GTR gathered together the global heads of export finance from the major international banks to discuss how they are working with export credit agencies (ECAs) and tackling the challenge of shrinking liquidity and lack of risk appetite.
Increased demand for ECA cover has put the agencies under unprecedented strain, raising questions over their ability to meet these new challenges.
The roundtable was kindly hosted by Standard Chartered in London.
Participants
- Nick Grandage, partner, Denton Wilde Sapte (chair)
- Charles Carlson, global head of structured export finance, Standard Chartered
- Nick Shaw, managing director, structured trade finance, BBVA
- Olivier Paul, global head of export finance, BNP Paribas
- Henri d’Ambrieres, global head of origination, export and trade finance, Calyon
- Patrick Brockie, managing director, global head, export and agency finance, GTS, Citi
- Marck Wengrzik, senior vice-president, head of structured export and trade finance, Commerzbank
- Simon Sayer, managing director and head of structured trade and export finance, Deutsche Bank
- Matthias Wietbrock, global head of export and trade finance, KFW Ipex
- Jorge Tapia, global head of trade, export and commodity finance, Santander
- Denis Stas de Richelle, global head of export finance, Société Générale
- Max Niesert, head of trade and export finance, WestLB
Grandage: Export finance and funding: Is the bottleneck shifting from a risk focus to a liquidity focus?
Paul: There has been a shift from risk to liquidity issues, but this liquidity issue has been present in the market for the last 18 months – so it is no longer very new.
This means that regarding liquidity issues, I think that the necessity of increasing the pricing in export credit transactions has allowed most banks to swallow some of the liquidity pricing. It means that the market adapted itself to this new environment.
What is new is the evolution of risk perception, especially for certain corporates in particular sectors. Heightened risk perception might slow down banks to lend money whatever the security package. This is because interpretations of risks in some countries or regions have become more difficult for some credit committees to handle.
Grandage: That’s because of governmental action in those countries perhaps?
Paul: Those actions are motivated by the fact that the crisis is starting to affect emerging markets. It might create financial difficulties for those countries, hence a series of postponement of projects.
In a sense, the capacity of banks for these regions, even on a sovereign basis, could be affected.
Tapia: Coming from a risk department background, I’d say it is more credit risk vs liquidity risk issue. Previously, liquidity risk was very low because banks thought they’d be able to finance themselves at Libor flat forever.
The perception of liquidity risk is far higher now, and that risk will be there for a number of years. However, it’s true that risk perception might prevent some banks from entering into certain markets, although it is not clear to me if this is a matter of risk assessment or a redefinition of some banks’ business models, shifting from a product orientation to a more client-driven model.
Wietbrock: In fact, we see a lot of transactions now where banks won’t take refinancing risk anymore. There are banks now that won’t provide money for more than five years, let alone 10 years.
Grandage: Have government funding programmes had any effect yet on export finance funding?
Carlson: Some ECAs have been slow to respond to the crisis. Those ECAs who already had established direct lending schemes such as SEK and EKN have been very active.
But with respect to new programmes, there haven’t been that many developments. US Ex-Im is bringing in a 10-day refinancing option, which is in the right direction.
Some ECAs may respond to the crisis after it’s over. The problem is that, understandably, they have to consult with the exporting community and the banks, and then seek approval of their governments. In many cases, a change in programmes requires a change in legislation.
I think that by the time all the ECAs come in, this will be all over.
Grandage: What should the ECAs be providing?
Carlson: There should be more direct lending like what Swedish Export Credit (SEK) is doing.
Paul: To clarify, when we are talking about direct lending, it is refinancing.
Carlson: Yes, I agree.
Sayer: I completely agree with Charles – the programmes already in place are being widely used. Yet, the rest of them are floundering around trying to put in place various details, criteria and rules. By the time it’s all done, it will probably be too late. The UK is a classic example of that and perhaps Germany too.
Carlson: Many banks have made suggestions to the UK government about direct lending or refinancing options for the UK but change will take time.
Sayer: There are some discussions with the UK government and Bank of England regarding a form of repo scheme, whereby you can take a transaction to the Bank of England at any stage of its lifetime for refinancing.
Paul: The ECAs have done well to anticipate the magnitude of the crisis. We have said to our clients that due to the crisis, export credit will become a key product in making investments in emerging markets.
ECAs have been there, willing to take on the risk on emerging markets, but what they hadn’t anticipated was that the capacity of banks to offer liquidity was drying up. But the ECAs are now realising that, and entering into new processes in order to develop refinancing schemes.
Brockie: I attended the recent WTO meetings in Geneva, where the focus was primarily on short-term trade. There was a similar theme at the G-20 meetings. There has been a lot of talk about getting trade finance going as opposed to supporting export credit markets.
At the WTO meetings, the multilaterals were very present, but the ECAs were not so present. In fact there was very little ECA representation. There was a focus on what multilaterals could do, for example, expanding trade finance facilitation programmes.
Wietbrock: Regarding the governmental programmes, addressing the short-term liquidity issues is probably the easier problem to tackle.
The issue of supporting long-term financing is more difficult. As a point in case, we have an officially supported CIRR financing programme in Germany, which was used up in the first quarter of this year.
So where do you get money from? Do you have the governments move in and take the risk? But you need to avoid moral hazard and phasing out the private sector. Or does the private market move in and buy up covered bonds, for example?
There has been some activity in Germany on additional refinancing for Hermes-covered transactions, but again this is tricky as you don’t want to block out the private sector.
Grandage: Are the ECAs going to end up competing with the banks?
Niesert: The question here is do we really have a funding crisis in the ECA business?
I don’t think so – the crisis is only that the market price is higher than most people would like it to be. Even if you have a 2% margin, the base rate is falling as interest rates are cut by the European Central Bank. Is there really a funding crisis?
Paul: For me, yes there is, but, most likely for a limited period of time. One of the consequences of having increasing margins is that it could create a situation where projects we are financing will suffer in terms of profitability, from the sponsors’ perspective.
Wengrzik: I can’t agree with this at all. Taking into consideration the all-in cost basis, ECA cover and margins have never been as cheap as now – this is very clear to me. People who argue about 200 basis points lack the transparency on the other markets in the non-ECA covered markets.
When a Russian borrower pays 800-1000bp on a 24-month facility, and we are arguing over 200bp on ECA pricing – we are not having a relevant discussion.
Paul: Don’t forget the price of the premium.
Wengrzik: Yes – that is nothing. Looking at the all-in cost – it is still very cheap.
We are facing a different environment right now. Do you see any syndicated lending in Russia? There is hardly any for two or three years, and certainly not for five or 10 years. Yet, we are still pricing the ECA product like there is an alternative. From a cost perspective, the all-in pricing could be around 500-600bp. If you finance a project and can’t afford that, you are financing the wrong project, because it hasn’t been cheaper than that before.
Niesert: Our share of the interest rate is bigger, but the interest rate as such hasn’t changed. We saw that in the last six to 12 months we had extended revolving facilities to clients, doubling the margin, and still clients paid less.
Brockie: Just to return to the question of whether ECAs will end up competing with banks. I think there is a time and place for direct lending. We have the Chinese governments and Swedish governments pumping in money and helping out, for instance. I’ve heard US Ex-Im is doing direct loans on recent projects in India and Saudi.
But these efforts need to be interim measures taken to support markets where there is a shortage of capacity.
If you look back two or three years ago, the market was adequately supported by the banks. Currently, the ECA products and the bank products are complementary, but in the long-term the banks need to retain their important role in the export credit market. As banks we are able to promote ECA products which the ECAs themselves can’t do – so we are complementing each other.
Banks play a vital role getting access to those key exporters or importers. That’s how ECA financing gets done – there’s a lot of travelling and work – educating clients about agency products compared to a capital markets product. It should be a healthy collaboration and cooperation between ECAs and banks to get the best outcome for our clients.
Banks have a critical role to play and should remain long-term lenders in this segment.
Stas de Richelle: The funding problem is not over yet and we see that some banks are not in the position to commit to very long-term financing. This trend was not the case a year ago, but it will not disappear quickly. No one will do underwriting of US$1bn. We want to share deals and some of us are even reluctant to take a ticket of US$100mn-200mn – which was not an issue a year or two ago.
Sayer: On the issue of underwriting, it is exclusively about liquidity, not really risk. Risk is a binary decision and most of us are capable of judging whether another bank can make a risk decision.
The big issue is whether the deal fits from a funding perspective. There are so many variables around the liquidity issue, such as tenors, amounts, currencies, drawing schedules – it is very difficult to understand how a bank will react and that makes underwriting virtually impossible.
Grandage: Where can you syndicate a transaction at the moment?
Wietbrock: We are mainly seeing club deals – and deals are being done on a far more individual basis. Each institution has its own issues: one bank has the risk appetite but not the liquidity, the other has the liquidity but not the risk appetite and yet another bank says ‘no’ as the client is not a core client or the deal is not core to its country’s national interest.
Brockie: There are few syndications today in the technical sense. Club deals are the norm and are very relationship-driven. Many of the larger ECA deals involve two or four banks as MLAs with others being invited in during primary or secondary as may be necessary.
Stas de Richelle: We have come to a point where liquidity risk and costs are very important and the risk perception is increasing dramatically. ECA-backed financing will be the only way to finance long-term for at least the next year as it is a reliable financing instrument.
Risk perception and liquidity will become be even more linked. It is not a profit issue, we all know that with OECD ECAs, ECA-backed finance is a profitable business.
But risk perception is increasing across the whole banking sector. Banks don’t want to take risk. And there is another issue with private credit insurance companies reducing their appetite. The only ones left ready to take the risks are the ECAS, and ECA business will increase dramatically.
The next question is can triple A sovereign risk last — will they keep their sovereign rating? We have seen Spain downgraded. If an entity such as US Ex-Im is downgraded, will banks’ risk departments accept ECAs as they have up to now? We’ll see risk perception coming to the same level of liquidity risk, and eventually crossing the liquidity risk as this risk lessens. We’ve seen some signs of reducing liquidity risk in the bond market, with investors coming to market with three to five year bonds and winning oversubscriptions. But the risk perception will continue to increase.
Carlson: Looking at the Dealogic tables for Q1 it seems that in fact the volume of deals are fairly low compared to ’08.
Niesert: Global trade as a whole is reducing though. There is an increase in trade transactions, but the volumes of imports and exports are declining. I would imagine the figure is relatively stable compared to last year, but the proportion of trade financed via ECAs is rising.
The focus of ECAs is widening with agencies covering deals that they usually would not have done.
Carlson: My perception is that the volumes of deals are lower but perhaps that is because banks are more lax in reporting their deals in the first quarter.
Brockie: We would expect to do more this year than last year, but I am not sure there will be a dramatic increase in league table volumes. Some ECAs see increases and others are seeing lots of applications. But these are not necessarily crystallising into deals.
What you will see is the capital markets initiatives develop, particularly in the case of US Ex-Im on the aviation side. Some of us (Citi included) are mandated on a capital markets transaction now. These deals open up a new distribution outlet.
Grandage: What differences are there in the types of companies borrowing ECA finance?
Stas de Richelle: We have seen a much wider range from very high-level borrowers that were never using ECAs before, such as big Russian companies that are coming to the ECA market. Then at the other end of the risk spectrum you see companies that can not afford any type of financing unless it involves ECAs.
The range of borrowers has dramatically changed since last year. That is a significant shift and helps explain why the figures are at the low end for Q1. Some of these borrowers have never used ECA financing before – they are not familiar with the product and you can not just close a deal in just a few weeks.
The documentation side of the transaction has probably lengthened compared to last year due to a change in borrowers.
In the metals and mining sector we see a strong reduction in volumes. We have heavily financed this sector for the past five to six years, and compared to telecoms and infrastructure there is definitely less business.
Grandage: Are transactions becoming difficult to close?
Niesert: Yes, banks in emerging markets are also changing their behaviour in the same way we have, causing issues when we provide ECA financing to them.
In Russia, we had some situations where the Russian bank as the borrower in principal was really hesitating to open credit lines on to the end user. We had some nice deals, but Russian banks simply told us they were not ready to take the risk.
Brockie: We have seen an increase in business in the Middle East and in Asia as well – they have always had strong capital markets.
If we’d have had this conversation five years ago, we might have argued the case that ECAs were holding up the deal process. But now in my view, the agencies have improved their resources and timelines.
We are certainly trying to accelerate our time lines, through use of standard LMA [Loan Market Association] documentation and being efficient with documentation. Some borrowers take longer than others but generally in my opinion, the agencies are not the bottlenecks in these transactions.
Shaw: I agree with you totally on the agency side. In that respect they are reacting very well – they are showing speed and flexibility in terms of the process of analysis and reaction.
The sort of customers you are seeing in the game now are the new-old players – the ones who many years ago used to be familiar with the product and dropped it in favour of many alternatives that were on the table. In Latin America, we have seen a lot of that and the are now back in the ECA game in a big way and fairly open-minded as well.
Sayer: The one class of borrower I would add are those in the developed market. Borrowers in Western Europe and the US were traditionally not interested in ECA financing unless it was an interest rate play. Now large western corporates are very interested in what ECAs can do – not only for their cost of funding – but also for diversification and tenor of financing.
Niesert: But are you seeing real deals or just discussions?
d’Ambrieres: It was the case four or five years ago that we had US companies that might not have been good risks, but now we have good investment grade firms coming to us asking about ECA facilities.
Sayer: We certainly have mandates and they will emerge as real deals by the end of year – they are definitely serious.
Grandage: Looking to the future – which sectors or regions do you see the best opportunities for export finance?
Wengrzik: Telecoms and infrastructure.
Carlson: We will look to Asia and economic recovery there. We will see more business with Asian agencies, not necessarily Sinosure, but also China Exim, which has proven to be a quick and user-friendly institution.
Brockie: It would be fantastic if more of the emerging market ECAs came out actively into the market. I was hoping you’d see an agency in Russia and in the bigger markets. The Brazilian agency hasn’t quite taken off yet. Once there is movement here there will be real opportunities for all of us to do more for our clients in those countries. You just have to look at the volumes the Chinese and Korean agencies are doing – they are now in the top five of global export credit agencies.
Carlson: However, the new ones will have the issue that compared to established OECD ECAs, they are not triple or even double A rated.
Brockie: The other area of growth is with the short-term programmes the agencies are running at the moment. They are really trying to expand them and make them more useful. There will be lots of activity in the short-term. Switzerland’s Serv announced a new programme in May and ECGD are looking at announcing a new programme soon, for instance.
Grandage: What happens when the tide turns again – what will we be talking about in two or five year’s time?
Paul: The issue will be prepayment from borrowers – how all the credit put in place now will be refinanced.
Carlson: Most of our treasury desks have match-funded larger portions at a higher rate than subsequently repaid. That’s going to be an interesting problem as borrowers will seek to refinance in a lower interest rate environment. Regulators will be much more diligent.
Stas de Richelle: I predict we will also have some restructuring in two or three year’s time. We will have to have people to handle existing portfolios and not develop new business.
Paul: In three years, there will be a period of consolidation of our assets and a restructuring of repayments. The question will be whether there will also be a period of strong deal developments?
We’ve also been talking about the emergence of new ECAs. In two years time, the issue will be, maybe, how they deal with claims on different transactions.
Carlson: You mean some of the new ECAs that don’t have a good or established track record with claims might cause some problems?
Paul: It really depends on how deep the crisis becomes. But it’s true that we will have to be attentive to these potential developments.
Wietbrock: Many of the new ECAs are outside the OECD consensus and have not been tested under stress – so it will be interesting to see how they react to claim disputes.
Niesert: My experience is that ECAs are reliable partners. But we have to make sure we, the banks, assume our part of the responsibility in risk limitation. Anyone who is generous with documentation could have a hard time.
Grandage: How good are the established ECAs?
Sayer: The trend for ECAs is for them to become increasingly commercial in the way they deal with claims. The reality is that they will begin to behave like privately-owned insurance companies. Documentation procedures will be increasingly important. However, history has shown that our collective memories are not very good at maintaining standards when times are good.
I confidently predict that this will happen again and documentary standards will deteriorate again. We already have borrowers asking for removal of market disruption clauses and other documentary safeguards.
Grandage: Yet haven’t those standards been better maintained in this market than other markets?
Wietbrock: I would say yes, and innovations in the ECA arena have not been quite as exotic and removed from the underlying transactions as in other areas.
Grandage: If you look at corporate lending market, there are banks that would have liked to have called defaults a lot earlier – but they couldn’t because of documentation that had slipped.
I would be surprised if there are many deals where you would like to be making a claim but you can’t.
Sayer: I maintain ECAs will become more commercial and I can think of at least a few ECAs where I know there are outstanding litigations on claims.
Stas de Richelle: What exactly do you mean by more commercial?
Sayer: That they will look to the terms and conditions of the policies they sign up to. You can’t expect ECAs to act the same in the future as how banks have expected them to behave in the past.
Paul: The situation is, of course, different when there is just one isolated claim to an ECA. But if several come at the same time for big amounts, the situation could be more difficult to manage. This being said, my deep conviction is that we have all been doing export credit for the last 40 years and gone through several crises where export credit has been threatened. I’m sure we will survive.
Niesert: But when Russia collapsed some time ago, there was several billion at stake for the German government. But what was the effect? Hermes was able to reliably cover us.
d’Ambrieres: Coface is telling us that they will cap the guaranteed margin at 75bp, which is a margin lower than our funding costs. This makes Coface’s cover less attractive than others where there is no cap on the guaranteed margin or a cap above funding costs.
Wietbrock: The pricing scenario may differentiate greatly between ECAs, even between the OECD ones, in Germany or with France’s Coface.
Stas de Richelle: The topic that is heavily discussed among French banks and exporters is the higher environmental constraints imposed on certain business sectors.
Banks and ECAs are facing constraints such as the Equator Principles which all have admirable aims of improving life for all on the planet. But the principles are being used in different ways by different banks and institutions and I think this will become an issue that will be discussed more and more.
One of the issues is the application of strict environment rules on ECA finance and how we handle this in a smart long-term basis. We need to have some flexibility in their application and come to some consensus that will still help development in these economies.
Carlson: But won’t the principles apply if there is not an ECA?
Stas de Richelle: No – they won’t apply if it is a syndicated loan used to finance general purposes of a corporate.
d’Ambrieres: The principles only apply if it is a project finance transaction. If the money is raised on a pure corporate basis it doesn’t apply.
If we do an export credit with full corporate risk on Eskom – is it a corporate loan or do we apply the principles?
The Equator Principles were not made for small corporate deals and are difficult to apply in these cases. We consider that the Common Approaches are a good way to deal with environmental issues, which are important for all of us.
Stas de Richelle: If the sponsors default on the principles, can we, the bank, get early repayment?
What happens if ECAs apply the Equator Principles on ECA-backed financings but the principles do not apply to syndicated facilities? Do we stop doing ECA financings?
The difference with project finance is that you start from the beginning with the sponsor and you inform the sponsor you must be compliant with Equator Principles. But the borrower then comes to you and wants a quote for an ECA-backed facility, and will compare it to a local banking syndicated facility.
You enter the deal at very late stage and it is quite hard to then say ‘hey you’ve forgotten about all these principles’.
What I wanted to raise is that ‘do we need to be pay attention on the issue of environmental principles as potentially they could be an ECA request’? They could be a big constraint.
Grandage: Any other issues anyone would like to raise?
Brockie: Regarding pricing, we are seeing sovereign bond spreads coming down in Germany, France and even in the UK. Do we think pricing is stabilising? It has been very volatile – but to me it looks like it might now be stabilising.
Wietbrock: It will be interesting to see what happens around long-term finance – but things are certainly stabilising to a certain extent at the short-end.
