The need for export credit financing in Africa is as crucial as ever, and banks are keen to support the continent if they know that ECAs have their backs. Sarah Rundell reports.


Africa was one of the worst hit regions when trade finance dried up during the global downturn and it has been one of the slowest to recover. The enduring perception that the region is too risky, heightened by uncertainty returning to stalk more trusted markets, stifles export finance. Yet Sub-Saharan Africa’s economic growth rates are pinned around 7% – double developed economies – and the continent’s booming telecoms sector, its infrastructure deficit and undeveloped agriculture, mean the region could represent the steadiest deal flow in years to come.

Buoyant commodity prices will help ensure profitability in projects focused on Africa’s ports, roads and rail networks to better haul raw materials out of the continent. It’s an opportunity debt-laden developed economies looking to export their way out of recession and corporates with an eye on expansion can’t afford to ignore. Africa’s banks are also spotting opportunity.

Export credit agencies (ECAs) are leading the way. They are now considered a crucial source of finance to African businesses buying imported capital goods. “On the bigger deals, borrowers can go to a range of sources and ECAs are not the only game in town. In less developed markets and for less obvious, or less well-established names, ECAs are now vital,” says Piers Constable director of Deutsche Bank’s structured trade & export finance (STEF) team in London, which specialises in medium and long-term lending to projects unwritten by ECAs or private insurers.

ECAs are also starting to help Africa’s own exporters and provide solutions for a broader range of corporates. Last year, Russian fertiliser group EuroChem secured a debut US$261mn financing backed by South African ECA ECIC, working for local corporate Shaft Sinkers. It was the first ECIC loan granted to a Russian company and the first ECA-backed facility for EuroChem. “ECIC is paving the way for South African exporters into foreign jurisdictions. This is the first ECIC-supported transaction in the Russian Federation. We strive to fulfil our mandate to promote, encourage and facilitate South African exports internationally,” says ECIC general manager of operations, Emile Matthee.

Elsewhere, Nairobi-based Africa Trade and Insurance Agency (ATI) recently facilitated borrowing for the Tanzanian government guaranteeing a US$50mn segment of a total US$250mn syndicated loan destined for infrastructure, including roads, railway and telecoms.

ECAs forge ahead
It’s a role ECAs have carved out since the recession when they filled the funding breach vacated by constrained commercial banks. The recession has eased but nagging global economic worries and Africa’s risk perception means the likes of France’s Coface, Italy’s Sace and the US Exim, along with the Nordic ECAs, China’s Sinosure and India’s export-import bank are still just as sought after.

“Although international banks have more liquidity and more appetite to finance transactions in Africa there is still a strong demand to protect their risk through ECAs,” says Craig Polkinghorne head of structured trade and commodity finance at Standard Bank in South Africa. Politcal unrest and regime change in North Africa is a case in point. “Banks are mostly happy with the operational risk around a project; what they don’t like is political risk,” says Stewart Kinloch, outgoing CEO of the ATI which has seen income from premiums jump from US$1.1mn in 2007 to US$4.8mn in 2010.

Developed economies’ ECAs hold the key to reviving sluggish home markets. The US has said it wants to double its total exports over the next five years and Euler Hermes has just boosted its ties with the ATI.

“The improved cooperation with multinational African institutions is part of our strategy to intensify the engagement with Africa on multiple levels”, comments Euler Hermes managing director Andreas Klasen.

Recession-hit Italy has the same priorities. “Italian exports are crucial to Italy moving forward,” says Michael Creighton, head of Sace’s African operations, the only non-African ECA with an office in Africa. Sace is also a board member of ATI; in 2010 it invested US$10mn in the agency as part of its efforts to boost Italian exports into Africa from historic lows of 2% of Italy’s global exports.

In fact, the need for ECA support has indicated that they are not doing enough. Tightly-regulated, they need to do more to support trade with a more “flexible approach” and “innovative funding” structures with fewer tied deals, say bankers.

ECAs back national exports, but if these drop off in recession-hit economies they should expand their remit to broader national interests. They also take a long time to arrange financing with due diligence, which bogs deals down in red tape.

“ECAs are crucial but it is an issue whether they are doing enough, and quickly enough,” argues Geoffrey Wynne, a partner in the London office of law firm SNR Denton.

More untied deals would boost the deal flow but not all European ECAs have these programmes. “Japan has a tied and untied programme,” says Faruq Muhammad regional head of structured export finance at Standard Chartered. “If certain products don’t fall under the tied programme it can use the national interest argument.”

Funded by domestic taxpayers in debt-laden countries there is also a worry that ECAs will be scaled back. The shadow of credit rating downgrades could also impinge on their role. The US lost its top-tier AAA credit rating from Standard and Poor’s and Italy’s rating hangs in the balance. Downgrades could mean lenders to projects with cover from these ECAs may not discount the pricing so much, warn bankers.

Financing opportunities
Commercial banks jostle competitively to fund the continent’s best-known corporate names. Banks scrambled to sign a US$127mn capital expenditure deal for South African telecoms operator Telkom, backed by Chinese state insurer Sinsoure with equipment from Huawei in early 2011. Other sought-after names include South African parastatal Eskom and logitics giant Transnet, telecoms operator MTN and Nigerian conglomerates like Dangote, and oil group Oando. “These are big ticket deals and everyone wants to do them,” says Standard Chartered’s Muhammad.

The problem is that medium-sized businesses, widely considered the engine for Africa’s long-term economic growth, are sidelined. Few have a track record of borrowing and are too risky a proposition. Cautious credit committees are wary of drilling down to smaller quantum deals, particularly if nobody else is doing it. “If it is a new company with no trade record it will struggle to get trade finance. If you don’t know and trust the management or there is little track record of the business it is tough,” says Polkinghorne at Standard Bank.

It’s an opportunity African banks could seize. “African banks tend to be risk averse but they are greedy,” observes ATI’s Kinloch. “If they see a profitable business they will jump into it.”

Unaffected by the 2008 financial crisis, pan-African lenders Standard Bank and Ecobank snap up the biggest deals but smaller players are also muscling in. They got a toe in the market providing letters of credit for local clients when global banks hauled their money home to shore up balance sheets and cut exposure and are now reaping the rewards. “Local banks are lending to local clients and are real competitors for us,” says Polkinghorne.

Nigerian lenders are an example of this. A handful have emerged as national champions in the wake of the 2009 US$4bn bailout that weeded out weaker players. A total of 14 Nigerian banks rushed to finance MTN Nigeria’s US$2.15bn five-year commercial bank loan in 2010. It was the largest syndicated facility denominated in naira to date and the first time MTN Nigeria has secured Swedish ECA EKN cover for any of its transactions. In this case, KfW Ipex-Bank’s facility within the deal was covered by EKN for Ericsson’s equipment purchases for the Nigerian operator.

Elsewhere, Nigeria’s Access Bank recently secured a US$30mn trade finance facility from the Export Import Bank of China covering letters of credit and export credit guarantees.

The MTN deal showed African banks’ growing ability to form partnerships with international lenders to better tap ECA products. ECAs require structures and due diligence that local banks struggle to meet. Excluded from this deal flow, they are now teaming up with international lenders which arrange the cover, but do the actual lending themselves. “The international bank arranges the ECA cover but the risk of the borrower is taken by the local bank,” says Standard Chartered’s Muhammad. ECAs say they want to develop ways to better work with local banks. “We see it as a possibility and we are trying to work with them,” says Sace’s Creighton.

Regional banks may also steal a march on bigger rivals because many haven’t signed up to new regulation. New rules requiring banks set aside capital equivalent to the value of off-balance sheet items is worrying big lenders. “When banks allocate more capital their ability to lend is reduced and this will feed into Africa along with everywhere else,” says Muhammad. Borrowers are starting to think about how they are going to fund transactions early on and distribute the funding to a larger buyer pool, he says.

Growing inter-African trade as African markets liberalise will also throw more local corporate business their way; continent leader South Africa now exports as much into Sub-Saharan Africa as China does. Border posts, where trucks wait bumper to bumper for days, and non-tariff barriers like roadblocks and weighing stations, continue to blight free trade but regional integration visible in Comesa and the East African Community is the new mantra. DFIs and multilaterals continue to oil the wheels. They have been restricted by their dependence on commercial lenders but efforts to boost export finance are paying off.

“If commercial banks are tough on them it does restrict what they are prepared to lend,” says SNR Denton’s Wynne. Recent initiatives include the Asian Development Bank (ADB) and the African Development Bank (AfDB) signing a trade finance agreement to boost south-south trade. A pioneering programme between the ADB and the International Chambers of Commerce to track and monitor trade finance transactions in Asia could really benefit Africa, argues Michael Grossman, a consultant for the AfDB. “It would illustrate the low risk nature of lending and guarantees in Africa. Banks will be able to make decisions based on data rather than perceived risk.”

Elsewhere, the African Export-Import Bank recently raised US$500mn to help fund trade finance loans. In 2010, the IFC, Citigroup, and AfDB provided US$300mn in trade financing for exporters and importers in Africa as part of the IFC’s global trade liquidity programme.

Challenges continue to blight export finance to Africa but the shift in importance of the region is hard to miss. For lenders prepared to see that opportunity outweighs the risk, the potential is immense.