When Covid-19 brought global trade to a near standstill, export credit agencies (ECA) stepped up by introducing or expanding cover for working capital programmes, rather than traditional project-led financing. But with the pandemic still raging and concerns over insolvency growing, do companies need to see a paradigm shift in export credit? John Basquill reports.


The impact of the pandemic on trade cannot be overstated. Between April and June 2020, when containment measures were at their peak in most parts of the world, UN figures show that the value of global goods trade was 19% lower than during the same period in 2019 – the sharpest drop since the financial crisis in 2008.

Though there have been signs of a partial recovery since then, driven largely by soaring exports from China, the effects of that trade crunch are still being felt. Many large corporate buyers were hit by a sudden drop in demand, leading their suppliers to face delays in payment or order cancellations, while demand in some sectors rose sharply.

In both cases, the result was a squeeze on liquidity across whole supply chains and a spike in demand for financial support. With governments across the world stepping in to facilitate that support, export credit agencies (ECAs) played a crucial role in allowing banks to lend without taking on the full risk themselves.

The Berne Union, a global association for the private and public export credit industry, says that among its members, new cover for domestic risks increased by 50% year-on-year in the first half of 2020, to a total of US$36bn. It adds this was largely cover for working capital and manufacturing risks.

“80% of members reported an increase in new demand, most commonly for short-term credit and working capital products. Around a third of respondents indicated that this includes a substantial increase in inquiries from new clients,” the association says.

At the same time, Berne Union members saw a “marked increase” in payment deferrals, and “most expect to see Covid-related claim levels rising” from early 2021. The most vulnerable sectors are transportation, especially aeronautics and shipping, as well as retail, construction and product manufacturing.

The liquidity issue also topped the agenda at a September meeting of the ECA heads from each G12 nation. A joint statement from all 12 – the first ever such statement – describes the meeting as “a productive and open exchange that highlighted efforts aimed at stabilising the availability of working capital and export credit in a volatile international market environment”.

“The ECA leaders reiterated their steadfast commitment to supporting their global supply chains – domestically and internationally – as well as promoting exports, job security, and financial investment, all of which underpin prosperity at home and abroad,” the statement adds.

However, as Berne Union secretary general Vinco David points out, many of the emergency measures taken by governments and ECAs “are set to expire by the end of this year”. When it comes to claims, David says this “may be a determining factor, as indeed will be the substantive course of the pandemic itself, which remains to be seen”.


New mandates: ECAs respond to crisis

As of press time, it is too early to see the full extent of working capital support on offer from most ECAs. Sweden’s EKN, however, published a detailed report in September that reveals a surge in demand from both larger corporates and SMEs.

Before the Covid-19 crisis, EKN’s standard offering included a working capital credit guarantee for SMEs, albeit with cover limited to 50%. Once trade started to stall – Swedish exports fell by 17% and 26% year-on-year in April and May respectively – that limit was raised to 80%.

EKN says the number of working capital credit guarantees for SMEs increased by 20% over that period, even though other types of guarantee went into decline.

The overall number of transactions fell, yet the number of individual companies that obtained guarantees and the overall value of transactions grew.

A spokesperson tells GTR it is difficult to draw conclusions from the change in volume, but the “much higher value is related to EKN being needed more than ever in times of crisis”.

The ECA also created a new product by expanding that offering to larger companies. “At the start of the crisis, many large corporates contacted EKN requesting that EKN share risk with the banks, for the purpose of gaining access to working capital financing. Normally, this type of risk sharing is only offered to SMEs,” it says.

“Some companies had experience of this crisis measure from the 2008-10 financial crisis, but EKN was also contacted by many companies that had not previously been customers. By the end of August, EKN had issued a total of 46 offers amounting to SEK135.6bn [US$15.7bn] for this product.”

The agency had previously admitted that demand was higher than anticipated. EKN director general Anna-Karin Jatko said in April that working capital guarantees for large corporates were expected to total SEK100bn [US$11.6bn], adding: “It is important that we act quickly given the current circumstances. Companies need to secure immediate financing for their working capital.”

Between January and August 2020, the total value of EKN guarantee offers was more than four times higher than over the same period in 2019.

Rising demand for working capital facilities among larger companies is also a pattern on the other side of the Atlantic, according to Judith Pryor, a director at the Export-Import Bank of the United States (US Exim).

Pryor said during October’s GTR Africa 2020 conference that working capital guarantees “are usually smaller facilities, maybe US$20mn or US$30mn, but now we’re seeing Fortune 500 companies coming to us”.

“The amounts are US$500mn, US$700mn – Boeing, US Steel, Embraer, Freeport LNG – and many are first time customers as well,” she added. According to Pryor, US Exim has already supported more than US$1.5bn in financing “primarily in supply chain and working capital loan guarantees since Covid hit”.

There are similar stories across many more ECAs. Poland’s Kuke issued an announcement in May saying its new Gap Ex+ product could be used to secure factoring or working capital loans, “significantly improving liquidity”.

Finland’s Finnvera says demand for financing “exceeded our preliminary estimate”, providing more cover in the first half of 2020 than in the whole of 2019. The agency says demand was initially stronger among SMEs but then “shifted to larger enterprises”.

And UK Export Finance (UKEF) launched a new export development guarantee in July, allowing it to support working capital needs on a non-contract basis. Automotive giant Ford was an early beneficiary, receiving a UKEF guarantee on a £625mn loan facility.


Difficult times ahead

Despite ECAs’ considerable efforts in supporting companies’ need for working capital support, industry experts are not expecting 2021 to be plain sailing for exporters.

The Berne Union says the current environment, with high demand but low claims, may prove to be the “eye of the storm”.

“A combination of the natural claims cycle and mitigating efforts from governments around the world means that Covid-related claims will not appear immediately. We do expect to see increasing claims in 2021,” says secretary general David.

The association adds that “increasing corporate insolvencies and the wide economic recession are the biggest ongoing concerns”.

A Euler Hermes study published in July said the pandemic is expected to “trigger a major acceleration in business insolvencies due to both the suddenness and historic size of the economic shock and its expected lasting effects”.

“So far, government interventions to prevent a liquidity crunch for corporates, including tax deferrals, state loans and guarantees, wage subsidies and debt moratoriums, have helped limit the immediate translation of the Covid-19 shock into official insolvencies in many countries,” it says.

If that policy relief is withdrawn too quickly, Euler Hermes says it expects a significant increase in insolvencies.

Gabriel Buck, managing director of trade consultancy GKB Ventures, warns that suppliers taking advantage of such schemes may not have fully grasped what is at stake.

“Working capital facilities for exporters have been a godsend in terms of creating liquidity. However, the guarantee that they’re providing is not to the exporters themselves. What the schemes do is provide risk protection to the banks,” he tells GTR.

“If the suppliers that are taking advantage of these facilities find that their underlying buyer defaults, the facilities they have protect the banks, not them. I worry that a lot of suppliers don’t seem to realise this.”

It is too early to know whether those concerns will materialise in 2021, but in the UK, a May study by the Business Banking Resolution Service found that 43% of businesses surveyed do not expect to repay emergency government-backed loans taken out during the height of the crisis.

The study says this is “either because they do not think they will be able to, or because they do not believe that the government will pursue the debt – despite this being a matter for the banks”.

Buck says that another concern is that buyers might not be benefiting from financial support to the same degree as suppliers, due in part to a lack of harmonised effort among different countries’ ECAs.

“ECAs have been good at providing that quick injection of liquidity into the market, particularly on the supplier side. What hasn’t happened, at least on a co-ordinated basis, is anything to help the buyers,” he says.

“Individual ECAs may have put their own programmes in place, but there has been no consensus or agreement at the OECD level. The OECD, as the governing body for export credit, has not got its act together to co-ordinate that.

“Where I’m concerned for the industry as a whole is that this becomes a free-for-all, and ultimately that will be to the benefit of the strongest ECAs.”