British Exporters put on a brave face
UK plc is keeping its head above water, but the view that further improvements in the financial services sector could provide a stronger trade underpinning refuses to go away, writes Kevin Godier.
On the face of things, the 80,000 or so British companies that trade internationally are keeping their heads above water. Many small-to-medium-sized enterprises (SMEs) continue to complain that they are not receiving the banking and insurance facilities that they require, but the UK’s steady export performance is helping to underpin what is seen by many observers as a robust, albeit increasingly services-driven economy.
That UK exporters are ‘managing” was flagged up by the April 2006 Euler Hermes UK PMI Exporters’s Index, which indicated an annual rate of UK export growth of around 6%, despite the downside of higher interest rates, a stronger pound, and still-high oil prices. The UK’s principal export markets have been growing for four years, with export gains in recent months linked closely to a buoyant euro area, according to the index.
Moreover sterling’s strength has had little effect on foreign demand for UK goods and services, according to Euler Hermes’s UK Cash Flow and Profit Report for Q1/2007. This shows that companies ranked overseas demand as the greatest positive influence on profits, with the manufacturing and service sectors performing particularly well.
Positive noises are also coming from the UK’s banking sector. “Through recent customer research we found a direct link between exporting and gains in productivity, with companies experiencing a large increase in productivity in the year prior to becoming exporters,” says Angela Potter, head of trade and cash solutions at Barclays in London.
“Nearly six in 10 mid-sized businesses in the UK are engaged in international trade, challenging any view that trading abroad is the preserve of big business, according to figures released from Barclays Business Banking,” she notes.
The Barclays data shows that 70% of mid-sized businesses in the northwest UK were involved in either importing or exporting goods or services in 2006, compared to 60% in Greater London and 58% in the southeast, also the average figure for the UK. And despite one exporter’s lament that “Britain no longer bashes the metal”, the Barclays research reveals that while nearly 80% of mid-sized manufacturers trade abroad, only 38% of distribution companies and just 18% of service sector organisations take part in international trade.
Proactive banks
“UK plc continues to grow apace,” claims David Manson, director, international sales, at Royal Bank of Scotland (RBS). “But the trends in trade – where clients are increasingly moving towards open account and global operating models – can often be less visible in terms of traditional trade statistics.”
According to Colin Hemsley, head of major corporate and FI sales at Lloyds TSB, “a decline in trade services and trade finance products over the last 10 years within the UK has now begun to reverse in some cases – the trade finance community has been more proactive, generally”.
Catering for SMEs “is an absolutely fundamental part of our strategy,” says RBS’s Manson. “This is evidenced by the establishment of 18 International Business Centres (IBCs) around the UK and the establishment of a specialist sales force in our Business Banking focusing on smaller businesses and first time exporters, facilitating not simply exports but all elements of international trade, including import, export, payments, foreign exchange and so on.”
Internet offerings have been a key focus area for trade services banking teams. Over the past year, Lloyds TSB’s online offering has been made “more flexible and usable by major corporates, especially those with different locations and subsidiaries, and has also added a collaborative side,” says Hemsley. “This lets the customer share and fine-tune data with other counterparties, before documents are finalised, so that all sides can take comfort.”
The beauty of the internet, enthuses Hemsley, is that it also lets smaller companies use electronic products, “even if for only one transaction per year”. Support for companies transacting annual business below £15mn is a strong feature of the Lloyds TSB offering, he says, stressing that over 40 of the bank’s business specialists provide SMEs with support around the country.
Other UK banks, including HSBC and Standard Chartered, claim competitive edges by dint of their overseas banking networks. HSBC’s global presence “has enabled us to support our international customers to grow their sourcing and supply around the world by using our in-market trade specialists who are familiar with local trading conditions,” says John Dial, senior business development manager, global transaction banking, at the bank.
At ANZ Bank’s London office, Peter Sargent, head of trade for Europe and Americas, highlights that ANZ has a network spanning 13 Asian countries. “Banks talk about China and India, but the Asian trade market is far broader, and we have representatives in Indonesia, Vietnam, Laos and the Philippines. That can work for both UK exporters and the many importers which are buying on Asian commodity supplies.”
Corporate view of banks
Whatever banks may say in their defence, a recent survey has revealed discontent among many companies trading internationally. “We have undertaken research amongst some 1,200 companies with turnover varying between £50,000 and multinationals,” says Chris Siegl, director at specialist UK corporate and trade finance consultant Novus Initium. “Almost 70% of the SMEs are unhappy with the services they get from the traditional High Street bank,” he stresses.
Among the most common complaints dug up by the research is the inaccessibility of bankers. “Where do smaller companies go for advice
- ” asks Siegl. “One survey respondent asked a UK clearing bank for export finance products, and was told to “go to our factor” by the bank.”Other moans included banks’s lack of understanding of their clients business; generally slow services; and product-driven rather than bespoke financing solutions. “A key issue is that very little support is given to exporters, whereas most of the clearing banks devote their clearing business to imports,” says Siegl.
He adds: “Importers are doing well with the pound having reached two dollars now, whereas exporters are struggling to be competitive. Some 68% of UK exporters canvassed in the survey last year said that they wanted more support from banks.”
In response, Novus Initium has set up a telephone-based banking advisory and implementation service aimed at SMEs, entitled Novus Support. The services offered range from simple directions on how to make low cost international payments and arrange a letter of credit up to a complete business funding review.
Training programmes
“Banks are interested if a deal has eight noughts in it,” adds an exporter who prefers anonymity. “If you mention a US$100,000 deal there is a sharp intake of breath, but the reality is that most exports are small.” His view is that exporters and banks should job swaps, with perhaps a three-month secondment period, to discover what life is like on the other side of the table.
To boost banking sector trade-related skills, the Institute of Export (IoE) launched a new Certified International Trade Adviser (CITA) qualification for international trade specialists in banks in April 2007. The online, continuous assessment project was triggered by approaches to the IoE by major banks, including Bank of Scotland, HSBC and Barclays, for advice on how to devise a skills and knowledge test for their international trade staff.
“They were concerned that too many advisers did not have the necessary experience or knowledge to work with multinational companies or to handle cross-border activities,” says Andy Nemes, chairman of the IoC, which has a remit to set and raise professional standards in the UK’s international management and export practices.
He continues: “Anyone can call themselves an international trade adviser these days, but too often the advice given to companies competing in the global marketplace is second rate and not current. The CITA qualification sets an internationally recognised standard of best practice,” says Nemes.
According to Hilary Wilson, a relationship manager for HBOS Treasury Services who was the first qualifier among of a wave of 22 bankers that undertook the test – and who has 13 years experience of international banking – the CITA is worthwhile. “It has made me appreciate everything that is involved in trading internationally – a bit more than just opening a currency account and preparing documents for a letter of credit,” says Wilson, who covers corporate HBOS teams operating across Edinburgh, Fife and Tayside in Scotland.
At Lloyds TSB, which was examining the CITA certification as GTR went to press, Hemsley pronounces himself a “big fan” of the qualification. “We want the sales team to have independent training, and there aren’t many options for that. This will be good for bank personnel, who will get a wider understanding of an exporter’s perspective, and it should be of comfort for the export community,” he says.
At HSBC, many of the bank’s team of international business managers have recently attained the new qualification, says Dial.
Busy bankers
Whatever complaints might exist, banks’s determination to be involved in the international trade moving in and out of the UK is very apparent, says Bob Bruce, export finance manager at Raytheon Systems. “Most of our customers trade on open account. But over the last 12 months, we have been tendering on business that requires finance packages or letters of credit (LCs), and banks have been very keen to court us for this business,” he underlines.
“We receive plenty of cold calling from banks,” adds Eric Nevill, general commercial manager at helicopter manufacturer AgustaWestland. “Plenty of banks have always made themselves available when we have had export programmes needing finance.”
At Thales UK, “we tend to get the most attention from the foreign banks that have relatively small operations in London,” says Robert Scallon, export finance director. “The big indigenous UK banks have huge operations, and cannot always provide the same flexibility.”
For export finance deals, “we go to the provider that is best suited”, says Richard Hill, vice-president, credit insurance, at BAE Systems. “Pricing is not a commodity, but is also not the first issue. However, presence in a country is a recommendation, as country expertise and contacts at the local ministry of finance are very important to us.”
Import finance is a slightly different arena, contends Harry Hewson, finance director at steel company Corus International Trading. “The providers all have the same capabilities with no one in particular having an edge,” he emphasises. “Pricing is not really an issue – we currently choose our trade finance provider based on the availability of line capacity.”
Nevill’s strategy is to “look for a bank that brings something more than finance”, he says. “I like a presence in lots of countries around the world, and a willingness to work as part of a team.”
Bruce also believes in shopping around. “Not everybody has the appetite and expertise for medium-term finance, or short-term, for that matter. We have looked at one or two deals with London Forfaiting Company, and they are flexible in their approach to providing the structure that best suits the deal,” he highlights.
Bruce continues: “We find that the smaller specialist teams such as LFC and BNP Paribas have the approach and flexibility to meet our requirements, rather than some larger banks, which do not necessarily have the same agility.”
Better service
So is the service from UK banks improving
- Yes, says Manson, who points to “considerable improvements” at RBS both in product – in terms of range, geographic delivery, innovation and technology support – and on the sales side, where relationship managers control all interfaces with the customer.Feedback is “actively sought” by RBS as an integral product development component, adds Manson. An example, he says, is the development of RBS’s supply chain finance capability, “the design and delivery of which has been strongly customer-focused and built on an overt strategy of consultation with the market”.
Service and reliability is valued far more than five years ago – and is at least if not more important than pricing, which is also an important component, always, in many customers eyes,” says Lloyds TSB’s Hemsley.
“There is a good level of cover for large businesses requiring trade finance,” says finance broker Alex Hilton-Baird, founder of the Hilton-Baird Group. “But in relation to export factoring, there are only a handful of companies that provide a multi-currency, multi-jurisdictional and multilingual product. Bibby and HSBC are strong in overseas collections, as are Fortis and Coface.” He adds that, “despite being more expensive, export factoring has almost replaced the overdraft as it is a far better way of providing much needed working capital.”
Coface UK is “seeing many more companies coming to us considering invoice discounting”, says managing director Jon Lindsay.
Meanwhile the American Insurance Group (AIG) is making efforts to widen UK corporate access to securitising trade credit accounts receivables. Its AIG Trade Finance venture, launched in January 2007, “is designed to make access to capital markets funds both cheaper and easier to access for companies with £25mn of receivables and upwards,” says Neil Ross, senior vice-president, trade credit, AIG Europe (UK).
Nevertheless “the working capital situation is not good for exporters or traders – the main issue is the risk associated with manufacture,” says Glyn Powell, trade finance manager at transaction financier Fairfax Gerrard. “There are a lot of small exporters that win the dream order, worth maybe half or a full year’s turnover. The problem is that their suppliers cannot give large amounts of credit, and banks generally can’t support the order as the balance sheet doesn’t stack up. The result is that some UK companies are losing out to foreign competition as they have no readily available finance scheme.”
Powell cites a Midlands-based engineering company with a £1mn turnover that received an overseas order for a rock-crusher, from a mining company that had already purchased two similar items. “Every part of the deal stacked up, including an existing substantial annual income flow for maintaining the existing machines. However while the buyer could have provided an LC or advance payment, it needed a delivery guarantee.”
Powell recalls that the order eventually went to France because the vendor’s bank was unable to provide bridge finance. “A six-month delivery period was involved, so the UK company needed £500,000 before it would be paid £900,000 in month seven.”
With regards to financing import activity “there are definite gaps,” says Hilton-Baird. “There are only half a dozen or so finance houses in the UK. Versailles was the biggest but collapsed, and Davenham Trade Finance is now the largest. The rest are niche players who cannot push lots of money out to clients. It is therefore the SME sector that is not so well served.”
Davenham’s Clive Naylor, sales and marketing director, is quick to flag up that the Manchester-based company’s most recent customer survey revealed a 90% satisfaction rate. He says that 2006 and 2007 have been “exceptional years” for Davenham in terms of its financing volumes, and that new specialist staff are being employed to cope with the workload.
Supply chain models
Davenham’s product range was recently expanded to include an integrated warehousing and distribution facility, a service whereby it can fund imports, hold and control stock and aid distribution to end-users. Davenham’s security “is in the transaction”, allowing it to fund “importers who perhaps do not have an adequate capital or security base to enable them to trade through traditional bank letters of credit”, explains Naylor. “If you ask a high street bank for a £1mn letter of credit, they will want cash or tangible security cover or some other form of security,” he comments.
A greater move into supplier chain financing is an inevitable step for Davenham, predicts Naylor. “Already, if a large retailer wants 5,000 digital cameras from China, we are now involved at every step.”
Most major UK banks have started to put in place supply chain financing facilities that can provide additional working capital at various points along the chain. “We have segmented our service and sales propositions for companies of all sizes to cover wider supply chain solutions rather than treating importers and exporters as separate entities,” notes HSBC’s Dial.
“Customers are increasingly looking for support both in the physical and financial supply chains, supporting their business on an end-to-end basis, not simply a series of transactions within it,” says Manson.
However Powell cautions that there are key issues in supply chain finance that have yet to be resolved by banks “Who owns the stock through the chain
- ” he asks. “Retailers don’t want to pay until it arrives, so someone has to take the risk on damaged products and return risk.”According to Naylor, “the big players such as Argos, Walmart, Tesco, Woolworth and B&Q now want importers to take risk on goods that are moving, and have stopped issuing strict purchase orders.” Inevitably, importers’s margins are increasingly suffering, he says.
Powell is also concerned that some bankers are recommending that purchasers attempt to squeeze longer payment terms from manufacturers. “This runs contrary to publicly stated government policy, which is for prompt payment – and shows that many banks still do not understand the commercial reality that the supplier will run into working capital shortages,” he insists.
Medium-term finance
When it comes to medium-term export finance, the jury still appears to be out on the progress of the re-shaped Export Credits Guarantee Department (ECGD).
According to Barclay’s Angela Potter, huge amounts of emerging market liquidity have provided both UK exporters and foreign importers with alternative forms of funding. “The amount of transactions where ECGD support is required is reducing year on year – ECGD’s role is becoming focused on either very large transactions of US$500mn or more where the borrower is looking for alternative forms of liquidity, or where the all-in cost of an ECGD facility is lower than the commercial market.”
“There is not an awful lot of ECGD business being done, but one gets the impression that they are trying harder,” claims Thales UK’s Scallon, whose company recently supplied a set of flight simulators to Russia in a deal backed by ECGD. “There is more of a willingness to look at new ideas – we are hoping to do another ECGD transaction soon, this time in India, and with a little more adventurous structuring,” Scallon says.
At the London office of BNP Paribas (BNPP), there is no lack of ECGD-backed deals coming through the pipeline, says director of export finance, Andy Simpson. “Defence is still the bread and butter, but we are seeing transactions across the board: in telecoms, minerals and construction.”
Simpson adds: “Things are looking a lot brighter within the Department – there is more of a can-do approach as Patrick Crawford has made his mark as chief executive.” A particularly salient signal, he notes, is a widening of ECGD’s foreign content restrictions, which have just been announced, so as to better accommodate the globalisation trends that spread industrial manufacturing bases around the world.
The UK exporter community had supported a 30% minimum foreign content percentage at ECGD, “but even 25% would help – the local content window isn’t adequate right now”, notes Richard Glover, export director at bridging, steel fabrication and construction firm Mabey & Johnson.
Another UK-headquartered company has undertaken an extensive scrutiny of – and concluded several deals with – non-UK export credit agencies, due to restrictions at ECGD. “The Danes have a very relaxed attitude towards foreign content, as do the Swedish, and we looking at the Spanish agency, Cesce, because of their reach into the Far East and Latin America, and at Holland, where a new ATP window is being set up,” says an executive.
“As and when ECGD’s widened foreign content becomes policy, exporters and bankers will begin to see certain types of deal as possible again,” observes BNPP’s Simpson. “This year we have looked at a couple of deals where ECGD couldn’t accommodate the foreign content – and we’ve had to go elsewhere or use more complicated structures. But Patrick is gradually succeeding in turning around the public perception of the Department, which has been a tough job,” observes Simpson.
Another banker – again via condition of anonymity – contended that ECGD has suffered from a dire lack of government support. “ECGD is being left to sink or swim. What you see is much less governmental interference but no substantive support. The truth is that many companies now see ECGD simply as another financial option where pricing-to-market is combined with longer tenors and the backing of the British government – but not as an arm of government support.”
He argues: “The overall levels of government support for exports are abysmal, which can be seen in the broader way that UK Trade and Investment has identified only India and China as worthy of serious attention.”
Aerospace performance
Aerospace sales represent one area where ECGD has regularly provided support unavailable from commercial banks. An example of this, says Gordon Welsh, ECGD’s head of aerospace finance, is the Airbus A318 model using Pratt and Whitney engines. “The very first deliveries took place recently and we are involved. Commercial bankers may have a tendency to stand back from new technology due to the unproven future residual values of new, and new variant, technologies.”
Welsh predicts that “there is a bedrock to our business in aviation going forward for some years to come, highlighting that ECGD underwrote sales worth around US$500mn linked to some 50 aircraft in 2003-04, which had risen to 86 aircraft and “just under US$1bn” in 2005-06. In the 2006-07 year, which finished in April 2007, 58 aircraft, generating a UK financing volume of about US$500mn, were underwritten by the Department.
He comments: “We are backing around 50-60 aircraft a year now, at a time when the aircraft commercial financing market is very liquid and aggressive on terms. When the cycle turns, we will be a lot busier – when people get squeezed they traditionally revert to export credit agencies [ECAs].”
ECGD backing for deliveries of Rolls Royce engines to Boeing and other non-Airbus aircraft “could also rise further if there is a wider range of credit risk”, suggests Welsh. He highlights the current reinsurance co-operation between ECGD and US Ex-Im Bank, which provides for a ‘one-stop’s tranche of financing “that allows Rolls Royce to tell its customers that they don’t have to go to two ECAs, thus reducing the costs of transactions and producing a more efficient result for both the exporter and the borrower/buyer,” Welsh says.
According to Welsh, ECGD’s ability to distinguish itself from commercial market practices will become even more apparent following the conclusion of a new Large Aircraft Sector Understanding (Lasu), after negotiations that have taken more than two years.
“The principles of the new agreement – in particular the rise in Lasu rates – have been well-telegraphed by others. In the future, ECA transactions will more easily demonstrate that they are not encroaching into the commercial marketplace in which we all work,” forecasts Welsh.
Private market options
GTR was told that ECGD’s pricing-to-market is among a number of reasons why the private insurance market is increasingly seen as a viable option for UK exporters. “ECGD’s cost structure is an issue – a commercial insurance quote that we recently received for a contract in a good Latin American market was noticeably lower than ECGD,” highlights one exporter. “ECGD can also be harder to work with in terms of timespan and bureaucracy,” he adds.
“We occasionally use insurance, and we will have projects that will require medium-to-long-term financing again,” says AgustaWestland’s Nevill. “In the past we have used both ECGD and the private market. However, I find that the private market is more flexible as they are able to offer a specific, tailored policy that understands where you are coming from.”
Hill acknowledges that BAE Systems is engaged in work with the private market, “to help it develop to cater for some export contracts where we want to provide a credit package for buyers”.
He notes “a significant shift over the last three-to-four years” in the private market towards longer tenors and greater capacity. “We’re reasonably confident that we can place a US$250mn-US$300mn risk with a four-to-five-year delivery period and a five-year project period into the commercial market, on a syndicated basis,” says Hill.
Contract bonds
As the chairman of the British Exporters Association (BExA), Hill points to on-demand performance bonds as an area worthy of greater scrutiny by the UK government. “A number of competitor countries such as Italy, Sweden and the Netherlands have a facility to help exporters raise contract bonds. We have asked the UK government to introduce it, but the Department of Trade and Industry has refused even a consultation process, which is very frustrating,” he emphasises.
“Australia’s Export Finance and Insurance Corporation (Efic) has a bonding scheme, but the government here says that there is no requirement, as commercial banks are the providers,” says Powell. “But banks will only step in when there is cash-cover, so UK companies are losing orders and the opportunity to provide potential new jobs,” he contends.
For SMEs, the bonding system poses an especial problem, says the IoE’s Nemes. “Foreign importers typically want a payment guarantee to cover their advance payment and exporters that are already using an overdraft to facilitate a contract often cannot stretch to this. If banks are asked to step in, they have to double-count the risks, due to Basel II regulations on liabilities, which bumps up the price.”
Companies with US operations can try to secure US surety bonds, while the insurance market provides another option within the UK, says Nemes.
