With the effects of coronavirus hitting exporters and importers across the globe, a new study claims that businesses operating in trade are increasingly looking to alternative finance providers for trade finance support.
The research by UK-based alternative trade financier Stenn – of 700 executives at medium to large-sized businesses in the UK, US and China – claims that over 80% are considering switching from traditional banks to alternative lenders for their trade finance.
With the fieldwork for the survey carried out towards the end of last year, Stenn says this highlights that companies in various sectors – including construction, manufacturing and transport – were eyeing up non-bank finance providers even before Covid-19 started causing issues.
According to Stenn, the coronavirus crisis will only serve to accentuate this trend towards alternative finance providers, as organisations like theirs “can provide access to faster and more agile funding to help navigate the effects of Covid-19”.
Impact of coronavirus
Drastic government measures to stymie the spread of the virus, from issuing stay at home orders to shutting off borders, have led to economists widely predicting the first global recession in over a decade.
Meanwhile a report released last week by the World Trade Organisation (WTO) is downbeat about prospects for international commerce in the coming year.
It forecasts that global trade will fall between 13% and 32% in 2020 as a result of Covid-19. Should the worst case scenario take hold, that would see a drop in trade similar to that seen during the Great Depression in the 1930s.
In a bid to stave off these negative economic impacts and keep trade moving, governments have in turn announced drastic financial relief packages, with the US congress passing a US$2tn economic stimulus bill and the UK announcing a £330bn coronavirus rescue fund, for instance.
Meanwhile the Bank of England and US Federal Reserve have dropped interest rates to rock-bottom levels.
But Stenn says companies will struggle to get access to government-backed financing.
In the UK, for instance, it says that thousands of large businesses with poor credit ratings may be unable to access the Covid-19 commercial financing facility, because “firms need to match an investment-grade short-term credit rating from one of the big three ratings agencies, Moody’s, Standard & Poor’s, or Fitch”.
Commercial banks retrenching?
Stenn Group president Kerstin Braun tells GTR it’s unclear at this stage whether governments have committed enough support and, if not, “whether banks will step in on their own”.
She adds: “There’s no doubt that companies are going to emerge from this crisis with significantly degraded financial positions that will preclude them from bank financing without government backing.”
Simon Lay, CEO at London Forfaiting Company (LFC), which provides forfaiting and other trade finance products, also tells GTR that traditional banks are likely to be more cautious in offering trade financing in the wake of Covid-19: “I think I think there is likely to be an element of retrenchment by commercial lenders, because the overall risk profile has heightened so much.”
He adds: “This is obviously a situation where banks will start looking at their risk profile in a completely different way. Liquidity will no longer drive credit decisions. Banks are less likely to expand their client relationships and balance sheets in this environment.”
According to law firm Simmons & Simmons, risks facing financial institutions as a result of Covid-19 include a hike in “actual or potential defaults” on the part of borrowers, which could in turn lead to an increase in restructuring and insolvencies.
Detailing the reasons for this in a Covid-19 impact report, released in March, it says: “The disruption to the international supply chain… may impact the ability of various categories of borrowers involved in this chain to service existing debt repayments, as cashflows and normal commercial activity is impacted.”
Credit insurer Coface is predicting that there will be a 25% increase in insolvencies, with most sectors impacted by Covid-19.
Two bankers working in trade finance, speaking to GTR off the record, both echo Lay’s earlier comments.
One says: “We’ve stopped doing business altogether. We’re just in capital preservation mode. And anyone who’s out there telling you different things, to be honest with you, they’re a little bit far from the truth. No one knows what’s around the corner. No one wants to repeat mistakes of the past.”
Meanwhile the other states: “I think every time there is a crisis in the market a lot of banks do tend to revert back to their home base or try to reduce to some extent what they are doing outside their sweet spot.”
Nevertheless, one commercial bank has told GTR that it is not retrenching and that its trade finance business is doing well.
Citi’s head of trade, treasury and trade solutions in Asia Pacific, Vishal Kapoor, says that while supply and demand have both been impacted, Citi has actually seen “significantly higher” trade finance activity.
He adds: “With the volatility and what has happened in the financial markets, there is a dollar liquidity crunch in the market. So for banks which are not large and scalable and don’t have a source of dollars, and who have to go and borrow dollars, the marginal cost of their borrowing has gone up substantially in the last month. [But] we as a large global bank do not have that issue. More demand is coming to us because we are able to support our clients in these times.”
Commercial banks coronavirus measures
Citi this week announced a wide-range of coronavirus-specific relief measures for Asia Pacific clients.
In Hong Kong, for instance, Citi will offer its commercial bank clients a one-month maturity extension on existing and new import trade loans, and clients will also have “the flexibility to convert a portion of their unutilised trade lines into a revolving line for six months”.
Meanwhile eligible Citi customers in Singapore will be given interest and fees waivers, tenure extensions, alternative settlement arrangements, options to restructure borrowing and trade credit facilities, and extension of liquidity and loan payment reduction programmes.
This follows on from Standard Chartered’s announcement that it would provide US$1bn to companies that could help in the fight against coronavirus – such as manufacturers of ventilators – in the form of loans, import/export finance or working capital facilities.
In February HSBC also moved to support trade finance customers in Hong Kong by providing more than HK$30bn (US$3.9bn) in liquidity relief for businesses, including cashflow support for trade finance customers.
In the UK, HSBC has also made £3bn available in support to importers and exporters, and has said it will provide pre-approved 60-day extensions on trade loans for customers with a sound trade loan and financing record.