GTR and Chubb convened a group of industry experts in Singapore to discuss the geopolitical issues and economic uncertainty impacting trade, and the role of the trade credit insurance market in supporting flows in the face of evolving risks. Participants also explored topics including ESG considerations, data reliability, portfolio management strategies, and the potential for greater collaboration between banks and insurers.
Roundtable participants:
- Baldev Bhinder, managing director, Blackstone & Gold
- I-Mei Chan, managing director, head of portfolio management and distribution Asia, HSBC
- Tarang Khimasia, head, funded distribution, Asian Development Bank (ADB)
- Sam Ladbury, regional manager, credit and political risk, Chubb (chair)
- Carlos Ng, head, trade credit insurance, Standard Chartered
- Warren Rixon, director, credit insurance, Standard Chartered
- Irys See, senior underwriter, political risk and credit, Asia Pacific, Chubb
Ladbury: Considering the shifting landscape of geopolitical concerns and the China slowdown, how have risk, supply chain dynamics and financing requirements evolved in Asia Pacific over the last year?
Chan: On the supply chain side, we’ve seen a few key trends. The major theme is around nearshoring and moving operations from China more towards places like Asean. This shift is being seen in countries such as Vietnam, the Philippines and Bangladesh.
We’re also seeing a rationalisation of the number of partners: corporates in Asia are looking to realign themselves and build deeper strategic relationships with a smaller group of suppliers. This leads into what we’re increasingly hearing from corporates around payment and financing terms, which is becoming a key condition and consideration when reviewing supply chain partners.
We’ve seen a rising number of queries when it comes to our receivables financing facilities. While traditional trade finance and available working capital remain key, the higher interest rate environment and higher funding costs are driving greater demand for products such as inventory financing.
Finally, another of the key priorities for corporates is around reducing scope 3 emissions, and there’s an increasing interest in sustainable supply chains to incentivise the value chain to adopt the ESG agenda.
Bhinder: I would go so far as to say that the change in supply chains is unprecedented in recent history. As well as corporates moving away from China, there are energy and food security issues. New oil traders have popped up in the past two years. There’s the push for metals to support the green transition, such as nickel, cobalt and lithium, which now means there are lots of parts of Africa that you have to deal with as well. All these are new jurisdictions that are coming into prominence, and they carry with them legal risks.
It’s undoubted that some of these countries might not have as sophisticated or experienced a legal regime as the UK or Singapore, especially when it comes to international trade. That’s something you can’t run away from; it’s the price of doing business. Vietnam is a good example. Everyone is enthusiastic about Vietnam, and has been for many years. But the legal system there does present challenges for foreign investors or counterparts to navigate. However, the same could have been said of China 15 years ago, especially when it came to enforcing arbitration awards, but that’s now changed dramatically. There are still growing pains in Vietnam, Bangladesh, India and the Philippines as compared to more developed legal jurisdictions such as Singapore. But the unprecedented levels of international trade involving these countries would also give them opportunities over time to develop legal experience in that sector.
Ng: Similar to I-Mei, we are also seeing a lot more enquiries involving onshoring away from the traditional markets. For example, there is a slight shift or pivot towards the Asean region.
From a risk perspective, other than the shifting of the supply chain itself, the other trend I see is a transition towards leveraging data to support transactions. I think this is in line with how banks are evolving: Standard Chartered is a champion of looking at data as a way of how we get information from the client, how we understand the transaction, and how we manage our risk. This isn’t to say we are dropping reliance on the documentary part of things, but that dependence on data is becoming more prominent as we go along. This is not just a short-term trend; I think it’s a way forward for the medium and long term.
As a result, as we pivot more towards the use of data rather than hardcopy documents, a topic that we potentially need to spend more time on is cyber risk.
We have a lot of initiatives to work on platforms and trying to see how we can leverage the available technologies out there. But it’s a challenge because often we face limitations in working with third-party vendors.
See: Another issue is that data is only valuable if all the banks are inputting data on their counterparties to verify the accuracy and authenticity of those trades.
Bhinder: The trade finance registry is aimed at filling that gap in a data-sensitive way. I don’t think it’s foolproof, but it goes some way to detecting issues like double financing.
Ladbury: The Russia-Ukraine conflict, inflationary pressures and recessions in European markets have had broad ramifications. How have these events influenced your portfolios and strategies in the Asia Pacific region, and how have you adjusted to mitigate these challenges?
See: As a result of all that has happened in the world, we definitely see an uptick in political risk insurance enquiries, and that’s helpful for the market as a whole. We also see an uptick of pricing across the board, which is in my view a bit of a price correction, which the market certainly needed.
We are seeing new insureds as well, which is quite interesting. We have seen a couple of new corporates and banks coming to the market, because of what they’re hearing, and because of best practice sharing among their peers. All of those are opportunities for us.
From a risk management perspective, we are still very much business as usual. Our guidelines and strategy have been fairly similar, but we ask a lot more questions nowadays to make sure that we really understand the underlying flows, the investment and the purpose of that financing, and I think our bank clients have been very understanding of us when we ask questions.
I think we’re all supporting key clients and key assets.
Finally, we are seeing that banks are also holding a lot more on their own books, with the trade volumes and flows still being a little bit down.
Ng: We believe in diversification of our risk, and it’s more about rebalancing our strategy.
Khimasia: I often find that there is a lack of understanding of ADB’s operations and scale. Unlike the World Bank Group, we have both public and private entities under one umbrella. In 2022 according to our annual report, ADB committed around US$20.2bn in total across our public, private and trade operations. Of that, non-trade, non-sovereign or private sector represents around US$1.2bn. To put that further into context, we have 68 member countries, and 49 of those are in the Asia Pacific region, bookended by Georgia and Tonga. Given this, we don’t see a major portfolio impact.
However, there is a definite impact that correlates with our strategic operational priorities. Our member economies continue to recover from the pandemic; however, growth has slowed, and they face headwinds. Supply chain disruptions and sharp increases in commodity and energy prices have been exacerbated by the Russia-Ukraine conflict. This has particularly affected our economies that are more reliant on food and energy imports.
Recessionary vibes in the west impact demand and have affected our export-oriented economies. Pronounced currency depreciations and an increase in the cost of servicing debt are unwelcome side effects that ultimately impact living standards and cost of living.
Considering these challenges, we continue to pursue investments focused on our operational priorities. Some of these are very much at the forefront, including a focus on the nexus between climate change and food security, poverty alleviation and promoting sustainable infrastructure.
Rixon: The bank’s main priority is to support our clients within our footprint of Asia, Africa and the Middle East, and there hasn’t been a huge geographic or segment shift. In terms of things that have come through the insurance desk, we’re seeing that insurers are able to take a longer-term view in asset classes such as real estate where liquidity in the bank or fund market has dried up; the insurers don’t have to mark their assets immediately, so they’re able to take a view of good assets in good locations and jurisdictions without having to take an immediate mark-to-market haircut. As a result, we’re seeing a bit of an opportunity to distribute through insurance where normally we would have gone through a funded investor market.
The other side that we’re seeing more of is structured credit, whether that be project finance, shipping finance, or even leveraged finance or fund finance. The bank is finding more opportunities in those asset classes, but also the appetite within the insurance space has increasingly grown as insurers become more receptive to these newer classes of business.
Ladbury: Given the recent defaults and disputes in the trade sector within the region, what are the key takeaways, and how are you currently positioning yourselves or advising your clients for future resilience?
Bhinder: From a trader’s perspective, there are three things you need to think about. The first is what happens if your counterparty can’t or doesn’t want to perform? The second is what happens when a third-party event occurs that prevents people from performing? The third is, if someone can’t perform, how much do they have to pay? The reason why this is becoming acute in this market is because everyone is trying to renegotiate, either because volatility has gone through the roof, or because they simply think, ‘why perform this contract if I can perform another more profitable contract another day?’
This brings us back to the shifts in supply chains. There are new entrants to the market who may be smaller companies that might not have that long a trading relationship with their counterparties, and so they might be incentivised to renege on their promises and not perform.
The first point is termination events. When someone doesn’t perform, is there a termination event that leads to it?
The second is force majeure, which is a loose word that is bandied around, but it happens more often than we think. Currency devaluation, mine closures, export bans, all of these things have happened more in the past two or three years than they have in the 10 years before now. However, one person’s force majeure doesn’t necessarily translate to another person’s force majeure in the supply chain, so it might not be a credible argument to raise.
The third point is around limitation of liability. In some contracts, there’s what might loosely be termed a penalty clause if you don’t perform, but then what’s the point of having the contract if you can pay to get out of it? Is that a contract or is it a letter of intent? We’ve seen this particularly in the LNG market when prices went sky-high. People started to divert their cargo elsewhere because the additional profit they could make was greater than the penalty, and that is a real risk in today’s market.
From a bank perspective, all of this volatility, in addition to the liquidity squeeze, brings up the risk of fraud. Anytime there’s a liquidity squeeze, you get cases like we saw in 2020. When you cannot move cargoes, all of a sudden, the fraud exposes itself. I think the ultimate lesson for bankers in all of this is transparency, and there are many dimensions to this. Where does the trade flow start from? Who is it going to? That’s where bankers get caught the most because the borrower only tells them about the part that they’re financing, and that’s where the danger with double financing lies.
The second aspect of transparency is financial statements. They’re not the gospel. You can’t rely on them as much as you would hope, and overreliance on financial statements was the starting point of people making poor lending and credit decisions.
Ladbury: Are there any other key challenges in the medium term that could hamper trade flows, and has there been any change in what clients have been asking you for in terms of support?
Chan: We are looking at a more proactive strategy. We are seeing rising costs and we are seeing various evolving regulatory changes in all the Asian markets. As a result, we’re seeing companies exploring different avenues and looking at diversifying their supply chains. While regional sourcing is an attractive alternative, they also face new challenges as a result. What helps us is that we’re very entrenched in a lot of the markets, and we have a very good relationship and understanding of the risks, which means we can advise our clients as they navigate this volatility.
Ng: These challenges have always been there, but they are becoming more prevalent in trade and working capital and people are becoming more aware of them. For example, we now hear more questions from clients about how an insurance policy works when it comes to a dispute, or what the exclusions might be. What we’re also seeing more of is that there is increasing complexity around KYC and areas like ESG where a wider range of responsibilities need to be taken into account. As a result, there’s a greater expectation for us to do more due diligence on the underlying transaction.
Khimasia: From a sector perspective, infrastructure accounts for around 60% to 70% of our annual commitments in the private sector, and within infrastructure, the most prevalent is project lending. What we must understand is that we’re financing real assets that are monopolistic in nature and crucial to the functioning of the economy as they provide essential services. The project or infrastructure debt asset class is countercyclical from an economic cycle perspective, and the underlying projects have gone through years of feasibility studies before they reach the contractual financing point. Whether you’re a sponsor, a banker or a developer, you must think across the long-term economic cycle.
These more transient or temporary phenomena like interest rates, supply chain shocks and inflation have impacted the economic viability of a lot of these projects. The assumptions upon which the bids for the tender were based may now be void. Therefore, a lot of the discussions we’re having with clients are centred around these types of issues. In general, we find that developers and sponsors are very proactive and engage with us early.
Ladbury: On the distribution side, to what extent is there still liquidity in the market? Do you foresee any significant shifts? What trends are you seeing in pricing, and the cost of funds throughout the region, and to what extent is this shaping your approach to client segments?
Chan: This is one of the shifts we are seeing. With high interest rates and challenges in the economic and geopolitical environment, investors are clearly more cautious and selective about the risk that they’re looking to book. We see pricing still remains competitive for good quality assets; however, we expect this to change. Certain sectors are seeing more interest from investors, particularly in the ESG, electric vehicles and renewables space. For the more leveraged names, it’s more selective and there is more scrutiny.
Part of the issue is that in Asia, there’s still liquidity, and overall, the market has been very soft, so because everyone’s chasing good quality assets, that’s depressing the price.
Rixon: A big part of that is the competitiveness of the financing market in Asia, where there are deep deposit pools that can be deployed. As a global bank, if we’re trying to compete against, say, DBS in Singapore on a Singapore dollar-denominated transaction, our higher cost of funds makes that challenging. And then, when international banks are competing against one another on the same mandate, they’re all trying to pitch for the same names. The top-tier borrowers want you to provide bigger tickets and they want to work with a smaller syndicate group, so you need to provide that big limit. Increasingly, you’re facing competition on those deals that you want to do.
Khimasia: We’re seeing similar themes. We target three broad pools of liquidity: official liquidity, which is multilaterals and development finance institutions; commercial banks; and institutional investors. Of the three, the most sensitive is the commercial banks, both for the reasons already mentioned but also because a cross-product relationship plays a big role in the decision to bank a client. Having said that, I concur that liquidity is abundant at the moment.
Nonetheless, there are definitely headwinds, and you just need one or two small shocks and this liquidity could disappear very quickly, even in Asia. There’s a corporate default cycle that has started in the US, which clearly the markets haven’t yet reacted to. Credit card and commercial real estate delinquencies in the US are feeding into the collateralised loan obligation market. There’s what’s happening in Germany, both with real estate and the ripple effects from Ukraine. And then there are also exports falling off a cliff due to global demand dynamics and the structural macro concerns around the Chinese economy. There are many factors at play, and any one of those could suddenly blow up and lead to a retrenchment in terms of liquidity, which would impact pricing.
See: From an insurance perspective, we’re seeing new entrants coming into the market, whether they are players from the London markets coming to Asia, or new teams globally. Some of them have come in with big lines and pretty aggressive rates. But we have also heard of a couple of insurers who are being quite cautious on certain sectors and certain countries, as well as some exits here and there.
We still see opportunities, but pricing has always been a point of discussion for us when we look at the deal, because sometimes when we look at a deal, we think it should be priced in a different way.
We have started to see a lot more private credit players in the sub-investment grade space. I’m not sure whether we’ll be able to get there in terms of risk profile, but I think that’s another space where there is liquidity available from that pool of specialised private credit players.
Rixon: While interest rates have gone up, spreads have not materially widened. The cost of funding and the reference rates have shifted, which means that the banks’ liquidity management side is doing okay, but the ability to then pass that through to your credit protection may not have shifted in a way that insurers feel is representative of the change in market conditions.
What we’ve probably seen more of is structural tightening on transactions, so as you go further down the credit curve, your willingness to lend at a particular multiple has tightened up. That’s likely what we’ve seen more than a widening of spreads.
Khimasia: One of the points to note in relation to loan market spreads is that there is much more of an institutional bid to credit than ever before. These investors tend not to be floating rate sensitive, because they’re long cash. In this rate environment, it’s more of a yield play, so that effectively puts a cap on spreads.
Ladbury: Reflecting on the role of the insurance market in these dynamic times, how would you describe the support and collaboration received? Are there areas where the industry could collectively improve?
Rixon: Our experience with insurance providers is that they are understanding of the bank’s position. They want to work to get to solutions now, but also they want to partner for the long term. Where there is a tightness on the bank’s net margin because of the cost of funds, the insurers will try to accommodate to the best of their ability. Obviously, this doesn’t mean that they’re willing to take any price available, but they’re receptive to the market dynamics and understand that the cost of providing this funding exists.
Chan: Especially with insurers, we’re here for the long-term partnership. In this increasing risk environment, credit insurance is going to play a bigger and more vital role within the bank itself, especially when we’re looking at de-risking, and to maximise our capital returns. We will definitely be promoting more engagement across the industry. It will be important for banks to be willing to work with the underwriters to evaluate new and more innovative structures as the market evolves.
Ng: I’ve seen from insurers a lot of willingness to listen to the banks to try to accommodate certain challenges in doing business such as cost of funding, and while we appreciate the number of new entrants to the insurance market, we will continue to focus on those insurers with which we have a long history and good understanding.
On the ESG topic, what would be useful is if insurers could come up with something tangible for the banks. ESG is not just a feel-good factor. We need to do something about it, and we as a bank want to do more and lend to the right people, so if we bring you a deal that we believe works and meets all the criteria, it would be useful to get more support from the credit insurance industry, both in terms of capacity as well as incentives from a pricing perspective.
Rixon: It’s about aligning everyone’s interests through the structure of the transaction, because often in sustainability-linked financing there’s an incentive to the borrower that if they meet certain ESG goals they get a discount on the margin. If you had a leverage grid on a transaction and it stepped up, the insurer would expect a pass-through. So in the same way, if the margin stepped down because of ESG incentives that we’re trying to encourage, the insurer being able to support the bank by sharing that difference would be useful.
