focused, cutting out insurance costs to remain competitive. The market penetration of trade credit insurance in Asia is just a fraction of that seen in European markets.
However, demand for credit insurance is beginning to rise, in light of reduced risk appetite among exporters and investors.
“That’s especially true in the Asia Pacific region, which traditionally hasn’t been the case. When compared with Europe and North America, the penetration rate for insurance has been very low. Now, as the perceived risk for Asian exporters and investors has increased, there has been a reduction in self-insurance and a surge in demand for credit and political risk insurance,” comments Frederic Louat, senior vice-president and regional manager, Asia Pacific, credit & political risk, Zurich, Surety, Credit and Political Risk.
Despite the potential untapped insurance market in Asia Pacific, credit insurers, particularly those who operate on a portfolio as opposed to single risk basis, are being very careful about what risks they take on.
Louat notes: “Given the current economic uncertainty, credit and political risk insurance underwriters have become increasingly selective. While they haven’t necessarily changed their underwriting criteria, fewer transactions meet these criteria. It’s far more difficult in the current environment for exporters and cross border equity investors to get cover than last year. However leading players like Zurich have been committed to these markets over time and we expect to continue to serve our customers.”
As demand grows, and capacity shrinks, prices for cover are inevitabily driven upwards. “Across the entire industry, it appears rates for political risk insurance market have risen across the board. Rate increases in the multi-buyer credit insurance market are generally in the 25 – 30% region. In the single-risk credit and political risk markets, average rate increases are even higher. There are several countries and several types of transactions where rate increases are in excess of 100%,” Louat observes.
Is China helping?
China and its industrial might and thirst for commodities has been viewed as the possible rescuer for suffering Asia Pacific economies.
However the country has been running into its own problems, with a slowdown in GDP growth from 8% to 6% predicted earlier this year, and a rising level of unemployment.
But the country has been taking action, and its US$585mn stimulus package aimed at financing infrastructure projects should help boost domestic demand for products, as external export markets dwindle.
China is also looking to maintain an outward export-oriented economic perspective, and at the end of April, it signed a multi-billion dollar trade co-operation agreement with the US.
The two countries signed a total of 32 deals worth roughly US$10.6bn. China Telecom agreed contracts with Microsoft, Dell, Emerson, Cisco and Alcatel-Lucent, while China Construction Bank signed deals with HP, Cisco, IBM and Microsoft.
China Mobile also secured deals with HP, Alcatel-Lucent, Oracle, Emerson, Sun Microsystems and Cisco.
In terms of the provision of trade finance, China Development Bank (CDB), and other Chinese banks are taking a very active role.
As Société Générale’s Ling reports: “Chinese banks are returning to the market and playing a role in the syndicated market. China Development Bank is also being very aggressive.”
According to Dealogic data, China Development Bank has leapfrogged into poll position as the main provider of trade finance, not only in Asia Pacific, but globally. This is in terms of amount, rather than actual number of transactions.
In the first quarter of 2009, the bank financed US$25bn-worth of trade finance and ECA-backed deals (including bilateral loans).
The Chinese banks are also pumping much-needed liquidity into the markets. China’s biggest banks, Industrial & Commercial Bank of China, China Construction Bank Corp and Bank of China have recorded record first-quarter lending. This flurry of activity is a direct consequence of China’s stimulus package. which is targeting railways, roads and port developments.
However, some concerns have been raised that Chinese banks have not carried out all the necessary risk mitigation processes when lending and this might lead to deals going bad in a few years time.
Johnson Chan, head, structured trade finance – North Asia, at OCBC, airs his worries that China’s banks do not have the necessary skill-set to channel funds into viable projects.
He sees some Chinese institutions dipping their toes into structured commodity finance for instance, but not yet reaping the rewards.
“As a result of more and more commodity trading in China, Chinese banks are increasing focused in structured trade financing for commodity products. Nevertheless, due to the lack of experience in most of the Chinese banks, problems occur,” he explains.
He adds: “‘Some regional development banks such as the Shenzhen Development Bank and the Guangdong Development Bank are looking at expanding into structured trade finance, but their initiatives are not progressing that successfully.”
Based on his own observations, he thinks the Chinese banking sector has not yet got a complete grasp on the details of how to put together a structured trade deal.
“Understanding the concept of structured trade finance is crucial,” he elaborates.
“From the point of inception we finance a transaction until the minute we receive the repayment. Where are the goods? How about the bank’s collateral position? How is the trade flow? What tenor is required for the trade finance? Many factors must be taken into account before we conclude a deal rather than simply ‘copying’ a structure from one to the other.
“This is why Chinese banks require time to build up their structured trade finance experience.”
However, he is fairly optimistic about the success of the Chinese stimulus package in reviving the country’s economy and its knock-on effect on the metals and mining sector, where his business is focused on.
He observes that compared to the start of 2009, domestic prices of many base metals including aluminium, copper, zinc and lead, picked up significantly in recent months.
Factors out of market control
However, just as small signs of recovery in North Asia and Asia Pacific emerge, the region, and indeed the world, is facing a threat that could once again undermine market confidence. The rapid onslaught of swine flu is already making some a little jittery.
One trade finance lawyer remarks to GTR: “Remember that the memory of the Sars virus of a few years back is still fresh in this region, and one bank we met already raised concerns over the effect this might have on trade.”
A report from Standard Chartered’s chief economist Gerald Lyons states: “With risk appetite already fragile, swine flu outbreak will strengthen aversion plays.”
The report highlights tourism, retail and stretched budget deficit economies as the areas most at risk. During the Sars outbreak, IMF estimates suggested that East and Southeast Asia lost almost US$18bn in demand and business revenue.
As yet, the full implications of the new virus on trade are, of course, unknown, but it is unfortunately another dent in a slowing recovering sense of confidence.