With capital markets tight and the World Trade Organisation highlighting the importance of trade finance, are export credit agencies (ECAs) a ray of hope for Middle Eastern borrowers with large projects to finance and who no longer have a competitive commercial market to turn to? Lucy Fielder and Nicholas Noe report.
As the global credit crunch tightens its stranglehold on traditional bank lending, export financers say a growing number of borrowers are looking to ECAs as a possible solution to fund large-scale projects, especially in the Middle East, a little-tapped ECA market.
“We’ve seen a definite pick-up in interest in ECA financing in the Middle East over the past six months, with a number of borrowers who have not previously been ECA borrowers coming to the market,” says Piers Constable, Deutsche Bank’s director of structured trade and export finance for the Middle East and Africa.
“This is mainly because the established sources of funding just aren’t there at the moment and aren’t expected to be there in the immediate future for the large-scale financing requirements that they have. So, in that respect, the credit crunch has led to an increase in ECA opportunities in the Middle East.”
The focus of the trend, export financers agree, is overwhelmingly the Gulf Cooperation Council (GCC) countries, especially the United Arab Emirates and Saudi Arabia. In Novemebr 2008 JPMorgan became the first US bank to open an office in Riyadh, an indicator of where the bank is concentrating investments.
Infrastructure projects that require imported goods are the focus of ECA-supported financing in the region, financers say. Deals have been overwhelmingly concentrated in Saudi Arabia and Dubai, with smaller, but thriving markets elsewhere in the GCC.
In Dubai particularly, there has been a boom in infrastructure, residential, corporate and industrial developments. “So investment growth is still taking place and that in itself has sucked in a lot of raw materials, a lot of finished goods, commodities, so in that sense the Middle East is still bringing in a lot of goods and services,” says Jeremy Shaw, managing director, global trade, at JPMorgan.
“Increasingly the Middle East is becoming a more important transhipment area as well, so goods are coming in, being manufactured or transformed to some extent and then re-exported. Both sides remain very strong.”
Population and commercial growth in countries such as Saudi Arabia have also fuelled a regional need to update infrastructure, as has a regional drive to diversify away from the oil and gas sector, which previously accounted for most of the larger projects requiring investment.
In November, the Islamic Development Bank estimated that Arab countries might need to invest up to US$200bn over the next decade to meet their growing populations’ demand for water and sanitation. It reported that 50mn people have no access to safe drinking water.
Constable says the largest project with an ECA tranche Deutsche has been involved in, along with several other institutions, over the past four or five months was with the Dubai Electricity and Water Authority (DEWA). “They have significant capital expenditure requirements over the next five-to-ten years and they are going to be buying a lot of equipment as always from European and Asian countries that are eligible for ECA backing,” he said, adding that in the past, DEWA has not generally needed to turn to the ECA market.
That was one of three significant ECA transactions Deutsche has been working on in the United Arab Emirates, with the other two also being non-energy related infrastructure projects, he said, giving no further details.
Major ECA player, Citi, also has a couple of large infrastructure projects with export credit underpinning under execution, Yusuf Ali Khan, vice-president and team leader for the Middle East and North Africa, tells GTR. Both are in the United Arab Emirates. One is worth “several hundred million dollars”, involves multiple ECAs and is for infrastructure; the other is for a manufacturing facility.
In May 2008, Citibank closed on Yemen’s first long-term project financing involving multiple ECAs, a US$2.8bn deal to build a two-train plant for the country’s Liquefied Natural Gas Project. The tenor on the ECA tranches, supplied by France’s Coface, Japan’s Nexi and South Korea’s Kexin, was more than 15 years.
And in April 2008, the bank closed a US$259mn US Ex-Im Bank-guaranteed financing to buy two Boeing 777 aircraft.
ECA-supported finance deals Citibank concluded outside the Gulf include a US$320mn funding package for a plant for Ciment Blanc Algerien, sponsored by Egypt’s Orascom Construction.
HSBC, another major player in ECA finance, concluded in late December the tiny emirate of Ras Al-Khaimah’s first large export credit transaction, says Jeff Bailey, HSBC managing director and co-head of export finance for the eastern hemisphere. The deal was for the development of two tower blocks for both residential and office space and one of the emirate’s first major infrastructural projects in its drive to develop as an alternative financial centre to Dubai.
“Many UAE states are thinking seriously about looking at coming away from typical commercial bank lending and are looking at export credits as a solution going forward,” Bailey says.
A large private-sector petrochemical project in Saudi Arabia was another recent deal. “That was quite unique because the Saudi Arabia private sector hasn’t really tapped the export credit market in recent years,” Bailey says. Without giving details, he adds that HSBC is arranging financing with ECA tranches for a number of petrochemical projects for some of the big corporate names in Saudi Arabia, such Saudi Arabia Basic Industries Corporation (Sabic) and a private steel-producing facility.
Although export financers say larger deals focused on the UAE and Saudi Arabia, other countries in the region are under consideration, with North Africa’s infrastructure in particular tipped as an area to watch.
Egypt has also seen considerable ECA activity in the past, and an ECA-backed financing tranche is under negotiation for the Cairo metro. Most funding for infrastructure continues to come from domestic banks, however.
Trade observers warn that trade finance for developing markets with higher counterparty risk will be hard to come by in 2009, making it likely that despite some recent Egypt and North Africa projects, the more secure Gulf, with its account surpluses and low debt, will remain the main focus.
Booming investments in Jordan may also increasingly require ECA funding. In July, BNP Paribas signed its first financing package that combined Islamic murahaba financing and ECA backing, covered by Germany’s Hermes and Finland’s Finnvera. The deal, worth US$120mn, was to supply equipment from the two countries for Arabian Cement Company’s Al-Qatrana cement project in Jordan.
Islamic financing was tipped by analysts to be a potential growth area, although very few transactions have been closed to date. In 2006, HSBC provided the first ever ECA transaction to be written in accordance with sharia law for Sabafon, Yemen’s leading telecoms company, with export credit support covered by Germany’s Hermes.
Khan says Citibank had experimented with Islamic finance packages and some lenders were starting to understand how to bring Islamic law and credit finance together, adding: “It is a growth market and one that should and is likely to be tapped by the ECAs going forward.”
Why the boom?
Gulf countries have turned to ECA transactions as a once large liquidity pool has dried up in the past few months, lenders say.
“It’s a readily available form of financing when other parts of the market are beginning to retract, such as commercial bank lending,” Bailey says. “Larger clients are now seeing that their opportunities really are limited in terms of the commercial bank market, so large infrastructure projects in particular are being looked at in some degree of detail.”
A strong factor in the appeal of ECA project financing is the availability of the longer tenors, or credit periods, needed for large-scale infrastructure projects. Commercial banks, including regional ones, are becoming ever more unwilling to part with funds for long periods. But ECA guarantees, because of the implicit Triple-A rating that comes from sovereign support, still frequently secure 10 to 15-year debt terms. That is appealing in terms of banks optimising their balance sheets, financers said.
“Over the past years we have seen terms increasingly relax,” says Silvan Doorenspleet, head of commodity finance Middle East, Fortis Bank Nederland. “In the current market, with great challenges of re-financing, we see greenfield projects being delayed or cancelled and brownfield projects being scaled back. Additional security is being sought and ECAs will gain importance in the course of 2009.”
He says Fortis Nederland would be keeping an eye on oil-exporting countries and for “investments that have a fit with our existing clients or have a strategic match”.
Patrick Brockie, Citibank managing director, export and agency finance says because lenders saw the Middle East as a “hot area”, short-term commercial loans have until now been competitive in the Middle East. But for the first time some “strong, well-rated corporates” are considering export credit plans when seeking longer tenors.
“Spreads have been declining dramatically over the last several years and as a result people were borrowing short to take advantage of that,” he says. “But I think there’s an old rule of thumb that if you’ve got long-term assets, then perhaps to have some long-term debt on the books is also quite prudent.”
All of this makes Mena deals attractive to the lenders and credit agencies too. “It’s a means of balancing their portfolios,” Constable says. “ECAs haven’t had significant exposure to GCC borrowers, and if they can balance up the less credit-worthy risks they have on their books with GCC borrowings over the next year or two then that’s something they’re looking to do as well.”
Until the liquidity crisis, one of the main criticisms of ECA funding was its relative expense. But with commercial debt pricing shooting up, ECA finance looks increasingly competitive, trade financers say.
“They continue to have stable pricing, so bank margin prices may have shifted but ECA premium levels have remained the same,” Citi’s Khan says. “So when you look at an export credit you still can provide a relatively competitive package.”
The need for speed
Export financers also see a trend towards ‘club-style’ lending, due to the declining number of lenders to about five or six that remain able to fulfil larger mandates for project finance. “On some of those deals, like the Dubai electricity and water deal, a number of the institutions are working together, and I think that’s the model that we are expecting to continue,” Constable says.
Brockie predicts a mini-boom in ECA financing in the Middle East in the next year to 18 months but warns that borrowers need to be quick.
“I think agencies are going to be fairly selective on the sort of transactions they get involved in and will be looking at the economic benefit for them and their exporters, it’s definitely not an unlimited area,” he says, adding that borrowers should try to get a bank on board early, pre-contract.
Khan agrees, saying Citi has received more enquiries in the last few months than has ever been the case and noting: “If the volume of requests and deal sizes continues to grow, we would expect the ECAs to run out of capacity, given exposure concerns for a particular region or industry.” Financers, too, should make use of the window before the capital markets are buoyed again and steal the show from the ECAs.
Some financers urge caution, however, pointing out that trade generally is shrinking — according to WTO statistics released in November, world trade growth slid to 6% in 2007, down from 8.5% in 2006, and with the liquidity crisis those growth is likely to slump further. Costs for banks to raise funds and pressure on the precious resources they are prepared to allow out of the door could mean belt-tightening in all areas, leaving trade financing also vulnerable.
“There will certainly be a greater need for ECA activity but funding is equally important and funding is also very scarce at the moment,” warns Fimbank president Margrith Lütschg-Emmenegger. “This is also affecting the Middle East of course.” Shorter-term, lower-risk trade will attract more funding in such a climate, she adds.
Maninder Bhandari, managing director and head of treasury services sales for the Middle East at the Bank of New York Mellon notes that infrastructure projects were booming in the Middle East and North Africa when oil was at US$140 a barrel, but many investors are now holding back, so projects are in fact fewer than had been predicted. “Yes, most commitments that were made earlier, they will proceed ahead, but new commitments are going down significantly,” he notes. Financers agree that banks are tending to try to increase the pricing on project financing deals that have been under execution and not yet closed.
JPMorgan’s Shaw points to the WTO chief Pascal Lamy’s recognition in December of the importance of finance for keeping trade moving. “I would say trade finance is very much at the forefront of what we’re going to focus on for next year,” he says. “In the absence of a lot of clean, syndicated lending, then trade-related projects, trade-related imports-exports, priced correctly, look to be good pieces of business to support.”