As client demands evolve, alternative sources of liquidity emerge, and gaps in the market widen, GTR gathered together a group of export financiers to discuss new constraints and shifting business models.
- Alex Taylor, Emea head of export and agency finance, Citi (chair)
- Olwyn Buldhoo, executive director, head of ECA finance, Emea, BTMU
- Andre Gazal, global head of export finance, Credit Agricole
- Jonathan Joseph-Horne, EMEA head of export and agency finance, global trade finance department, SMBCE
- Mark Howard, deputy global head of export finance, Societe Generale
- Ralph Lerch, global head of export finance, Commerzbank
- Chris Mitman, head of export and agency finance, Investec
- Nicholas Shaw, global head of trade finance, BBVA
Taylor: Are banks meeting the requirements of their clients with regards to export finance? What constraints are there such as liquidity, legal or regulatory, to fulfilling that requirement?
Joseph-Horne: Deals are still getting done. Deal volumes have remained pretty high but it is the type of transaction which has changed. The landscape is changing in terms of who is using the product. Who is a buyer, who is a supplier and how transactions are getting done has changed a lot. If you happen to be a borrower relying upon a bank that has felt the credit crunch severely, you may have a different perspective on availability of ECA finance from somebody who is seeing it from the other end of the slope, so to speak.
Gazal: We are also seeing banks using their capital and liquidity in a more selective manner: using it for their key clients, less involvement in opportunistic transactions, and much more focus on getting the most from the relationship with that client.
Howard: I am also seeing clients, or potential new clients, being a lot more demanding in terms of what they are looking for. They are coming to the market with a range, saying: ‘We have not yet decided on sourcing, so I want all you banks to come up with how much you are willing to do and the price you are willing to do it at, across a whole range of ECAs.’ There is, then, a change in how some of the clients are approaching the market too.
Shaw: One thing that we, at least, have noticed is that the demands, which were very heavily driven by the exporter, are now driven much more by the borrower, especially on ECA deals. The borrowers are really calling all the shots and being extraordinarily demanding, and exporters are finding themselves much less in the driving seat – not even being able to back-seat drive many times either, for that matter.
Taylor: From our side, we have historically been very buyer-centric, spending a great deal of time with buyers. On the bigger deals, the buyer typically has a great deal of influence. For example, before joining Citi, I recall I was with a bank that won a bid to support an exporter, yet we were promptly removed from the mandate when the buyer appointed another bank to arrange the deal. It was quite a rude awakening.
Buldhoo: I think there remains the concept that liquidity is still challenging the market. As a result, there has been a transition from the exporter driving the financing and from larger experienced borrowers with the knowledge and resource to, perhaps, the second-tier category of clients, who have now also learned how to use the export finance market, and this is where we see more competition. A few years ago, that second-tier client would accept the exporters’ finance proposals. They now, however, are confident to have the banks compete with each other.
With respect to legal and regulatory constraints, there are two separate issues here: what I have certainly noticed is that the global requirement for compliance checks has become more demanding and, as a result, may affect or delay the timing of the process,
In terms of regulatory requirements, we have been discussing Basel III and the implications for our various institutions for many years. I believe that is will be an ongoing discussion and it will be interesting to see how the market will in the end be affected.
Taylor: The regulatory approach could be a huge discussion in itself. Does anyone have any views as to the constraints that they are starting to feel as Basel is implemented? As a US bank, we were addressing Basel I for many years, yet it felt as though Basel II and indeed Basel III requirements came about rather rapidly. Are you seeing changes in how your businesses are being operated? More specifically, are the new metrics requirements limiting solutions you can provide to clients on the export finance side?
Howard: I am delighted to see the American and Japanese banks finally come into the game, because I think the European banks have been following Basel III for at least three years now. From a business point of view, we see the impacts on our business P&L, so it is something that, clearly, is followed very closely. We understand the impacts, what we need to do and how we need to look at the business to determine the overall cost or benefit.
What it does is it gives you an awakening of some of the constraints on certain types of products and structures, and you need to think about how you price them. The reality, then, is that not everyone is at the same level. If you start pricing in something which the rest of the market does not, you have a situation that you are no longer competitive. I am, therefore, glad to see you and some other institutions finally accepting the consequences and potential costs of Basel III, because it will come.
Gazal: It has not yet been reflected in the costs of some banks, but it is getting there. My concern is the regional application of the regulation and the uneven playing field resulting from such regulation, causing uncertainty as to the real impact.
Howard: It is a long-term process. We still do not know the final result of the leverage ratio and x, y and z. We all have to continue to push on the lobbying side to make sure that we get the right treatment of ECAs’ high-quality, liquid assets. We also need to work with the European Banking Federation and with our local federations to push these things; otherwise, we will get detrimental treatment, which will ultimately impact exporters. It is difficult for just the banks to drive that, we also need the support of the exporters. Coming back to your point, Basel III is important. It is here to stay. We should start to price the consequences, but it is something that will happen over a period of time, because the whole of the market needs to get to the same level.
Shaw: Much of the essence of the regulation is a fine thing. However, the industry has a concern in the cumulative process and interpretation of the regulations. In fact, it is just that we perhaps run the risk of two things, one of which is going overboard in our interpretation and implementation. The other is trying to voice our concerns individually. What additional things can we do collectively, from a lobbying point of view, other than what is being done now? It’s important that we get the full messages of the advantages of trade in general across to the regulators.
For instance, generally speaking, I think ECAs reacted to the crisis extremely well and proactively, and it has worked well. That’s the path we need to follow with regulators.
Lerch: I see the major concern at the moment, besides what has already been mentioned, that the mentality has changed. Within the banks, ECA business is no longer considered as something that is preferred in terms of consuming a low amount of risk-weighted assets and so on.
Taylor: Is the suggestion that the regulators should do something to tweak the rules as they are, or is it more about adapting to the rules as they stand? Our reading of the rules – and I would love to hear if people agree or disagree – is that there is encouragement to limit the booking of AAA-rated assets and a push for banks to lend to credits towards the bottom of the investment grade range. Ideally, therefore, everything higher rated should be sent out to the capital markets. This seems to be a complete change from what ECA used to be, because it used to be great to have an AAA-rated wrap on your loan. It was a wonderful thing and now it is arguably a bad thing.
Howard: I do not think that the exporters currently see what could be coming round the corner in the next few years, because they are being serviced with reasonably priced transitions, or even skinny transactions. They think that that is fine, but they need to understand that things are changing. We, as institutions, will have to adhere to those regulatory changes, and that has a cost for them. They may have everything now, but these market conditions are not going to be there in the next five years or so.
Buldhoo: It goes back to liquidity, and the sustainability of whatever liquidity we envisage is in the market at the moment. If we were to be quite specific, US Exim has provided a direct lending scheme which has significantly reduced the requirement for bank funding. We should ask if this is really sustainable? I would expect the US treasury to question the need to continue such a programme if there is capacity in the market. Other ECAs have also developed funding schemes providing highly competitive rates.
If the banks are not required over a period of time, there is a risk that some banks will be forced to exit the market, and even if they decide to re-enter the market it may take some time to establish teams. Further, exporters and indeed importers should understand that there is a need to have long-term, sustainable liquidity, and not just from one single source.
Shaw: They also need to understand that the pricing levels prior to the crisis are never going to be reached again; the changes in regulation alone have already had an impact on pricing. I am not sure if that is fully understood.
Gazal: I think that some of them understand that – the more sophisticated exporters understand that. What some do not understand, however, is the implication, not just in terms of cost, but in terms of availability of funding.
Going back to the issue of liquidity, there is liquidity but there is also a capacity issue driven by capital allocation. The fact is that some banks may feel pressure on their export finance teams and allocate capital to other asset types – for example, asset-based lending – that may generate higher returns. The risk is that banks may make decisions based on the overall profitability of this activity compared to other asset classes based on regulatory impact. This may lead to fewer players.
I tend to concur that ECAs are not going to fill the gap by funding directly. I do not think that US Exim can sustain this type of activity. They are doing it in project finance primarily, but once they start doing this on a more systemic approach to other guaranteed loans, it is going to be very difficult for them from a back-office and public accountability perspective, as there are viable alternatives out there for that ECA.
Joseph-Horne: The impression I have is that many exporters – and they are probably right to have this view, to an extent – do not care where the financing comes from; whether it is provided by a bank, by capital markets or by a direct loan from the ECA. What they want is finance to be put on the table so that they can export their goods. That is a perfectly justifiable perspective for them to have. The long game is perhaps a little different, and I think people do need to consider whether some of the schemes that were put in place at the height of the liquidity crisis to address liquidity needs at that time will end up disintermediating banks once liquidity comes back. I do wonder whether some of the direct funding schemes and alternative sources of liquidity could end up disintermediating the banks, leading to a contraction in the skills-set that is applied to this product.
Taylor: It is an interesting point because a lot of the discussion has been very much about regulation affecting the banks, our ability to fund, and the impact it has on our balance sheets. There are a whole host of non-bank investors who are on Solvency II and who could fund term assets very successfully. We have been pretty active and do a reasonable amount in this space. Do you see the involvement of non-bank investors as a positive and as an opportunity, do you see it as a threat, or do you see it as something totally separate from the banks? Finally, how would you see the involvement of non-bank investors evolving?
Joseph-Horne: I have a personal view on this, which is that I wonder if all of the investors in this kind of product understand what they are getting into, and I wonder if borrowers fully understand what the consequence of widening the universe of funding providers would mean particularly in a stress situation. If your lender is a hedge fund or a bond investor, they could behave differently in a stress situation to a relationship bank, and I do wonder whether that point is fully understood by everybody who is participating in this market right now.
Mitman: I agree. It is not even just the capability to deliver, and the willingness, and having the tools to deliver, and deploy local resources etc. It is fine while the plates are still spinning but, if they stop, possibly some of the pressure will return to the ECAs themselves to drive the recovery effort.
Lerch: As always, there are two sides to this. First of all, the fact that new players are coming into the market and are interested in ECA assets is not bad for the reputation of the business itself. If there is some increase in volume, as there is in crisis cycles, new players come out. For us, it is helpful to position our assets in a way that they are seen as something that is accepted in the market. From my perspective, that is the positive thing.
On the other hand, exactly as Jonathan said, if these players stay in that business when the crisis cycle is over and ECA volumes remain stable, or at least do not increase much further, what will happen? Margins will be under downward pressure. In order to grow, you have to gain market share from the competition. Whether these hedge funds and other players are sustainably interested in the business remains to be seen.
Gazal: It is a liquidity play. Today, all investors are flush with liquidity and the central banks are pumping more cash in the system, so they are looking for opportunities to deploy their capital and their liquidity. Today, margins are compressed because there is so much liquidity. As we get out of the economic downturn and quantitative easing, the dynamic is going to change and margins may not be at the same level. There is also the fact that, when you talk about institutional investors, you are talking hedge funds, money funds, insurance companies and pension funds, etc – they all have different perspectives and dynamics. Some are rate-buyers; others are looking to match their liabilities. There are a lot of different criteria in terms of what they are looking for in that type of asset. Some are interested in the asset today, but it does not mean that they are going to continue to be interested in the asset as they compare alternative investments. They are not committed to this asset class the same way banks are.
In the long run, there will be some that will continue to play in this space, and I think we need them. The question is how they are accessed and used. Today, it is all over the place. The US Exim bonds were the first type of institutional product available. In Europe, we are now talking about refinancing guarantees.
Going forward, my view is that the best way to get this resource to function efficiently is in a refinancing scenario. You are not going to have institutional investors interested in waiver requests from borrowers and in dealing directly with the borrowers. You are not going to have institutional investors being involved in the long construction or delivery period and having to deal with different products. You would still need the banks to address all of this and, further down the road, a repackaging of these assets is probably the most efficient way of using the institutional investors. At that point, it is a question of which investors will buy what, under what structure and at what price. There are so many different mechanisms out there today that it is also confusing for the investor.
Howard: It has come in and it is needed. If you add all the bank balance sheets together, we could not fund all the corporate or project financing, so it is a reality. It is a long-term reality and a lot of education of the institutions. I agree with Andre: at the moment, there are so many people interested but, in reality, that will filter down to far fewer. Those people will decide that this is an asset class that they want to keep and grow, albeit illiquid versus their other asset classes, but they get a kicker, they are happy with it, they understand, and it will take a long time for them to understand. They have to understand that they cannot pull the plug because, if they did, they do not have the guarantee or the insurance. They have to listen to the ECA.
It is also an education point for the ECA in terms of allowing these people to come in. They are a little paranoid and scared about bringing in these new names. They do not know how they are going to react or what the impact will be. For me, refinancing is part of the solution but it is not the whole solution. I do not want to be left with a transaction which I structure and refinance and then it is on the balance sheet but all the income has gone to someone else. You need to look at a whole range of solutions. What we all need to do is to recognise that it is coming, it is needed, and that we have to spend time and energy to educate people in a way that means that they take onboard the fact that they do not pull the plug, and they act more like a corporate lender, where they have to listen and go through a process.
Mitman: It is more a concern of the ECA; they should be the ones worried about that. I do not think these funds suddenly wake up one day and decide that they need a reasonably-minded recoveries department to help this ECA behind them with all the risk on their books to get their money back. I do not see that happening.
I just wonder about the size of deals. For a reason, this all started with aircraft and with US Exim – the scheme is pretty bulletproof. You have a clear line of sight to the guarantor and it is all pretty simply structured to facilitate capital markets.
In terms of the size of the deals, you cannot take smaller deals to the capital markets. Banks have a really valid role to play in supporting their exporter customers to finance those types of deals. It might not be sexy enough for banks that have really large teams and lots of mouths to feed, but it is a very valid and important role that banks will have to play going forward, if they want to. The space is available and no one is invading it. We are talking about big deals which could go to capital markets.
Joseph-Horne: There is a role for ECAs in the SME sector as well. There is always a lot of political will behind supporting that sector, but the ECAs need to make it easier for the banking market and the borrowing market to support this sector. It is not just a case of saying: ‘We want to see people active in it.’ Many large, say US$100mn, contracts are made up of sub-suppliers at some point in the supply chain who are SMEs. It is often a case of at what point the SMEs are visible and whether that is as a supplier or a sub-supplier. If people look through the supply chain, they might be pleasantly surprised at how many SMEs are supported by this product set.
Taylor: That is a really key point. We find it challenging to support smaller deals. This is often because as SMEs begin exporting and have buyers overseas, they naturally require a great deal of support and they are learning as they go. It is also difficult to execute these deals efficiently. I know that we are not well-positioned to help in this area and would be curious to know if anyone around this table can.
Mitman: There is one entity that has made a business out of it – Northstar. They have a satellite office here, which is getting some traction, I think, anecdotally. I do not know exactly how much but it is hard work and high-intensity stuff.
Shaw: For many countries, the potential driver for re-establishing the economies is getting the SMEs functioning, supported and exporting, as well as being able to network the importers’ side. The difficulty, from a financial-institution point of view, of course, as has been alluded to, is that you have to hold hands. You can have higher returns from a financial institution point of view and, of course, the margins can be higher, but the holding-hand aspect is far greater for the return that you are necessarily going to get.
The other issue is that the SMEs do not even know about or understand the product in the first place. They do not have the access from the ECA point of view. I think that large banks are duty bound to play in partnership with ECAs and to act as agents, if you like, in terms of being able to get that information and understanding to the SMEs, which is all important in the first place. I genuinely think that, at least from our point of view, it is certainly a market that we are aiming at in order to take greater control of the opportunities that exist there from the importers’ side, with the importer being much more important, from the originating point of view, than the exporters’ side.
It is important that the ECA evolution accompanies that process, not only in terms of partnerships that banks establish to make information available to exporters and potential exports, but also in terms of the schemes that they put in place, which need to be far more simplistic and less daunting for those exporters, because of the type and volume of exports that they are making. It is very important that the product is simplified for that type of player.
Lerch: Support for SMEs did not start with the ECA or with export finance in Germany. What I always try to explain is that over a long period measures have been set up that provided the SMEs with the comfort to go abroad knowing that it is not obvious for SMEs to explore exotic markets. For example, German Chambers of Commerce all over Germany but also abroad advised and supported them in contractual, cultural and financing matters. Embassies helped to open doors for SMEs and KfW provided programmes to enable them to exercise major international supply contracts or to invest abroad. Over time, demand for specific solutions for their short and long-term financing needs increased. And in the meantime you cannot be active in export finance in Germany in a broader sense and as a retail bank without covering this sector. Also Hermes was, from my perspective, under much more pressure to create and customise their products for SMEs than other ECAs and managed that well. But copying Hermes and implementing something similar for SMEs in other countries remains a challenging exercise if the business climate for entrepreneurs is not friendly.
Mitman: Coming back to Northstar, it is one institution that has really tried to address this sector. They have been enormously successful in their home market, and their foray into Europe is reasonably recent. They are trying to do something across Europe, which no one has tried to do outside of the banking sector. We will have to wait and see. Certainly, however, there have to be localised tweaks to whatever systems are put in place, and ECAs have to be part of that to make it easy for the institutions to work with them.
Gazal: One thing is for sure: if you have a small transaction, you cannot deal with it in the same way you handle a larger deal. The products from the ECAs have to be adapted accordingly, and the procedure has to be simplified. There is also a lot of hand-holding that takes place between the banks and the exporters, which is time-consuming. They do not understand the product.
I have to question whether what we look at as ECA financing in terms of medium and large transactions really should be looked at for small businesses. Small businesses should be using products that are much more adapted to their needs, and they are letters of credit and trade finance products. They need to adapt those with the ECAs’ support to enable that type of activity to take place, as opposed to using the large export credit deals and trying to adapt them to small businesses.
Taylor: Just one point on that: UK Export Finance has announced a direct funding programme specifically for SMEs. As I understand it, the programme does not require a bank to be involved which is an interesting development. Their argument is that there is a gap in the market in terms of servicing SMEs, so treasury will step in and fund them. Is that a route that can be taken? Is there truly a gap in the market? Is that a sensible approach that is being adopted? Is it replicable?
Shaw: I genuinely think that there is a gap in the market. One of the difficulties that one finds is that, at the moment, if you are going to make a concerted effort and decision to go into the SME market, your team size has to grow dramatically. The volumes that you have to deal with grow dramatically. In the circumstances in which we have all found ourselves, it is very difficult for any bank to embark on that and take that plunge.
The first step is going to have to be made by the institution to say: ‘We are going to have to expand our team significantly.’ We all know the long period of time that elapses before you see the benefits of the business from an ECA perspective. You have deals that take time in maturing, and a whole sector that has to be trained to understand the product. Before you know it, years have gone by and you have not had many returns to be able to justify it. It is a very difficult call for a bank.
Is it justifiable for UKEF to contemplate it? It is possibly justifiable. I have more doubts about their ability to support the SME market, for that very reason. I just do not see how they can have the manpower to be able to deal with the volumes that would be required if it was done correctly. The banks are the right instrument, which is why I think the partnership is so important. It should be a much stronger partnership in terms of working that out and in terms of the internal lobbying that one does within the bank. Certainly, this is an area that we are contemplating and trying to see how best we could work and how we could get support in order to utilise it in those areas where we have a distinct network. We are duty-bound to look at it very seriously.
Taylor: Just to jump topics, we touched on margin compression earlier in terms of what has happened in the markets.
Gazal: Let us talk about expansion for a change.
Joseph-Horne: It is interesting when we talk about margin compression because margin levels are always relative to six months ago. Margins have perhaps compressed, but we cannot talk about margin compression compared to ECA pricing six or seven years ago.
Mitman: You are right when it comes to the ECA assets, but what we are also seeing, as a predominantly Sub-Saharan bank, is compression across all asset classes. We are seeing South African customers sourcing non-bank FI money directly onto their balance sheets, straight from the institutional investors. Never mind the ECA cover, it is just coming straight in. If you track the price of B- through to BBB, pre-crisis, through the crisis and to where we are today, you can see why issuers would do this.
I do not think it is something that we worry about as being a long term trend in the market. Once QE tapering starts – or even threatens to ease off – that sort of money will start to disappear from that space. Nevertheless, it is a feature of the current market, and our clients and our borrowers want to get into it.
Joseph-Horne: A feature of the debt markets during the financial crisis that I found interesting was an inversion of the normal situation of sovereign pricing lowest, and then bank pricing and then corporate pricing. What we saw in many cases was a complete inversion, with, for example, single-A corporates pricing finer than single-A banks and, in turn, pricing finer than single-A sovereigns. I think that that made it very difficult to price bank lent ECA loans to corporates.
Howard: The pricing point is important but, if we go back to 2006/07 and start having that sort of pricing, we are not going to be in the market. I am sorry: you may say that it is a reality of compression, but compared to 2006, you will not meet the requirements now on a regulatory basis, so you will not have the banks and the depth of banks in the market. There has to be, then, some kind of reality in terms of where the price should be. Up to 300 to 400 basis points may be too much, but down to 50 to 60 basis points is too little. If you are seeing pricing at the moment, as we all are, for the German business at 60 to 70 basis points, I am sorry but it is not sustainable. If you are currently seeing pricing being forced down for the Italians at 150 to 170, it is not sustainable, so there has to be a reality check somewhere. We all have reasons why we need to be in a deal, but we are all following a downward cycle, and we need to be wary of that; otherwise, we will have big problems going forward.
Lerch: I do not fully agree because I see that, in Germany, you can manage to be profitable with 60 or 70 basis points margins, especially if you can rely on a strong funding base. A lot of banks did well in sourcing competitive funding and therefore it is more a matter of how you see customer franchise in a deal, how you price the risk, and whether it is a good idea to compete at such a level. As you all know, the covered bond market in Germany provides favourable terms and conditions, so it works. On the other hand, it is a question of whether you are smart and put that in your calculation in a direct manner.
From my perspective, what the banks often do is to look at their funding sources and their costs of funding, and they derive their financing solutions from that. Maybe that should be ended and transitioned into some more risk-oriented view, which would then drive pricing from some sort of matrix, looking at the rating of the corporate, his business model and what sort of competition is under way, and then being more cautious. However, in terms of being profitable, I can tell you that we can offer 60 to 70 basis points.
Howard: You then also end up having regional banks doing regional ECAs. You will be priced out of a deal in Japan or in the US, and you will stay within your market just working with your exporters. If you want to do that, that is fine but, in reality, it does not provide the overall service for a client who operates on a global basis.
Lerch: For German exporters this is a rather comfortable situation as they normally do not complain about who is offering competitive long-term financing and as long as they can compete with other suppliers. I agree that the pricing driven approach is not a sustainable one, however, it is true that we can be profitable even with lower margins.
Howard: I am not disputing that you can be profitable; I am just saying that it has long-term consequences for your business model. I would also say that German exporters may feel that they are being competitive but I see the Japanese, who can come in equally as competitive, and the Chinese and Koreans, albeit on the finance side not as competitive, but who can replicate. It is not a long-term safeguard to have very cheap financing to be able to back up your exports. You have to look at it from the point of view of: ‘What is sustainable for them and for me to deliver exports? Fine, they are growing now because they are strong or whatever, but, at the end of the day, if they only have regional banks supporting them, they could have a problem going forward.
Buldhoo: There will be capacity issues in the long term. We have to look beyond. In recent history, we have experienced some very hard lessons that we should to take into account. We have witnessed a crisis where the liquidity in the market simply evaporated. At the time, the only product available to support exporters was ECA finance. As a result, we have all been looking inwards in terms of what regulations are implemented and the impact to our banks. We are trying to find our solutions within our own institutions in terms of how we can sustain export finance given its long tenors yet low defaults. We must ensure sure that there remains a long-term sustainable market. If we do not and the liquidity is no longer available, exporters may encounter limited financial support in much-needed times.
Lerch: The only thing is that banks behave completely differently in Germany. Therefore I would agree with you, but the reality is that, for a normal €20-30mn transaction to Russia, 15 or 20 banks instantly jump onto that train. I no longer see that so many German banks are among them. From my perspective, you are completely right that what we are doing is not wise, but coming back to my initial remark, I think that, at the moment, we are in a transition period. The volume of ECA covered business is no longer increasing, which means that if banks want to grow and to maintain their structuring expertise and capacity they have to gain market shares by competing with each other.
The better prepared you are for that – structuring expertise, funding measures and covering different ECAs – the more successful you will be in such competition. What the banks are doing currently is a bloody competition and not that very smart, but that is what always happens in transition periods.
Howard: We all have a reason for why we need to be in that deal. There are client, sector and geographical angles – there is always a reason. At the end of the day, however, it is going to come back and bite us all.
Mitman: I cannot help but feel that we are dancing around the issue here. Pre-crisis, the base business model for an export finance business was: ‘Let us lend lots of money, take lots of ECA cover and sell it to the regulators as a great, low-capital business.’ That model is fundamentally changing, but I am not sure that the banks’ fundamental business models have changed to respond to that reality. We will be going through contortions as that reality sinks in and the change evolves.
Joseph-Horne: I remain quite optimistic that the market will reach its own level. The landscape is changing and the banks that are competitive today are different to those that were competitive five or six years ago. One of the lessons that I have seen over the past five or six years is that it is not the broad market that fundamentally changes, but rather the players within the market in terms of who are the borrowers and who are the lenders and who are the providers of the funding. The deals are still being done, and the product is still being used, often in new and innovative ways, and that is a sign of a healthy market.
Taylor: What do you think about the concept that the old model is truly dead, that booking an ECA asset is arguably a bad thing, and that we should always be originators and distributors of this paper?
Mitman: We are just a capability. We have zero assets.
Joseph-Horne: We like assets. We are a commercial lending institution.
Mitman: At what price – at today’s price?
Joseph-Horne: We will take a view of what the market price is, and lend or not at that price, at that time.
Howard: I think we can all have different business models, and it will be a combination of both of those. Historically, we have been a take-and-hold animal, but we have transformed.
Shaw: I am sure that there is room for people who want to close and hold, and I am sure that there is room for advisers, but I agree with you. Historically, banks are close-and-hold, because it was so easy to do and because it was allowable, because, from a regulatory point of view, there was no pressure to do otherwise. I do think that lately there has been an enormous shift. Every serious player realises and knows that distribution is an important part of the deal. It is not easy. Investors have to understand what has been done. If you go to a model where there are only investors and you only close and distribute, it can collapse through investor ignorance too. There are inherent dangers in that model, which is why I think it will always end up being somewhere in between.
The difficulty that banks have to face as well is the fact that you may not be able to distribute until after the disbursement period is over. There is an enormous amount of analysis in terms of the portfolio that you are putting together which has to be distributed, because you have uncertainties in terms of what it is you are going to sell and at what price three years down the line.
Joseph-Horne: It is a case of having the options open: whether you start off holding and then look to distribute later on, or the market changes and you want to adapt to it and distribute more actively. It is a case of having those options, whether those options are book and hold, book and distribute later, or distribute immediately.
Gazal: Right. Having this option and this flexibility in your model is important. French banks have learned the hard way in the last couple of years and have had to adapt. Through this transformation, you inevitably tend to build a book that is more flexible and fungible in case of need. It does not mean that, today, you have to sell everything that you originate, but you must maintain flexibility down the road. The concern that I have, which goes back to the question on pricing, is that when banks are pricing these deals so tightly today, there is a herd mentality. Bankers have short memories and always find a reason to undercut pricing. Ultimately, if it is not sustainable, you are removing all the flexibility that you may have down the road. There has to be more rigour. There isn’t enough of it in the market today.
Mitman: When the Fed last made noises about potentially doing something around QE, US Exim capital markets pricing jumped. That is very difficult to factor into your pricing for longer dated commitments.
Howard: Going back to the point about the model, we have clients who we need to service, which means that we have to keep some skin in the game. The ECA banks will also expect us to keep some skin in the game as well. A lot of them are willing to open their arms to new sources of investors, mostly in the banking sector, whether regional or previously non-export finance banks, and maybe to consider the institutional investor, such as insurance companies and pension funds. The banks that have the clients need to remain in that transaction over term.
Gazal: That is part of the reason why a lot of the ECAs have not switched to a direct lending programme or to a full-guarantee programme other than in aircraft. The whole transaction is no longer managed; it is the ECA who is directly facing the borrower. All ECAs cannot afford to do that or do not want to do that. They do not have resources or a network; they rely on the bank to assist them with local issues. It is very hard to envisage a structure where you have direct lending from ECAs, and the banks being absent from the equation.
Taylor: Many of the banks involved in this business do not have a core presence nor do they have the ability to provide this network. It has been very much a case of being close to their exporters and supporting them as much as possible by flying to required meetings. However, they are not on the ground and therefore often do not know the borrower.
Gazal: Active export finance banks have more proximity to the borrower. They may not have an office in that particular country but they may have a regional office that oversees that region.
Taylor: From my perspective, a local presence is both extremely powerful and very useful. However the infrastructure such as the administration, management, credit analysis and restructuring team also play a significant role. The agencies could recreate or outsource this infrastructure, but it is there already in banks and it is up and running.
Lerch: I guess the problem for ECAs is that they are also not aware of what, ultimately, is the best solution for everybody. They have made a good job of providing funding guarantees, and that has been helpful for the time being. In the meantime France, Denmark and Austria launched refinancing guarantees which might be eligible for institutional investors or covered-bond schemes. From my perspective, that is something that will be ongoing because they are trying to provide support.
Gazal: The Scandinavian ECAs have been tremendous at coming up with different solutions and making them available, as well as being very sensible in their approach. This is an example that the other ECAs could follow. What is happening in France now is they have created the Banque publique d’investissement (BPI), which is going to provide direct funding for small transactions. Coface also came out with the securitisation guarantee. The more options you have, the better it is for the future. The ECAs that are reacting in that way are showing good responsiveness to the exporters.