Defaults among banks in the emerging markets are making some uneasy about the future of forfaiting and trade finance. Recent closures of forfaiting desks have exacerbated these concerns. But for others, market conditions are slowly improving, writes Rebecca Spong.
Market activity in the trade finance and forfaiting markets has picked up in the second quarter of 2009, especially compared to the stagnant days of late ’08 and early 2009. But anxiety seems to persist.
“Since March, activity in the market has improved,” remarks Edmondo de Picciotto, general manager at Intesa Soditic Trade Finance in London. “But then on the other hand, you have banks in the emerging markets potentially going bankrupt or defaulting on their debt and this is causing a degree of uncertainty.”
As GTR goes to press, those in charge of restructuring the debt of Kazakhstan’s BTA Bank are finalising their decision on the treatment of trade finance assets.
BTA is rescheduling US$15bn-worth of foreign debt, which includes US$3.7bn-worth of trade finance debt, following the takeover of the bank by the sovereign wealth fund Samruk-Kazyna in February and the decision to halt all principal payments, due to some creditors attempting to accelerate debt payments in April.
Marcia Favale-Tarter, one of BTA Bank’s independent advisors, told GTR: “We will finalise how we treat trade finance very shortly. To be truthful, we are looking at trade transactions very carefully so we are honest and fair to everyone.
“We don’t want to arbitrarily make decisions. We are trying to protect investors and this takes time, money and a lot of due diligence.”
The final decision will closely follow announcements made by fellow Kazakh bank, Alliance Bank, on its restructuring package.
“We have just successfully restructured Alliance Bank and we appreciate the investors who worked alongside Alliance to come to an amicable agreement that benefits all,” Favale-Tarter comments.
In early July, Alliance Bank announced how it would repay creditors, outlining a number of options, which included discounted debt buyback options including haircuts of up to 77.5%, and extension of maturity on some debts, with or without discounts. The agreement was submitted to regulators for final approval on July 15.
Treatment of trade assets
Problems with defaulting banks in emerging markets have, whether justified or not, reduced banks’ risk appetites for such regions.
One trade financier remarks: “We have been sitting on our hands regarding Kazakhstan and Ukraine and not targeting those markets for new business.”
Another forfaiter comments: “The market is waiting on the rescheduling of BTA and Alliance Bank’s debt.”
Anxiety reached new levels when, at the end of June, it was publicised that BTA Bank’s chief executive Anvar Saidenov had told reporters that the bank would restructure its US$3.7bn-worth of trade debt alongside other debts as part of the restructuring package.
The Reuters article published on June 22 cites Saidenov stating that no debts will avoid restructuring, and that trade finance liabilities “must become part of the overall restructuring”.
Previously, the bank had said that trade finance was of operational importance to the bank, and “true” trade finance would be treated appropriately.
The bank’s supposed change intact has caused concerns, and Favale-Tarter admits to GTR: “The trade finance issue is more complicated with BTA than Alliance. Trade finance is a bigger portion in BTA than it is in Alliance.”
The resignation of Goldman Sachs as restructuring advisor to BTA in early July may also potentially slow the progress of any announcements on rescheduling plans.
However, Favale-Tarter assures the market that there is “no bad blood” between the bank and Goldman.
And, in answer to criticisms that the bank has taken its time to announce its restructuring plans (it was initially proposed that plans would be released in May), Favale-Tarter retorts: “Most new management take six months to understand the strategy of the bank and to change it. BTA on the other hand have an entirely new management, have dealt with a major new restructuring, dealt with former management, and at the same time protected investors.
“Given the complicated size of the bank, I think we are working very quickly.”
However, it seems that the bank’s efforts have not done enough to quell some fears over the potential treatment of trade finance assets.
“BTA’s repayment plans could set a dangerous precedent in the market, particularly if trade finance assets are not given preferred creditor status,” comments Intesa Soditic’s Picciotto.
“If this is the case, it could undermine trade as being a more secure form of asset at least in Kazakhstan,” he adds.
The Association of Forfaiters in Switzerland (Vefi) has penned a formal letter to Saidenov in defence of the appropriate treatment of trade finance in any restructuring.
Written by Sal Chiappinelli, chairman of Vefi and CEO of Swiss Forfaiting Company, the letter expresses Vefi’s “regret” about the restructuring measures, arguing: “Kindly observe that trade finance is internationally understood to be the only stable source of financing for the global cross-border trade of various countries, and it has never been a speculative financial instrument at the benefit of speculators in the capital market.”
He adds: “I feel that the current measures announced by your esteemed bank will affect the international view of the concept of trade finance as perceived in your country and might create a grave and irreparable political prejudice for the future ability of the respectful Republic of Kazakhstan to facilitate imports of services as well as of consumption and capital goods to the improvement of the country’s wealth.”
Speaking to GTR, Chiappinelli further comments: “My wish is that country governors do not forget that forfaiters are long-term dependable investors.
“They were investing in transitional economies before the investment bankers and speculators came in, they forcefully remain invested during the worst period of the crisis and they will remain after the renegotiation of the country debts.”
Yet BTA advisor, Favale-Tarter, does not believe that the BTA Bank issue will cause any “irreparable” damage to Kazakhstan’s reputation or long-term economic growth.
”What has Kazakhstan done?” she asks. “It is a victim of the malaise of international oil markets, and regarding the banks there has been some questionable management.
“However, the problem with BTA Bank is primarily not a country issue but it is a former management issue, as indicated in the Ernst and Young report,” she argues. Ernst and Young carried out an audit report on the bank earlier this year.
The former management of the bank continues to be mired in controversy. There is still a warrant out for the arrest of the bank’s previous chairman, Mukhtar Ablyazov, on accusations of fraud. Ablyazov fled Kazakhstan following the takeover of BTA Bank in February. He is, according to sources, now in London.
Other former shareholders of BTA are still pursuing a number of arbitration cases against the bank, claiming billions of dollars-worth of losses following the bank’s takeover by the sovereign wealth fund Samruk-Kazyna.
Yet, despite the complexities surrounding the takeover, sources in the market are still happy to look at some deals, generally on a case-by-case basis, in Kazakhstan, and the surrounding CIS region. There have even been a few deals to emerge from Ukraine, which has arguably been worst hit by the crisis and less well-managed compared to Kazakhstan.
Simon Lay, managing director at London Forfaiting Company (LFC), observes that “Ukraine is a pretty much no-go area, though we have seen some deals offered in the market at deep discounts.”
He adds, “Belarus is a much preferred risk to Ukraine but even there it is difficult to get support for new deals, notwithstanding that our experience with Belarus has been impeccable with repayments made on time or, in some cases, pre-paid.”
Talking about HSBC’s forfaiting and trade finance activities in the CIS, Geoff Sharp, managing director, head of forfaiting, project and export finance, comments: “Much of our exposure in trade finance in the CIS markets has been typically underpinned by governmental or quasi-sovereign banks such as Kazkommertsbank or Halyk Savings Bank in Kazakhstan or VTB and Sberbank in Russia.
“These banks are not causing us to lose sleep on a daily basis, but it is obviously important to be a little more cautious in those markets. There are some restrictions on business in the CIS.”
However, banks that could be causing a few sleepless nights could be found in the Middle East.
Financial problems with Saudi conglomerates Saad Group and Ahmad Hamad Algosaibi & Bros have left some trade finance banks with bad debt exposures.
In June this year, the Saad Group hit difficulties, resulting in the Saudi central bank freezing the accounts of the Maan al-Sanea, the group’s billionaire chairman. The group is now carrying out a complex restructuring of its US$6bn debts.
The problems afflicting Algosaibi have also had repercussions on the group’s subsidiaries. The International Banking Corporation (TIBC), one of Algosaibi’s wholly-owned subsidiaries, has defaulted on financial obligations to banks, including those with trade finance asset exposures to the bank.
Inevitably, these restructurings will have further ramifications throughout the Middle East, as the international banking market will be increasingly reluctant to finance or refinance syndicated or bilateral loans with corporates in the Gulf region. Although it is more likely to be the mid-cap firms, rather than the top-tier quasi-sovereign entities, that will suffer the most.
The various restructurings in both the Middle East and the CIS will also mean there will be a shift back to doing more “true trade finance” transactions, as it is expected that the debt reschedulings might hold a few surprises for those banks that have a looser definition of trade finance that that of the defaulting bank.
“Previously there were a lot of deals being dressed up as trade finance and not really financing a specific trade flow. There is now a shift back to true trade finance, funding specific tangible goods,” comments Mike Gilham, director, international finance solutions at Lloyds TSB Corporate Markets.
Whatever the outcome of the various debt restructurings, banks can no longer sit still and continue to put a hold on lending.
As Simon Lay at LFC points out: “Some banks are looking inwards at their business model and have stopped underwriting any new business. They are sitting on their cash – but they are going to have to start lending it again soon.”
He adds, “We got to a stage where our liquidity ratio was very good. We were sitting on a lot of cash and consequently our emphasis changed from conserving resources to finding great opportunities to use them.”
Since March, Lay notes that there has been a definite increase in the number of deals coming to market, with the underlying risks becoming increasingly attractive.
Others have similarly remarked on the slowly improving market conditions. Lucio Matassoni, head of forfaiting at OCBC, comments: “The forfaiting market is beginning to see signs of improvement – particularly compared to the first few months of the year.”
Market conditions are, in part, ideal for forfaiting. Formally cash-rich corporates are now struggling with their liquidity and looking to create additional liquidity from their assets, such as their receivables, and are turning to the forfaiting and trade finance market.
Yet, in contrast, world trade has dramatically slumped, with World Trade Organisation (WTO) estimates suggesting volumes of trade will shrink by 10% this year. Less cross-border activity would suggest the potential market for forfaiters would similarly shrink.
In practice, this does not seem to be the case, as Silja Calac-Schneider, head of trade risk management at HVB-UniCredit in Munich, notes: “Among our customers, demand is astonishingly strong.
“I expected we would have a stable income due to price increases, but I am really astonished that there is also an increase in volume.
“Business volumes for forfaiting involving bank risks have increased by over 5% in the first quarter compared to 2008.”
Volumes have risen, despite the fact that Germany, where the Munich-based HVB-UniCredit forfaiting team source most of their clients, has seen dramatic falls in their levels of exports. Official statistics show that German exports for the first quarter of 2009 fell by 21.2% compared to 2008.
Statistics also show a pronounced decrease to key markets. German exports to Turkey fell by 39% and exports to Russia fell by 31.4%.
“This should all mean that forfaiting volumes should fall, but in fact they increased,” Calac-Schneider observes.
“I can only put this down to exporters having greater need for liquidity and are now coming to us with transactions that they would not have usually forfaited. We are seeing much more diversity in the risk we forfait,” she adds.
Marina Attawar at DF Deutsche Forfait also reports higher demand and a broadening of the types of risk she is being asked to forfait.
She remarks, “The reduction in financing alternatives has led to forfaiting currently being applied to other types of receivables, aside from foreign trade financing, such as receivables from companies and banks from industrial nations.
“As opposed to the end of last year and the beginning of this year, the non-AAA type of risk is something many institutions are looking at again.”
Continuing problems with defaulting banks and a worsening global recession have inevitably caused pricing on forfaiting and trade finance assets to remain unpredictable, although with some signs of stabilisation in certain markets.
HVB-UniCredit’s Calac-Schneider comments: “Pricing remains volatile and is high for some risks. But for some top names in China or India, pricing is already decreasing compared to earlier this year in March.”
In Russia, she observes that pricing has begun to level out, depending on who you are working with. “With top names, you might look at pricing of around 1.5-2% but second-tier banks you can quote up to 4%. There is still a big gap between top-tier and second-tier names.”
LFC’s Lay remarks that he has seen pricing declining again in some markets. “Margins are beginning to head downwards again. For instance, at the beginning of the year in Korea, pricing was around 300 basis points, then from March onwards we are seeing a few deals priced about 225-250bp.”
Similarly, Intesa’s Picciotto has seen a variation in pricing, depending on the region. “Yields have remained quite high in general in emerging markets, especially for medium-term transactions, although we have seen a decline in some countries in Asia and Turkey.”
Secondary market trends
The lack of secondary market activity is playing a role in keeping pricing high.
As Sal Chiappinelli at Swiss Forfaiting Company comments: “[We] continue to charge a premium on top of the country risk for giving up our liquidity and getting locked into an illiquid asset class with very few forfaiting players in the secondary market, particularly for transactions beyond a tenor of 360 to 720 days in duration.”
Once the secondary market has fully reactivated, forfaiters and trade financiers will be able to sell on assets and create more capacity in order to win more deals.
An active secondary market could also be to the benefit of the corporate client as it would increase the availability of trade finance, and lower the cost.
Some have already heralded its return. “There is definitely a strong development in the secondary market activity. Whereas the secondary market was almost dead at the end of last year, it seems to be reviving now,” observes DF Deutsche Forfait’s Attawar, echoing similar sentiments expressed in the market.
But, by no means is the market back to pre-crisis conditions. “We are not at all close to being back to normal,” remarks HSBC’s Sharp, though he adds, “secondary market activity has gradually improved through 2009, banks have to continue to write business, you can’t just stop business”.
Sharp explains that there is still liquidity in the market, and his team are making sales of trade assets on a funded basis, but he remarks it would be “foolish” to suggest the secondary market has not been affected by what has happened in the primary market.
Limits on liquidity also mean that banks, previously happy to participate in trade transactions, are now looking to do unfunded participations rather than use up their valuable liquidity. The appetite for risk seems to be there, but the actual liquidity to do deals is lacking.
Surviving the market
Concerns over the long-term viability of the forfaiting product persist however, despite some small positive market trends.
SFC’s Chiappinelli is apprehensive about how forfaiting teams will be treated by the wider banking world in the future.
“When an investment banking team loses 30-60% on the value of their assets, they are still decently well-paid or fired with a golden parachute. A forfaiting team that loses 10% of their asset value is immediately made redundant,” he remarks.
There are some contradictory trends in the forfaiting world, with some banks such as SMBCE and Nedbank reducing or closing their forfaiting desks.
Others are in expansion-mode, as LFC’s Lay remarks: “In some ways, market conditions make it the perfect time to establish a forfaiting desk. Nigerian banks are getting more active, ICBC is setting up in London, and National Bank of Abu Dhabi has recently recruited trade finance expertise.”
Ensuring longevity in the forfaiting and trade finance world relies in part on where you position yourself in the market.
For instance, Lloyds TSB maintains a strong presence in the primary market, and is not reliant on the secondary market.
Mike Gilham at Lloyds TSB Corporate Markets, comments: “Our secondary market activity is focused on supporting our customers’ requirements and assisting our key partner financial institutions on a reciprocal basis. We only distribute assets, which we would in principal, be happy to hold on our books and take assets from the secondary market using a take and hold strategy. We don’t run a typical trading book.”
Those who have a foot in both the primary and secondary markets seem best-placed, as HSBC’s Sharp explains: “Historically you could get away with operating solely as a secondary market player, but ultimately the big primary market players, the global banks, with a strong client base, which previously used forfaiting market institutions to offload or manage their books, have simply acquired the appropriate people and skills to handle that themselves.
“Forfaiting companies would typically take off assets from larger banks and distribute them to other investors. In many cases, the need for that intermediation has disappeared,” he explains.
Banks that now no longer have that intermediation role are feeling the pressure to diversify their business operations. Some moved into the syndicated loan market, but presently even that market has become fairly inactive.
Sharp warns: “If they don’t diversify, they will struggle in the current market.”
Similarly, certain methods of managing a forfaiting or trade finance portfolio have been seen as detrimental to the long-term survival of trade finance teams.
Those that are made to mark-to-market their portfolios based on bond or CDS pricing are suffering due to the volatility of these methods of pricing. This method has been referred to by some as the ‘death knell’ for forfaiters.
It may well be short-sighted of banks to hamper their trade finance capabilities with short-term methods of pricing. As HSBC’s Sharp concludes: “Banks need to take a longer-term view on the historic performance of trade assets to successfully manage forfaiting businesses.”