GTR gathered together a group of export finance experts to discuss the presence and performance of banks and ECAs in the market. A fiery debate was expected and roundtable participants did not disappoint.
- Geoffrey Wynne, partner, SNR Denton (chair)
- Gabriel Buck, global head of export finance, Barclays
- Henri d’Ambrieres, chair of export credit working group, European Banking Federation
- Andre Gazal, head of export finance, Crédit Agricole CIB
- Ralph Lerch, head of export finance, Commerzbank
- Andreas Mehl, head of export and structured finance for Emea, JP Morgan
- Chris Mitman, head of export finance, Investec
- Olivier Paul, global head of export finance, BNP Paribas
- Mini Roy, head of export and agency finance, global trade finance department, SMBC
- Simon Sayer, head of structured trade and export finance for Emea, Deutsche Bank
- Florence Werdisheim, global head of export finance, UniCredit
- Matthias Wietbrock, managing director, Northstar Europe
Wynne: Given the large increases in ECA volume, how much more will the ECAs be willing to do? Is there a limit and what are the constraints?
Buck: Regarding the question of ECA volumes, these are certainly up. Governments, particularly those from the OECD, realise that economic growth is not going to be derived from their own public sector. Growth for many is at best flat. One economist described it as flat being the new norm. As a result ECAs are heavily promoting ways to encourage exports as a way of stimulating economic growth.
ECAs have been given a political agenda to do whatever is needed to support both existing and new exporters. The level of cover is up not just in terms of buyer credits for the large ticket, cross-border, emerging market transactions; but right across the full spectrum of markets and also for short-term trade products.
Is there a constraint? From an ECA’s point of view I do not think there is. Given the greater amounts of exports that they are providing support to, and the very low loss that they have historically seen across their businesses, I think each of them have got more or less unlimited appetite to support. The issue of constraints is a huge topic in terms of liquidity and in terms of the way that banks have traditionally provided the funding of export credit loans.
Mitman: As always I think some ECAs will get full on some markets where there has been a particular demand for capacity against credit constraints. Generally however I see much more of a pro-business, solution-driven operating model emerging, and the ECA market seems quite keen to support a pro-export growth recovery.
Werdisheim: When we look, for example, at the Berne Union figures related to Turkey and Russia, we see a sharp increase in export financing coverage by all the ECAs, so it depends on the importing countries involved. Of course, it is countercyclical; it is our product that has logically had a higher demand these days, economic uncertainty and market volatility have made ECA-backed financings very attractive. Besides the country limits of the respective ECAs, other constraints are the funding issue and very long maturities.
It is quite an issue from a risk and funding perspective. And finally we have legal constraints. In Austria, for example, OeKB has a€€50bn aggregate guarantee exposure limit of which at the end of March 2012 about €37bn had been utilised. So, from today’s perspective we have enough room for additional export credits backed by ECAs.
Wynne: Do you see ECAs protecting their own home base or being flexible in third countries?
Mitman: Obviously national interests apply but I think the old story of ECAs only supporting the largest exporters will remain a pressure point. I think being seen to, but also actually supporting some of the SME export activity, is going to be a major challenge for the ECAs going forward.
Lerch: The ECAs are trying to do the right thing to somehow cover the needs of the major exporters, the banks and the market as a whole. Without any doubt, countercyclical measures are necessary in order to attract investors in emerging markets to spend money even if the investment climate is not very favourable. My expectation is that as long as banks consider trade and export finance as part of their business model, ECAs will play a major role to support their activities. Maybe it is not certain that export finance can survive as the most profitable business in a bank, but as long as corporates and their needs are considered as important from the banks’ perspective it will continue. From my perspective, there is no limit for ECAs to step in, because there is still a lack of alternatives.
Roy: I have a slightly different view, having watched the reauthorisation process of US Exim. It seems to me that the direct lending ECAs certainly have to talk to their governments about the resources they are going to get.
The guarantee and insurance ECAs may have unlimited capacity to grow because this may be an off-balance sheet type of exercise on sovereign balance sheets. We have seen such a move for agency assets from the Italian government. So where it gets constrained by sovereign borrowing limits, generally speaking, it is not quite so clear a picture as to what will happen in every market. However, for practical purposes for our immediate business, it is unlimited, and I think it is really good that the agencies have been very flexible and are trying to address not just bank investors but also other investors.
Sayer: It would be political suicide right now for governments to withdraw or cap support for exports, particularly on the risk taking side. I accept funding is a slightly separate issue. I think it has almost become a badge of pride for ECAs to demonstrate how much they are actually supporting in terms of export volumes, and to the extent they are able to show a growing trend, that is good news for their guardian authorities.
One of the constraints and limits is possibly risk concentration limits, but I would say, even on that point, it is something that ECAs have lived with for some time. The example I would provide here is the Nordic ECAs who have, for the last 15 years, frequently been maxed out on their telecoms cap and maxed out on certain markets like Russia, Turkey, Mexico, and possibly the US as well, but they have always found a way to do incremental business. I think that is exactly what ECAs will do to the extent they have concentration risk issues going forward. The good news is that there is help at hand because there is a lot of diversification in the type of risk ECAs are being asked to look at now, in so much as they are turning to developed markets, OECD, better-risk names. Effectively, ECAs are upgrading their client list a little bit at the moment, so even on concentration limits there is good news.
There are constraints in staffing. The number of times I have spoken to ECAs over the last two or three years and they have said, ‘We simply cannot get the offers out quickly enough’, is quite extraordinary. There are tremendous business volumes and the staffing and logistical issues are a real constraint.
Mehl: One segment where I see constraints, if not caps, is aircraft finance, where some ECAs clearly pronounce that they do not intend to exceed the ratio of x, y, z to be supported by ECA finance, despite the fact that the market probably wants to have 40%, 50% or 60% financed by ECAs.
The SME business will continue to become more important to ECAs. Governments generally are keen to support this sector as it faces more challenges in securing finance.
As to the lack of alternative, what if we had sat here seven years ago, there would be doom and gloom around the future of ECAs because it was a graveyard exercise and nobody believed in the product anymore because there were enough alternatives. The current activity is the function of credit challenges. Banks need to work together with the ECAs and the exporters to develop alternatives to address the liquidity and funding issues and then, over time, the ECA business will fall back to the place where it used to be and it will lose some of its prominence.
With respect to the direct lending, I totally agree that it is not an endless resource. Government budgets are fairly stretched, so I don’t think it’s a fix.
D’Ambrieres: Regarding regulations, it is true that nothing for trade and export finance was done in the first text of Basel III. The good news is that in Europe, some people realised that there may be unexpected consequences of capital requirements directive (CRD IV) on the activity. Therefore, even if nothing has been finalised yet, in the draft of CRD IV which is circulated in parliament, it is clearly mentioned that consequences will have to be reviewed according to real facts. In addition, CRD IV introduces some flexibility for trade finance. Therefore, we know that we might have the opportunity to look again at this. And the commission has directly acknowledged that.
Paul: I see a few limits. One limit of regulation has already been mentioned in the Basel III organisation, which has not yet been solved, so we still have an issue there. The other issue is the average level of risk, which today is very good in classic export finance markets, namely the emerging markets, globally speaking. The level of risk in those countries is very good. I do not think that there are so many defaults around the table in so many files and in so many transactions. So everyone’s appetite is quite high because of this low level of risk. I do not know whether this situation will prevail for a long time and whether there will be some difficulties appearing in the future. In that case, for budget constraints, if we have to create some provision for a lot of transactions, even at the ECA level, maybe there will be a time where those ECAs will say, ‘Okay, we have limits on those countries and we cannot go above those limits because we already have some issues there’. So perhaps there will be a limit there that will prevent continuing development.
The other limit is that there is, in my view, a mismatch between the necessity to a company and to support the national exporters for each ECA, and the fact that the commercial banks are not so ready to accumulate large amounts of new credit on their balance sheets. Therefore, in a sense, all the ECAs have the constraint to create vehicles to be able to provide direct lending. This has already been done in the Nordic ECAs. Coface is thinking about creating such a vehicle as exists already in Germany. So it will create new constraints, budget-wise, for those countries if they create such vehicles. I do not know whether they will have the capacity to maintain these kinds of vehicles and to develop them to a large extent. The situation is good but there are still issues.
Wietbrock: I think the two good things that have been mentioned here that have come from the problems of the last four years are: firstly, that ECAs are firmly back on the landscape, which I am sure will stay the same and not change for a while; and secondly, the willingness to find new solutions and also to co-operate between the different ECAs, which was not always the case but is now increasing.
Gabriel was saying that the public sector has a flat trajectory, but the ECAs are part of the public sector, so I think the public sector will play a much larger role going forward. The question will be, as has been mentioned here a couple of times, what that role will be, because we all know ECAs are not there to support banks. If they find a non-bank solution to a problem they have no problem following that; and if there are limits or budgetary constraints, I think there will be solutions. Therefore, I do not think these limits will stand in the way of business.
One thing to watch, however, is a certain trend to move back towards national interests, ie, ‘If it is our money or if it is our risk then we want to support our industries and we want to win our voters with this’. Additionally, there is the fact that, volume-wise, a lot of the support goes to a smaller number of very large exporters and certain sectors, like aircraft, whereas the number of business and transactions supported is much larger with the SMEs and the smaller transactions, which is to some extent still an unresolved riddle and an area we have focused a lot of energy on.
Wynne: Have the regulators got it right in relation to ECAs? Should you all be pressurising the Basel Committee to give better treatment for ECA-backed facilities, thus potentially improving the capital weighted position of ECA finance and improving the return, the profitability, or are you going to live with it and say it is ok?
Buck: I do not think it is the issue of Basel III and I do not think it is the issue of a capital allocation that is the constraint. Around this table we all have different regulators with different rules. From a UK perspective, regulators are requiring banks to match fund for long-term assets. With pricing for ECA assets often lower than banks’ long-term funding costs this is where the pain is being felt.
I can see the logic where the regulators require banks to match long-term assets with matched funding. This preserves liquidity and manages risk. This same rule applies whether one holds AAA ECA assets or long-term sub-investment grade assets. You still have to provide the same matched funding irrespective of the risk. On the question of pressurising the Basel Committee to give better treatment for ECA-backed facilities I do believe the regulators should make an exemption for ECA assets. Take UK Export Finance for example given that the total amount of new assets is about £3bn per year spread amongst 10 or 15 banks, I can’t see how this can cause an adverse distortion in the portfolio of banks. This is about liquidity, common regulation on matched funding rather than risk-weighted assets.
Lerch: I remember the times before the crisis, when almost every ECA was considered as an acceptable risk mitigation instrument. Nowadays we see that all the major banks are still open for Hermes-covered transactions, but the lower the rating of an ECA or country, the fewer the range of banks that are competing. From my perspective we do not have a level playing field among ECAs anymore, because the differentiation of ratings is affecting the business and the access to capital markets. Regulators can somehow try to provide support for the reputation of trade and export finance, but they cannot equalise this system.
Wynne: When you say regulators providing support, does that mean being more understanding about not requiring matched funding for longer term facilities?
D’Ambrieres: Regarding long-term liquidity, we do not know how the net stable funding ratio will be exactly built up. In the liquidity coverage ratio export credits are not given any value, because the export credit loans we have in our portfolio have today no value with the European Central Bank (ECB)or the Bank of England, which is not the case in the US. We also know that if we want to be given a fair treatment in the LCR the first step is to be recognised as assets eligible at all national central banks. This is one struggle on the agenda and the door is not totally closed for the countries where it is not possible today. I think that a lot of people are realising that there might be a need for a change and if you look at the texts of the European parliament regarding CRD IV, it is very clearly written that they would like to have all assets eligible at the ECB considered as liquid assets.
On top of that, the ECB is not saying that export credit is not eligible for refinancing or anything due to the features of export credit, but it is not eligible due to the fact that the borrower is not located in the eurozone. Therefore, it is a technical aspect rather than a financial issue. If we can overcome this technical aspect, I see no reason why eligibility of export credit should not be approved by the ECB.
Sayer: For many years, we lived in an industry that moved incredibly slowly and we now live in an industry that is moving incredibly quickly. I cannot help thinking that the whole issue around regulatory solvency issues, capital and so on are kind of act one scene two or three, but we are already moving very, very quickly into scenes four and five. No matter what happens on the regulatory side, we are in an environment where banks are on massive diets and just the balance sheet – let alone RWA or capital – required to support the business is going to be crowded out by other things banks want to do in their smaller state. So even if we have some really quite dramatic changes under Basel III, which would help us hugely, we are still going to be in an environment that is being crowded out by other business lines.
That brings us on to what I think we are going to talk about a little bit, which is getting things off the banks’ balance sheet and alternative packaging sources. There is then a further development, which we are starting to see a little bit in my own institution, which is the trend to go back to basics and back to real business, because in planning for what the bank is going to be like over the next three, four or five years, the penny has dropped that a lot of the derivative businesses, the leveraged finance businesses, the equity capital markets businesses are not going to be able to command the attention they did in the past. Therefore, the white knight in all of this is that people do want to get back to trade finance, export finance, lending, cash management, doing what banks are supposed to do and have done for many years, and resources will be aligned accordingly.
Roy: All of these issues are coming to the fore, but I cannot help thinking that one of the changes that is happening is that capital has accumulated away from the OECD. If you look at the pools of capital around the world, they are in the Middle East, they are in emerging markets and, 10 years from now, we will be able to see faces around this table that are going to look Latin or Asian, because they will have a lot of the money that is funding into trade. All of these regulatory changes I think are good, but the function of trade finance and where international banks fit is being challenged.
Wynne: Let us get onto this idea of the ECA banks arranging but distributing the assets to the non-traditional sources; in other words, the funds, private investors and beyond.
Buck: I think the problem we have had, if you just look around this table and the teams that we represent, is that this market has been pricing business based on balance sheet. In reality our skillset is country knowledge, buyer relationship, structuring, deal transaction skills all packaged to help projects get done.
That is our added value. Where banks’ business models have been based on just the annuity income and the cost of balance sheet then we have a problem in the industry.
Sayer: The business is underpriced; that is what you are saying.
Buck: I am saying the value that we provide to buyers and to suppliers is this, not balance sheet.
Roy: Every time you talk to investors about these assets, the non-traditional investors, they give you their benchmarks and you look at their benchmarks versus the way we price it on bank balance sheets, it is crystal. If you want non-traditional investors, you are going to have to meet a market hurdle and we are nowhere near that market hurdle in terms of bank competition.
Buck: We have a full distribution model and I am always amazed as to the price that the banks are willing to buy these assets versus what the fixed income investors will want to receive.
Roy: Even now when we look at benchmarks, whether it is capital markets or elsewhere, it seems that bank pricing or the price at which deals get done is very low. When you are putting on a 10-year or 12-year asset, even if you do not have mark to market bankers do not want to be wrong.
Gazal: Let us be honest though, there is not going to be a standard to which all the banks are going to ascribe, because you have regional differences, nationalistic differences, bank differences. You are going to have differences throughout and each ECA also has its own criteria. When talking about bonds such as the US Exim bond we did for Pemex, it was basically something that could be done with US Exim, but it cannot necessarily be replicated somewhere else.
Each region, each country, each type of institution will have to come up with a different mechanism and what we are seeing in Europe now is the northern countries have come up with ways to refinance the bank ECA debt. Other countries are far behind and need to catch up. They realise that and want to keep up. Obviously the countries are going to be losing their competitive advantage if they do not come up with something, because there is a shortage of liquidity from banks in the market and banks are not going to be supplying all of that liquidity going forward. Therefore, there is going to be refinancing through ECAs, capital markets and other methods that are still being developed.
Wynne: I thought we were going to talk about the regulatory constraints about being able to sell your transactions to non-traditional investors; what you are saying is because we are not pricing them high enough we are not going to attract those investors, who will look elsewhere. If pricing goes up, you can then sell down your deals outside the conventional market.
Mehl: Banks with relatively easy access to liquidity in certain currencies are passing this advantage along to their clients.
Paul: On the question of pricing, as long as we concur that the market is efficient, which is obviously the case for export finance, the level of pricing should not be a very big issue compared to what we have in the capital market. That is because when you take the average level of remuneration of an export deal in 2006 or 2007, the average level of margin was not so large.
Due to the Lehman collapse and the crises that occurred at that time, practically from one day to another the average level of pricing of an export credit went from a few basis points up to 150 basis points and it was not a big issue. We had the capacity to transfer this increase of pricing to the customers, to the borrowers. Frankly speaking, 2009 and 2010 were the best years ever for export finance and everyone was anticipating that export credit should disappear, because the level of pricing was totally low and the scarcity of liquidity should create a big collapse for export credit. It was exactly the contrary that happened. Therefore, as long as we have average efficiency over the world in export finance, increasing the pricing should not be a big issue.
Wynne: Is the existence of ECAs, particularly the OECD ECAs, cause for your customers to believe that pricing should be lower?
Paul: Yes, there is this issue where ECAs, from time to time, are telling us, ‘You have to respect the competition and the competitiveness of the French offer’. For instance, if I look at a French export credit compared to what will be proposed by the competitors of the French industry. ‘You can’t kill the business for the French industry because of your pricing,’ they say. Yes, of course, but we have also to take into account the reality of the market today. We cannot continue to develop our business telling our general management, ‘Sorry, guys, we have to support the industry and we have to reduce our pricing, because otherwise the competition will not be okay for the French industry’. Somehow we have to do something.
Mehl: What we tend to forget is that the ECA premium needs to be factored in. If I was taking money from someone, I would pay margin and have to pay the annualised ECA premium. Many of the ECAs, particularly in OECD countries, are now careful not to undercut the market. Even if you were able to do a balance sheet play on the margin side, the premium would jump and level the field out again.
Gazal: All things being equal, at the end of the day you have the all-in price. When you take the cost of financing today it is much cheaper than it has ever been.
Mehl: In fact, you can get a 12-year financing for 4% or 3% and that is nothing compared to what it would have been five years ago, so the financing factor is not as much of an issue for an export transaction as it used to be.
Wynne: Does that mean that you want to say to your ECAs, ‘We do not want your direct funding. We would rather just pay your premium and we will work out the cost of funding that we will offer to the customers’ or do you want their funding?
Buck: I think their direct lending is a very positive outcome of the changes that have been going on in our industry.
Mitman: It is a necessary bridge. But I would not like to see a long-term trend like in Canada where direct lending prevails. The consequence is Canadian and international banks are not so active in the business and their branch networks are not being deployed to help exporters win business; EDC has had to open overseas offices accordingly. In the current market however it is very useful for banks like us, who also sponsor and develop projects to know that a direct funding programme such as ELO Denmark is going to be there to fund our project if we need it, but also as a backstop to issuing the securitisation guarantee in the capital markets when the time comes to fund. It is a useful bridge. None of the banks around this table can tell me, ‘Guaranteed I can fund your next wind farm 18 months from now at Libor plus 100’. You cannot do it, whereas a direct loan programme can provide more certainty.
Roy: The direct lending provides a cushion of financing. Any big deal that you want to get done is not possible without the direct lending. Therefore, when you are advising you have to tell your clients, ‘Go for the direct lending programmes because they are going to be there; they will support national interest, and give you a predictable rate of financing’. It is natural.
Wynne: Does that mean, therefore, that on this direct lending you are fine with the ECAs in medium-term transactions? Do you want to see the ECAs direct lending on short-term transactions?
D’Ambrieres: I totally disagree. If we want to promote direct lending, in five years none of us will be still be there.
There is some exaggeration, but I think that regarding the promotion of direct lending, if we want to build EDCs in our respective countries there will be a limited need for banks. ECAs will fund and take the risks while commercial banks will advise. It will not be a problem for us. For the general management of a bank with 100,000 employees, the relocation of a team of 60 people is not an issue. However, in the end, it will be a problem for the exporters, because in Canada the Canadian industry is not able to rely on the Canadian banks for this business. So I do not like direct lending. I prefer to promote other ideas, like refinancing or co-financing, but not direct lending.
Sayer: I think we live in a moment where direct lending has been hugely important, but it will never completely take out the banks and the role the banks play. To Gabby’s point, there is expertise in getting things done. Not only that, as we said, the governments are not going to have a completely bottomless source of resources for this, for very good reasons. It is a relatively stopgap measure. Everybody is doing more than they have ever done before, but this will come back again. It is not going to take over the industry, in my view. It will recede; governments will get fed up with having it on their balance sheet. We are seeing Finnvera come into the market with an issue that is going to be capped. That is their appetite for doing business for the next year or two and they will not do any more after that.
Werdisheim: Another instrument which we see developing is the covered bond based on a securitisation guarantee. For example in Austria, with an ECA refinancing scheme in place, they are thinking about introducing such a guarantee like in other European countries. In my opinion, we have different instruments elaborated on a national level according to the national rules and regulations, all based on a special-law framework specifically dedicated to regulate a covered bond system of a country. Banks active in export finance will look at the ECA instruments of their neighbouring countries meeting their national requirements in order to optimise the funding situation. Looking at the very different refinancing conditions of the eurozone countries, this will put a lot of pressure on pricing.