Some of the top decision-makers in the trade finance met at the end of 2009, just as the Dubai debt crisis sent the financial markets into a frenzy. Against this backdrop of renewed panic, they discussed their concerns surrounding the potential impact of the Middle East problems. Looking towards the new year, topics such as Basel II, liquidity constraints and Kazakhstan also came under the spotlight.
Roundtable and lunch participants
The debate coincided with GTR’s annual editorial board lunch, attended by the majority of our GTR board or a representative from the respective institution (as listed below).
The lunch was kindly hosted by ANZ at their Canary Wharf offices in London.
- Peter Sargent, director, international trade finance, ANZ
- Iain MacDonald, head of trade product, global cash & trade, Barclays Commercial Bank, (standing in for Vivek Ramachandran)
- James Parsons, managing director, BlueCrest Capital Management
- Dominic Broom, head of business development, treasury services, BNY Mellon (standing in for Alan Verschoyle-King)
- Patrick Brockie, global head, export and agency finance, Citi (standing in for John Ahearn)
- Charles Morrison, partner, DLA Piper UK
- Geoff Sharp, managing director, HSBC
- Nick Robson, business unit head for credit and political risk, JLT Group
- Dani Cotti, global trade executive, JP Morgan
- Riza Kadilar, representative for Turkey, Natixis Pramex International, Natixis
- Adnan Ghani, global head, trade asset management, RBS
- Charles Carlson, global head, SEF & Head of European project and export finance, Standard Chartered Bank
- John O’Mulloy, managing director, Standard Bank
- Wolfgang Friedinger, head of trade products and services, Unicredit (standing in for Markus Wohlgeschaffen)
GTR: With news of Dubai World’s inability to meet debt payments sending the financial markets into panic – what impact will this have on trade finance?
Robson: Talking from the perspective of the insurance market, the view of Middle East risk had been affected long before the Dubai issue by the situation with Bahrain’s TIBC and the Saudi Algosaibi Group, which we believe may lead to up to US$500mn of claims to the insurance market.
That has already caused considerable concern and made people more cautious of the risks they write in the Middle East generally, but as yet it has not resulted in a exodus from market and we don’t expect this.
In the weeks following the TIBC default, we were receiving calls from bank clients asking if insurers were moving away from Middle East to which we replied “not yet” but what would the bank asking the question be doing? In response they answered that they would generally be more cautious or restrictive with their Middle East book – and since this time we have seen less Middle Eastern business.
DP World’s announcement has to have a further negative impact but many have been expecting a problem in Dubai for sometime. I don’t think anyone would ever say they are firmly closed for Middle East business but the level of caution will remain high.
Sargent: I would look at Abu Dhabi for our existing client base, and selectively parts of the rest of the Middle East for short-term, relevant trade flow business for our clients – especially for those trading with Asia. In Dubai it has been clearly common knowledge that they have overspent for some years. This was a situation waiting to happen.
Sharp: It has the potential to change the dynamics of the Middle Eastern business – which as we know is based on name-lending.
We might see a return to a more European style of lending activity in the region.
Robson: I understand that the aggregate numbers in terms of total debt for DP World stand at US$40-50bn (though no one expects there to be a “problem” of this scale), and that is less than Northern Rock in the UK. In that context– it’s a large number but in light of global experience over the last 18 months it is not as scary as it could be.
O’Mulloy: I don’t understand how the announcement of a potential loss of approximately US$60bn in Dubai could cause the financial markets to write off trillions-worth of assets. This suggests there still is a massive lack of confidence in the market. For example, you have Russian CDS prices increasing by close to 80% due to the potential losses in Dubai.
On top of the issues with Saudi conglomerates, you will also see Middle East banks stepping back from personal guarantees.
Parsons: We will see more of this. Sovereign credit risk is definitely a theme for next year.
Robson: The impact of the Dubai debt issue says more about the global economic recovery than it does about the Middle East.
Parsons: We have had a liquidity-driven rally on credit spreads in the capital markets to optimistic levels around the world. Whilst of course nominal risk-free rates are low, which is a natural driver of a search for yield, underlying the move, all that has happened is a transfer of private-sector debt to public-sector debt which stores up trouble for later.
Sargent: Talking on Islamic finance, there has been a certain amount of confusion over some of the Islamic finance structures used in Dubai and their ability to sort out the restructuring of these issues.
Robson: There has been a growth in the Islamic bond market in last few years, where we understood that there were perceived benefits to the banks in stressed situations, because technically they have a direct ownership interest in underlying assets without having to enforce security. However, we also understand that the growth of the bond market has perhaps raised more problems regarding restructuring issues.
GTR: Is liquidity still a major problem for the market?
O’Mulloy: It is better than it was nine months ago. At Standard Bank, we did a US$425mn financing in Cambodia in November, the biggest deal ever done in Cambodia, something that wouldn’t have been done nine months ago. However, with the Dubai issue, it is difficult to know where the market is going.
Sharp: We’ve all been beneficiaries of people seeing trade as secure asset class over the last year. However, liquidity has been very much centred around the short-end – there has very little medium-term liquidity for capital equipment, and less demand as no one is replenishing capital goods.
While trade finance activity could not be described as normal, apart from the last quarter of 2008, liquidity for trade finance has been relatively good compared to other asset classes (eg. loan markets, securitisation etc)
Broom: The question is whether the Dubai issue is really a tremor or a shock? If it is a shock, then we need to keep in mind that most of that liquidity that has been injected into capital markets this year, has come from governments and we have been told there is going to be no more of that. So what happens then?
Sargent: I think 2010 is going to be a difficult year for banks. We are in the early months of our new financial year, and we are obviously being pushed to find new revenue streams. The bank has balance sheet capacity, but finding the right structures, using the right products, in the right geographies to meet our clients’ needs is an issue – more banks are becoming geography-driven rather than industry-driven.
Banks are becoming more regional in their approach and this may lead to an opportunity to work bank-to-bank in the future. I also think that the effect of regulatory changes resulting from the credit crisis plus a more rigid approach to operational risk management will have an effect on the on-boarding of new business.
MacDonald: Barclays has remained open for business throughout the period, however there was clearly a wider market issue with the virtual shut down of the secondary market for trade assets. There is evidence that the secondary market is returning which is assisting with the wider liquidity position in the market. Dubai sent some initial shivers through the market although at the present time the situation seems to have calmed down. The return of both confidence and liquidity is starting to create downward pricing pressure for both corporate and bank risk.
Kadilar: Going back to the issue of cross-border financing – which was a big point of discussion at the IMF meeting. All banks have benefited directly or indirectly from government support and therefore are facing some pressure to support their domestic markets. Trade finance benefits as you are serving the needs of corporate clients at home.
Liquidity is improving compared to last year but the real problem is still capital allocation. Banks are still not enjoying excess capital. We don’t know the safe level of capital because the definition is changing.
Parsons: We at BlueCrest Capital provide regulatory capital relief to banks for trade finance exposure they hold on balance sheet. We have noticed recently that a number of banks, particularly those that have received state support, temporarily have excess capital but anticipate that they will be returning it to governments over the course of 2010 and so it is not really available for lending. In practice, banks want to get out of government control as soon as possible – so capital availability for new lending is likely to remain constrained.
Sargent: This really is a case of economic nationalism developing. I believe that in Europe there is a two-speed approach to banking developing, where you have banks that are government-owned and those that are independent having not taken state aid recently.
You can’t expect RBS to do the same amount of business in Greece, for example, which they used to do, as the bank now has to serve two masters: both the UK taxpayer through the government shareholding and its corporate client base.
Strategically, someone like Barclays has more flexibility compared to government-supported banks such as RBS and Lloyds. This is a trend that applies across Europe and is something we need to consider when dealing with these banks now.
Robson: As liquidity appeared to improve, there was a trend for people to select better transactions that gave a good compromise between reasonable risk and return. Then you got competition for a select group of deals – you had the same people going after the same deals creating the illusion there was more liquidity. This leads to rates being pushed down.
In July/August we had increasing pressure from banks for lower prices as we entered the third quarter.
GTR: Is there still a major problem with a lack of liquidity in the trade finance markets?
Brockie: I cover short to long-term export credit financing and liquidity has not been so much an issue recently. Some of the longer-term projects are raising financing, for example, Nordstream in Russia, raised nearly €4bn.
Of course, these deals featured high levels of export credit, not something you would have seen a few years ago. However, six months ago there was a big question mark hanging over long-term financing. Today there is a different story emerging with deals featuring 16-year tenors getting done.
However, banks are concentrating on better corporates and credits. Those sub-investment grade and SME corporates are struggling to access funds. It is not so much a liquidity issue, but rather a credit quality and cross-border risk issue. There is definitely a case for banks needing to work together to ensure credit capacity.
O’Mulloy: The ECA point is fundamental. The majority of large-scale long-term deals need ECA support now – even the top names need ECA cover.
Brockie: Volumes among the ECAs are up dramatically. For example, US Ex-Im issued a statement of increased volumes of business in 2009, and the Swedish agency did nine times what it did last year. Most agencies are up 50% in 2009.
O’Mulloy: Essentially anyone – governments, DFIs, multilaterals – everyone is providing funding, except the commercial banks, like us, who come in last of all.
Brockie: We, the banks, are sitting on lots of cash. We have excess levels of liquidity because we have to. But this cash is not necessarily finding a home.
Sargent: Is this an effect of Basel II and the continued negative effect on the market? It seems instead of allocating the right amount of capital for the right risk and right deal, what Basel II is doing is squeezing the market so we only do the shortest possible tenors and largest possible investment grade deals. It has disadvantaged the SME market.
Broom: If the last year has taught us anything, it is that there should be a return to market specialism in banking, rather than banks trying to work to a global model.
Practitioners, as in other professions, need to get involved in markets they really understand. For instance: do you know the client and would you lend them money? It has now become questionable why certain banks got involved in some markets in the first place.
Morrison: I just want to put a positive perspective on developments. The problem of liquidity was due to banks being unwilling to lend into the market due to uncertainty surrounding the liabilities carried by some institutions. However, liquidity pumped into the market by governments has helped to address this problem.
India and China are now growing again and sucking in imports. Emerging markets such as Sub-Saharan countries have to continue to trade in agri-goods and metals, etc. Most of us here are financing these types of deals, week in, week out. For instance, copper is coming out of Zambia and going into the China market; exports from Germany and France are rising with both nations coming out of recession. We need to see the difference between the perception of risk and the reality.
You are seeing banks returning to regions and products they know and understand and in structures they can rely on. This leads on from the current problems surrounding BTA Bank. We saw banks piling into deals with BTA that they really didn’t understand and shouldn’t have been doing in the first place.
Friedinger: Interesting will be how pricing will develop mid-term. We in UniCredit saw the peak in the first half of 2009. Since then margins went down, but did not reach old levels. Today they are more realistic related to the actual crisis.
O’Mulloy: Pricing levels will depend on whether it is the well-structured, high-quality corporate market or the more unstructured or SME market. I think there will be more divergence of risks. There will still be competition for deals at the top of market but less for SME-type business. This is where the state-owned banks will be pressured to fund that market.
GTR: What impact is Basel II having on the market? What efforts are being made to overcome any negative effects of the regulations on trade finance?
Sharp: There is nothing wrong with Basel II per se. It is a better model than Basel I as it is differentiating risk. The problem is with the input. For example, the assigned ratings. Who judges the rating agencies? Just because a company is a certain size or has a certain level of borrowing, it doesn’t necessarily determine its credit worthiness.
Brockie: I went to WTO meetings last year where they were very focused on trade and trade finance. There was much discussion on how to get better capital treatment under Basel II. What is happening is that the ICC will share information confidentially on losses in order to develop a track record on debt repayments. This is the right thing to do, as trade finance should get better treatment.
Cotti: This crisis demonstrates the quality of the trade asset. Kazakhstan aside, trade has remained strong in the worst recession of recent years.
Sharp: Even in Kazakhstan there should ultimately be a normal rescheduling of debt – with cross-border trade letters of credit in one pot and other general finance debt into another. However, the definition of trade finance has now become much wider. The impact of the financial crisis and the efforts by the ICC may bring the market back to ‘true’ trade finance, where in the event of a restructuring, genuine trade transactions should receive appropriate treatment.
O’Mulloy: I can’t see anyone doing many trade-related FI syndicated loans in the near future. That market is completely out of favour.
I remember being at a conference a few years back and someone stood up and said these Kazakh loans are not for trade, asking “how can you be doing them at these prices?” In retrospect, he was totally right.
Parsons: In trade finance, realised default rates picked up following the collapse of Lehmans, but still came below the corporate loan market. Most of the structured commodity finance deals, the majority of which were structured well, have survived the crisis, despite some restructurings. If we could gather all this data and put it in front of the regulators, it would put the trade finance market in a better position.
Cotti: The ICC held a meeting in Brussels about compiling a data registry. But getting and preparing that data is not such an easy task. Industry groups are pulling together, but the problem is that it is a fragmented market.
We are working on creating a global trade council where associations such as Baft and others can come together in one forum and use one industry voice to make a bigger impact on regulators. We are working on this behind the scenes, but all of us have to get more engaged. We have to dedicate our time and send our people to these events to help create a much more transparent image of the market.
GTR: Can you expand at all on how effective ECAs are in supporting the market?
Brockie: ECAs have been doing a lot but they could be doing even more in the short-term space.
Some programmes have been launched but generally ECAs have not been so good at the flow-type trade business – it is still a huge learning curve for them. To meet the needs of the market, they need to be nimble and efficient – and the ECAs are not there yet.
MacDonald: Flexibility and responsiveness is critical to both corporates and banks. As a rule, ECAs have not delivered the speed of turnaround and ability to structure outside the set parameters. However, recently we have been encouraged by a great example of support from the ECGD for a non-standard letter of credit deal which was turned around in record time. Originally we wanted to put the deal through their new letter of credit guarantee scheme, but as it was outside the criteria, a bespoke structure was required and within two or three weeks. ECGD stepped up and help us deliver what will be a landmark letter of credit transaction to our customer.
GTR: But is the commercial bank market still working, without relying on ECA support?
Sharp: We’ve recently syndicated a US$90mn short-term deal in Nigeria which demonstrates there is liquidity there for the right deals. I still back the bank syndication market for placement of short-term and selective medium-term trade deals.
