Dealing with uncertainty

The global uncertainty spurred by low oil prices, terrorist threats and political instability has increased the need for security in export finance. GTR gathered experts in the sector to discuss its outlook.

Roundtable participants

• Olwyn Buldhoo, head of ECA finance EMEA, BTMU
• Andre Gazal, global head of export finance, Credit Agricole CIB
• Yasser Henda, global head of export finance, BNP Paribas
• Erik Hoffmann, global head of export and agency finance origination, Santander
• Jonathan Joseph-Horne, global co-ordinator and EMEA head for export and agency finance, SMBCE
• Ralph Lerch, global head of export finance, Commerzbank
• Faruq Muhammad, export finance head for Middle East and Africa, Standard Chartered (chair)
• Xavier-Marie Robert, head of export finance, funding, Americas, Asia and sectors, Société Générale CIB
• Jeremy Shaw, global head of export finance and EMEA trade head, JP Morgan
• Alex Taylor, EMEA head of export agency finance, Citibank

Muhammad: On the overall round-up for 2014, who wants to take the first shot at telling us how they felt the year was?

Gazal: Despite some of the geopolitical and economic issues that took place in 2014, be it the Russian sanction situation, lack of pick-up of the US economy, or signs of deflation in Europe resulting in projects stalling, I think we have seen a relatively good year, globally, in export finance. The volumes have been lower, but we have seen more banks involved, and more liquidity as well, resulting in more competition and pressure on pricing.

Shaw: Yes, I would agree. The first half of the year was very strong, though down from the peak from prior years. As we moved into more uncertainty in the second half of the year, and speculation around interest rates, that had an impact on the industry and deal flow.

Henda: The first part of 2014 was rather slow, with uncertainties, whether it was geopolitical or the slowdowns in a number of economies. A number of emerging markets did not deliver as anticipated, and moved too quickly into the risk attention zone. This being said, generally speaking, liquidity helped this market. We have seen small, medium and very large sized transactions, in particular in the limited-recourse and project finance space in North America and Asia. The year ended up with decent volumes. Downward pressure on prices was one of the topics of the year, and I think will continue, going forward.

With volumes getting slightly lower, the gap between banks is reducing, compared with the past few years, when the top banks in terms of volume-taking were way ahead. I think the volumes are getting narrower and narrower, and more banks are getting involved with significant takes on the market.

Hoffmann: If you look at the inswings, where the volume really happens, there was a sharp reduction in volumes for aviation finance. At an industry financing level, the change has been quite modest or has increased, compared to last year. This, I think, is the main reason why the banks are getting closer together in terms of league table position. Some of the institutions have focused very much on industry, and they are suffering the most from the fierce competition in the ECA world.

Shaw: I think there are other factors as well, depending upon interpretations of Basel III and capital requirements, so I think there is a lot more sub-selection around deals. However, this has made the deal landscape a bit more competitive amongst banks.
Robert: 2014 was a decent year given the context of somewhat widespread turmoil. ECA volume bounced back a bit after a rather strong tightening in 2013. There were big projects in a cash flow-driven approach or even in the conventional field… that fuelled the activity! At the same time there were more banks involved than ever before. The usual European suspects were as active as ever and the mega Japanese banks continued to chase good assets. The lenders are basically all awash of cash, something that puts real pressure on pricing. That’s undoubtedly good for the borrowers but is becoming more of a problem for the banks, particularly in light of Basel III requirements.

Joseph-Horne: Generally, it has been a pretty good year. I think there is a general slowing of deal volume, but we have seen a continuation of some of the trends of recent years like the mega projects in the project finance market, and developed market and investment grade borrowers making use of the ECA product which has been one of the interesting developments of recent years.
Taylor: We have seen the bank market come back in a very big way: liquidity has returned. As a result, pricing has come down significantly. In the aviation market, for example, pricing has dropped dramatically. One interesting development in export finance is that the complexity of some deals has increased. In terms of tenor, the market is willing to go longer, provided there is ECA support. Indeed, in some instances, profiles have gone out beyond the terms that can be expected with ECA-related funding. Despite the considerably improved market there will undoubtedly be bumps along the road.

Buldhoo: We have seen some of the transactions that have been in the pipeline come to fruition. There is significant liquidity in the market, including a very healthy bond market. Whenever we have such liquidity in the market it does affect the ECA space, we do see a reduction in new transactions, and I envisage that happening in 2015. Many of the transactions that we now see are
no longer plain vanilla structures any more. The ECA transaction has to be utilised in a more sophisticated way in order to compete with that liquidity.

Muhammad: 2014 was a good year for export finance with a number of deals flowing through the pipeline in the previous year. We have seen, though, in some of the markets, particularly the Middle East, which used a lot of ECA financing in the past 3 to 4 years, that they now have more options, particularly local and regional banks. In the ECA space in Middle East there are a number of Asian banks which are now coming in with huge liquidity, and are willing to come in at low levels. I think tenor still is an advantage for ECA-supported financing. And that is where I see them more being used by the limited-recourse and non-recourse markets in project financings, where we still see demand. Pricing will continue to be under pressure.
A lot of Japanese banks are now coming into play, in the Middle East, in a more aggressive way than they have previously. That is good for the borrowers, because it will also drive pricing down in that space.
In 2014, how were aviation financing volumes, compared to what you have seen in previous years? Now that the full impact of the new sector understanding has come through, are the airlines looking at commercial financing more than ECA financing? How do you see those trends, from 2014 and as they carry forward?

Taylor: We have seen much more competition in terms of non-ECA solutions, whether from commercial banks, or from enhanced equipment trust certificates (EETCs) – there are now many more choices available. We pitched on a recent deal, which I am sure many other people here pitched on, where there was a shortlist of 20 different banks. Remarkably, we missed that shortlist despite pricing aggressively. The winners offered a raft of commercial solutions – ECA finance was just cast to one side. We are going to see stronger airlines tapping the commercial market more frequently, because it seems to be, in part, cheaper. There is going to be an element of topping up with ECA funding – certainly ECA will remain relevant for airlines.

Shaw: Post-crisis, the ECA will remain part of a sophisticated borrowers’ arsenal of funding requirements, because markets can come and go very quickly. The sophisticated airlines understand that, and have a balance. However, at some point, commercial lending will be much lower. Capital markets will be lower. People understand that. They will fund accordingly to hedge that effectively.

Hoffmann: Underlining that again, the airlines we are talking to are using all the financing alternatives they have. The conclusion I draw from it is that the commercial investors simply look for yield. If they are going to these kind of asset class, aircraft financing especially, the narrow body planes, for example, the 737 or A320 are more seen as a commodity in the industry, and I think there is not much room for ECAs right now. If you look at big birds, at the A380s, for example, there may be opportunity in the future.

Lerch: I totally agree, even if we are not the most active bank in aircraft finance we also have seen more demand for commercial financing solutions. Looking at the provisional Hermes volumes in 2014, the portion of cover for aircraft went down to 12%. This illustrates that, from our perspective, the volumes have moved to other alternatives. We expect that some of the second-tier airlines will seek ECA financing in the future, since they are lacking long-term financing solutions.

Muhammad: How has increased global terrorism risk affected your business, particularly with Islamic State and Boko Haram? How is the industry adjusting to this?

Lerch: I believe that terrorism is not limited to the emerging markets anymore. We have seen that we are all somehow endangered in our Western society, with our values and the way we are doing business. You cannot ignore that in some regions or destination countries of ECA financing, terrorism may also have an impact. For instance, we signed a Hermes-covered loan agreement for an energy project in the Kurdish region of Iraq, last year in July. All of the parties involved – our colleagues in the bank, Hermes, the exporter and the investor – were really worried, because at the same time, IS was close to Baghdad. You can imagine that our business in such an environment is not self-explanatory and so we had intense discussions on whether we should go ahead or wait, knowing that it is almost impossible to predict how such conflicts will further evolve and how terrorists may behave.

It was a huge achievement that, even in that period, Euler Hermes provided cover for such a deal. I believe otherwise the project would have been postponed.

Muhammad: In Nigeria, if the problem had been in the south, there would have been much more concern around it. Because it is in the north, I think there might be a higher perception of Nigerian risk, but transactions are not going off the radar. There might be a bit more due diligence needed.

In the Middle East, however, the IS issue has wreaked havoc, particularly in Iraq (which was poised to be an ECA growth market). A lot of transactions and discussions in Iraq have to be completely re-looked at. Commerzbank was probably lucky to be able to sign a loan agreement.

Robert: This is a matter that you cannot ignore. Beyond the danger in itself, terrorism can create political instability or even lead to a completely messy and unexpected situation. Just look at how quickly IS took control of Mossul, the second-largest city of Iraq, in June 2014. Signing a deal in countries so affected by terrorism gets much more difficult.

Henda: The areas affected by IS were prospects for business, and what this is doing is delaying for a period of time any initiatives for that part of the world. For Boko Haram, I agree with you, Faruq. It is north versus south, unfortunately. I think business in Nigeria has not been affected for the major industries, major clients and major sectors.
Hoffmann: In Nigeria, we are going to monitor very carefully if this is still a very domestic issue, or if it is going to expand. It is now affecting Niger. It is going to Chad. If you look into IS, could it affect the south of Turkey and the big infrastructure projects which are taking place there? I think we have to monitor very carefully how the Islamic State ‘idea’ is moving in the area, even though those countries which are currently affected are not the ones which are very active in the export finance business.

Muhammad: In terms of the Russia and Ukraine conflict, how much of an effect has this had on risk and deal flow?

Joseph-Horne: We have definitely seen a decline in deal volume from Russia and Ukraine, but so far this has been reasonably localised. There are still deals taking place selectively, and after being looked at very carefully to ensure that any proposed deals are fully compliant with any applicable sanctions. We are still seeing banks supporting the region. I think the CIS is going to remain an important region for ECA finance, and if it stabilises I am sure business flow will come back.

Robert: There is no doubt that Russia was an important land for ECA business. All of a sudden volume declined there. Société Générale, who has a long-term strategy in this country, may still consider transactions. And there are still deals to be done, of course in strict observance of the international sanctions. The question is not only limited to the issue of compliance. We also need to take a view on the impact of the sanctions, combined with today’s drop in the price of oil, on the viability of Russian companies further down the line.

Buldhoo: We need to consider not only which names are sanctioned today, which clearly has an effect, but also what could be the next move, and whether the relevant authorities will include more names in the sanctions. At our institution, being very conservative, we do not look just at the sanctions names, but also take a cautious view on what that next step might be.
Of course, that will have an impact on the deal flow coming from Russia and indeed Ukraine. There may also be a contagion effect, because we are looking at cross-border activity. We must also consider that Russia has its own ECA with Exiar. I am not sure how many banks can now actively work with Exiar.

Taylor: We expected an increase in deal activity in Central and Eastern Europe, as well as the CIS region. I would not say it has been a complete transfer of deal volumes; we are not in a business where you can just simply transfer deal volumes from one country or region to another. However, there is clearly an increase in interest and activity in these regions.

Gazal: While I agree that there seems to be more activity in the CIS, I do not think this is necessarily directly related to the Russian situation. You cannot transfer the risk and the business from one area to another. In terms of volumes, Russia represented a significant share of the ECA business globally. Then, in a matter of weeks, it came to a grinding halt. Some deals are trying to get done, but concern about other potential sanctions makes us very cautious. What we are also seeing is the deterioration of the credit situation in Russia, which could become a big concern following the devaluation of the rouble and the oil price collapse. Also, because of the sanctions, they cannot necessarily sustain their investments. It is going to be very difficult to replace this business. Substituting ECA business that was being done in Russia elsewhere is not that straightforward.

Hoffmann: It is a collection of a lot of factors: the sanctions, the conflict, the depreciation of the rouble, the oil price, or commodity prices in general, which are again putting Russian companies in a very difficult credit and liquidity situation.
We do not underestimate that companies like Rosneft and Gazprom have to refinance billions over the year. They cannot really match their refinancing needs with the big Russian banks only.
It is a very crucial situation.

Henda: Today, there is a lack of visibility, either on tightening of sanctions, but also, if one could look for a positive, possible relaxation, and how the relaxation could be dealt with. Would you project it on a longer run, or wait and see? The second topic, the credit quality of existing exposure, existing portfolios, is an important topic for our existing undertakings in country. The commodity cycle does not help that. It is possible to look forward but also dealing with what we have got in our portfolios is an important factor.

Hoffmann: Do you see any closer links between Russia and Asia, specifically China, in this aspect? There is one very prominent project, which is progressing right now. Is the deal flow from China and from Korea much more intense into Russia than it has been before?

Gazal: Today, I cannot say that we have seen that much of a switch, but the expectation is that there is going to be more trade flows between Russia and China. How that gets financed is another matter, as sanctions apply to everyone.

Henda: You may see other players that are getting into this business for different reasons, but it is unlikely that it would change the stance for our banks and institutions.

Lerch: For the central Asian CIS countries the impact from the political crisis in Ukraine comes with some sort of a delay. We are noticing that workers active in Russia, from Azerbaijan, Armenia, Tajikistan etc, tend to transfer less money back to their home countries. For those countries this provides some additional constraint. In parallel, exports from these countries to Russia and Ukraine have also declined. Therefore it is unlikely that capex investments will go ahead without considering such impact. It seems to me that business in central Asia can only partially replace the business in Russia in recent years. Smaller countries like

Belarus are also in a pretty tough situation, because nearly 80% of their exports are going normally to Russia. That stopped in December almost completely, when the rouble went down. The impact is still spreading. I am really pessimistic that CIS will play an important role for ECA business in 2015.

Muhammad: Have you seen ECA shrinkage? Are they now asking more questions on projects in Russia and Ukraine?

Taylor: There is understandably a different level of scrutiny as regards what money is being used for, and if there is any alternate end use for the product. The kinds of discussions taking place are multi-layered and complex.

Gazal: Some ECAs have told us that they are still open on Russia, but they are basically piling up the applications on their desks, and they are not processing them, whereas others remain quite active and are looking at Russia on a case-by-case basis.

Buldhoo: More significant is the language in the documentation that has been introduced. This has also had an impact on the deal flow, where it has delayed the process. It has also caused situations where clients have re-opened negotiations in a transaction. My view on Russia is that it will be a very difficult year. Even with the transactions that fall outside of the sanctions, banks will behave cautiously and will seek to introduce sanctions language in the event that those names are included or affected in the future. I think that will lead to further shrinkage in that market.

Joseph-Horne: It is also fair to say that sanctions have had an impact on existing transactions. Banks and ECAs are devoting significant resources to understand the sanctions impact on existing deals and ensuring they are compliant with the sanctions regimes. Some issues which banks and ECAs have considered, for example, are whether drawdowns and amendments or waivers are permissible, in each case with respect to facility agreements entered into prior to the sanctions effective date, etc.

Muhammad: How has the oil price drop changed the way you support exports in the sector? Personally, particularly from an origination perspective, I think that this is great news, because export finance by itself is counter-cyclical. In the Sub-Saharan Africa space and also in some of the Middle Eastern countries, opportunities in export finance will become much more numerous. Size-wise, I also think it will have an impact. Unfortunately, I think some of the ECAs, with their risk appetites, or the reinsurance market, may not be as enthusiastic about it.

Taylor: It has a negative impact on some borrowers, and a positive impact on others. For those companies that have a substantial cost base related to the oil price, such as shippers, the cruise segment, or airlines, there are benefits. Energy-intensive industries are going to see that element of their costs come right down. On the shipping side, there has been a real pick-up on the demand for tankers. People are using them for storage to deal with the contango at the moment.
On the other side, a number of oil and gas projects will become more challenged, as people re-assess long-term oil prices. There is a view that prices will need to normalise at a higher level if base line capability is to be maintained. There is a tussle going on between some of the OPEC producers and the new producers. That will, at some point, need to shake out in order to normalise the situation.

A number of oil producers are being hurt. We’ve already talked about Russia and sanctions. But I think the much greater harm is being done by the oil price. The oil price fall has hit a raft of countries, and will flow through to credits: people are talking about downgrades. As a result, ECA finance will become more important. As oil producers find themselves in a more difficult position, they may shift from being very focused on the commercial bank market back to reconsidering the ECA market.
The last point I would make is that a cut in the oil price of this magnitude is like a huge fiscal stimulus to developed countries that are net oil importers – soto that extent it ought to be positive.

Henda: Some of the oil-importing countries will take advantage of focusing on infrastructure developments and shifting the spending to long-delayed investment opportunities in key infrastructure sectors.

Shaw: The firm view is that it is not going to remain at this level forever. It is a shorter-term adjustment. These are long-term projects. Again, it depends on which companies and which borrowers you are dealing with. Top-tier borrowers understand their business. It may be now be a challenge for them, but over the life of the project it will equalise out.

Joseph-Horne: I think that if we were to make an assumption that the oil price will stay where it is now, then we will see a fundamental shift in trade flows and capital projects away from producers towards net consumers, and that will have an impact on our industry. My personal view is it will be a mildly net positive impact overall, in terms of infrastructure spend, capex projects, etc. However, the reality is that nobody knows whether this is a short-term drop in price and if it will spike back up, or whether we have entered a new paradigm and we will be looking at US$40 to US$60 a barrel for the next five years. Until we have a clearer view on that, it is difficult to judge the structural impact of today’s oil price.

Lerch: It is always a matter of perspective, some will benefit from the decline in oil prices, others will suffer. But due to the overall situation it is obvious that risk departments will be even more cautious and look at each business case asking, ‘Will the borrower be able to meet his debt service requirements?’ and ‘What will happen in a worst-case scenario?’ So we will have to do more to assess projects and to convince our risk people of the underlying business case irrespective of whether it is directly impacted by oil or not.

Hoffmann: I believe that every increase in volatility and every additional risk which is coming into the market will in the end be beneficial for us in the ECA world. Whenever your risk departments start looking much more carefully at the due diligence, it is very much truer for the commercial money. If any industry is benefiting from volatility from risk, I believe it is us.

Robert: For the countries that massively rely on oil imports this will be somewhat similar to a large fiscal stimulus and will give purchase power back and help to foster growth. For the companies that make heavy use of oil-related energy such as cruise companies, airlines and shipping companies, that will be positive. But it will put a number of oil-producing economies and companies under more financial or budgetary strain, leading to a cut in investments and projects. Announcements by some of the major oil producers have already been made in that respect. However, key infrastructure projects will still have to be developed in these countries and this could open the game to ECA-backed financing solutions which were not previously so appealing.

Muhammad: My personal view is that for the export finance business, this is going to be hopefully a net positive impact, because while there may be cutbacks or postponements and delays in some of the current oil and gas projects, there are some large economies, particularly in Sub-Saharan Africa, which have critical infrastructure spend. Some of it will delayed, but some critical ones will continue, and they would require more ECA support than they have until now. Similarly, there are other economies that will benefit from the lower oil prices, and they will then proceed with some of the projects that they have had on hold for
some time.

Buldhoo: For most of the projects that are in line for approval to move forward, I expect a ‘wait-and-see’ period given the sharp oil price drop currently being seen. In the long term, there has to be a reassessment of the economics of the project. Only then, I would expect the projects to proceed. I think 2015 will be impacted by this ‘wait-and-see’ period.

Henda: We have seen already a few large projects being cancelled.

Gazal: You are going to see it shift away from the oil and gas sector, which traditionally has been a big user of ECA financing, on to other sectors that will benefit, like infrastructure in Africa and other emerging economies, where they are going to have the means to spend due to savings in oil imports. It is going to shift into totally different sectors, and have a rebalancing effect.

Henda: This comes back to Russia: if the Russian economy was not correlated to the commodity cycle, you would think about substitution. However, the correlation is such that this reduces the possibilities of substitution from Russian business.

Muhammad: How has ECA support evolved in recent months? Have you noticed a change of attitude? Do you feel ECA direct lending competes or complements bank-funded ECA loans? Do you see some ECAs becoming more aggressive and more prominent now, particularly the second-tier ECAs as well, or category B ECAs?

Hoffmann: I believe that we are not so much affected by the ECA direct funding. We could promote the second-tier ECAs which do direct lending, as you mentioned before, to some of the better rated borrowers for which the all-in pricing is the determining factor. Hence it will be more complementary than competing.

Joseph-Horne: I have seen an increased focus from some ECAs on co-lending, rather than direct lending in the sense of replacing bank lending. The market has now moved on from how many of the newer direct lending schemes were initially conceived in the dark days of low bank liquidity in the market, and I think the need for ECAs to step in and provide alternative liquidity to banks is now much diminished. However, I do believe there is a role for co-lending by ECAs alongside banks and I welcome that approach.

Taylor: We do not see direct lending as a challenge. To the extent that the agencies are willing to work with banks, they become another useful partner. We always work in every single deal with other banks and other institutions. Where it becomes an issue is if they choose to structure and arrange deals themselves, and in doing so disintermediate banks. We do not know many that do that. The other thing that we have seen is agencies are becoming more willing to embrace complex, newer ideas, and that has been helpful.

Muhammad: ECAs are continuing to be very supportive on transactions. In fact, they want to get engaged earlier in the process. If you engage them early in the process and work through some of the complexities, they are very open to looking at various structures. We have seen them coming in with an open mind, and the appetite as well. Most of the ECAs want to serve as a complementary product to banks. I think that the cases of ECAs taking and arranging it all themselves are few and far between, and only in cases where they have a huge internal justification.

Henda: I think ECAs are not equipped for that and do not have that intention. It would be too heavy for them to invest in resources to compete with banks and financial institutions in structuring and arranging deals.

What we see also is that ECAs are very active in their markets, and competing against each other more and more. They are trying to deliver more innovative products, getting into new risk profiles, from time to time.

On the topic of competition, funding, co-funding etc, ECA direct funding is always helpful to fill in some gaps. Clearly, it is a plus. We cannot, as institutions, say: ‘No, we do not need you today.’ Then overnight, when there is an issue, say: ‘We need you.’ We need to find the right balance across parts of the cycle, in order for every party to find its space.

Robert: ECAs have been quite supportive, in my view, fully playing the role that has been assigned to them by their guardian authorities. We’ve seen them act quite efficiently when coping with more complex financing structures, and we value them more as partners. It is however an issue when the ECA takes the driving seat and structures and arranges the deal itself. But let’s be honest: this is rare! In terms of direct funding I would see that as a complement to the financing of jumbo deals rather than pure competition with commercial banks. I don’t believe this would lead to an eviction effect across the board in the long run – ECAs are not equipped for that, especially since their state budget is generally under strain nowadays. We should also remember that they are more than welcome to keep the wheel turning when times are tougher! It is good to know they have developed tools to bring liquidity in, be it direct funding or securitisation guarantees.

Gazal: Having a multitude of options is a good thing, because you can then calibrate your offer to the economic situation and to the dynamic of the market. More frequent dialogue between the banks and the ECAs is good, because you then can align the offer in order to be able to deliver the most competitive solution. Likewise, they can refrain when there is a need for them to hold back on promoting certain products. I think that this ‘synchronisation’ is what is needed in the market, and unfortunately up to now it has been done a little bit in parallel as opposed to jointly. The reason for this is that this is a political agenda from most governments.

Shaw: What sometimes frustrates me is the commercial nature of how the offer is deployed. We are all here to run a profitable business, and operate market standard, wherever that market may be. The question for those who are administering direct lending is: ‘How can we be sure that we are market competitive?’

Muhammad: Regarding pricing: how much lower can it go? I would like to split this question into two parts: the aviation and the non-aviation. The aviation side probably has come down significantly. Non-aviation has also come down under pressure. I still think that the underlying borrower, or where the underlying borrower
is, has an impact on the pricing. A borrower in, say, Kazakhstan might still be priced differently to a borrower in Qatar or the UAE.

Particularly in Southeast Asia, the pricing for non-aviation deals has also come down drastically. You are at double digits now for almost all ECA pricing. This is not so much in the Middle East, where it is still in the double digits and triple digits, but the downward trend is there. It has all got to do with the banks trading in with excess liquidity in those markets. In the more difficult markets, the pricing is still holding a bit, but increasingly you might get one odd institution which might come in and absolutely undercut the others, and then, lo and behold, the pricing starts to go down there as well. I think it is going to be in double digits for non-aviation. For aviation, it is already double digits.It might be single; I do not know.

Buldhoo: So much liquidity in the market generally means that tenors on public transactions are extended. The price amongst pure commercial facilities has also come down considerably. I think it can go even further. It does give concern and would result in less business, simply due to the fact that we must achieve a level of profitability on each transaction. There are however, banks out there that are prepared to do very, very low pricing.

We also hark back to the ECAs being able to put direct funding facilities at so called market prices. What determines market price when the price certain ECAs are prepared to offer is lower than most banks would be seeking? Perhaps, that is something that the OECD could take a look at. In general, I think with greater liquidity in the market, banks are chasing transactions, and I believe pricing will come down further.

Gazal: At the end of the day, it is a question of return on liquidity and return on risk for the banks. As long as that is maintained, it can go as low as the market will allow it to go. There should not be an artificial level. It should be driven by what makes sense in the market. Where it starts not making sense is occasions when one bank will just let go and drop prices for relationship reasons, or because another more competitive product is on offer, creating new benchmarks which are hard to sustain. That is the risk, as long as liquidity is abundant.

Henda: Ultimately, there is also competition against other asset classes. There is therefore some form of correlation or linkage between the pricing of ECA-backed facilities versus other asset classes. I see a risk if complete de-linkage takes place in the pricing of a given risk, between commercial, debt capital markets, and ECA-backed products. For the time being, it is still workable, but my fear is that the de-linkage takes place.

Shaw: Just like any other syndicated long-term borrowing, it is still a loan. I think it is a challenge, because sometimes the market treats it differently from how it should be treated. Obviously, on the aviation side, it is highly commoditised. There are plenty of others. There are leasing options. Plenty of people want to play in the space of nice ticket sizes. On the non-aviation side, it is still heavily relationship-driven, because there are certain banks who have more experience in certain markets.

Robert: Price tends to hold a bit in the more difficult markets while we can see tiny margins in the stronger playing fields, but its probably not sustainable in the long run in light of Basel III. One of the questions is also to what extent the ECA-backed financing solutions are able to compete with other financing tools, such as syndicated loans, debt capital markets or leasing. ECA loans may have an edge in terms of door-to-door tenor but the challenge is there.
Muhammad: The last point is the general outlook for 2015. From our perspective, in the ECA space we expect transaction sizes and deal flow to remain the same in 2015. In some of the markets we might see a reduction in plain vanilla ECA type of deals, so corporate borrowers who have historically or since the crisis used ECA financing to get long-term funds may not come into the market for ECA anymore. It will remain part of their financing mix, but they might reduce volumes there. Some of the project financings, on a non-recourse or limited recourse basis, will continue to drive the business volumes for ECA loans as well.

In terms of new entrants, in the Middle East markets we have seen some of the Japanese banks much more active. We are seeing more banks coming into the Sub-Saharan Africa space in the ECA market in particular, especially where there is 100% cover. There is going to be more competition, and we have to find ways to differentiate ourselves from other banks: not just around the export finance option.

Lerch: All of these political crises, all of this volatility in currencies, interest rates and commodity prices requires predictability for exports. But even if the attention is given, it will be quite challenging to succeed in concluding deals this year, because importers and investors also go through tough times to permanently adjust their business cases for potential capex investments in line with such volatility.

Henda: I expect the deal flow to continue and the demand to be there, in investments that have been delayed from 2014, and with some investors who would see the right windows of opportunities in the coming weeks and months to get into new transactions expecting, when projects come to operations in two or three years’ time, to be at the right time of the price cycle.
We see appetite for Sub-Saharan Africa. We see a significant focus to continue on the compliance and CSR topics. We have seen regional and local banks getting into the ECA space over the past two years, but with the price levels we are reaching, we will not see many new entrants in the market.

Shaw: We are forecasting some growth in 2015, though we’re likely to see less from the aviation sector. If a company is going to go down the ECA route, then obviously it is looking at alternatives, such as working with capital markets. We are already seeing prices increase. Investors want yield. If they are going to get yield through a lease structure, they will go with that option. To the extent that a company wants ECA-backed financing of some kind, the pricing is lower than the market standard on the aviation side, which is not really sustainable. On the non-aviation side it depends on the market.

Hoffmann: At Santander, we have a very good ECA financing backlog for 2015, and I think this is typical of the industry. We have an origination to execution time of 180, 360 days, even longer, so I would say that the first half of 2015 will be very good. We will have to fight for the last six months of the year, and I am convinced that something will be originated throughout the next six months.

I agree that we are shifting from one region to the other. I have been in the industry for 20 years and I have seen so many shifts in the business, coming from Iran to Russia, from Russia to Brazil, from Brazil to China. Africa is one of the targets right now. I believe that northern Africa or the Gulf area is still one of the areas to grow. Maybe there will be another opportunity soon. Maybe Iran will become popular again in the nearer future, depending on what is happening on the politics side. I am very optimistic for our industry in general.

On the pricing side, I also believe there that we will go further down, because most of the production factors of our industry, for example, liquidity costs, risk costs and return of equity, do have a continuous downward trend in the banking industry.

Buldhoo: I agree with Erik that there are a lot of transactions that are already in motion. When it will hit is towards the end of 2015, when we will see a decline in deal flow. I expect to see over the year a fall in the number of transactions as well as volume. That is purely down to the liquidity in the market, and alternative financing for those transactions. In terms of new market entrants, do I see new banks coming in as ECA-financed houses? No, I do not think so.

Where I do see a new interest is the local bank market. I think local banks have assets that they need to place, and perhaps they will utilise ECA. Where the ECA space might fight back, so to speak, is on the local currency. With hard currency like dollars, the non-dollar houses around the globe clearly have a liquidity cost. I think that perhaps we might see greater demand in local currency and perhaps we might see some transactions here.

Joseph-Horne: I see deal volumes trending down this coming year, partly because of fundamentals in terms of the range of financing choices that borrowers currently have, and partly because of the time lag as we see the effect of what could be a structural shift arising from the drop in energy and commodity prices. I think that the effects will take time to flow in terms of their impact on ECA deals, and as a result, we will see a time lag effect. I do feel broadly positive in terms of what we might be talking about as the state of the ECA market in 12 months’ time; in fact maybe more positive than my outlook for the immediate coming 12 months. As far as new entrants are concerned, I would be surprised if we saw arranger level new entrants coming into the market, but I do think that we will continue to see an increase in local and regional banks stepping into our market because they are attracted to the capital-efficient and risk-adjusted returns they can achieve.

Gazal: I am moderately optimistic for 2015. Obviously, Russia is pretty much out of the equation in the near term. In terms of potential growth, with the euro weakening vis-a-vis the dollar and widening interest rate differential, we should expect some pick-up in activity from European exporters, which can make them a little bit more competitive than they have been in the last couple of years. Having said that, the key for me will be the level of growth in emerging markets and timing as we have seen particularly slow decisions being made on investments.

In terms of the offer, there is abundant liquidity – that is not an issue. There is a concern about the competition from commercial credits and the bond market, but I think that there again it is a question of balancing out between what banks do for relationship reasons, how they compress their pricing on the commercial loans, and to what extent they are willing to stretch tenors.
I do not expect to see a dramatic shift in who the current players are and who is going to be there at the end of 2015. We talked over the past couple of years about institutional investors coming into the ECA space. I think that has been put on the backburner. Because of the excess liquidity and yield sought by investors, I do not think that is an attractive asset class for investors at this time, compared to alternatives they have.

Robert: The pipeline for the start of 2015 is good, even though we will not be fuelled by jumbo project finance as much as in the past. And there’s perhaps more uncertainty for the second part of the year and beyond. But it’s often like this in our industry. It goes without saying there’s going to be more banking competition, and not only in the ECA field. The pricing pressure is to remain, and will probably even intensify. Some jurisdictions will still be more or less unplugged. Having said that I remain broadly positive, globally speaking.

Taylor: Depending on the level of uncertainty created, it is possible that market reaction to the Greek elections might change everyone’s view that there is ample liquidity everywhere. In terms of deal volumes, there is competition from commercial markets, and that might compress export finance a little bit. However, we have a big pipeline for the first half, so things continue to look healthy. Regarding new market entrants, I perhaps have a slightly different view from you Andre. We still see non-bank investors come in. One lingering query is when they get up to speed, what would stop them from bringing in people to structure and arrange their own deals?

We have seen other people who we thought were supportive – and offered a friendly balance sheet – who turned out to be not so friendly and then moved into lead roles. So we are interested to see what happens there.