Export credit agency (ECA)-backed financing has become more essential since the onset of the financial crisis, as banks tightened lending and heightened risk consciousness.
The market is far from having moved through the peak of the credit cycle difficulties and there continue to be many gaps in credit and cross-border appetite amongst the banks, as Patrick Brockie, global head, export and agency finance at Citigroup in London explains: “The bank market is showing some signs of life but is still nowhere near where it was pre-crisis.”
Furthermore, there are fewer banks active in export finance than there were before the crisis, says executive vice-president of Finnvera in Finland, Topi Vesteri. “And longer maturities – anything beyond five to six years – are difficult for the banks remaining in the market.”
As part of their response, a number of ECAs across the globe have increased their mandate by either enhancing their capacity, offering direct lending and/or devising new products for their clients.
“All countries have had to take other measures because banks are not doing their job – which is to lend,” says Raoul Ascari, chief operating officer of Sace in Italy. “This is especially grave for project finance where the tenor is longer, the figure is bigger and the risk is higher.”
Export banking heads across the globe have hailed ECAs as a stabilising force. But are they fulfilling their potential, and at what point will the market decide that they are no longer needed?
According to Kimberly Wiehl, secretary general at the Berne Union, demand for ECA coverage picked up at the end of last year.
“Then we heard, when we did our first survey in March, that demand was still very strong, with some agencies (such as the Swedes and the Finns) reporting a 400% increase in demand – numbers that you’ve just never heard of before,” she comments.
She attributes this increased demand partially to the fact that the private market was unable to meet the heightened demand, but primarily to the deteriorating risk environment, which led to an increased demand for credit insurance across the board.
Béatrice Tuffrau, who works within Coface’s state guarantees department, highlights the countercyclical role that ECAs play in the market. “Our role is to be there when markets are not. In certain circumstances – like this – we are really needed more than ever, and it’s where we see the peak of our responsibilities.”
The French ECA has experienced an increase in applications. In the first nine months of the year, compared with the same period in 2008, Coface issued more than double (150%) the number of letters of intent to exporters. There has also been a 30% increase in final covers.
The fact that new ECAs have been set up across the globe indicates not only a demand for insurance in general, but also that governments are making their support of exports a top priority in the current tough market. According to the Berne Union, the newest ECA to become a member of the Prague Club, is Export Credit Insurance Company of the Emirates (ECIE) based in Dubai. It is also rumoured that the Brazilian development bank BNDES – while not new as an export promotion institution – is looking to set up a joint venture with SPCE. Other countries who have recently established or are investigating various export credit schemes and entities include Ireland, Latvia, New Zealand and Vietnam.
Since the outbreak of the financial crisis last year, ECAs have responded to the challenge of recovering trade volumes in a multitude of ways.
Not many new products have been implemented – though this has not proven to be problematic. “There have been some initiatives to support SMEs – by France, Spain and the US, for example; or ease liquidity – by Norway, Canada, France and the US. And working capital programmes have been implemented in Japan and by US Ex-Im for instance,” says Xavier-Marie Robert, managing director – head of multisource group at Société Générale Corporate & Investment Banking (SG CIB) in France.
But the fact remains that the ECAs have been reactive to the needs of exporters. “You don’t need that many new tools. It doesn’t need to be that diversified an answer,” says Isabelle Roux-Sharpe, director of SG CIB’s multisource group. “There was a need for big tickets and long durations – that’s what the borrowers and the exporters have been looking for. And the ECAs have been there for that.”
For those ECAs with a limited ceiling, the key response was to increase their capacity. For example, agencies in Belgium and Sweden increased their ceiling range (+36% for Belgium and +75% in Sweden’s case).
Other ECAs, such as those in Germany and France, where there is sufficient headroom to cope with the demand, have developed a different approach. “These are targeted mainly at supporting their SMEs through the crisis, or those companies that are vital to their economy,” says Roux-Sharpe.
The Berne Union’s Wiehl notes that the Nordic ECAs have often been at the forefront in terms of efficiency. “They are seeing a significant increase in demand,” she says, but adds that they are very cautious in terms of what they are actually putting on the books.
“The Danish agency, EKF, has provided reinsurance to the private market insurers – so that when the market conditions return to normal, the market doesn’t really see the difference – it’s done behind the scenes. And that’s how EKF operated when it exited the short-term business originally, over 10 years ago.”
Wiehl highlights the Asian ECAs as being particularly proactive, especially with regards to the Asian Reinsurance Network, which functions as a series of bilateral cooperation agreements among the various ECAs in the region.
Swiss ECA Serv has also been relatively pioneering in its approach. The ECA introduced four new products in cooperation with the Swiss Confederation in May of this year. The new products include working capital insurance, a counter guarantee, a refinancing guarantee and letter of credit confirmation insurance, says Herbert Wight, head of the business underwriting office – soon to be director – at Serv in Zurich.
As they serve the specific purpose of supporting Swiss exporters in the current crisis, the new insurance products are temporarily offered until the end of December 2011.
One of the major upshots has been to provide liquidity to exporters and related industries. In Finland, Finnvera introduced a new direct lending export credit scheme to ensure export projects stay on track. In Israel, Ashra established an exporter’s fund of US$125mn.
The Export Import Bank of the United States (US Ex-Im) has been hailed as being fairly innovative in its approach, and as a result, their business volume this year is up approximately 50%.
John McAdams, senior vice-president of the US Ex-Im’s export finance group, says that the bank has done some direct lending, which brought liquidity to the marketplace when things were particularly difficult. The bank has also made some changes to its working capital programme to enable it to be more flexible for various uses.
According to McAdams, significant lines of credit have been made available by US Ex-Im to cover the confirmation of letters of credit. “For example, earlier in the crisis, commercial banks were reducing their country exposures and trade was getting more difficult to do. So, for instance, we put in place a US$2.9bn credit facility for Korean banks that is for US banks to confirm a Korean bank letter of credit,” he says.
US Ex-Im also designed a “take-out” option to reduce banks’ liquidity risks, implemented in July this year. By purchasing the take-out option liquidity insurance, banks are able to sell the guaranteed loans to US Ex-Im at par if there are significant changes in their credit spreads and funding costs, or in the overall market. Without giving figures, McAdams confirms that the bank is beginning to see utilisation of the option, and that “a few things are in the pipeline”.
McAdams notes that the bank is also beginning to see usage of the capital markets in the financing of major exports in generally large transactions.
“The objective here is twofold,” McAdams says. “Firstly to use the capital markets to obtain favourable pricing for the exporter and the buyer, and secondly, to allow the lending banks to get funded out and then go do more export finance – some of which would then stay on their books.”
US Ex-Im’s first such deal was signed on October 5. The US bond offering was for US$413.7mn with a fixed rate coupon of 3.465% per year, and involved the financing of three Boeing 777-300ER aircraft for Emirates Airlines.
The secured notes are due in August 21, 2021, and are payable in instalments of principal and interest on a quarterly basis. Goldman Sachs and Calyon Securities acted as joint bookrunners and joint structuring agents.
For Canada’s EDC, the biggest part of their activity is direct lending – and it is agreed that this is what was most needed. EDC is “much more aggressive than the other ECAs as far as foreign content is concerned,” an ECA head tells GTR. “They have a whole different thought process.”
Nevertheless, the Canadian agency remains the envy of the majority of other ECAs, and its effectiveness is highlighted by a number of banking heads.
“In Canada, we’re commercial – we’re not a lender of last resort,” says EDC spokesman Phil Taylor. “Good deals can’t find a home because of the credit crunch. Now if you’re the lender of last resort, it makes it difficult from a mandate perspective. Whereas we just don’t have that restriction. We’re used to navigating a higher level of risk – our track record demonstrates that we’re quite successful at that. When the entire environment becomes more risky, well then we’re already there from a risk mitigation perspective.”
He adds that EDC is approaching transactions on temporary measures, “so we can step out when the private sector is ready to reassume that role”.
EDC’s business volume in the first half of this year reached C$38.2bn, an increase of C$2.5bn over the same period in 2008. The increase in volume, which can be attributed to the impact of a weakening Canadian dollar, was achieved despite a 24% drop in Canadian export trade in the first six months of 2009.
Short and long-term capacity
With the private market reducing their limits, the beginning of this year saw ECAs implement measures to increase their short-term capacity.
“We have seen in the Berne Union’s figures that the overall market capacity at the beginning of 2009 is down compared to the peak in the middle of 2008,” says Fabrice Morel, assistant director at the Berne Union. “But in the first two quarters of 2009 it has been stable. So we’re taking this as a sign that maybe the capacity provided by the market has now levelled. We will have a better idea of the direction of the trend when we receive the third quarter figures from the Berne Union members.
“Because ECAs have increased their capacity, the share in buyer limits granted by public players is higher than the average over the past several years.”
The Berne Union’s Wiehl notes that the North American and Asian ECAs never really had any restrictions on their short-term business, and were able to energise their additional programmes rather quickly.
For example, China’s Sinosure reported that China had provided short-term credit insurance for exports of over US$60bn by the end of September this year – twice as much as a year earlier.
Conversely, in the EU, ECAs have not been permitted to cover the marketable risk. But a number of agencies have appealed to the EU and some, such as Finland’s Finnvera, have been granted exemption to open up to marketable risk.
“The share of publicly supported short-term business that Morel is talking about may even increase a bit,” says Wiehl. “The US, Canada and Asia could really jump in right away, but the Europeans had to go and get approval, and that’s coming through now.”
The European schemes on export credit insurers came through in May for the Danish, in June for the Finns and in August for Germany. So for the European ECAs, it is likely that the factor of increasing capacity will be seen more in the third and fourth quarters, says Morel.
On the medium and long-term side, there is strong demand, but there are also a number of projects being postponed and cancelled. “From the anecdotal evidence we heard at our annual general meeting, for the public ECAs, the demand for the medium to long term is back,” says Wiehl.
Tackling problems and claims
Claims are rising as the economy deteriorates, and ECAs are beginning to suffer in the emerging markets.
To exacerbate claim concerns, ECAs are also aware that when they implement their new coverage programmes in OECD countries, they need to steer clear of getting bad risks on their books.
“They need to avoid being hit by a second wave of claims – when they start to do business in the US, UK, France, Germany, and so on,” explains Morel.
Wiehl points out that the agencies are stretched to capacity because their systems are not designed for underwriting a large volume of short-term business.
“So, we have heard from a number of our colleagues that since they launched the new short-term schemes, they have had large numbers of applications. This volume of new requests adds greatly to the processing and administration required, especially as the ECAs are taking care to screen out the unwelcome risks.”
ECAs are beginning to question rules that have – up until now – always been accepted, comments SG CIB’s Roux-Sharpe.
She notes that ECAs have made enquiries regarding some of their rules in their OECD arrangements. She lists the review of the maximum official support level (currently 85% in the OECD arrangement) saying that some ECAs have mentioned that it might make sense to review an increase of this percentage. There has also been some progress concerning repayment terms – which, in some cases, have been extended from five years to 8.5 years.
“There were a lot of things that were viewed to be normal, which are now questioned. Even if we go back to normality, those questions have been raised,” says Roux-Sharpe. “It is very interesting for us working in export finance, because our business will be shifting and pushing the limits.”
Competition between ECAs in industrialised countries and the relationships between banks and ECAs with regards to pricing are further challenges. “Many banks still see ECAs as a sort of subsidy for the transaction. As such, they are trying to get as much as possible for themselves,” says Sace’s Ascari, adding that the lack of liquidity in the market means that banks are charging more on their loans.
“It has gone from banks lending at low Libor to banks lending up to 200-300 basis points above Libor. Banks are trying to optimise their lending by trying to maximise their profits.
“There are ECAs that as a policy charge very low premiums and make banks very happy. And there are ECAs like ourselves that charge a market price, and so make it more difficult for us to work with banks,” Ascari says.
Furthermore, a problem arises as ECAs become more involved in industrialised countries, because the OECD does not define a clear minimum premium for industrialised markets. “So I guarantee you will have a race to the bottom by the ECAs, and I’m afraid for this impact on the level playing field.”
Henri D’Ambrieres, global head origination – export & trade finance at Calyon, agrees that the only point neglected by the ECAs (because they don’t know how long crisis will last) is the cost of liquidity. “In some cases they claim that the banks are too expensive and that we should be cheaper. But it is difficult – we are pricing the cost of our resource, so if we have to pay more to fund ourselves we want to increase our pricing.” He adds that some banks have left the market because they had no solutions to refinance themselves – especially in the long term.
ECAs vs the private market
Although the world’s ECAs may have stepped in to fill the gap left by the struggling private market, there has been some debate on whether or not their position is an infringement on private insurers’ territory.
The general consensus is that private credit insurance companies were able to do the job of covering marketable risks until the start of the financial crisis. And as long as private credit insurers continue to be cautious in their risk underwriting, state cover is the only way for many exporters to do business abroad, says Hans Janus, member of the management board at Euler Hermes in Germany. “At this point it is not clear whether at the end of 2010 enough facilities will be available in the private market to cover marketable risks once again.”
It is no secret that the private insurance market is experiencing difficulties and continues to be impacted from downgrades by rating agencies. “People are very concerned about counterparty risk,” says Citi’s Brockie. “If they’re going to work with an insurer, they need to be comfortable their credit rating is going to be maintained. This is very difficult to do when private insurers are still being downgraded.”
Serv’s Wight explains that the Swiss ECA is required by law not to compete against private credit insurers.
“We collaborate closely with the private market and try to support private credit insurers. Private credit insurers also feel the impact of the currently difficult economic situation.
“For example, they experience difficulties in receiving reinsurance from private reinsurers. This is why we have lately received an increasing number of requests for reinsurance from private credit insurers. If possible, we comply with these requests.”
US Ex-Im’s McAdams is confident that the private sector will return to the market and take more exposure. “If you go back two to three years ago, the private sector was more willing to accept risks associated with export transactions, and the private insurance companies were more aggressive in offering cover. As the crisis hit, they reduced their appetite and as things get better, they will, presumably, be back in the market in a much stronger way than they are today.”
Though this view is echoed across the market, there has been some speculation – from the ECAs themselves – that they may be crowding out the private market and impeding the recovery of ‘normal’ banking activities.
One ECA head tells GTR that ECAs, when undercutting the market, may be “wasting their respective government’s resources by fixing something that is not broken. Whenever markets function, ECAs and governments should step aside”.
This appeal does not surprise Wiehl at the Berne Union, who says that similar cries were already being heard at the union’s meeting in October. “They know their role is to complement the market, and to step in when there’s a problem,” she says.
“The last thing they want to do is crowd out the market.”
Wiehl explains that quite a few Berne Union members have highlighted the temporary nature of their crisis measures, and have made sure that when they enact a new programme, they don’t crowd out the banks or the private market insurers.
“While they’re glad to have this heightened role, at the same time, they are very aware that if they take on a lot of risks and misprice them or analyse them incorrectly, their headaches are going to be there in three, four or five years’ time when everything is back to normal and they’re having to manage a portfolio of bad risks.”
This, Wiehl explains, is why ECAs are informing their clients that these new measures are going to be expensive and that they really are the last resort. The issue that consequently arises is that clients question the need for higher prices, which reflect the current market levels, when the government has requested that ECAs step in.
The start of the mandate of export credit agencies began in the crisis of the early 1930s, and have, as such, come in a full circle since then.
ECAs function according to the supply and demand of the marketplace. On the demand side, it’s the volume of exports, and on the supply side, it’s how competitive agencies have to be to win the business, explains McAdams. “We’ve been here for 75 years – it’s not an on/off switch. It’ll never be completely eliminated.”
“At some point in time there will be some private lenders who are willing to take the risk in XYZ country, and that eliminates the role and the cost associated with dealing with an ECA. And then the competition begins,” he says.
McAdams goes on to explain that at the best of times, in terms of trade, liquidity, and so on, the US Ex-Im were in the US$13-14bn range of business. This year, because of the difficulties, they’re over US$20bn. McAdams is confident that it will ease back – but that it won’t go all the way back.
Others believe that it will be the various countries’ governments who dictate when the agencies need to scale back their operations.
But the Berne Union’s Wiehl argues that as practitioners, ECAs are on the front line, and they will most likely see the signs of market improvement more quickly than the governments. “The governments for political reasons may want the ECAs to stay in because their industries still need their support. Or governments may be quick to tell the agencies that they’re no longer needed, and that their activities should be stopped. Each case will be different.”
“The government called the shots on the way in, and they’re probably going to call the shots on the way out. The practitioners will be informing them as to what they see.”
Citi’s Brockie believes that it’s far too soon to begin discussing how programmes will be cut, claiming that some programmes have only just been put in place, and have not had the opportunity to allow full utilisation yet.
“If you look at the syndicated loan market, it hasn’t improved much,” Brockie notes. “If it was back to what it was, there may be grounds for a reasonable discussion. That to me is your litmus test. But it is still nowhere near the level of activity it was last year.
“ECAs are providing support where it’s really needed. And who’s to say what other twists and turns are going to happen even from here.”