Commercial banks’ reluctance to extend credit is creating big opportunities for export credit agencies (ECAs), who are filling the gap for much-needed export finance. ECAs operating in the export-dependent Nordic region have stepped in, essentially with programmes for short-term lending of working capital, credit guarantees aimed at small and medium enterprises (SMEs), and by raising the ceilings for their business volumes. Shannon Manders reports.
Governments within the Nordic region have been quick to respond to the economic crisis and the individual needs of their ECAs. Norwegian Giek’s exposure limits were increased; Swedish EKN’s guarantee frameworks were doubled; Denmark’s EKF was provided with an export loan facility as well as a short-term reinsurance facility; and Finnish Finnvera’s maximum authority for domestic financing to SMEs was increased. The Finnish government also introduced a temporary buyer credit financing scheme.
But these schemes have been closely scrutinised by the banks – who feel threatened by the new role that the ECAs have adopted – as well as by the exporters themselves, as some of the packages have as yet failed to get underway.
Short-term trade finance
Many public ECAs in Europe and the rest of the world are working on implementing or increasing their short-term trade finance facilities. The importance attached to these measures was reflected in the outcome of April’s G-20 meeting in London.
There has been little uniformity in the measures that various countries have taken, with facilities being drafted in all shapes and forms.
“The first priority is to get the trade finance market working again,” says Jan Vassard, deputy CEO of Denmark’s Eksport Kredit Fonden (EKF). “I guess that’s why we see so many initiatives – even experimental initiatives – in this area at the moment.”
Vassard identifies the next most important step as re-establishing a non-distortive, level playing field in terms of regulatory standards. He explains that it would be a problem in the longer run if the players in the trade finance field are regulated differently.
Vassard lists as an example, the fact that the EU has a specific set of rules – the EU Short Term Communication – which states which markets are indeed marketable.
“According to these rules, as an EU public ECA, you cannot go into OECD areas with finance or guarantees under two years. If you look at the broader picture, most short-term facilities outside the EU are regulated by national standards,” he says.
Most non-EU ECAs typically operate according to national standards, and International Financial Institutions (IFIs) – which have increased their role in trade finance during the financial crisis – are not formally regulated.
“In this crisis, with facilities cropping up, the uneven playing field is becoming even more distorted. This is something we have to look into as soon as we get the trade finance market moving again,” says Vassard.
Difficulties in arranging liquidity and security have brought strong demand for EKF’s products. To remedy the situation, the agency has offered to cover a larger proportion of the risk exposure undertaken by banks and private credit insurers.
In mid-March this year, EKF signed reinsurance agreements with the three private credit insurers in the Danish market – Atradius, Euler Hermes and Coface. The agreements marked the return of EKF – and the Danish state – to the short-term trade insurance market for the first time in a decade.
The aim of these reinsurance schemes is to increase the capacity and the appetite of these three operators, who for the last six months have withdrawn rather rapidly from a number of regions and sectors.
Vassard says that it is expected for the problems within this market to be temporary, and as such, the agency has been prepared for an exit strategy from the start. Vassard explains that there are incentives for both credit insurers and exporters to return to normal market cover as soon as they can.
In mid-May, the EU Commission gave the green light for extending the scheme to transactions with a number of OECD/EU countries under the commission’s temporary simplification measures, devised in response to the financial crisis.
Another tool made available to the Danish ECA was an export loan facility revealed in January this year. The Danish government adopted an initiative known as the credit package, which includes an export lending scheme of Dkk20bn (approximately US$3.8bn) over the next three years. The scheme will be managed by EKF, and will tackle the liquidity problems with financing medium and long-term transactions.
But in May, local press reported that nearly four months after the government’s package was supposed to help stimulate business exports, none of the money had yet been paid out to eligible companies. This delay has been severely criticised, and many experts and politicians have reportedly labelled the Danish export market as being in serious trouble.
But Vassard disagrees, stating that contrary to some media reports, the establishment of the export loan programme and the subsequent handling of applications by EKF have been both “quick and effective”. He argues that during the first 10 weeks of the programme, EKF handled applications for projects amounting to nearly US$1bn. “Offers have been issued or are about to be issued,” he confirms.
Although Vassard concedes that no actual loan payments have been made, he states that this is not surprising, considering that the programme involves large capital good transactions. “Many different parties are involved and the financial crisis has meant an increased scrutiny on the part of banks, sponsors, exporters and buyers when making large investments.”
Giek, the Norwegian ECA, also reports an increased demand for short-term credit insurance. Giek’s director Edvard Stang, notes that transactions in the maritime and oil and gas sectors continue to dominate.
As a means of dealing with the crisis, Giek’s exposure limits were increased to allow for participation in more transactions. Giek’s general guarantee scheme was increased from NOK50bn to NOK80bn, and the exposure limit for the building loan guarantee scheme was increased from NOK5bn to NOK6.5bn.
In May this year, Giek reported a rush for counter-guaranteeing letters of credit (LC), and the ECA took such risks in 29 LCs worth NOK540mn in the first quarter of 2009.
Stang confirms that there is an increased risk of cancellation of contracts, delays and lower sales volumes. “It’s back to normal business, in that banks and credit insurers are treading a little bit more carefully, and are considering securities,” he says. As such, he names the key challenges facing the Nordic trade finance market as being the ability to secure continued decent underwriting, and being ready for the imminent upturn.
Meanwhile, EKF’s pipeline for medium-to-long-term transactions has doubled to US$4bn within the last year. Vassard reports an increase in the demand for their traditionally large sectors, such as cement plants, wind farms and infrastructure projects in addition to a growing number of new customers in a variety of sectors. “Not surprisingly, we have witnessed a return in demand in the shipping sector – a sector which has been virtually absent from our portfolio over the last 10 years,” he says.
Geographically, the demand appears to be quite widespread. Vassard names the biggest regions as Western and Eastern Europe, CIS and the Middle East. The largest single markets are Russia and Turkey.
Like many ECAs, EKF has seen a growing demand for medium-to-long term cover within the OECD area. Wind farms are the main driver in this trend, says Vassard.
EKF is facilitating Danish exports in another area too. In November last year, the agency launched a series of unique climate guarantees that will help Danish enterprises utilise the considerable export potential for climate technology.
Working capital guarantees
Across the strait in Sweden, the Swedish government has been equally quick to respond to the effects of the crisis. In December last year, a decision was taken to double EKN’s limit to increase guarantees from Skr175bn to Skr350bn (approximately US$4.4bn).
The Swedish ECA’s director-general Karin Apelman says that there has been a dramatic increase in demand for guarantees – especially since towards the end of last year. “Over the years, we’ve seen a large increase in exporters going into new markets, with new clients, new buyers and new products in what can be seen as difficult or new countries to them,” she says. “What we are seeing now, is that both the exporters and the banks are coming to us for transactions in more or less every market.”
It is business as usual for the Swedish ECA, and Apelman explains that the agency is receiving many requests for guarantees in markets, such as Mexico, India and Indonesia, that they have not been asked about in the last couple of years. “The Swedish exporters are now using EKN guarantees in the transactions where they have handled the risks themselves – together with banks – for some years,” she says. And although there are payment delays in Russia, Ukraine and Turkey, Apelman notes that more transactions can still be done there.
EKN attracted 100 new customers in 2008 – most of them small companies.
Since 2006, EKN has been offering working capital guarantees solely to small and medium-sized companies who have expressed a need for such facilities. But when several large corporates experienced difficulties in obtaining financing from banks, EKN decided to temporarily broaden the limits of its working capital guarantees to include companies of all sizes.
On the downside, the agency is experiencing some delays and defaults, and delays that could lead to defaults. “It’s a natural effect,” says Apelman. “We’ve had very good years, we’ve had all-time lows on payments, combined now with an all-time high on demand and on our exposure. We are starting this more difficult period with a healthy balance sheet.”
Finland has been particularly hard hit, and looks to be the Nordic country that has endured the biggest drop of exports – by almost 40% in the first quarter of this year. “Amongst other reasons, this is because they have a strong dominance in the pulp and paper area, which has shrunk immensely,” says Claus Asbjørn Stehr, head of trade and project finance at Nordea.
At the beginning of this year, Finland’s export credit agency Finnvera increased its ceilings on lending and guarantees and introduced a new direct lending export credit scheme to ensure export projects stay on track. As part of the state’s stimulus policy, the SME lending limit was increased to €4.2bn, and its ceiling on export credit guarantees to €12.5bn.
According to Topi Vesteri, executive vice-president of Finnvera, the Finnish economy has benefited from the stability and low interest rates the Euro has brought. He claims that the country’s economy has been one of the fastest growing economies in the EU in the last decade. “Now that we are falling, we are falling from a record high level of GDP – we passed most European countries and Japan by this measure. Being in the Eurozone, we do not have the cushion of a devaluing currency like Sweden or the UK for example.”
In March, Finnvera launched two new financing products – the counter-cyclical loan and the counter-cyclical guarantee – the overall authority for which is €900mn. It is intended that the products help offset the consequences that the downturn has had on enterprises’ liquidity or profitability. The fixed-term arrangement will be valid from 2009-11 and is aimed at enterprises that employ a maximum of 1,000 people.
According to Vesteri, these instruments can be used for companies that have been profitable but have experienced temporary difficulties due to the recession. “The main condition is that the company’s bank financier must agree to reschedule repayments beyond the prevailing recession. The product and Finnvera’s participation encourages private market financiers to see companies through the recession instead of foreclosing on collaterals they have.”
The Finnish government also introduced a temporary buyer credit financing scheme of €3.7bn.
For this, commercial banks can act as the arranger, but can then transfer part or the whole of the export credit to be funded on the balance sheet of Finnish Export Credit (FEC), provided that no other financing is available for the project at reasonable terms. The scheme has a current limit of €3.7bn and still requires a 100% export credit guarantee from Finnvera to avoid having to further capitalise FEC. Banks using this scheme must either fund or guarantee a residual of at least 5%.
The idea of this temporary scheme is to provide liquidity, not to subsidise or to compete with the market, explains Vesteri. “Therefore, this instrument has been priced to reflect the increased funding cost of banks, Finnvera and the Finnish government.”
The first transaction under the scheme has already been closed, and Vesteri says that there is a substantial pipeline of transactions despite the relatively high cost – namely the underlying funding cost plus 1% per year or CIRR, whichever is higher, if it’s a fixed rate, or the bank’s equivalent market funding cost if a floating rate.
Cynicism in the market
The various government initiatives that have been put in place so far have not always been greeted with open arms by the bankers operating in the region.
One banking source tells GTR that, generally speaking, the packages that have been made available have largely been used for bolstering the balance sheets of the financial institutions, and to a lesser extent for directly aiding the market. “There needs to be some direct aid coming from the governments – one that has a more subsidiary view than a true credit risk review,” he says.
The dominant factor in the industry, GTR’s source explains, is that liquidity has not returned to the market, meaning that the cost of funds is still expensive. “This is the reason why government initiatives should not only be the increase of risk mitigation – they should also be providing liquidity.”
An additional concern that has been raised is that very few SMEs have any kind of utilisation of the various lines of credit – which eliminates the clients of a number of Nordic banks, who are not involved with the large Nordic corporates.
The ECAs have also received much criticism for their provision of increased capacity. It has been argued that export credits may further the burden of debt that poor countries already suffer.
Another Nordic banking source says that they are sceptical about the roles that the ECAs are currently playing, calling them a “root of the evil”, and suggesting that they may indeed be to blame for the current situation.
But EKF’s Vassard disputes this claim, and argues that the ECAs are undoubtedly essential in the current situation, where there has been an unprecedented withdrawal from trade and project finance on the part of the commercial banks. “Otherwise sound export transactions have been reduced or cancelled due to a lack of capacity or risk appetite on the part of the commercial banks and private credit insurers,” says Vassard.
GTR’s banking source argues that ECAs are overloading the market with risk capacity. “Risk capacity is increased, because you can sell off 50% to the ECA, and then leverage off that.”
“And they don’t go for the tough countries. They go for England, China, and so on.”
Giek’s Stang disagrees, saying that he has had no experience indicating that ECAs are in favour of some markets: “I think the risk evaluations are maintained, and applicants are treated equally.”
The agencies’ beneficial prices are also proving to be a problem for banks. It seems that hitches occur when clients request banks to share 50% with an ECA, and the price level is below what the bank would have favoured, had they gone in alone. “This is not beneficial to the market,” says GTR’s source. “The only contribution they have is that the price goes down.”
Again, Vassard argues the contrary. “ECAs’ premiums generally tend to be far less volatile than market prices. As for political risk premiums, they have now started to increase in line with the change in the risk classifications of the OECD.”
Vassard explains that in terms of commercial risk premiums, the private market players lowered their prices to an “unsustainable” level during the economic boom period. “During that period, the ECAs had to give huge rebates just to participate in large projects when invited by the market players.”
Now, with the current difficult financial situation, the picture is somewhat reversed, with ECA prices being more “competitive”. “Of course, ECAs should also adjust their prices to reflect the actual increase in risk. Hopefully, a successful outcome of the negotiations within the OECD on ECA commercial risk premiums will result in more dynamic and risk-related premium levels,” says Vassard.
Responding to the negative claims, EKN’s Apelman states that the Swedish agency’s guarantees complement the private market for credit risk insurance and financing.
“Our core business is to assess risks and cover acceptable credit risks in countries like Nigeria, Russia, the Ukraine, Bangladesh, Kenya and Algeria. Our ‘top 10’ countries for issued guarantee offers during 2008 were all outside the OECD. Our pricing follows the minimum premium rate decided by the OECD plus pricing of the commercial risk, depending on the credit worthiness of the buyer.”
Apelman adds that when the agency supports an exporter’s need for working capital in the form of a guarantee to a lending bank, they strive for market oriented pricing on an “inconstant capital market”.
“We have stretched our mission during the last six months while there has been a lack of funding. We have met with positive response from both exporters and the banking society. Back to normal, the banks will take a more active role,” she asserts.