As Germany’s exports plummet, its exporters are turning to export credit agencies (ECA) for support, filling out applications for Euler Hermes cover in their droves. The German government also has renewed its commitment to support German exports. The banking sector now needs to ensure it can meet the upsurge in demand for trade and export products. Rebecca Spong reports.
As 2008 drew to an end, Germany’s export market had clearly taken a severe hit. In November last year, it saw an 11% fall in exports, the largest fall since East and West Germany reunified. The country’s economy is suffering, perhaps unfairly, from an over-reliance on its historically successful export industry.
The German minister of economy, Michael Glos, pessimistically commented in October last year: “In contrast to recent years, it appears that foreign trade will not prove to be an engine of economic growth in the coming year.”
But, in the following month, the German government stood alongside fellow OECD countries and non-member governments to underline their support to provide corporates with access to export credit. They issued a statement via the OECD confirming “their strong commitment to continue to be reliable partners to exporters and financing banks”.
This economic climate could now play into the hands of banks who can offer traditional and relatively stable forms of financing, either guaranteed by the German ECA Euler Hermes, or supported by strong collateral packages as seen in pre-export deals.
More and more German corporates, which previously would have dealt with export contracts on a cash basis, are turning to ECA-guaranteed buyer’s credit facilities. For the German exporter facing an acute economic downturn, the ability to offer some form of credit to the importer can help win them that elusive contract.
Bankers are already reporting that top tier German names, finding their house banks unable to lend them corporate loans, are now ringing up a bank’s trade finance department or putting in a call to a forfaiting boutique.
Lothar Meenen, head of structured trade and export finance in Germany at Deutsche Bank, is particularly enthusiastic about the market for ECA-backed financing: “Our time is now; we have seen such an increase in demand we have to tell the world and our clients that it is an absolutely fantastic time for ECA financing.”
An optimistic Erik Hoffman, executive director, head origination trade and export finance at WestLB, similarly remarks: “The second half of 2008 was really an enhanced situation for ECA business. We see a huge pipeline for the New Year.”
He goes on: “We see typical markets for ECA financing in Russia, Ukraine, Kazakhstan, and we are also looking to more industrialised countries lacking financial resources.
”We have closed in Russia, in the Ukraine, closed in Turkey. We are about to close in Brazil. We are quite positive about the New Year.”
Ralph Lerch, director and team head in export finance at Landesbank (LBB) Berlin, adds: “We at Landesbank are seeing more applications than in normal times. We are known as the bank that is still active in Eastern Europe – so corporates which were in former times more linked to big private banks are now coming to us as other banks can’t fulfil their financing needs.”
Bernd Sooth, first vice-president at the German development bank KfW, also observes: “Using collateral structures or ECA cover mitigates the risk position and reduces pressure on equity. Therefore these kinds of facilities have been of great assistance to banks in managing assets during the crisis.”
However, a boom in customer demand for ECA-backed financings does not necessarily translate into a boom in business volumes or profit.
Eckhardt Moltrecht, head of international relations, at Euler Hermes, comments that the German ECA, in terms of its German state business, has, “seen a significant increase of the volumes of applications for cover,” but adds, “that does not mean automatically a proportionate increase in new business.”
“We don’t know if these applications will be accepted. Projects could be delayed or cancelled.”
As Germany sinks into recession, projects are inevitably put on hold.
Lerch at LBB echoes Moltrecht’s sentiments by suggesting that increased applications for ECA-backed transactions is not a sign of more business in the market, “rather it is a sign of lots of customers approaching lots of banks to find one willing to offer financing,” remarking that some banks in the German market just don’t have access to enough liquidity to fund long-term ECA-backed deals.
He adds: “Euler Hermes saw a big volume of deals up until October. ECAs and export finance benefited from the liquidity crisis but they now start to suffer from the economic crisis.
“Local banks are more conservative about evaluating deals, and their outlooks or forecasts are changing. For instance, steel works or power generation companies are now suffering from a lack of demand – so of course they are revising their investment plans.”
“This can lead, at least, to delays in projects either under discussion or envisaged. No one is willing to make a decision right now, most clients are saying ok, let’s wait and see if prices for raw materials such as metals necessary for projects decrease further.”
WestLB’s Hoffman qualifies his initial optimism, concluding: “The problem that I see is that part of the cake financed through ECA business is getting bigger, but the cake itself is shrinking due to the recession.”
Kazakh deal lost and won
One transaction close to winning ECA-backed financing from banks in Germany is a €106mn Euler Hermes-supported deal for the Development Bank of Kazakhstan.
According to market sources, the loan is set to be lent by a group of international banks in Germany to the development bank in order for it to on-lend to KUN Renewables, a private Kazakhstan company. The funds will support a two-phase project to build an integrated polysilicon producing plant in Kazakhstan (polysilicon is used in the manufacture of solar cells). The project will involve the use of specialised German technology.
According to one source, the credit agreement is “nearly ready for signing”.
This project is included in Kazakhstan’s national 30 Corporate Leaders programme, a government-led project which promotes the modernisation of the economy, and the involvement of Kazakh companies in international markets.
This deal contains a number of appealing elements to make it an attractive proposition in these post-Lehman risk-adverse days. However, the project has still thrown up a few challenges.
The deal’s first appealing trait is that it is an ECA-backed facility, which provides the comfort of a sovereign-backed guarantee in the event of non-payment.
Second, the deal is in the renewable energy sector, a sector banks are keen to invest in, from both a profit-making and corporate social responsibility point of view.
Third, the borrower is the Development Bank of Kazakhstan, a state-owned entity, and along with Euler Hermes, presents another reassuring presence in the transaction.
However, the process of securing mandates has taken longer than initially expected, which is hardly surprising considering the volatility of today’s markets. According to market sources, mandates were originally granted to Landesbank Berlin (LBB) in the first half of 2008, but number of factors, no doubt including the collapse of Lehman Brothers in September, crashes in inter-bank lending and hikes in cost of funding, led to renegotiations on the details of the mandate.
During this time, the Development Bank of Kazakhstan then approached a number of other global banks to tap their interest in the deal, and the battle to win the prized mandate at an attractive price recommenced, and ultimately a consortium of international banks won the mandate. LBB is said to also be rejoining the deal in some form.
Inevitably, the deal is expected to be priced higher than the original price discussed in early 2008. However, the decision to opt for a syndicate of international banks by the Development Bank of Kazakhstan could be motivated by political reasons just as much as financial ones. The Kazakh economy took the initial brunt of the credit crisis, and will inevitably be eager to restore international confidence in its economy.
Despite the imminent signing of this deal, and the generally enthusiastic talk of further ECA deals set to close, no one is entirely sure which way the market will head. At the end of 2008, it was still very much a case of wait and see.
Lerch at LBB comments: “Export finance will become more popular again. That of course is the trend.
“I’m optimistic for the mid to long-term, as I am completely sure that if banks feel capable to create more sophisticated funding solutions for export finance then they will be able to manage their deals and will be rather successful.”
Joachim Landgraf, head of trade and export finance at Landesbank Baden-Wurttemberg (LBBW) in Stuttgart, also notes an air of uncertainty in the market, particularly regarding when and if the secondary market will return.
“I think the secondary market will return in the second quarter perhaps. It really depends on the insurance companies,” he says.
Whatever capacity is on offer from insurers, banks and corporates will be facing higher premiums, particularly as claims begin to climb upward.
Thomas Langen, regional director, Atradius, Germany, comments: “We do expect lower export volumes in 2009, and yes we have seen an increase in claims.”
“In light of the deterioration of the German economy we need to adapt our prices. However, compared to the risk premium increases on the financial markets even for AAA rated companies, our price increases are quite moderate – especially when taking into account the steady price decreases of the last few years.”
One definite trend that will continue into the New Year will be that as new deals come to maturity, German banks will certainly be looking to refinance in euros rather than in US dollars. “It is almost impossible to get long-term US dollar financing and all German banks will look to do euro financing as it is far easier,” comments Landgraf.
Bankers also note that the market for ECA-backed financing in Germany is increasingly being driven by the exporters and importers, rather than purely by importers wanting credit, as seen in pre-crisis days. Exporters now want export credit facilities to not only guarantee they will get paid for their exports, but also make their offer more appealing to importers. Filling up the order books for 2009 is essential for German exporters as the country prepares to face a potentially rising number of bankruptcies.
Deutsche’s Meenen notes: “Government-backed deals are very valuable to help exporters make deals. When I am travelling around Germany, I am receiving requests for ECA financing in order to make sales. I have not seen this kind of demand for a long time.”
Top tier names in key German export markets such as Russia are also raising ECA-covered financing, some for the first time to date.
In November 2008, Russian nickel producer Norilsk Nickel signed its debut ECA-supported deal. It secured a 10-year €278.8mn facility guaranteed by Euler Hermes. The funds will be used to refinance the company’s shipbuilding programme for the construction of four Arctic icebreaking class container vessels made by the German shipping firm MTW Werft.
Mandated lead arrangers on the deal are Bayerische Landesbank, Calyon, DZ Bank and ING Bank.
Pricing and the reassessment of risk
Pricing on ECA-backed deals is also hitting new heights, with most bankers quoting a doubling or tripling of pricing during the last few months of 2008. Rough estimates on pricing suggest that half a year ago an average deal pricing at between 25 and 50 basis points over Libor, is now likely to be 100bp or more.
But ECA financing still remains comparatively cheaper than other forms of financing. And, more importantly, it is available when other sources have disappeared.
Steadfastly guarding their valuable liquidity, some German banks are also adjusting the way they assess risk, particularly in these fast moving unpredictable times.
Deutsche’s Meenen explains that when looking at how to price a deal, they are paying close attention to the credit default swap (CDS) rates.
“By looking at CDS rates, we have some kind of indication of what the market is thinking about and we include this in our pricing. I see other banks also going down this route regarding risk assessment.”
By using the CDS rate as another risk assessment tool, Deutsche can get a broader and potentially more current risk perception of a particular region or market.
Choosing the right risks and right projects in the first place is also essential. As one banker remarks: “We have to find those projects that will still materialise in a difficult environment.”
WestLB’s Hoffman speculates on what could potentially be good regions or sectors for ECA deals.
“Perhaps, in less developed countries the problems in the financial markets won’t affect projects as much, as these economies are less involved in the global industry. For example, projects in Sub-Saharan Africa focused on infrastructure development rather than the production of manufacturing plants might potentially be less affected.”
He adds: “Two digit euro investments have far better chances of being realised than mega deals.”
Return of trade finance
Not only are ECA-backed deals growing in popularity among German exporters, traditional trade instruments are also enjoying a revival.
Peter Deisenbeck, head of trade risk facilitation in Germany, at HVB-Unicredit, comments: “There is a growing demand for financing needs through trade finance instruments, including letters of credit, letter of guarantees, post-financings, discounting, and without recourse business (forfaiting).”
But he notes that certain aspects of his business have changed, particularly since October 2008.
“What have been changing in the market are tenors becoming shorter, sometimes cancellation of the underlying commercial contracts, and (as a matter of fact) changes in the financing structure itself,” he observes.
Similarly, Marina Attawar, managing director at DF Deutsche Forfait, reports that more and more corporates are considering arranging some form of forfaiting transaction.
“There is an incredible new amount of deals being offered to us and at much better quality. These are deals we never saw before as they went to house banks.”
She adds that she is seeing much more LC business coming from “good” banks, and therefore she can happily ignore deals involving pure corporate risk, commenting she can really “cherry pick” the best deals on offer.
“Big German names are now frequently calling us, those that never bothered in the past. Demand for forfaiting in Germany has grown tremendously and in particular from medium-sized German companies that have problems finding banks for LC confirmation or to issue guarantees.
“The impression we have is that other banks have reduced significantly their lines for countries like Russia, Turkey, China, Korea, Thailand and India. There is a distinct move away from corporate risk, and away from structures.
“The demand we are getting is much more than we can handle by far. Which is nice for us,” she concludes.
Attawar also notes that exporters are also returning to Euler Hermes to cover their letters of credit, as finding banks willing to confirm them is proving difficult.
Previously demand for Hermes cover was limited, as it was far easier to phone a bank. “One call and you can get something covered, with ECAs it simply takes longer,” she explains.
Secondary market issues
Despite talk of a relatively stagnant secondary market, Silja Calac, head of trade risk management at HVB-UniCredit, in Munich, echoes Attawar’s positivity, stating: “There is a secondary market and there is a lot of choice if you are on the buying side. We are still buying and selling.”
In fact she tells GTR, that in 2008 between September and November, her team distributed more than double the volume of assets compared to the same period in 2007.
“In September-October we saw no slowdown, customers still wanted to cover risks and sell risks they would usually have kept on their own books,” she explains.
Though, she adds: “In November we saw a clear slowdown compared to last year. However from an income point of view the change was not so apparent, as even if the volume of business was reduced, the pricing increased.”
But, according to Calac, HVB-Unicredit was still reaping some of the benefits of operating in a more risk adverse market.
“We are getting a more reasonable spread on deals when we sell. For example in Russia, last year’s deals were priced at 20 or 30 basis points, and we were arguing over a few basis points. Now deals in Russia are over 100bp,” she explains.
The credit crisis has also unlocked previously untapped markets, with German corporates and banks looking to mitigate their risks in markets such as Latin America, Taiwan and the Middle East.
“Our risk portfolio is much more diversified, whereas it used to be dominated by business with Russia, Turkey and CEE.”
A wider range of markets will prove useful as banks verge on their capacity limits for certain risky markets, such as Ukraine.
Calac adds: “We did a lot of business in Ukraine and we will not be shopping around for Ukraine business right now.”
Reigniting the markets
For trade and export financiers in Germany with enough liquidity and the ability to pick the right risks, 2009 could hold some intriguing possibilities. But much will depend on how entrenched the recession will be.
The next 12 months will be a tough year for German exporters, and the future of the economy rests partly on the level of commitment from the German government, in terms of real injections of capital, to support its export industry.
The German government is on the verge of approving a €50bn investment package aimed at rebooting the country’s economy, which could help reignite the country’s key exporting industries.