GTR gathered together leading export financiers to debate the outlook for their industry in Asia in light of the gloomy economic picture of late. Will export finance business grind to a halt?
- Erwin Boon, regional head Asia, global export and project finance, ABN Amro (chair)
- Paul Gardner, managing director, head of structured trade and export finance, Asia, Deutsche Bank
- Masahiro Goda, general manager, Asia, global trade finance division, Mizuho Corporate Bank
- Christopher Green, head of export finance, Asia Pacific, resource and energy group, HSBC
- Simon Jones, head of structured export finance, Asia, ANZ
- Michelle Ling, managing director and regional head, export finance, Asia, Société Générale
- Marina Vettese, head of Hong Kong office, Sace
Many thanks to ABN Amro Singapore for kindly hosting this roundtable.
Boon: In light of present economic turmoil, will export finance business expand as more organisations have export insurance coverage, or do we expect this dip to be so severe that fewer deals will be done and fewer investments made?
Ling: We still see great demand for export transactions, but for financial institutions we are seeing a lot of volatility, so that will affect our alternatives. There are good transactions and let us continue to focus on that. Nowadays, because of uncertainty, things will take longer to materialise, so we have to work on transactions longer and, for certain cases, we have to go to a higher level to get approval. Transactions are still being done though.
Boon: Do you think there is still enough liquidity in Asian structures?
Ling: Because of the QE2 (quantitative easing) and the upcoming QE3 there is an increase in local interest rates in many Asian countries to tackle inflationary pressures, so for a lot of Asian countries there is great demand for offshore financing, including export finance. Therefore, export finance
will still be relevant.
Boon: If you look at your experience with Asian export credit agencies (ECAs), did they have a good 2011? Did they do a lot of deals?
Ling: Both the Korean and Chinese ECAs were quite busy during 2011, but in terms of transactions that materialised there are a lot in Korea, but in China because of the long approval process, not too many have closed.
Green: With China, our experience has been that in closing a Sinosure deal it is very challenging to get more than two, three, maybe four deals done in a year. To start that process you had better have those mandates about 12-18 months prior to close. The process and procedures around Sinosure are what is holding Sinosure back – at least for the medium to long-term business.
There are clearly masses of volume and availability of opportunity, but the process and procedures and implementation of that product is not what it needs to be for Asian ECAs, and locally Sinosure, to make a real splash in the market in Asia. I think it has created an opportunity for other Chinese institutions capable of taking risk, notably China Development Bank (CDB), to fill that void and fill it substantially with big ticket holds and cross-border clean risk.
Jones: That is true of the buyer credit policy in China, but what that has opened up is an increase in the use of other Sinosure policies which are not restricted by the whole process. We have seen a large increase in the number of leasing transactions being closed and signed very quickly. From start to finish, we will probably close a leasing transaction well inside three months.
So I think banks able and willing to play with a leasing policy will still continue to do Sinosure transactions. Also, the shorter tenor or the supply credit type insurance policies, I think banks are doing quite a lot of business under those receivables discounting. Not all banks, but a number who have got comfortable with policies.
Boon: Is it not, in part, due to ourselves that apparently all national banks are quite comfortable with Sinosure? That has happened over the last couple of years and quite quickly. Sinosure has done an amazing job in setting up a professional organisation with fairly knowledgeable people, but if we are forthcoming with so many applications, they might be a little overwhelmed by the number of applications.
Ling: Yes, I think Sinosure realises the internal problem. There was an internal reorganisation in Sinosure in July, so going forward it will put more emphasis on overseas investment insurance, including leasing insurance.
Green: Sinosure is almost encouraging a move in that direction, because it knows it can deal with that particular policy by itself. There have been question marks around whether or not the policy is in full faith of the Chinese government. We have assurance from Sinosure that it is and we are confident in ministry of finance support for Sinosure as a policy institution.
Boon: Is it the preliminary conclusion that if we see fewer deals in Asia it is not because of the economic turmoil, but more that the whole process takes a long time to get things done?
Gardner: We are seeing fewer deals. If you look at some statistics, there was US$30bn of ECA deals written in the first six months of 2010. During 2011 there is only US$20bn growth in the syndicated loan market in the same period; we are back to almost pre- crisis levels.
There used to be about US$5tn written in any one year; there was about US$2.2tn written in the first six months. Thus, you can see where the syndicated loan market is liquid, the ECA market has started to fall away.
When you talk about turmoil, to me that has been relatively recent, because until August 2011 most people thought we were out of the financial crisis. It is only this month [September] where you have US money market funds not delivering or not funding European banks in US dollar terms.
It is this month when you have seen the CDS spreads for banks blow out past 2008 levels and if you look at the sovereign CDS as well, it has also gone through 2008 levels for most of the sovereigns in the region and in Europe. There is clearly a correlation between the amount of ECA deals done and the world perspective on whether we are in or out of recession.
Green: I agree with the volume. Asia is not one market; it is a series of markets. India should still offer opportunity, because the macro environment is such that rupee rates continue to rise; US dollar-denominated export credits should look very attractive when swapped back to rupees. Therefore, there are macro issues within India that should make the product attractive. Whether or not there are going to be increases in volume has still to be seen.
Indonesia, on the other hand, is elevating itself to investment grade status shortly. My observation is that local banks there are far more aggressive now and able to take on term financing. Therefore, even when it is not pure cross-border syndicated risk we are seeing markets like Indonesia where the strength of local banks is becoming much more evident which is going to take market share away from the export credit product in that market. We have had a fantastic 2011 closing deals in Indonesia, but I see that shift beginning to change and moving into 2012 there are going to be fewer opportunities.
Australia is a different situation. There are currently enormous volumes of LNG projects and opportunities in the metals and mining space where previously Australia would not be considered a sizable export credit market. Australia is emerging in Asia as a very significant opportunity.
It is really a market-by-market focus that we are trying to take and there are still some more markets out there.
Goda: The point is how ECAs support those projects. If you look at JBIC’s track record after the sub-prime and Lehman crises, transaction numbers dramatically increased. Of course, we have to support Japanese exports and this means that governments are trying to support their own company, own country increase. The question is how JBIC has also untied facilities, untied guarantee insurance programmes, used for non-Japanese suppliers, non-Japanese borrowers. How does an ECA support those overseas projects?
Boon: It is clear there is a correlation between financial stability and ECA products, but I sense a little bit of difficulty here if volatility comes quite quickly, because we can also conclude that the process time of an ECA deal has always been quite long. Therefore, by the time you finish your ECA deal you have probably already had two cycles and your client is thinking: ‘Does it make more sense to tap the syndication market or the ECA market?’ It will likely be a very difficult discussion with your client if this continues.
Gardner: There is some volatility on timing, but if you look at industries backed by ECAs, if you look at the top two, it is oil, gas and power generation. Neither of those are buy-today-instantaneously-on-sale-type industries. They are long-term planning industries. They generally have factored into a large, long-term build period, so a six-month turnaround by an ECA is not a dramatic impact on such an industry.
Equally, liquidity for these industries is not available in terms of the bond market, so whereas some might be able to say: ‘Liquidity is back in the bond market, let us go there today,’ for those types of industries where it is generally a project-type risk it is not yet an easy sell to a bond market to sell a project that has completion risk and various other risks around it.
Therefore, they are still reliant on either the syndicated loan market or the ECA, neither of which are quite overnight markets. So we are less sensitive in terms of the major ticket items on the ECA list than we are on the smaller stuff.
Boon: True, but for Asia one of the most important sectors for K-Sure and Sinosure is shipping. The interesting concept of doing business for ship owners is, first, order the vessel and three months before delivery call the bank. There we definitely see an issue of convincing the client what makes the most sense and before we can do that we should also convince ourselves what makes the most sense and that changes every week in our internal discussions.
Gardner: At Deutsche, we have seen incredible growth in shipping in 2011, so I would suggest this is becoming reasonably commonplace. I am not saying they do not come to us three months before delivery, but they are now much more attuned to the ECA product than before. The ability for banks to take clean asset financing on ships is somewhat marred by their legacy assets where they have a number of loans out on a number of older vessels to ship owners who obviously suffered in the crisis.
If you have less trade flow, if you have fewer charters, you have less money going to the shipping industry. Therefore, credit’s ability to take 80% loan-to-value is no longer there. We are moving from 70% to 60% loan-to-value on some vessel types depending on whether there is a long-term charter at the back of it or whether it is going in the spot market. Again ECAs seem to provide the stability and tenor of financing to take away and de-risk, which is what a bank is trying to do in an environment of volatility.
Green: My observation on the shipping side is that companies that have never used export credits are now beginning to seriously consider it, if not going full tilt into the product. These players are not doing it three months before deliveries, but rather two years. We are talking to clients who have deliveries in 2013, 2014, so they are prepared to take that commitment now and that may look to be a very good decision with the way cost of funding is going. Who knows where it is going to be? It could be still going north by the end of 2012 for 2013 delivery. In certain sectors, particularly the container sector where there is not a lot of support, export credits are going to continue to be absolutely critical and new clients have been coming into that market, so there are some growth spaces.
One of the differences in Asia versus the Middle East or Latin America is that the size of projects, with the exception of Australia, tends to be relatively small. These are not like Middle East projects where you have massive petrochemical US$5bn-10bn projects and inevitably there is not enough commercial bank support for those projects alone. Therefore, all these major Middle Eastern projects are going to have very large allocations to ECA financing. Asia is a bit dissimilar maybe from some other markets, because you see a lot of US$50mn-200mn projects where you can still get those away in the syndicated market and/or the local banks and handle those kinds of volumes.
Jones: As well as longer-term issues that face the industry there have also been some kneejerk reactions to volatility we’ve seen in the markets recently in that it seems to have changed the behaviour of banks. Holds seem to be reducing; lack of underwriting seems to be coming through. Banks are walking away from transactions or failing to bid for them because they lack the long-term liquidity or they feel for their long-term liquidity and do not want to be seen to be pitching transactions at the moment.
The Barzan deal in Qatar is a good one. Four or five banks that would ordinarily have bid for it decided they did not want to. It looks like it is going to be oversubscribed though, because there is still enough appetite out there for ExxonMobil, Qatar Petroleum-type projects, but there are banks that stepped back from pitching.
Therefore, generally, an increase in pricing and lack of ability or desire to go into too many big, long-term deals seems to be an instantaneous kneejerk reaction. We have discussed with some US banks that were doing, in the aircraft sector, US Exim deals at Libor plus 20 or 30 a couple of months ago. Their appetite has decreased significantly and pricing is going north very rapidly.
Green: We are hearing the same. Aviation will be interesting because there is still considerable demand out there for banks to fund, but very few banks interested in taking US Exim assets at 70, 80 basis points.
Jones: There will be many aircraft deals out there; it is just a matter of how many ECAs are supporting. In good times when banks were very liquid and the cycle was right it was 20%. That flipped to 60-70% during the financial crisis a couple of years ago and is probably hovering around 40-50% now.
Vettese: As far as Sace is concerned we have seen increasing demand for ECA backed financing in Asia and that is from the outset of the crisis. That is why we decided also to reinforce our presence in the region. That was mainly for large project finance transactions and initially also for smaller-sized transactions. Nowadays, we are seeing a slowdown, even though in some areas in Asia we still see demand for ECA-backed transactions. For example, in Vietnam and India we are opening a dedicated office for this purpose.
Of course, the crisis has also created opportunities for us to look at transactions in category zero countries like Australia. Before the crisis the use of ECAs required for deals in those countries was very rare and now we see that because of the size of the investments in the pipeline there are more opportunities for use in the large oil and gas transactions.
Boon: Is it purely from a liquidity point of view that you have a stable source of funding to have an ECA in those large transactions?
Vettese: It is from a capacity point of view, yes. It is also tenor.
Jones: We have closed three wind farm transactions totalling about US$1bn in the last 18 months and those deals go out to 22 years which the Australian banking market does not do. Therefore, if wind is what they are doing, then it has to be with ECA support and, as you say, there are mining and LNG projects too. If you add up Australian investments that are likely to happen over the next four or five years, you are talking about US$25bn-30bn and there just is not that capacity in the Australian market.
Gardner: Risks fundamentally have not changed. The risk on a wind farm is still the risk on a wind farm – is the wind going to blow, is it going to generate at the right tariff, do you have the right feed-ins, etc? What has clearly changed is the ability to get liquidity and to get liquidity at the longer tenor.
To my mind, that has never fully come back from the crisis. Pre-crisis, you were getting 15-year money on projects in the commercial bank market. Through the crisis that just was not available at all. Post crisis there are very limited pools of liquidity available for that sort of tenor and at 22 years Simon, I think you are right — there is nothing available out there in the commercial sector.
Therefore, the role of the ECA is not so much risk mitigation; it is very much the liquidity and tenor provider. We are into a very interesting cycle now because, depending on what happens in Europe, we might start to see it being risk mitigation as well. If you believe there is going to be a slowdown in Europe – and all indications are there – then can Asia stand alone? With the fact that the US market has already gone down, as it were, in terms of slowdown and goods coming from Asia and if you couple that with a complete slowdown in Europe as well and, worst case scenario, even a breakup of the eurozone, can Asia continue to function as it has?
Will it be immune or will contagion spread? If it does, then perhaps you will have more of a risk mitigation element coming back into ECA financing.
Jones: The US and Europe are not the only places that buy Asian goods. As we know, about 40% is intra-Asia anyway and so it will be insulated a bit. Therefore, I do not think it will be a catastrophe, but there must be some contagion. There always have been contagions for most crises even if it is just perception.
Gardner: If 60% of your market goes away it is going to impact you and that is ultimately what we are looking at. The question is; have we learned enough from the previous recession and has the way the ECAs and central banks reacted last time been good enough to avoid recession this time? We are already seeing that. If you look at market indicators, we are worse off already.
The CDS spreads are wider, sovereign CDSs are wider, so we should be in a worst case, but as yet there is no panic in the market because we are better prepared. The central banks and the European Central Bank (ECB) are already funding Greece; it is already funding those banks that cannot raise dollars. If you look at the indicators though, not one Eurobond was done in August.
That has not happened since the euro began. Thus, indicators are terrible, but there is no panic this time and that is partly because we are better prepared and if our central banks act in a coordinated way we shall come through this one as well. But there is no doubt we are at least as bad as we were in 2008.
Green: The big difference between now and 2008 is that the banking system is more robust and has not seized up. When the banking system did seize up it was a pretty interesting opportunity for export finance to really take market share in cross-border debt products.
The syndication market collapsed in Asia, the bond market collapsed. There was no other cross-border source of funding except for export credit and we all saw a rise in volumes. Volumes are coming down, but that is a natural effect due to some normalisation of the markets. However, there are storm clouds with US and eurozone issues weighing on confidence and maintaining pressure on the banking system. Banks in Asia have been protecting themselves and have been gaining strength in certain markets. We are seeing those banks continue to focus on infrastructure development in those countries – notably, India, China, Philippines, Thailand, Malaysia and increasingly Indonesia.
Therefore, Asia will have some buffer for that kind of global liquidity contagion and will still be able to go out and invest in infrastructure development. But can they do it alone? Probably not. GTR