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With banks not yet back at their full funding capacity, Nordic ECAs are developing new schemes to meet the growing demand for guaranteed financing with particular focus on the SME sector. Laura Benitez reports.

 

Roundtable participants

  • Karin Apelman, director, EKN
  • Jan Vassard, deputy CEO, EKF
  • Topi Vesteri, executive vice-president, Finnvera
  • Edvard Stang, director, Giek

 

GTR: How is the demand for ECA-backed finance compared to last year?

Apelman: EKN’s guarantee issuing was more than SKr28bn (US$4.2bn) in the first half of 2011 − an increase from the same period in 2010, taking into account our discontinuation of temporary solutions in the financial crisis. Since July 1 we have done an additional SKr10bn.

In early spring we saw some repayments resulting in premature guarantee redemptions of SKr15bn. Most of these related to the temporary working capital credit guarantee, SKr10bn, and SKr5bn accounted for export credit guarantees.

However, in May and June demand picked up. The market didn’t react to the Arab Spring, but when the eurozone and US crisis hit, it meant an increase in demand on export credit guarantees and that’s where we are now.

Vassard: Overall we’re seeing a high level of activity and we expect a moderate increase in new guarantees in 2011. EKF’s total commitments have doubled since 2009.

We have closed a number of large deals over August and September, and looking ahead we have a strong pipeline. Although we expect this to continue it probably won’t be the dramatic increase that we’ve seen over the last few years.

Stang: The demand is still high and it’s more or less at the same level from last year. Although people have become a little nervous in the last month about Europe’s banking systems so this might have an effect.

In terms of taking on risk, the volume of new applications has decreased, but the number of applications is around the same level as the first half of the year. So still there is a high level of activity.

Vesteri: The demand for new medium to long-term guarantee cover in 2011 is slightly down. However, guarantees issued are up from last year and demand for medium to long-term funding support has substantially increased. Our temporary (Januay 2009 – June 2011) export credit funding programme of €2.5bn was fully utilised and many banks are asking our permission for off-balance sheet funding structures.

 

GTR: How are your product offerings changing?

Vassard: EKF’s role in funding is of growing importance. The banks are still not back at their full funding capacity with regards to large projects with long tenors so we see a need to continue funding here. Two years ago in the wake of the crisis we introduced a special export loan facility, a government facility funded by the central bank of Denmark, and we’re seeing an increasing demand for that facility. Now, we are looking for therefore established a new SME department and introduced two new products; a working capital guarantee and a special SME guarantee.

Stang: In the medium to long-term, around 90% of clients are looking for coverage on large contracts. Before the crisis there was a demand for insuring on a 50/50 basis but now levels have been reduced and with certain countries, such as parts of Africa, and banks having less capacity, there is a demand for that type of cover.

 

GTR: What countries and sectors are you seeing the most demand from specifically?

Vassard: The wind power sector continues to be very important for EKF. It was our largest industry sector in 2010 covering approximately 40% of business, and it is still growing.

There is a diverse demand among countries in Western Europe, particularly for offshore wind projects. In Brazil the focus is on the oil and gas sector and wind power projects where demand is growing fast. Russia’s also a big market for us now; the appetite has returned and we’ve seen some big projects, mainly in cement production.

Stang: The sectors where we are seeing the most demand are in oil and gas and offshore activity in Brazil; it’s our main market. The drawdowns on our credit line guarantee with Petrobras reflect the high activity we’re seeing.

Vesteri: The main demand is from the telecom, pulp and paper machinery and power generation sectors. In terms of countries, it’s Russia, India and Latin America, but also the OECD markets that are coming to us now for large transactions.

Apelman: The mining sector has grown worldwide, especially in Latin America and Africa. We’re also seeing Swedish companies becoming more active in the mining sector. In addition there is an increasing demand for guarantees from power, transmission and electricity projects.

 

GTR: How is the new pricing system for the OECD’s 2011 arrangement on officially supported export credits working out and how will this be implemented? How do you think it will effect business and pricing for OECD members?

Vesteri: Perhaps it will not affect our business because much of our pricing has been according to risk and risk-rated buyers for the last 10 years. Rules permitting, I see aggressive competition for new exports and lately we have had to match competing countries’ ECA conditions.

Vassard: We implemented the system in early October and it has been a fairly large project for us in terms of man hours and IT development. Additionally, as part of our new risk management strategy we have introduced a new risk classification, based on Standard & Poor’s templates, which we expect to resolve risk assessments and pricing and eventually lead to a faster and more predictable service.

As far as the overall effect on pricing, we expect our prices to be on average unchanged but looking at the effect across all of the OECD ECAs, it’s hard to predict how it will go. The aim is to create a more level playing field. However, there is no common classification criteria so there could be a loophole which might result in distortion of competition.

We might see some of the OECD countries that have charged fairly low average premiums raise their premiums and vice versa, but this remains to be seen.

There is a need for guidelines for classifications and pricing of transactions within the OECD countries, the so-called risk class zero countries, so we’ll have to monitor this and hopefully agree some practical guidelines.

Stang: We haven’t implemented anything so far as we’re waiting to develop the internal system. The difference with us is that we are risk sharing with the banks 70/30, and we follow the banks all the way through the transactions so our pricing will be conforming. We share the risk, fee and premium with the banks we’re working with and for that reason we won’t have the trouble that other ECAs might have in implementing the system. We normally follow the banks in their pricing so we do not have problems in following the new premiums system.

 

GTR: What other trends are prevalent in the market today?

Apelman: Several trends suggest an increase in small companies’ exports to countries such as China, Russia and India in the coming years. 50% of Swedish companies with annual exports of over SKr1mn (US$138,000) are exporting to emerging markets. Of the small companies that export to emerging countries, 75% are experiencing medium or strong demand.

Stang: In the short-term insurance market, the current banking situation in Europe is the big question for all of us. I think it is hard to say to what extent the developments in the European sector will affect buyers and transactions, but I fear that short-term and general trade may be affected.

A large proportion of Norwegian exports of goods covered by short-term insurance go to Europe and the OECD area, and a negative development combined with a strong Norwegian currency may have a negative effect on the activity.

On the topic of Nordic low interest levels, we have high price levels and we could easily be in competition with other countries that offer cheaper exports. We also have big problems in the other banking sectors which will inevitably cause problems with financing.

Vassard: We are focusing on the SME sector and introducing a new SME export credit guarantee which we can extend through the banks. The banks will then get up to 100% cover to deliver these guarantees. The buyer credit guarantee is issued via the bank, and the bank comes up with the credit funding against the guarantee from us.

It has been important for us to service the OECD market for SMEs because of the present EU regulation which forbids ECAs to go below two years of credit. A temporary waiver which expires in 2012 has been granted by the EU commission so we can issue cover guarantees between 180 days and two-years within the OECD. GTR