This January Citi closed a US$335.6mn facility supported with China Exim to finance the purchase of a 5th generation semi-submersible drilling rig, constructed at Yantai Raffles Shipyard. It was China Exim’s first financing for an offshore drilling rig and the borrower, a rig-owning special purpose corporation (SPC) indirectly wholly owned by Awilco Offshore, was able to lock in attractive pricing for the multi-tiered structure.
Besides the financing and the first-time agency support to this sector, the deal is the perfect illustration of the growing sophistication of Chinese shipyards, says Audrey Yu, the Hong Kong-based regional head of export and agency finance, Asia-Pacific, for Citi. “Traditionally China would manufacture container ships and the more complex, high-value vessels came out of Korea,” she says. “Now we are seeing China go into that space as well.”
With the transaction now several months closed, another trend embodied by the deal has also become clear: agency support for trade finance in and out of China has become more important than ever before.
The fight against inflation
The reasons, quite obviously, can be traced back one year or so ago, when China began to steadily tighten the cost of funds as well as implement other measures to tamp down inflation.
A dramatically changed landscape for both Chinese lenders and borrowers has been one result, Yu says.
“Previously, borrowers from China had plentiful local bank liquidity and did not find agency lenders that competitive – that has all changed dramatically. Essentially, because the Chinese banks have much higher funding costs now, it is often more attractive from a pricing perspective for outbound transactions to be financed by an international bank with agency cover.”
Indeed, as Chinese exporters become ever more competitive overseas, it is not just its shipyards that are competing for and winning the complex deals, agency support is downright crucial in some cases.
More borrowers are turning to Sinosure amid the country’s monetary policies, says Michelle Ling, managing director and regional head of export finance, Asia, for Société Générale, in Hong Kong.
“In the past borrowers could tap the commercial or syndicated financing markets more easily.”
ECA-backed financing, naturally she says, has become more popular with liquidity tightened.
At the same Sinosure is supporting larger and larger-sized transactions, according to Ling, who also believes it will become a significant presence in the investment insurance market, especially as more Chinese companies invest overseas.
For the moment, though, export cover for Chinese exporters is the big focus for both the agencies and banks eager to tap them for support.
Consider Indonesia, which has embarked on a programme to substantially increase its electricity generation. The company has already inked contracts worth millions of dollars of power equipment purchases that were supported by China Exim. Now, a US$550mn Sinosure buyer credit transaction for Indonesia’s state-owned electricity provider that, as GTR goes to press, is poised to close. A Bank of China-led consortium of some 18 international and Chinese banks, the deal’s pricing is said to be in line with where the market has traditionally been – roughly an 80 basis point-margin.
“We are very pleased with the Bank of China,” says one banker involved in the deal. “It has done a good job of managing the consortium.” Once this deal closes, the banker adds, there is another US$1.5bn to US$2bn in transactions related to the same project that are next in line to be financed.
It is less certain, though, how those deals will price. For while agency finance has become a necessary component in many deals, it has not been immune to the same forces that are affecting cost of the funds in the country. “It will be interesting to see if Sinosure pricing remains competitive for PLN [Indonesia’s power company],” the banker says. “We certainly hope so.”
That is because the Chinese government’s fight to clamp down on inflation is interconnected with how Sinosure-supported transactions are being priced, Christopher Green, director of project and export finance for HSBC in Hong Kong, explains.
“A lot of dollar liquidity is being sucked out of the Chinese banking system at the moment – the cost of dollars is very high and as a result, funding export-related transactions under Sinosure cover into the international marketplace is under considerable margin pressure,” he says.
In the current environment transactions are pricing at 1%. This time last year, by contrast, he says, “we saw margin pricing in the 60s to 70s.”
“The buyers at same time don’t have the same financing options available to them as they did even a year ago with the bond markets shut down, so even though margins are increasing the borrowers are finding the export credit supported structures at 100bp margins.”
“There have been a number of transactions that have had to be re-priced in fact,” Green continues. “Some of the older deals that mandated at 65bp are moving to 85-95 basis points.”
The fear among some in the industry is that this upward pressure will lead to untenable levels. Other lenders, though, remain sanguine about prices. Opinions and observations about margins, in truth, range across the board – although there is clear unanimity that pricing is rising. “Chinese customers tell me that Sinosure has always been expensive,” says David Sullivan, CEO of Trade Finance Corp in Hong Kong. “Sinosure, though, is reforming itself to compete with international private insurers. Recently we have seen wind turbines being exported to India and the Chinese exporter received a very reasonable pricing for India,” he reports.
Pricing has gone up a lot and a number of banks have stopped providing without-recourse facilities overall, Holger Kebernik, managing director of China Trade Solutions in Hong Kong, says.
“We see banks that had previously quoted 25bp over Libor as minimum pricing now quoting about 75bp over.”
That said, based on what is happening from his perch in the market, “we don’t think pricing will rise further unless there is a particular occurrence in the credit markets, such as a bankruptcy of a major bank.”
“In the meantime, for a lot of countries and banks, risk-reward-wise the pricing seems rather fair. Consequently, unless there is such an event [a bankruptcy], I would rather see margins decrease again slightly over the next six months.”
The uncertainty, however, is leading many banks to club deal instead of participate in syndications, one banker active in the market reports. “Syndications are getting risky because pricing is so uncertain now. Banks do not want to be stuck -and that is good for the banking community and good for borrowers, who will have certainty that deals will happen on terms and conditions most favourable to them.”
A steady stream
For Sinosure, such skittishness has prompted it to seek out an even greater level of comfort with those banks it does business. Indeed, there is a steady stream of western banks eagerly seeking to forge closer ties or develop relationships with the ECA for the first time in its existence.
BBVA has a robust commodity finance pipeline in China, working with most of the major oil suppliers and importers, Nicholas Shaw, head of global trade finance for the Spanish institution, says. “Because of the high value of crude, that occupies a large chunk of our business.”
Now the bank is in the process of forging formal ties with Sinosure, through its partnership with a local bank. It expects to participate in a Sinosure-backed transaction sometime this year, he says.
“Sinosure is a thriving and rapidly growing ECA. We have a good relationship with them through our partner bank in China, China Citic.”
The market is demanding a greater emphasis on export finance, he adds. “It has been a trend for the last few years for traditional suppliers of large scale equipment, especially in Asia, to buy manufactured goods from China now,” he says.
Other banks, such as BNP Paribas, are building upon the ties they have established with the ECA since it was formed several years ago.
“We have developed a strong relationship with Sinosure over the past four to five years – in fact, we are one of the top foreign banks that works with the agency,” Olivier Paul, global head of export finance for BNP Paribas, says, adding that the bank has closed about 12 transactions with the ECA.
Sinosure’s ubiquity in certain sectors is another draw for banks. “There is a consistent and large flow of Sinosure transactions into the market place, predominately in the power sector,” HSBC’s Green says. “The demand for power throughout Asia is huge and a lot of coal projects are coming up, which is where Chinese manufacturers have a competitive advantage.”
Steel is another big user of Sinosure credits, as is the telecom industry, he continues. “We are working with Chinese telecom companies – interesting, smaller-sized firms in telco sector. These deals that can be bitten off more easily and digested so there is continued business to be done with short and long-term buyer credit for telecom players.”
Slashing at the foreign debt quota
For all the market parsing of what the trade finance agency policies will look like, and how and at what level they will continue to support these transactions, the ultimate decisions are, of course, made in Beijing.
Indeed, the current trajectory for these agencies specifically, and trade finance in the country in general, was set more than a year ago when the central government implemented a 60% reduction in banks’s foreign debt quota in order to curb speculation on the renminbi exchange rate. Borrowers wanted, and still do, to go long on US dollars in their liability books so they can take arbitrage gains on the renminbi appreciation when they repay the loan.
This tightening on the part of the government shows little sign of abating – indeed, there is expected to be an additional 15% reduction this June in the foreign debt quota, according to Nick Atkinson, a manager with ANZ’s global trade finance division. “It doesn’t look like the cost of US dollar funds in China will be eased any time soon.”
Still, though, bankers remain confident – or perhaps better put, hopeful – that the screws will not be turned too tightly on agency support.
“We know that China has huge financial resources, a huge level of reserves – all of which suggests Sinosure will continue to remain active in the market,” BNP Paribas’s Paul says. “I believe that, even taking into account the current difficult situation of the financial markets, Chinese authorities will be keen to continue supporting the strong development of Chinese exports.”