ECAs continue to innovate and expand their product base as their need to fill market gaps keeps growing.
- Karin Apelman, director general, Exportkreditnämnden (EKN)
- Peter Field, executive director, origination and portfolio management, Export Finance and Insurance Corporation (Efic)
- Topi Vesteri, executive vice-president, Finnvera
- Todd Winterhalt, vice-president, international business development group, Export Development Canada (EDC)
GTR: How have the increased regulatory constraints affected business and borrowing costs? Will the impact of risk-weighted ECA assets reduce the incentive to co-operate with ECAs?
Field: I think that this is changing the landscape for banks. The treatment of ECA-backed assets from a risk weighting perspective, and the preparation for Basel III are adding to the speed of change. For ECAs, there is now much wider credit ‘bandwidth’, so there is some justification for regulators taking a different approach. That may be a case of ‘back-solving’ or ‘unintended reasoning’ in the sense that the growing credit differential between ECAs may not have been in the regulators’ minds at the time. That said, 100% risk weighting is not the right level in every case.
Will these changes be a disincentive for banks to work with ECAs? On the contrary. Banks have a valuable role to play in bringing borrowers, other lenders and ECAs together. Banks will be the risk to a higher-rated ECA.
Engaging the capital markets is coming slowly, but it will speed up as need will drive innovation. Some banks with large pools of liquidity and strong retail deposit bases will have different drivers and will look to onlend that liquidity, so there will always be a role for banks to provide ECA-backed funding. The net stable funding ratio is going to challenge the banks where long tenors are required and provide a great mechanism for bank treasury groups to profit from their lending books – or so the lenders will say.
We’ve been responding to gaps in the availability of finance for Australian companies engaged in export activities where the private market has always been willing, and with domestic projects of enormous scale. This has masked some of the broader issues and trends in Australian export finance. It is clear that borrowing costs have risen in terms of risk premium.
But underneath that, I think that it is very much back to normal. Total borrowing costs are either the same or lower than the pre-global financial crisis (GFC) costs. The change is that the benchmarks are no longer a proxy for the true cost of funds for banks.
Australian banks have probably been disadvantaged to a degree, as their pricing probably doesn’t reflect the quality of the risk relative to other banks that have faced significant problems and/or required governmental support. It is an asset class that doesn’t excite the capital markets as much today, which is why we are seeing well-rated corporate issuers tapping the markets at cost, at least the equal of or better than well-rated banks.
Vesteri: The borrowing margins have been rising and tenors are shortening due to the proposed regulatory changes and the financial crisis. There is a ‘flight to quality’ with regards to financing – it is more difficult to get financing packages together for larger amounts, longer tenors and riskier obligors, and ECAs are needed to support even better deals.
The incentive to co-operate with ECAs is still there, but the more fundamental problem is that banks’ willingness to finance exports has been diminishing. This has resulted in OECD ECAs increasingly using official financing support such as direct credits and refinancing to support their exporters, as there is a lack of medium and long-term funding from the commercial banks.
Apelman: Banks are more reluctant to take on risk, and banks in certain markets are much more affected than in others. The regional context has to be incorporated in any view on banks. At the same time we can see very low costs for creditworthy corporates in the bond markets. The rates are very competitive, but are greatly influenced by the name of the borrower.
We have continued to see an interest from financing banks to participate in large EKN/SEK-backed transactions.
Since 2009 we have seen an increasing interest in EKN-backed finance and we have more than doubled the level of EKN guarantee commitments. During the period January to September 2012, EKN’s volume of offers increased by over 50%. Guarantee volume also remains high.
Winterhalt: The WTO estimates that the additional regulatory burden will add 10-40 basis points to medium and long-term financing. Even those banks that can fund loans upfront may be increasingly unwilling to hold assets on their books. As a result, ECAs such as EDC are being sought out by banks – perhaps more than ever before to fund, co-fund or to provide guarantees and generally at longer tenors. The linkages between exporters and their ECAs are tighter than ever. While Solvency II is not expected to have a significant impact on EDC’s insurance activities at this point in time, we are actively monitoring industry trends in order to respond to the changing needs of Canadian exporters.
GTR: How are you stepping in to fill the gap being left by banks that cannot, or are unwilling to finance smaller transaction values?
Field: Efic has developed a number of programmes to provide support to SME exporters. In the past year, more than 92% of business by volume was with our SME client base, and that will certainly be even greater this year. We have introduced products to assist with small value FX transactions which banks are less willing to provide, through more retail focused providers. We have also reintroduced the export working capital guarantee product on a more structured basis, using framework agreements with a number of bank providers to facilitate more cost-effective financing of smaller amounts and have created a niche product to support Australia’s growing film industry where they are exporting their production.
Vesteri: Finnvera has an export financing model in place – there is no threshold for transaction size even though the Finnish capital goods export deliveries supported by Finnvera tend to be fairly large. We do recognise the gap and are willing to be more flexible with smaller deals.
Winterhalt: The small business segment, defined by us as companies with under US$10mn in annual sales, is EDC’s largest, as expressed in number of customers and accounts typically for 50-55% of the corporation’s customer base. In 2010, about 86% of Canadian exporters were small businesses, which were responsible for US$77bn (25%) of the total value of exports in 2010, with an average value of US$3mn per firm. EDC uses its financial solutions to help Canadian small business exporters access working capital and other forms of financing, and as well mitigate business risks.
In addition, EDC works with several key partners in the small/commercial market space. We hope to complement the activities of Canada’s Trade Commissioner Service (TCS) and its extensive international network and trade expertise. The Business Development Bank of Canada (BDC) is another key collaborator, providing a range of lending products, in particular term loans, as well as its consulting services to help develop managerial and entrepreneurial capacity in small businesses.
In 2011, EDC and BDC signed a protocol to ensure that their Canadian customers have access to the services and financial capacity that best suits their needs. Lastly, EDC delivers many of its loans to the small business segment in partnership with Northstar Trade Finance.
Apelman: The rights under the EKN guarantee for a short or medium to long-term supplier credit, the usual form of credit for a small transaction, can be assigned to a bank refinancing the credit. We are aware that banks are reluctant to arrange buyer’s credits for smaller amounts. EKN has signed a reinsurance agreement with ODL, Luxemburg’s export credit agency, to cover loans from Northstar Europe in Luxemburg. This agreement makes it possible for international buyers to get ECA-backed medium-term loans between €0.25mn and €5mn when they have Swedish suppliers. The agreement is now one year old and we have already made a couple of deals thanks to this solution.
GTR: What are the benefits of short-term funding or cover from ECAs?
Vesteri: Every now and then the private short-term credit insurance market fails to deliver and ECAs are needed to fill the gap. In my experience it is typical for the private insurers to overreact and turn down even the acceptable risks in difficult sectors or markets. This happened in just about any country or sector after the financial crises started in 2008.
Now this is happening in Greece and some other southern European markets. In 2009-11 we had a temporary approval to fill the market gap and covered a lot of short-term risks turned down by private insurers in OECD markets. Financial results of this activity were good.
Now we are covering single risks with six-month to two-year maturities turned down by the private market. These kinds of risks never really got private market support but have still been forbidden for us ECAs to cover. Getting these temporary approvals from the EU to correct market failures has meant a lot of bureaucracy for us.
GTR: What services or schemes do you offer that help stand you apart from other ECAs?
Field: We can lend, guarantee, provide performance, warranty, advance payment and bid bonds, and insurance for medium-term payment risk and political risk. This range has not changed and there was no need to expand it to address ‘missing markets’ during and as a consequence of the GFC. We have some limitations with respect to application of products by circumstance, so there is still some room for improvement to be more efficient in delivering our risk appetite. The ‘credit product set’ – loan, guarantees and bonds − have been in greatest demand, particularly loans where circumstances permit, as this is the most efficient way Efic can provide assistance to exporters or their clients.
Winterhalt: EDC has a long history of direct lending rather than functioning primarily as a guarantor. We believe this posture has allowed us to be relatively nimble through recent economic downturns. Another of our guiding principles is to be financially self-sustaining, which drives a market-based approach to underwriting transactions in addition to considering consensus-based terms where appropriate. Our mandate demands that we show a benefit to Canada in all transaction that we support – but we take the view of made by Canada rather than made in Canada.
Apelman: EKN is one of very few ECAs that offers single risk cover for short-term transactions, of course within the restrictions we have for so-called marketable risks as an ECA in an EU country. This means that our customers can choose which risks they want to insure and which risks they are comfortable with on their own books.
Vesteri: Finland now has a permanent scheme to finance export credits. Finnvera’s subsidiary, Finnish Export Credit (FEC) has started providing financing for export credits arranged by commercial banks, while the parent company Finnvera is responsible for the necessary acquisition of funds.
First issuances under Finnvera’s AAA-rated MTN programme took place in November. The commercial banks continue to have an essential role under this transfer scheme as guarantee holders, agents, arrangers and managers of the export credits.
FEC also administers the Finnish interest rate equalisation scheme, where the financial institution arranging the transaction also acquired the funds. An interest equalisation agreement with FEC provides the financial institution a swap which converts the fixed CIRR-based receivable into a floating rate asset.
GTR: How much more are ECAs willing to do, given the increasing volumes in business, and what are your constraints as an ECA?
Field: Most ECAs are stepping forward as markets still don’t cater for every need. Credit appetite has returned, in some cases with considerable vigour, but it’s a cycle not a new trend. The problems in the global financial markets are far from over, so we expect to see contractions and more problems emerge that will dampen this current enthusiasm. The impact for some ECAs may be less business in 2013, though the financing task confronting the unparalleled growth in resource development remains dominated by particular ECAs, though some banks have returned to this space.
Vesteri: Finnvera has constraints comparable to other OECD ECAs. The interpretation of Finnish interest is considerably flexible for pure cover but slightly stricter if we also fund the credit.
Winterhalt: Acting as an ECA our largest constraint is the absence of big-ticket Canadian contracts, which can sometimes make it challenging to ensure that ECC’s potential participation in a transaction meets our mandate. Our ability to step up and close gaps is also mandate-constrained more so than credit-constrained.
Apelman: Our ability to share risk with exporters and banks in the coming years is good. We have a statutory limit that gives us the flexibility to take on new risks, and we have reserves and capital to take on new risks. EKN has yet never had to say no to sound business due to limit restrictions.
GTR: What sectors have you seen the most demand from over the last year? And which sectors have you supported the most?
Field: Oil and gas has been a big part of the picture in Australia. More broadly, resource and related infrastructure spending which, historically runs at about 2% of GDP, will peak at about 8% in 2013, with those projects currently approved or under development. That is generating huge demand for foreign ECA support, both tied and untied. ECAs or development banks from north Asia, China and the US are particularly active in this market today.
Large-scale developments are dominating our deals by value, both at the project level and along the supply chain where good opportunities are present for smaller Australian companies to grow their expertise in domestic, but export-related projects and, hopefully, those companies will be exporting those skills in similar projects overseas in the years to come.
Vesteri: Telecom networks makes up roughly one third of our volume and shipping (cruise vessels and ferries) another third. Pulp and paper machinery and power generation machinery are the other main Finnish capital goods export sectors.
Apelman: EKN’s guarantee business mirrors the sectors of the Swedish industry as a whole. We support large volumes in telecom, transmission/generation, pulp/paper, mining equipment, transportation and defense equipment.
Winterhalt: Canadian business has traditionally been the most active in the extractive (mining and oil and gas), transportation, information and communications technology and infrastructure sectors, and accordingly EDC has supported those sectors significantly.