With more risk on offer in all markets and far fewer risk takers, export credit agencies (ECAs) are seeing greater demand for their services, writes Kevin Godier.
In normal circumstances, many of the state-backed ECAs that support national exports and outward investments act mainly as ‘last resort’ entities that keep open the channels of international trade and investment into developing and emerging markets. Even so, the sheer quantum of this business is shown by data from the Berne Union showing that its member ECAs worldwide covered new export business worth a total US$144bn in 2007, when their total risk exposure reached more than US$500bn.
Atradius Dutch State Business (DSB) covered business volumes worth €4.1bn in 2007, and in 2008 has already guaranteed “a high number of big ticket deals, especially in the Middle East, but also for Indonesia and Morocco,” says Johan Schrijver, director at Atradius DSB.
At the Export Guarantee Fund of Iran (Egfi), chairman and chief executive Seyed Kamal Seyed Ali notes that the agency’s new business “increased by 2.4 times and has grown to US$436mn for the financial year 2007- 08,” with business spread mainly across the Middle East, the CIS and Latin America.
But as the bail-outs and bankruptcies spawned by the credit crunch mount internationally, ECAs are inevitably finding themselves called from the margins towards an even more mainstream demand for their services. “Because of the financial crisis, the notion of risk is more pronounced among companies that may not have asked for ECA cover before,” says Karine Boussart, head of strategy at Belgium’s ONDD agency.
ONDD’s business volumes experienced a 50% or so increase, year-on-year, during the first nine months of 2008, as new demand came in from a variety of angles, adds Stefaan Van Boxstael, ONDD’s deputy head underwriting department. “We have been extending buyer credit cover for the traditional markets such as Russia, Turkey, Brazil, India and the Middle East, but the rising awareness of political risk all over the world – and especially in Russia, Bolivia and Venezuela – has led to a revitalised interest in our investment insurance facility,” he says.
There is also “the start of a return of old customers,” points out Rob Forbes, EDC’s vice president, international business development. “Some large corporates in emerging markets that had graduated to a reliance on capital and corporate debt markets are now renewing their previous relations with ECAs and international finance institutions (IFIs),” he says.
Van Boxstael also reports a growth in ship insurance cover, whereby shipping companies are buying credit protection against non-payment risk in their chartering agreements, a point partially echoed by Edvard Stang, deputy managing director at the Norwegian Guarantee Institute for Export Credits (Giek). “In 2008, our business has been up in all fields, and in particular in the medium- to long-term (MLT) for business in the maritime field, shipping, oil and gas. In the short-term our business covering exports to countries in Eastern Europe has increased,” he comments.
Russia has been a prime example in recent years of a high-risk boom market where exporters and banks have sought ECA cover to protect their business. “We have seen a lasting, substantial demand for cover of project finance transactions and investment insurance, mainly to Russia,” says Martin Durina, director of export credit insurance department at the Czech Republic’s Export Guarantee and Insurance Corporation (Egap).
Illustrating the point, he highlights that in 2007 approximately one fifth of all issued Egap policies and 40% of all insured volumes covered Russian political and commercial risks – and that since 2005, the insured volumes in Egap’s Russian business portfolio “is 2.5 times higher”.
In Africa, similarly, the collision of rising business opportunities with the external perception that risk levels remain high – and require mitigation – has seen a handful of ECAs making significant inroads. US Exim is making “more marketing efforts in Africa than in any other region of the world,” says director Joseph Grandmaison, board member responsible for promoting exports to Sub-Saharan Africa.
In June 2008, US Exim Bank more than doubled the limits on its Nigerian Bank Guarantee Facility to US$1bn, but its efforts are somewhat dwarfed by the Chinese ECA, the China Export Credit and Insurance Corporation (Sinosure). In its largest-ever strategic assault on Africa, Sinosure offered Nigeria between US$40bn and US$50bn in export credit guarantee facilities earlier in 2008, to facilitate Chinese infrastructure investment over the next three years, in return for oil.
Project finance surge
Project finance has been another recent boom area for ECAs. At Italy’s Sace, underwriters are seeing “a huge demand to cover capex investment in oil and gas, pipelines and infrastructure from traditional areas such as Russia and Saudi Arabia and Qatar in the Middle East, and in new areas such as Peru and Sub-Saharan countries such as Angola and Nigeria,” highlights Ivan Giacoppo, head of the oil, gas and infrastructure department.
Along with ECAs from the US and Korea, Sace helped to guarantee a milestone US$2.25bn limited recourse financing in mid-2008 for a liquefied natural gas (LNG) project at Pampa Melchorita in Peru. This was “one of our largest policies in the Latin American region in the last 10 years,” says Giacoppo, noting that Sace’s 16-year, US$250mn guarantee supported Italian companies involved in the construction contracts.
A leading priority here for Sace, and one reflecting the heightened sustainable development ethos running through all ECAs – was an accurate assessment of the social and environmental impact of the project’s 408km pipeline through the Amazon area. “All of the lenders and export credit agencies assessed this risk very carefully, and we worked very closely with the IFC and Inter-Amercian Development Bank (IADB) on the social and environmental impact,” points out Giacoppo.
Significant ECA financing tranches were a feature of several major Middle East project deals concluded in 2008. France’s Coface, Japan’s Nippon Export and Investment Insurance (Nexi), the Export-Import Bank of Korea, Sace, the UK’s Export Credits Guarantee Department (ECGD), Korea Export Insurance Corporation (KEIC) and Export Development Canada (EDC) all took a hand in an aggregate of nearly US$12bn in financing for the Yemen LNG project, Saudi Kayan Petrochemical Company and the Ras Laffan C independent power and water project.
New additionality
Providing additional project finance capacity has been an increasingly key role for ECAs, due to the inability of commercial markets to fully fund a series of deals running into many tens of billions of dollars globally. But as private sector financing resources seized up globally in September and October 2008, amid the largest global financial turmoil for 80 or so years, the role of ECAs was poised to widen, says Gerhard Kinzelberger, associate director, international relations and services, in OeKB’s export guarantees division.
“The financial crisis is a challenge but also an opportunity for export credit insurers. It will have an impact on the risks of the countries/markets and buyers/borrowers we are covering. Additionally, it is expected to affect our business in terms of increasing demand and, most probably, growing claims,” he summarises.
Similar patterns are seen by the Export Credit Guarantee Corporation of India (ECGC). “We expect our business from banks and exporters to expand owing to the growing tendency to resort to insurance in the present crisis situation,” says Geetha Muralidhar, general manager. “We have targeted a minimum 10% rise in our premium incomes – if stretched this could rise to 15%. Buyer markets in the US and Middle East are generating high demands for underwriting at the behest of our customers.”
EGFI also anticipates “more demand for ECA coverage,” says Ali. “I also think that in this crisis, it is better for exporters and investors to target the agriculture sector rather than industries and also to work based on shorter credit terms,” he recommends.
Van Boxstael says ONDD has seen an upsurge in demand for working capital financing. “Buyers in the Middle East are looking for this, because the local banks are weakened,” he notes.
“We are seeing increasing demand from at home and from all over the world, due to the crisis in the financial sector,” adds Anette Eberhard, managing director of Denmark’s Eksport Kredit Fonden (EKF). “All ECAs are seeing the same trend whereby banks, in particular, want more risk cover than six months ago,” she underlines.
Banks are also driving an indirect demand for cover, argues Rob Forbes. “They have tightened up their margining requirements for working capital facilities, so whereas a Canadian exporter might have been able to get margining of 80% of the value of their accounts receivables lines, banks may not want to do that now. As an alternative banks may direct exporters to seek insurance on these receivables with EDC, a triple A rated entity, allowing the banks to restore margining under the working capital line.”
A key leverage point, as bank capital becomes ever-scarcer, is the Basel II protocol’s zero rating for ECA-covered loans, contends Van Boxstael. “Banks are now coming to us and asking if we can find solutions to help them out. In particular, as the syndicated loans market is drying up, some banks want to offload their portfolios of risk, which we are able to insure if it is related to our core business.”
“We are certainly seeing increased demand, especially for longer-term coverage and project finance deals, and even from the better quality airlines,” adds Barbara O’Boyle, vice-president, structured finance, at US Ex-Im Bank. “We are also seeing projects with costs in the US$10bn to US$20bn range, in sectors such as refining and petrochemicals in the Middle East, liquefied natural gas in Asia, and mining projects in Latin America, where sponsors are pursuing every possible source of funding to put together the financing capacity they require,” she says.
As the global liquidity situation has tightened, Australia’s Export Finance and Insurance Corporation (EFIC) is also anticipating a potentially greater use of its MLT cover facilities, which doubled in 2006-07 to just under US$2bn. “We can see the effects of the credit cycle turning – we have had more discussions about deals that we might not normally consider,” says EFIC’s managing director Angus Armour.
The financial crisis and the implications for ECAs were cited as the predominant issue at one of the world’s biggest agencies, Germany’s Euler Hermes Kreditversicherungs. Eckhardt Moltrecht, head of international relations, comments: “From the German perspective, things are still at an early stage, and so it is very difficult to come to any kind of conclusion, even preliminary. 2007 produced a slowdown in terms of our new business, although it was very good for claims. By contrast, we have experienced a moderate increase in demand over the past three months, which should continue, but there has been no dramatic increase yet,” emphasises Moltrecht.
Demand translation
Whether the potential rise in demand will indeed translate into sizeable new business certainly remains to be seen. “The project pipeline has certainly grown, with a variety of different projects, but that hasn’t translated into new business yet, as might happen with short-term credit insurance,” notes EFIC’s Armour.
For the time being, the ongoing global financial crisis has yet to affect Poland’s Export Credit Insurance Corporation (Kuke).
“It will probably cause a visible increase in our claims ratios in the coming months but on the other hand should stimulate an increase of our business volumes, which is usual in a crisis situation,” comments Agnieszka Marcinkowska, marketing and communications manager at Kuke.
Kuke expects its 2008 business volumes to come in at around the same level as 2007, when CIS countries accounted for 90% of its 2007 export portfolio undertaken on behalf of the Polish state. However it sees some significant structural shifts in the Polish market. “Although the value of Polish exports is growing, the number of exporters is decreasing – exports are mainly undertaken now by large companies with foreign share capital,” Marcinkowska observes.
Giek’s Stang foresees, “a second wave of demand coming for our short-term business,” due to less lending liquidity and the many indications of harder times for corporates globally. “Some special challenges will be posed by conglomerates where difficulties in one company may have serious effect on other companies,” he moots.
A major problem now for banks, says Moltrecht, is that “they cannot fund at Libor, and so need higher margins to be able to operate at a profit”. He notes that Hermes’ peer agencies in the UK, France and Italy “are all complaining” about this situation.
This view is echoed by EKF’s Eberhard, who emphasises that despite an increasing level of demand from banks and exporters, the Danish agency’s business is expected to decelerate in the months ahead. “The first six months of this year were good and we have a large pipeline in sectors such as energy, agriculture, food processing, cement and infrastructure. But we are sitting in a waiting position, to see the impact on the real economy. Already some transactions have been in process for a long time, as the banks don’t have the funding,” she says. This slowdown “could continue into early 2009, depending on how quickly the financial system recovers,” she suggests.
At ECGD, “the volumes for 2007/08 were a little bit up on 2006/07,” when just £1.8bn worth of new business was transacted, says Steve Roberts-Mee, head of communications at ECGD.
“ECGD has seen an increase in enquiries, but because of the slow germination times for ECGD business, the rising enquiries have yet to translate into any increase in new business,” was his message.
Several potential trends are seen by officials at the Islamic Corporation for Insurance of Investment and Export Credit (ICIEC), where the recent underwriting focus has concentrated upon the Middle East markets of Djibouti, Ethiopia, Iran, Pakistan, Saudi Arabia, Sudan, Turkey and the UAE.
“As far as exporters are concerned, the credit crunch will hinder their borrowing capacities. ICIEC can provide insurance to these exporters for their unsecured exports, and our policies can be discounted by banks to allow exporters easy access to liquidity,” indicates Khemais El-Gazzah, director of underwriting.
Another near future pattern envisaged by El-Gazzah is, “strong collaboration between ICIEC and Islamic banks,” which have been relatively unaffected by the credit crisis gripping global markets. These banks “will need the support from ICIEC which is one of the only credit insurers in the world offering sharia compatible credit and political risk insurance,” he says.
Furthermore, “investors focused upon the so-called “developed” markets may be suffering from shaken confidence,” adds El-Gazzah. If this results in a switch of attention towards non-traditional countries, “the African continent could well become the new preferred target for the investors, which would represent an opportunity to market political risk insurance more effectively,” he says.
Private market interface
Aside from the inevitable focus on the credit crisis, the manner in which ECAs complement their private market peers remains at the forefront of agencies’ agendas.
EKF, for example, which provides mainly MLT business cover, has “started a short-term top-up facility, to cater for the expanding business underwritten in Denmark by Atradius and Euler Hermes and their consequent need for more cover,” says Eberhard. “If they need to increase their limits, we can take 50% of the risk, although they still undertake the risk assessment.”
Similarly, Atradius DSB has been making use of its trade finance facility product (TFF) launched in 2007, which allows it to share 50% of the risks with banks that support SMEs exporting from the Netherlands via standard letter of credit confirmations. “This year, more than a few hundred transactions have been insured with our TFF cover,” says Schrijver. “Due to the credit crisis, however, we are extremely cautious about the opening bank risk. We have in fact, now withdrawn some limits on banks especially in Russia and Ukraine.”
Co-operation with both the public and private markets through a wide range of innovative risk transfer tools has allowed Atradius DSB to reduce the high concentrations of credit risk on Ghana and, especially, Indonesia, in its portfolio. Indeed such is the agency’s accumulated expertise in laying off risk by swaps with other ECAs, credit default swap transactions in the capital markets, or reinsurance, that it will be hosting a special Berne Union seminar on risk transfer in Amsterdam at the end of the year.
The private reinsurance market for ECA medium and long-term risk has developed impressively over the last years,” says Vinco David, Atradius DSB’s head of international relations and development. However ONDD’s Van Boxstael believes that private markets are becoming more difficult for ECAs to tap. “We still use private reinsurance, but this year all the providers are near or at the top of their exposure ceiling for Russia, and we have seen an increase in the pricing for laying off Russian risk,” he concludes.
