GTR and Chubb gathered a group of industry participants in Asia to look at the region’s trade credit insurance market after a turbulent pandemic characterised by tight border controls, relatively rapid economic recovery, fraud scandals and emerging supply chain crunches.


Roundtable participants

  • Amit Agarwal, head of open account trade products, DBS
  • I-Mei Chan, managing director, head of portfolio management and distribution Asia, HSBC
  • Sam Ladbury, regional manager, credit and political risk, Chubb (chair)
  • Nicolas Langlois, managing director, global head of trade distribution – transaction banking, Standard Chartered
  • Esther Leong, vice-president, loan capital markets Asia, Sumitomo Mitsui Banking Corporation (SMBC)
  • Vanessa Lim, legal director, Clyde & Co
  • Bart Raemaekers, head, guarantees and syndications, Asian Development Bank (ADB)
  • Anne Simpson, underwriting manager, political risk and credit, Asia Pacific, Chubb


Ladbury: How have you seen supply chain shifts and financing requirements evolving in Asia Pacific since the start of the pandemic? What sort of financing needs have you seen in the medium term?

Agarwal: At the beginning of the pandemic, there was a wholesale reduction in volumes because of a demand shock which impacted short-term trade financing. But then as the Covid situation evolved and the world started seeing different types of lockdowns, we started seeing a supply-side shock. Most countries opened up but had strict regulations, causing factories to have lower production.

The supply-side shock changed the pattern and tenor of the procurement and distribution of goods, leading to increased demand for working capital financing.

Hence in the last 9 to 12 months there has been an increase in short-term trade financing because of higher inventory positions along with an increase in commodity prices. This is evident in our business at DBS, where we have grown 50% year on year on the supply chain financing side.

Raemaekers: We saw a bit of a slowdown last year. The development of infrastructure projects like power stations were delayed because of difficulties to get to sites – these were very practical, Covid-related issues. The actual planning or development of those types of projects was also delayed, partially because of slow economic growth and the lack of, or lower, demand for power. Contrary to what we would have hoped – that an increase in infrastructure development would stimulate economic growth – that pick-up in activity hasn’t happened yet.

On the financial institution (FI) side, where we normally fund on a medium-term basis, the FIs that we work with also suffered quite a bit from lower economic growth in terms of deployment of their balance sheet; they just saw a lower demand for credit.

That also meant lower funding requirements for our medium-term funding products. So in these two sectors, infrastructure and FIs, we saw a bit of a drop in activity. But when economies pick up again, we think that demand in these sectors will recover.


Ladbury: Have you seen many waiver requests or extensions over the last two years? Or have you had any experiences where people haven’t been that reasonable and haven’t agreed to do that?

Raemaekers: We had very little stress in the portfolio. We’ve had some covenant breaches, but I think only a handful of requests for rescheduling, if any. This has to do with the quality of the portfolio, but also the sectors in which we are active. We’re less active in tourism, manufacturing and transportation so we don’t have a lot of waiver requests or stress there.

Agarwal: A lot of government grants were introduced at the initial onset of Covid. During that time, the short-term trade repayments which were due were extended, and we offered incremental credit periods to clients – especially to SMEs – to repay their trade facilities. After the economic activity picked up in the latter half of 2020, we rolled back the increased tenors and now we are back to what we were doing in terms of facility sizes and tenors.


Ladbury: What has been the biggest impact that the pandemic has had on your portfolio in the region? How have you mitigated against the various challenges?

Chan: While traditional trade finance continues to form the main part of our distribution portfolio, we have seen increased requests for distributing structured trade finance deals, in particular for supply chain finance, as well as asset-based lending. This is mainly driven by the demand for receivables financing, and supply chain financing, as a new normal for supporting working capital during the pandemic. At HSBC we have seen year-to-date growth of 44% in the distribution of our structured trade products.

Langlois: What is interesting is that some of the expected impacts at the beginning of the crisis didn’t really materialise. From a credit perspective, I believe the government schemes and support have been very effective. All eyes are now on how governments will unwind those schemes in a rational and orderly fashion to avoid a waterfall of stresses and then defaults.

In terms of the level of activity, at the peak of the pandemic, liquidity was obviously scarce and expensive, so economic activity was reduced. Therefore we channelled it to clients, to support their immediate priorities.

We’ve started building deeper relationships with industries that are emerging as stronger players in the new economic environment. For example, telco, pharma, healthcare, and some parts of the retail and the ecommerce industries. That has also contributed to rebalancing the order book and given it some positive dynamics.


Ladbury: Have you changed how you viewed purchasing political risk or trade credit insurance since the start of the pandemic?

Leong: We find on the distribution side that there is definitely more demand internally for credit insurance as the product becomes even more relevant when we are finding ways to do more with existing customers, where concentrations may already be quite high. We have also observed a general flight to quality, so it is rather refreshing sitting on the distribution side to be presenting names to the market that we have not normally seen in the past.

We are also reassessing opportunities and that’s where we see more demand for the product itself as these opportunities can be in countries or sectors where we generally feel a bit more comfortable now than when the pandemic first emerged. Yet, on the other hand, as an institution we still want to mitigate potential losses and buy some credit protection just to sweeten the deal internally, and the product also helps to create more confidence with internal stakeholders that there are other risk takers besides the bank.

In terms of political risk insurance, we’ve not seen a huge spike in demand internally but in Asia we do have a track record of using this product. We will buy protection against any unforeseen political risk events and typically these are where financing tenors are longer and usually in emerging markets.

Simpson: We continue to see really good demand from existing customers. We’ve got both corporate and bank customers continuing to use credit insurance and distributing more. In the first few months of the pandemic there was maybe a short pause as everybody was assessing what was happening. Many institutions and corporates alike were expecting a meltdown, but this hasn’t happened because governments around the world stepped in.

At the outset of the pandemic it also took a bit longer to buy new policies and, as you know, credit committees were taking a bit longer to assess the situation. But this was probably sorted after a few months and then we went back to fairly normal trading patterns.


Ladbury: Given there have been a number of defaults and disputes in the trade sector within the region, what are the lessons learned and how are you advising or assisting your clients going forward?

Lim: The first thing to point out is that trade credit claims can take a long time to work out. That’s not because insurers or their legal counsel are slow, but rather due to the nature of these defaults and claims. Together with insurers, we’re still working through a lot of the claims that have surfaced in the last 24 months and we’re still a little way off determining what some of the lessons to take away from these will be.

Increasingly, fraud and other wrongdoing has become a concern for insurers and whether or not that taints their insured and/or the insurance cover. This is especially the case recently where there have been a number of high-profile insolvencies and collapses of commodity traders and supply chain financiers, many of which have been tinged with allegations of fraud and other undisclosed activity and practices.

When working in an active claims environment like this, it does tend to feel a little bit doom and gloom as all you see are the defaults and disputes, but I think in reality this is just a section of the overall trade credit insurance market.

So we’re still some way from getting to the other side and firming up the lessons for trade credit insurers that will come out of this. I think a key takeaway will be about the strength of the relationship: insurers needing to really trust their insureds, needing to have that long, proven, working relationship.

It may also prompt a second look at the extent of risk sharing; so instead of a 90% indemnity being the starting point, maybe carving it up a bit more to share that risk more evenly to give added confidence to insurers.

I think there’ll need to be a lot of trust in financial statements and accounts being accurate and complete, and a lot more understanding of what a transaction actually is when it’s being insured. One feature in common to many of the current claims is that the insurer just hasn’t been presented with the full or complete picture of the transaction being insured – whether that was intentional or not. So a lot of that is going to need to be grounded in relationships, underwriting discipline, trust, asking for more information and possibly being more difficult at the underwriting stage so that things can be easier during the claims process.


Ladbury: What are you seeing today in terms of trade flows and volumes in Asia? In which sectors or countries are you seeing the most demand and where is your organisation focusing on?

Agarwal: I can point out three specific sectors that we are seeing really good volumes and business. The first is e-commerce: there is a lot more online purchase activity and sales through e-commerce websites. In fact, we have created a financing solution for merchants selling on e-commerce platforms for JD, Alibaba group and Flipkart. The volumes are really picking up, including the financing, both in Hong Kong and India.

Second, we are seeing increased demand in apparels, footwear and textile segments in a selective manner. Initially we were cautious when the pandemic kicked in, but as demand in 2020 started picking up, we started financing suppliers in Vietnam, Taiwan, Indonesia, India and Bangladesh for the related goods.

Last but not least, there has been a shortage in semiconductor chips, which is affecting a lot of corporates, but it also highlights the working capital demand in that sector. Because of that demand most of our suppliers in Taiwan are looking for increased financing. Overall, DBS has been growing in these three sectors, in which we have on-boarded more than about 3,000 suppliers digitally across the sectors in the last 18 months.

Langlois: One trend that we’ve seen is more intra-Asian flows, especially between North Asia and Southeast Asia – that’s been an interesting trend.

The other aspect is that when economic activity started rebounding, I feel Asia was in general very dynamic and contributed more to that economic pick-up from a trade finance perspective.

Taking a closer look at trade corridors, the Europe and US corridors with Asia in particular have been very strong. We’ve been very active and doing some very large transactions, particularly for supply chain finance. Supply chain finance is emerging strongly in developing Asia, where there’s a need to free up finance and a current lack of products to mitigate risk.

In the retail space we’ve been selective and have had notable success with very strong companies with good credit in the sector. Manufacturing and electronics flowing through Asia’s trade corridors with Europe and the US have also performed well, and we have seen similar demand from semiconductor chip suppliers. Telecom and pharma have also been strong performers. Similarly ecommerce is a very dynamic sector in an evolving and increasingly connected world, where we see many opportunities to participate and support trade flows.

The Middle East and Africa have both been quite active in commodities trade, a sector for which Standard Chartered continues to see strong demand.

Chan: HSBC has deep roots in Asia with strong network capabilities across 19 Asian markets. We continue to see growth in Asia coming from Korea, Taiwan, Singapore and Australia. Similarly to the other speakers, we see strong growth from the US, Europe, Asia trade corridors, and we have definitely been seeing an uptick in the volume this year.

Raemaekers: Vietnam is currently very active for us. We have a few medium-term financial institution deals and quite a few renewable energy transactions are closing there. We mainly distribute those to banks through our B loan products and some other development finance institutions, but a portion of it has also been distributed to insurers.


Ladbury: Many governments, NGOs and end customers are making louder demands around ESG. How is this impacting financing and insurance requirements in the region, and what challenges do you face in trying to meet those demands?

Raemaekers: Governments clearly have their own targets to improve the power generation mix to make that more friendly for the environment. As a result of that, you see more development of renewable energy projects. Active markets in the renewable energy sector right now are Vietnam, Uzbekistan, India and Kazakhstan.

We would hardly take on any gas transactions anymore and certainly no coal transactions. In fact, we recently dropped a gas-fired independent power producer transaction that was then taken over by another multilateral development bank (MDB), although I think most MDBs have clear targets for alignment with the Paris agreement on climate change.

The challenges that we see are delays in implementation because of lockdowns and general lower demands for power. The other aspect is the creditworthiness of the off taker, which in some jurisdictions is not helping. In some jurisdictions, we even see postponement of cash on delivery commercial operations, essentially because of lower of demand for power.

What is interesting is that on the distribution side there is a very healthy appetite from banks and insurers for renewable energy exposure. Because banks, and some insurers, have their own targets to put on that type of exposure, we find it quite easy to distribute.

Langlois: There’s also a lot of positive pressure from different stakeholders such as governments, investors and multilateral organisations such as the ADB, who are all becoming more selective in terms of the type of transactions they are prepared to participate in and support.

One of the challenges is how we industrialise the identification of sustainable transactions, especially on the short-term trade finance side where the volumes are high. You can’t be analysing every single transaction manually for the required level of detail, so you need to have an infrastructure to do that assessment and the associated tagging in order to have an effective way to identify sustainable transactions and share the risk with investors in the market.

Another challenge is how to agree on ESG standards that are acceptable by all parties who are participating in a transaction. That common ground, to recognise whether it’s a sustainable or renewable transaction, is another initiative that we’re working on.

For trade finance, the most natural area to support clients on their sustainability agenda is supply chain finance. A number of clients already have their supply chains organised with a sustainable angle to it and in some instances with differentiated pricing. In a recent survey conducted by Standard Chartered, over 50% of respondents noted the value of supply chain finance programmes to support direct suppliers and highlighted a specific challenge on cost of onboarding, more specifically in Asia. This is an area where we’re investing a lot and leveraging our local market reach in Asia, Middle East and Africa.

As a result we are pitching and winning a number of deals which are sustainable in nature with an ability to place them in the market to increase the liquidity pool for our clients, given the strong appetite from investors on this type of transactions. ESG and sustainability metrics are also exerting their influence on supply chain financing products, especially in developing markets.


Ladbury: On the distribution side, we’ve heard a lot about how much liquidity there is in the market. Do you see that changing in the near future, given some of the central banks are tapering off their support?

Langlois: Banks are becoming a little more flexible and nimble in their approach and strategy. Previously, a number of them, including us, were only focusing on either buying or selling in the secondary market. I think several banks are adjusting their approach and being more practical about how to support their clients, for instance complementing primary financing with a secondary participation when it actually makes sense.

Capital market investors are also becoming more and more familiar with trade as an asset class and they’re trying to penetrate the market. They understand the attractive risk profile and they like it. There remains a need to reconcile their yield expectation with the reality of the economics of trade finance, but they are becoming increasingly interested and credible partners for trade finance.

Chan: As of now, the market is still very flush with liquidity. As banks look to deploy liquidity and book assets, we have seen an increased level of interest for banks to participate in more structured trade finance, including receivables finance and supply chain facilities. In this environment of ample liquidity, we are seeing a very competitively priced market.

In the near term, we’re expecting a slight upward trend in secondary pricing due to various issues such as year-end liquidity pressures, Federal Open Market Committee guidance, and recently with China Evergrande.

What we’ve also seen is more banks that are looking to form partnerships on a club basis and working to share the economic benefits of collaborating with us.


Ladbury: Is liquidity still there for some of those lower credits, such as double B and below? Or has the liquidity had a flight to quality?

Chan: Especially with the recent resurgence of Covid in some countries, there is strong preference for the top-rated names in the market. For the lower credits, I would say investors are definitely treading more cautiously.

Ladbury: I presume there’s still a reasonable amount of demand for B-loan structures and other secondary participants in some of those longer-term financings?

Raemaekers: We see a growth in those products. That is partly because we have increased our own efforts to use the product more actively, but also transactions are materialising due to a combination of other factors.

Throughout Covid, the transactions that we worked on typically took quite a bit of time to close. And we were quite positively surprised to see that banks stayed in those deals and didn’t walk away from them. We saw the same with insurers: we didn’t see any insurers walk away from deals that we were working on. So generally, we were quite pleased with the response of our partners to the temporary issues that we had through the Covid crisis.


Ladbury: How supportive has the insurance market been? Is there anything that insurers can do better?

Leong: Looking back at the various challenges we have all faced in the past 18 months or so, when the pandemic first emerged, there were a few insurers that were obviously holding back on appetite specifically for private credits, and adopting a wait-and-see approach. But we find it encouraging that the insurance market bounced back fairly quickly.

Now, there’s naturally more scrutiny on the underwriting side: there are more questions being raised that we typically did not get in the past, such as how Covid is impacting certain borrowers. But most of the questions are raised to get the deal across the line for the insureds. Insurers are similarly focusing on their key customers, which has really benefited seasoned insureds.

Where some of the insurers may have outperformed their peers is that they are better at discerning which deals to support, specifically in sectors that are more stressed, by taking into account broader qualitative factors such as their historical relationship with the obligor, the rationale for why we are distributing the asset and the wider strategy on why they’re looking to support this name, rather than just a broad-brush approach of rejecting the deal simply due to a lack of appetite for the sector.

Raemaekers: We are concerned that some parties that we work with are leaving the Singapore market. It’s not directly as a result of Covid, but the number of parties that we work with that meet our requirements for counterparty risk, and that actually have the appetite to participate in our deals, is quite limited, about 10 or so. If that number shrinks and those parties are leaving Singapore and the liquidity in the market is going to be reduced, then that would be of concern for us.

Leong: It’s not really all that surprising that we are now seeing a couple of insurers closing shop in Asia. The writing has been on the wall for some time now and they are primarily leaving because of business decisions, not so much a concern that the product is dying a slow death.