GTR recently gathered together several leading specialists on export finance in Singapore to discuss the present and future state of the export credit agency (ECA) market.
- Simon Jones, head of structured export finance, Asia Pacific specialised finance, ANZ (chair)
- Erwin Boon, head of Asia export and project finance, ABN Amro
- Albert Lim, head of credit and surety hub Asia Pacific, Swiss Re Corporate Solutions
- Gerald Lim, CEO, trade credit, financial and political risks, Asia, Marsh
- Masashi Onodera, regional head, Asia Pacific, ECA, commodities and trade finance dept, Bank of Tokyo-Mitsubishi UFJ (BTMU)
- Franck Passillier, regional head of export finance, Asia Pacific, Crédit Agricole Corporate & Investment Bank
- Rupert Sayer, CEO & editorial director, GTR Asia
Jones: Looking at the competitiveness and developments at Asian export credit agencies (ECAs) versus developments in Europe and North America, ECAs have evolved over time, and in particular there has been an acceleration of evolution since the financial crisis. What developments are Asian ECAs, in particular, currently responding to?
Onodera: We are talking here mainly about the Japanese, Korean and Chinese ECAs, so maybe I will start with the Japanese ECAs. The Japanese ECAs continue to be very active in this region because Japanese companies are investing more and more in the region. This is buoyed by recent Abe-government initiatives and also the correction of the yen – the currency depreciation – which strengthened Japanese companies’ export capabilities. Also, many Japanese companies now manufacture in countries like India and Indonesia. Based on those trends, Japanese ECAs have strengthened their support not only to the manufacturers in Japan but also to Japanese companies which manufacture overseas.
Jones: I saw recently too that JBIC announced a new facility for foreign exchange cover in Indonesia. Did anyone see that? It is in rupiah. They will give currency exchange cover for lending to borrowers in rupiah.
Onodera: Yes, that is right. JBIC signed an MoU with BTMU and a local financial institution in Indonesia to have further discussions on Indonesia rupiah financing for Japanese-affiliated companies. I understand that the key objective is to support local currency funding needs of Japanese companies doing business overseas.
Jones: That is your perspective on Japanese developments. For us non-Japanese, do we still perceive Japan as a leading light in ECA developments in Asia?
Boon: Asian ECAs are very supportive generally. Interestingly, this seems to raise questions in other parts of the world. When I speak to European ECAs, or if you read last year’s US Congress report on the competitiveness of US Exim, there are questions on the level playing field caused by non-regulated ECA cover providers which could be a potential threat to US and European manufacturers. There seems to be a lot of misunderstanding regarding the operation methods of these credit insurance providers. In our experience they are following the OECD rules more strictly than anybody else and definitely have a tough credit process, for example on local content. One example often used is the very competitive premium levels in shipping financing. We do a lot of Sinosure and K-Sure business in this sector. Compared to some other ECAs they seem to be much more competitive. However, this is possible because the OECD premium system for the shipping sector has still to be agreed upon and can be a national policy.
Jones: You have touched on an interesting topic, especially from a US perspective. The US does appear very concerned about movements on the Chinese front. Again, this links nicely into our question about the competitiveness of Asian ECAs. Are there any other perspectives on Sinosure?
Gerald Lim: From what we see on the client side, they are supportive. They took a bit of a rest in Indonesia. Now they are back.
Jones: The Chinese?
Gerald Lim: The Japanese. About five or six years ago, they sort of paused. Now they are going back there strongly. With the Chinese, we see them coming out for support from the commercial market. On one hand they can be expensive relative to what others are charging on certain types of deals. On some others, they are pretty competitive. Often this has to do with the way they do their pricing, typically based on project value, whereas the commercial market prices on exposure.
Boon: On local content, Sinosure is one of the most conservative ECAs around. For offshore, it has now been lowered to 40%, which is relatively new, but anything else is minimum 50% or, in some cases, such as project finance, it is even higher. Sometimes it is even up to 80%.
Jones: Franck, Sinosure versus the other ECAs: do you see them doing unusual things that the US needs to be concerned about?
Passillier: No, I do not think so. In fact we should see Sinosure introducing more flexibility in its conservative procedures this year, aimed at boosting the overseas business of Chinese exporters, who have been complaining about the high cost of Sinosure-backed financing when driven by Chinese banks. Sinosure has initiated discussions with the Chinese government to relax the 70/30 rule which imposes Chinese banks to lead arrange Sinosure transactions above US$30mn while having higher liquidity costs in foreign currencies than foreign banks. Below this US$30mn threshold foreign banks are already authorised to arrange 100% of the facility. We do not precisely know whether this ratio will be fully lifted to allow foreign banks to arrange the entire amount of any Sinosure-backed facility, or partially. Ie, the above threshold could be increased up to a higher amount, like US$100mn, for instance.
Sinosure seems to be confident in getting the Chinese government support to soften this 70/30 rule, so let’s see. It is difficult to say whether the Chinese banks will react towards their authorities, and how, to lower their liquidity costs to counter this relaxing or not. Given the tremendous amount of financing that they already have to grant, they might not, or might do it gradually. The question remains at which level the foreign banks will start quoting a Sinosure deal on their own. One can hope that reasonable attitudes will prevail.
Other flexibilities that Sinosure may introduce this year are the reduction of the minimum Chinese content for civil works driven projects to 15%; a possible untied financing programme similar to Japan; and an increase of the transaction amount falling under its decision delegation, possibly up to US$100mn. So you note no real outlandish things that the US should worry about.
Onodera: In terms of Sinosure, I agree that, due to the 70/30 rule, there is not much room for foreign banks to play with Sinosure. At the moment, there is a limited number of deals in the market for smaller scale deals. We are also not sure when they will change that policy. My understanding is that Sinosure’s objective is definitely to support the Chinese exporters. Chinese ECAs can sometimes decide very quickly on some deals. It is sometimes quite attractive for certain borrowers in emerging countries.
Jones: One thing we have also to reflect on is that Sinosure is a very new ECA, relatively speaking: it has been in existence for only around 10 years. Therefore, it is bound to be a little behind other ECAs in terms of where it feels it’s able to go as an insurance company, if we look at it as an insurance company. They are probably one of most restrictive ECAs, and I do not think the Americans have too much to be concerned about. They generally do not do as long a tenor as other ECAs. I agree pricing is sometimes cheaper but also sometimes more expensive. However, I also believe there will be changes in Sinosure. There is new senior management. The 70/30 rule, which we all talk about, is not a rule at all. It is an idea that the ministry of finance (MoF) had, and they cannot repeal the rule, because there is no rule.
We attended a closed meeting with Sinosure recently in Beijing. I am not sure if any of you filled in a recent survey issued by Sinosure. We believe we were invited to that meeting because we completed the survey – quite extensively, actually. BNP Paribas and SG were at the same meeting. There were three Chinese banks as well. At this meeting they again confirmed that the 70/30 rule – or the 50/50 rule, as it became – is certainly going to be reviewed more formally. The only reason it has not been changed is because no-one wants to be the first one to approach the MoF and experience delays. From a bank’s perspective, we need ECAs to be flexible. Sinosure is very keen to develop its process and procedures to be more flexible and to be as competitive as other ECAs.
Boon: We have had a very positive experience with Sinosure over the last four years. Even with these rules, they are willing to help out in whatever way they can. Of course, it should be according to the rules, but they are willing to help out. What happened with the liquidity costs of the Chinese bank happened two years ago as well, and they also needed foreign banks to step in and take part of the offer. It is happening again now.
On the competiveness of Chinese banks, they will probably find some kind of solution. I think they are already doing that by using offshore branches. If you see what is happening in offshore branches, you will be surprised by the billions they make available for financing. We see a lot of lease transactions going on right now.
Jones: What about Korea?
Onodera: Korea also continues to be active. They have, like the Japanese ECAs in addition to buyer’s credit, an investment finance scheme. They have also been supporting, quite actively, Korean companies’ investment in Asian countries. Since the economic crisis, Korea Exim Bank’s (Kexim) funding cost situation seems to have improved. They also continue to be active on direct funding, like JBIC.
Gerald Lim: On Korea, we sense a change in emphasis from the big chaebols. I think they are trying to provide more support to some of the smaller companies.
Jones: Do you think the insurance market also receives requests for export finance from Korean companies?
Gerald Lim: Compared to Japan, Korean pricing can be thinner.
Jones: What about in difficult markets? I saw a transaction for a Korean company in Laos, for instance, where a Korean ECA was not able to play, but I think the insurance market was working. It was relatively short tenor, of course.
Gerald Lim: Yes. I think the commercial markets are prepared to provide support, but a key challenge, more so with the Koreans than the Japanese, is pricing.
Albert Lim: I agree with Gerald. I have observations as an insurance head and my previous life at Standard Chartered. As a user myself, if you deal with them, you deal with this pricing. It is a challenge for Korean ECAs, but I think they do work with the insurance market. However, the challenge is always the pricing, which becomes commercially unviable. It is similar to Sinosure, a relatively new ECA. I think they are still finding their way around. Some think it is cheap; some think it is expensive. However, we notice that they do get on the insurance market quite quickly. Like any of this, we need to find an economic balance, especially as commercial operators. That is always a challenge for us. The Koreans are keen, but the pricing may be short.
Jones: I characterise it in Asia, with the Asian ECAs, that the Japanese led the way, the Koreans learnt very quickly, and now the Chinese are learning very quickly. China Inc needs Chinese construction companies and Chinese EPC contractors to start competing with their, at the moment, superior quality, possibly, Korean and Japanese neighbours. That is why they have to adapt as well.
Gerald Lim: Coming to China, we certainly saw a trend. Sinosure is a policy insurer: at one time they were prepared to be more aggressive in supporting risks to support Chinese companies expanding abroad. Currently they are more selective and more aligned with the commercial market.
Boon: Strangely enough we have trouble with getting ECA support for projects in difficult Asian countries like Bangladesh or Laos, where there is a good credit risk reason to have an ECA on board, while in shipping, for example, where there is limited credit risk because they are European or US-based borrowers and it is purely a capital reason, there is less discussion. This makes you wonder the real mandate of an ECA.
Jones: The role of ECAs is another huge topic. I do not think we’ll go there today. Franck, do you have any observations about the Koreans before we move on?
Passillier: Both Korean ECAs, Kexim and K-Sure, are very active in working on many transactions overseas. More than other ECAs I would say, because South Korea is an export-driven economy: exports represent 60 to 70% of the country’s GDP. Kexim and K-Sure are policy vehicles of the government of South Korea and the country is strongly supporting exports through both institutions with various programs. Kexim also provides direct loan solutions. They benefit from huge capacities and the government is actively encouraging their role to promote the Korean economy by supporting even small to large-sized Korean exporters.
They have accumulated in-depth expertise in various products such as in project finance, shipping finance and are developing as many products as any other sophisticated ECA. Their latest programme involves capital markets, and Kexim has already approved two ECA-backed bonds in shipping finance; no concrete case has been reported for K-Sure yet. They also support short-term trade finance and hedging programmes as part of their wider products.
There is no specific rule splitting their respective sphere of intervention. They are more complementary than competitors and usually support projects separately. Sometimes both participate in the same transaction when the amount involved is sizeable enough. Korean exporters do know how to optimise their involvement.
Jones: Moving on to our next topic: what are the Asian banks doing in the ECA space? What of the emergence of non-traditional ECA banks in Asia entering the sector? Korean banks generally, with the exception of KDB, do not play; Japanese banks obviously do, especially the three mega Japanese banks; Chinese banks clearly do play, Bank of China being by far the strongest, and China Exim, of course. We at ANZ deem ourselves to be an Asian bank: with Standard Chartered, HSBC and Citi, we are the largest four regional banks present, with branch networks across the whole of Asia. Let us talk about the emergence of new players. First of all, Onodera san, what can you tell us about the recent emergence of Japanese regionals – the second tier Japanese banks?
Onodera: They are looking at lending opportunities overseas and ECA-covered financing is one key area of interest. A recent example is Japanese ECAs’ export credit line transaction for Reliance Industries. Three regional Japanese banks participated in this transaction.
Jones: Is that the previous transaction or the new one?
Onodera: The transaction was recently signed.
Jones: In Nghi Son, there were more than 10 Japanese regional banks, and some of them took participations in Hermes, Coface and ECGD as well. Due to the lack of business domestically, they are looking to take high-quality risks, albeit overseas. Is that linked to Japanese interest in deals as well? Do Japanese regional banks always require some form of Japanese interest in the transaction?
Onodera: Basically, I understand that it is preferred but not a requirement. For example, some of the regional banks joined the Miga deal in Vietnam.
Jones: It is just a pure asset play.
Onodera: I am not in the position to make comment on that, but I believe there will be more and more interest in the ECA-covered sector.
Jones: We have covered Japanese regional banks. Are there any other Asian players anyone has seen?
Gerald Lim: On a smaller scale, Malaysian banks are lending against coverage from Malaysia Exim and commercial insurers. Also, Taiwanese banks have supported some of these insurance-backed transactions, mainly for return on capital, because the domestic returns were lower.
Jones: Singaporean banks?
Passillier: OCBC, DBS and even UOB are looking at participating in ECA opportunities – mainly as a matter of asset-booked diversification.
Jones: There was a club deal for Posco in Vietnam last year, which involved BTMU, DBS and Bank of America.
Gerald Lim: In fact, they have been active for many years, albeit low key.
Jones: So, there are Singaporean banks, and Malaysian banks, potentially. In the insurance market, which Asian banks are the big buyers of credit insurance product?
Gerald Lim: Many actually. They tend to be more in the short-term space.
Passillier: Singaporean banks can be good partners in bringing their knowledge of the borrowers located in the region. Some complementary partnership may happen on a case-by-case basis.
Jones: On a linked point, Asian investors could, of course, be banks as well, and they may be the second tier banks, like the Japanese regionals. Are there also Asian investors in the ECA risk space that are non-banks as well?
Boon: There is a lot going on at the moment, and we hear a lot of names from Korea. Pension funds and those kinds of organisations are very interested, of course, and see the general concept of having a stable income and Korean sovereign risk. The main issue is still to make an instrument they can understand and accept as an investor. That is a discussion we started a couple of years ago and continue: to find something suitable for an investor.
Jones: So, investors that are non-banks will not accept loan products.
Boon: Yes. The typical issues are still there. You have, for example, an insurance policy, not a guarantee. It is 95%-covered, not 100%-covered. There are a lot of things that have to be tailor-made for those types of investors. I think we have managed to take some steps forward over the last two years. The tragedy is that we are almost there but now we see pricing going down again in ECA deals. Then it becomes difficult to find the extra yield for investors that make it interesting buying, for example, a Kexim-covered bond. The coming months will be interesting.
Jones: Are you talking about K-Sure-covered bonds?
Boon: Both K-Sure and Kexim have now programmes for cover on bonds next to loans.
Jones: What about in terms of the product you are developing?
Boon: Basically, there are two ways where bonds and ECA cover meet, either in the form of an ECA cover on a bond issued by a borrower for a specific transaction, or as a bank-issued bond, being covered by an ECA loan portfolio, which we have seen the last years in Europe. It is a very interesting concept. It probably will not work like that in the Asian situation with cover from, for example, Sinosure. So we have to think of something there as well. In any case, you also need a big portfolio if you want to make a bond structure like this work.
Jones: Is it just Korean pension funds that would like some Korean government exposure, or is it Japanese pension funds as well?
Boon: Yes. I see the Japanese as well. It is more difficult to find European investors taking Korean or, as a matter of fact, Chinese exposure. First of all, it is in dollars. European pension funds are allowed only a certain percentage of their investment in dollars. Second, Chinese and Korean sovereign risk are still perceived differently. This is the case in the US on the odd occasion.
Gerald Lim: We have found that there is more short-term liquidity but more long-term requirement, so the challenge is to see how you can develop financial instruments from these longer-term ECA-backed transactions.
Jones: What are drivers, then, for going to alternative investors? Is it risk limits on the ECA, capital requirements, or liquidity requirements?
Boon: The reason actually changes over time. The market is still very volatile. At the moment, everybody is very liquid. If we were to go to ALM and say: ‘We have nice funding for you, which is interesting,’ that would, at the moment, not be a reason. A reason however could be exposure issues on ECAs. It could also be purely commercial reasons: to be able to take higher amounts.
Jones: Increasingly, certainly for the last four or five years, all you hear banks talk about is seeking out those additional forms of investor appetite for long-dated ECA exposures, for whatever reason.
Boon: Currently, there is a lot of liquidity, but I do not imagine it will stay that way. We definitely need this tool in our toolbox.
Jones: Moving on to the next question, with ECA-covered bonds, we have specific programmes where you do not have to create the instrument to sell to the investor; you actually have a bond, as we have seen with US Exim programmes and, more latterly, with Coface and ECGD, and the much-talked-about Kexim. Have bonds been issued for Kexim?
Boon: Yes. For two transactions as we understand.
Jones: What are the issues around ECA-cover bonds?
Boon: It is still clearly work in progress. Apparently, it is working. Kexim already had a guarantee instrument they were able to use. It is trying to improve the product, because right now the product provides for only immediate use instead of providing direct lending in the first place, with the option of a Kexim guarantee on a bond when the window of opportunity in the market is there to issue the bonds. If they are used, for example, a vessel financing, the ships will probably be delivered from the next year. At that moment, you want to decide whether you need a loan or a bond, and not at this moment. That was a small glitch in the Kexim product. The K-Sure solution might be more difficult for the market to absorb. There you have an insurance policy, not a guarantee, and which is under Korean law.
Jones: There has been much education of investors about ECA bonds, primarily for the US product in the US, of course. I think the US deals have been almost if not exclusively sold to US investors in US dollars in the US. What about Kexim bonds? Are they going to Asian investors, do you think, or do they go to US investors?
Boon: Indeed, primarily to US investors.
Jones: Which is where the deepest liquidity pool is, of course.
Boon: Exactly. You can do a lot of private placement there. Of course, the US banks have a huge distribution network and are very capable. They will be the first banks that are able to do that.
Jones: Price is one of the other reasons for doing it. It is in the US, for instance, where if the price beats the bank liquidity price, it is done; where it does not, it does not get done.
Boon: It is also finding the balance there, and I guess we will not see a huge number of Kexim-covered bonds, because you really need to have the exact right deal for this product for issuers and investors. First of all you only use it for asset financing, such as aircraft and vessels. Second, pricing is a difficult one, because you pay additionally for the Kexim cover, so you have an additional cost compared with a corporate or project bond. Third, if the credit risk is limited you probably can issue a bond and you do not need Kexim cover on that. It will not be hugely used, I am sure, but it is definitely another tool in the toolbox.
Jones: I am sure it is likely to develop as Basel III really kicks into long-dated exposures across the banking market.
This roundtable was kindly hosted by ANZ in Singapore.