Global heads of export finance argue that ECA-backed export finance will remain an important financing tool given the persistent market volatility.
Jorge Tapia, global head of trade, export and commoditiy finance, Santander
Patrick Brockie, managing director, global head, export and agency finance, trade head, Emea, GTS, Citi
Simon Sayer, managing director and head of structured trade and export finance, Emea, Deutsche Bank
Denis Stas de Richelle, global head of export finance, Société Générale
Colin Hemsley, head of sales, transaction banking, Lloyds TSB Corporate Markets
Olivier Paul, global head of export finance, BNP Paribas
GTR: Are you seeing any trends that are driving export finance at the moment?
Tapia: ECA-supported finance continues to be of massive relevance to the success of exporting economies. This is less of a trend than a baseline over the last couple of years, so it is not surprising to see different ECAs become proactive and more aggressive when offering products.
Stas de Richelle: Clearly, the European sovereign debt crisis has put pressure on the banks’ liquidity costs, as we have seen CDS prices increase again from March 2010. This has led to a re-pricing of structured financings, especially on long-term transactions. Not all competitors have the same liquidity position and we do see some actors continuing to propose low pricings for ECA-backed deals, which is clearly against the global market trend.
Sayer: Liquidity, or the lack of liquidity, is what is really driving the market at the moment. The alternatives available for corporates, governments, and projects that are looking to fund investments at the medium or long term, continue to be very restricted. The commercial bank lending market is greatly reduced as banks continue to trim balance sheets; debt capital markets are highly cautious and relatively expensive for all but the best investment grades. In a world where everyone wants to conserve cash, trade and export-related borrowings make huge sense.
Developed markets have been fairly quick to see the advantages of export finance and we are signing more deals in richer countries. At Deutsche, we have signed, or are in the process of executing, large transactions in the US, Spain, Italy, Abu Dhabi, Saudi Arabia and Dubai, all of which would not have been considered likely candidates for ECA-supported lending pre-crisis.
Funding costs for banks are again creeping up as volatility has returned to the markets in the wake of the Euro crisis. As sovereigns in particular, but also many corporates and financial institutions, assess their refinancing requirements, it is increasingly obvious that there will not be enough to go round. This is leading to cash hoarding and caution in lending again, and the interbank market is tightening. So while margins in export finance had trended downwards since the peak of the crisis, this is reversing and will probably worsen over the rest of this year.
Hemsley: The events of the last two years have left corporates with a much greater focus and awareness in a number of areas; liquidity, cashflow and counterparty risk, all of which influence export finance trends.
As a result of this, most corporates have taken a sharper look at all their cash and placed a priority on monitoring and managing it effectively. The big change is that there is a much greater reluctance to use this to accelerate their payables and take advantage of early settlement discounts in the same way many previously did.
GTR: Are transactions becoming easier to close?
Paul: No, it is not easier to close. The main problem comes from the borrowers and investors that are maybe reviewing the importance of their investments at the last minute, asking themselves if they should do it.
This is a global concern, especially as emerging markets have not been tested fully yet, so people do not know what the impact will be if anything goes wrong. This kind of investment is for the long term, investors have to anticipate what could come in the future and need to evaluate if the investment is a good choice for them in the long term, so this is why we get some hesitations. We see more and more delays in deals.
Tapia: There is a good appetite for short-term business, albeit margins have moved upwards, in some cases significantly. This is a reflection of the increased cost of capital as well as bank and country risk. We remain keen to work with corporates. The key, as ever, is to ensure that the bank is involved at an early stage in a transaction. Longer-term transactions are harder to close because funding costs look less attractive and the required due dilligence rises steeply.
Stas de Richelle: We experienced quicker closings in some ECA and DFI-backed transactions, but on the other hand some others have a longer closing process due to specificities of each individual transaction. All in all, the time to market has not significantly decreased.
Brockie: I haven’t seen any real change here. At Citi we aim to try and close transactions in a timely manner. It is in no-one’s interest to take longer than is absolutely necessary. Having good legal counsel, both internal and external, is key. In trade we constantly look to improve our documentation without losing the key elements that protect lenders.
GTR: ECA involvement in deals came into the fore during the financial crisis, now that the worst is over, how active are the ECAs in backing deals?
Brockie: It is really too early to be calling the crisis over. There is heightened risk with sovereigns now and we have Dubai and Greece as evidence of this. Of course, the issues with the banking sector got shifted to the public sector and hence the risk hasn’t entirely disappeared. Will the ECAs run into some limitations themselves due to the high volumes booked in 2009 and continuing? We cannot assume ECA support at such high levels is unlimited.
Stas de Richelle: ECA-specific crisis programmes continue to be competitive and an important source of long-term finance for corporates, banks and sovereigns to fund their investment in capital goods and services. Since the beginning of the crisis, ECAs have effectively proven that they are a reliable and competitive partner to borrowers, and have a long-term perspective. With rising liquidity costs for banks, and the premium level being stable, the price of ECA-backed financings is still very advantageous.
Sayer: ECAs are definitely even more active than during the crisis. As liquidity has remained very tight, investment projects that were perhaps delayed or postponed during the crisis are now coming to market, and the successful financial closings of many large export finance facilities with better clients in richer countries serves as a great advertisement for the product, and the price and tenor advantages that it brings.
Paul: I do not want to talk on behalf of the ECAs, but I do not consider that the worst is over. I will not say that the worst is in front of us, but it is not behind us either. We are still in the middle. Despite the appearance lately of more liquidity and more productivity across different markets, I’m afraid that problems still exist for banks.
GTR: Have ECAs and banks seen many claims in the market, and how have ECAs responded to these?
Paul: Quite well, a lot of those ECAs have a lot of new schemes to help this which was a very good move. From most of them too, not only from the newer ECAs from exporting countries such as China, Korea, Brazil and so on, but also from the more classical ECAs like Coface and US Ex-Im. In my view they have done a very good job. Will they want to maintain this level of support and flexibility they have show until now? This is the important question.
Brockie: Naturally the ECAs are seeing claims but I am not aware that they are excessive or exceptional. From a banking perspective I can only speak for Citi. We have not made claims on ECAs during the financial crisis and this record dates back many years. Having said that, we are not different to many other financial institutions and have experienced a number of restructurings, many of which are now going well and others to be completed.
Stas de Richelle: We have not noticed a dramatic increase in the amount of claims or deterioration in ECAs’ responses to claims. The number of default situations in export credits remains very limited. Of course, we have ongoing restructurings, but again, the numbers are not at all high.
GTR: Are there or will there be other financing options available? If so, will this make ECA financing less likely to be tapped to the same degree as 2009?
Sayer: No, it is still very important and will remain a core source of liquidity for the foreseeable future. It is very difficult to be optimistic for Europe over the next few years given the deep structural issues that all EU members need to address. Given Europe’s importance in the Emea region, this will overshadow Emea regardless of any stronger recovery elsewhere, such as in the Americas or Asia.
Even there, the financial landscape has changed to such an extent that demand for finance will outstrip supply for some time. To my mind, the export finance market will be core to the way the market finances big infrastructure and to the way banks serve their client relationships with balance sheet for the next decade. Basel III will have a say in this, but that is still a work in progress.
Tapia: Investors and banks will carefully observe and analyse the risk return figures and their utilisation of risk-weighted assets. For us it is of paramount importance to serve our clients where and when they need us. The method of finance is certainly something which comes into the equation, but this is not the exclusive factor to determine our involvement. We think ECA finance continues to be very important and a finance alternative which accounts globally for multiple billions of US dollars will never be relegated to the sidelines.
Brockie: We expected the bond market and syndicated loan markets to have improved more than they have. With the recent sovereign concerns these markets have not grown as expected and there has been an investor flight to quality. ECA financing will remain very important and relevant until the liquidity returns to these larger markets.
Stas de Richelle: Yes, there will be other financing options available, as there always have been. But ECA-backed solutions still remain competitive and provide a certainty vis-a-vis long-term financing and thus will continue strongly. From what we can see in the market, ECA financing is far from relegated to the sidelines. On the contrary, I would even state that ECAs are more active than ever. Investments are gaining momentum in many markets, including developed markets.
GTR: What impact will downgrades on sovereign debt have on ECAs’ ability to do business themselves and with the countries to which they export?
Stas de Richelle: So far, we have not noticed a risk aversion on the PIIGS [Portugal, Italy, Ireland and Spain] countries by banks and borrowers. Mainly because the ECAs are second-rank risks on the sovereign of the country of export and also because the goal of an ECA is to continue to support exports and through this, create jobs.
Sayer: Ratings are still very important and the capital efficiency of the product depends on the underlying ratings of the governments of the ECAs. For the best rated ECAs, the acceptability of the risk itself has to be taken as a given, but for less-well rated ECAs, this will become a problem if unchecked. Ironically, it is not ECAs like Sinosure and KEIC that are challenged from a ratings perspective, but rather there are now some ECAs closer to home that will be anxious about their sovereign’s rating. It is no coincidence that there have been no European ECA debt capital markets issues over the last 12 months or so; pricing in the markets does not work.
Tapia: This is a multi-layered question which deserves answers on various levels. ECAs’ ability to do business themselves is, from our point of view, not adversely impacted. ECAs will underwrite risk, and if and where they act as a direct lender, they will continue to lend. For the receiving countries there is no change in the case where the ECA enters into direct lending; for all other cases the availability of finance supply may be endangered, as lenders probably cannot provide finance for exports from countries which are heavily under pressure and whose debt rating has been downgraded. But this is less a function of real credit concern, probably more a function of the respective local banking rules and the internal risk/equity matrix.
Paul: A lot of ECAs have made presentations to exporters, investors, bankers and so on, showing their risk policy for the coming year. We have not seen any evidence whereby ECAs would be willing to reduce or to downsize their overall exposure that they have in different countries. There will be downgrading of different countries in the future that’s for sure, maybe the impact will see an increase in the pricing in terms of the tenor and credit, but so far it does not mean that ECAs will close or stop their business in those countries.
GTR: How does ECA pricing compare to other forms of finance?
Sayer: It is very competitive, particularly when benchmarked against the bond market. Competitiveness against traditional bank lending has to be considered in terms of availability and, frankly, there is very little medium or long-term lending available in the traditional bank debt markets.
Tapia: When all other alternatives dried up and the bond and syndicate markets were no longer open, ECA finance was the last man standing, in terms of price and in terms of tenor. Clients realised that the ECA product remained in place and was usable even at the height of the crisis. This certainly set a benchmark for any form of finance. However, from our perspective, competing lending schemes and finance alternatives are welcome. In the long run, ECAs should not and will not be the exclusive solution. ECA finance belongs to the family of intelligent, long-term solutions for our clients.
Hemsley: The margins increased considerably during the market disruption but are now falling back. We do not expect to see this drop to the levels that were typical for ECA transactions in previous years as there have been fundamental changes in the way banks regard risk, asset levels and long-term liquidity.
Paul: This is an important question. Today, what is important for borrowers is availability of financing and maturity of financing. Interest rates and terms and conditions attached to this financing are seen as a secondary issue. This is why ECA pricing has been quite competitive compared to other products because it is available and it still offers long maturity. This is all only from June 2009, as before then, I would have said that there is no alternative product, that export credit is the only option for financing, and that borrowers had no choice. Today it is different; today there is competition.
Brockie: ECA pricing with exceptions is generally very competitive with alternative forms of financing, particularly when you factor in the long tenor of most ECA financing. Many European ECAs can also offer fixed interest rates which is an additional option that does required swaps or credit line utilisation. As an example, fixed interest rates for a five-year repayment period and assumed one-year drawdown period is 2.32% for US dollars and 2.12% for euros.
Stas de Richelle: For long-term maturity above eight years of reimbursement period, there are no other products that we can compare to ECA financing.
GTR: Is there still a need for ECAs to support short-term trade?
Brockie: Yes I firmly believe so, as I expect the markets to remain challenged through to 2011. The volumes in the short-end of the market far outweigh the medium to long-term financings, and a mix of ECAs and private insurers is valuable to all active trade banks.
Private insurers are very good with portfolios of trade credit risk, whereas ECAs are more focussed on single export and credit risks. Some ECA short-term programmes don’t see high utilisation as they are not tailored to the market demand or are not competitive in other ways. ECAs should work with their banking partners on how to make these programmes more attractive to the market.
Hemsley: Speaking from a UK perspective, the real acid test must be whether businesses can access trade finance at competitive levels across the whole range of potential maturities; short, medium and longer term. The reality seems to be that ECAs quote for significantly more deals than they complete, which must say something about suitability and/or pricing. In the immediate term the focus on working with banks to help exporters secure confirmation facilities for export letter of credits is a logical step and, while the take up has been modest, I believe there is a good sense in banks and ECAs adapting this scheme to truly add value for the exporter.
GTR: What happens if there is a double dip recession?
Sayer: Less of a double dip and more of a sustained low. I believe the landscape has changed semi-permanently and the current difficult market conditions will continue for the foreseeable future. This is an opportunity for the export finance business and for ECAs to consolidate their claim for a prominent position in the financing plans of big infrastructure projects, and in the tool kit of large banks that want to continue to serve their clients to the best of their ability in more challenged times.
Tapia: We will continue to do what we have always done; focus on our clients and our relationships. We will provide our services to them and create change and success together. To name a few of the issues in the medium term; sovereign risk evaluation in Europe and the US and the exit of countries from the emerging markets into the club of industrialised or post-industrial economies.
Paul: This is a difficult question. I hope that even if we have a double dip, all the partners involved in export credit – ECAs, banks, ministries of finance – will continue to have the policy of supporting the national exporters.
Exports are one of the main triggers of growth and if we stop supporting exporters, it won’t be a double dip that we have to worry about, it will be much worse than that.
I think that it is the most important thing to keep a very strong level of support for international trade. It’s a question of global trade policy and behaviour and willingness to be supportive of our respective economies. Exporters have been through various crises before and have survived, and I’m sure we’ll survive this time too. Brockie: While markets will take longer to recover than many anticipated, I do not see risk of a double dip. I believe bank and corporate deleveraging leading to higher levels of liquidity will positively impact the market in the medium term, if not sooner.The European support package should eventually calm concerns over Europe but not immediately.
Stas de Richelle: Our opinion is that a potential double dip recession would concern developed countries only. The decoupling with emerging markets would only intensify the South-South trade that has already started, which will mean for global players to go where the trade flows are. GTR