Revisiting the rulebook: Export finance roundtable

In late October, GTR gathered a group of senior figures from the export and agency finance industry to discuss the market’s ongoing shift towards new product types, the impact of the OECD Arrangement modernisation package, and whether further reforms are required to boost financing for social infrastructure.

Roundtable participants:

• Gabriel Buck, managing director, GKB Ventures (chair)
• Cécile Camilli, global head of development and structured export finance, Société Générale
• Yasser Henda, global head of export finance, BNP Paribas
• Guillermo Hombravella, global head of export and agency finance, Santander
• Chris Mitman, managing partner, Acre Impact Capital
• Faruq Muhammad, global head of structured export finance, Standard Chartered
• Mark Paton, regional head for Europe, export and agency finance, Investec Bank
• Richard Wilkins, global head of export and agency finance Origination, JP Morgan

Buck: I’ll start with social infrastructure. How could members of the OECD Arrangement better support these types of projects, and is there a need to define what constitutes ‘social’?

Mitman: It is great we’re talking about the need to better support social infrastructure, as we weren’t five years ago. To date, the OECD Arrangement has yet to address this topic in any substance. One of the key issues seems to be the difficulty of defining the term ‘social’. There’s a lot of time spent defining sectors, as we know from the history of the consensus [OECD Arrangement]. You think it’s hard convincing 16 banks and the International Chamber of Commerce (ICC) to agree on reforms, but consensus change requires 35-plus export credit agencies (ECAs) – arguably even harder with their national stakeholders.

Putting my ICC co-chair hat on, we proposed a couple of sectors that could have been included as part of the modernisation. Healthcare, for instance. We also attempted to define them, drawing on exporters active in these segments. It seemed there was enough going on already in the modernisation for these to be considered for inclusion.

Our view is that definition is very important, and it can’t be broad, because otherwise we leave ourselves wide open as a market to allegations of social washing. Case-by-case sector inclusion in the climate change sector understanding (CCSU) is probably the most pragmatic way to go.

Buck: On the other side of the coin, perhaps it would be better not to define social because that could encourage greater activity among ECAs? There is an argument to say the industry could be more accommodating if the definition is looser.

Muhammad: I’d rather leave the OECD rules loosely defined. We currently have a loose definition under the Loan Market Association (LMA) social loan principles and if you want to make it more specific, you can align with the UN Sustainable Development Goals (SDGs), which include multiple sectors, such as water and healthcare. There may be grey areas. For instance, is a bridge which cuts travel time significantly and allows movement of people deemed to be social or not? That would be the way to approach it, in my view, from a social loan principles perspective. ECAs are not as exposed to social washing as banks are.

Camilli: I agree. At Société Générale, we have a framework to assess what we call positive impact finance, which encourages financing and origination of climate-focused and social projects. For me, one of the mandates of ECAs is targeted towards emerging markets where a large portion of the deal flow is connected with social infrastructure anyway. For instance, smart cities, education, water, transportation. Such deals have a huge impact across society. To me, a broader definition under the UN SDG framework would be better. The ultimate goal here is to allow those projects to benefit from the same enhanced terms as climate projects, thereby allowing us – together with the ECAs – to boost financing.

Hombravella: There is a lack of focus in the OECD Arrangement as to how to support social infrastructure. There is clear support for renewable energy through extended tenor and pricing, but there are no such incentives for education and healthcare. In certain emerging markets, longer tenors could be a big help to finance social infrastructure, and so too would greater content flexibility. When you go to countries like Nicaragua, or African countries, the impact of ECAs can be limited as social infrastructure is very local content-driven. Say an engineering, procurement and construction (EPC) contractor goes to Africa and 70% of the investment is local. To obtain export credit support for a big chunk of the project is not easy, especially compared to a renewable project where the majority of the investment is made abroad.

Wilkins: The original purpose of ECAs was purely to support exports, but post-Covid-19, and as the energy transition gathers pace, the European ECAs have joined their Asian counterparts in becoming more policy driven. The concept of local content was initially driven by a focus on exports, but we don’t think third-party country content should be treated differently than local content, particularly for social infrastructure. Most of these costs are for construction and are often very basic inputs such as concrete, which are produced cheaper locally.

Local content is probably the biggest issue in terms of supporting these deals. The 50% rule makes it much easier, but still, there are projects where greater flexibility is needed. Take a basic road project. If you require inputs like asphalt, you may be forced to buy from the next-door country rather than locally.

We need a definition for social to help encourage the OECD members to provide incentives, such as longer tenors. These are public projects, such as for education, roads or water, which will not generate profits and so could take longer to repay. The UN sustainability goals are a good place to start, but you don’t have to use all of them. The OECD could draw on some of them to create its own framework.

Henda: When we look at market references, there are a sufficient number of definitions – social loans, social bonds, sustainability-linked – that have been adopted by the market. Is there a need for an additional definition? The market seems to be saying no, and I agree with that. Is the absence of a definition the reason that prevents ECAs and banks from deploying more? In our view, there is rather a lack of bankable supply, both in the private and public sectors, in this segment, especially in emerging markets.

Paton: Last year’s modernisation package was very much focused on the ‘E’ [of ESG], reflecting Global North concerns about climate change and the importance of green projects. But from a Global South perspective, looking at Africa, it’s all about economic and social development and building projects such as roads, bridges, schools and social housing. These have been completely missed. It was a missed opportunity last year. We’re calling for longer terms on social infrastructure projects. A good place to start would be the UN’s SDGs because there’s buy-in from the Global South and North for that definition, and all countries know them. How can we motivate the longer tenors for those projects within the OECD? I think we need a sector understanding.

Over the last four to five months, we’ve seen sovereign borrowers ask for longer terms, as long as possible. They tell us they want to see tied aid credits – soft loans, mixed credits. One way of accommodating the request for more concessional finance is to extend the tenor and grace period. You can fund in a low interest rate currency. When you do all that, it will come out with something not dissimilar to requirements in those markets for softer financing terms.

Buck: Broadly, what would you all, as export finance bankers, like to see from the OECD Arrangement? Can you outline the top one, two or three changes that could help move the dial for ECAs to boost activity in the social infrastructure space?

Mitman: Can I counter your question with another question? You’re asking what more could be done within the confines of the OECD Arrangement – the supply side. Outside the arrangement, on the buy side, around this table, we all have a relatively limited footprint on the continent of Africa, where many of these social projects will be developed. Project identification could benefit from greater involvement of African regional banks such as Standard Bank, Investec, RMB and Absa, who have far greater reach on the continent. They can identify and bank projects in the early stage and take more private sector credit risk. ECAs and exporters should be encouraged to lean into these organisations, given their reach. We would also like to see more initiatives like the product accelerator programme from Swedfund, Sweden’s development institution, providing development dollars for project design and implementation at the early stage.

As export financiers, we have the luxury of arriving at the 11th hour and providing senior debt. But don’t forget, the hard work is done in the private sector with equity, and in the sovereign segment, EPC contractors are spending a lot of money trying to design and develop projects. In terms of wider industry action, we would like to see the Berne Union Climate Action Group renamed the Berne Union Climate and Social Action Group. A reference to social infrastructure in the OECD Arrangement CCSU would also help move the dial.

Camilli: Another area is the 95/5% down payment rule that I think we all wish to be permanently embedded. We are yet to touch on premium calculation for both climate and social deals. Having incentives to more proactively support projects with positive impacts would be a real game changer.

Buck: In essence, we are talking about a significant reduction in the premium charged by the ECAs when it fits that particular social infrastructure category. Personally, I think the ECAs have been overcharging borrowers, especially African sovereigns. The premium levels are disproportionately in favour of the ECA and very detrimental to the sovereign. They do not reflect the general portfolio of risk.

Hombravella: Indeed, ECAs are not profit-seeking entities and if you see their financial accounts over the last 20 years, they have all been very positive.

Camilli: We don’t want export credit agencies to lose money either, because they’re also taking on risk and we need them to maintain consistency in their support. But I agree, they have demonstrated it’s rather a performing business.

Muhammad: In defence of the ECAs, if you look at their all-in cost and what borrowers can get in Sub-Saharan Africa, it is well below what they can raise in the commercial market and with a longer tenor. ECA-supported financing is somewhere between concessional and non-concessional, maybe a bit more towards the non-concessional, but it does give the borrowers a cost-effective term funding solution.

The bigger challenge is around the adaptability of export finance. The world has moved on from export promotion, so why is there a difference between third and local country content? It makes absolutely no sense for a project in Kenya to try to source cement from Uganda rather than buy it from a Kenyan cement manufacturer. Also, why do deals have to be 85 or 95%? Why do they require direct linkage to exports? Countries such as the UK, and increasingly others, are now looking at overall export benefits for their country. Italy’s Sace also has its Push programme. If they can operate on this basis, then why shouldn’t the consensus allow more flexibility?

Mitman: It’s important not just to focus on the OECD Arrangement and how ECAs could be doing more. The modernisation was seismic and there’s a massive opportunity that we can all take advantage of. The 50% increase in repayment terms did not reference social, but social projects benefited.

Buck: In terms of longer tenors, the market seems to be divided as to whether banks will stretch to 25 years and beyond. What’s the viewpoint of the panellists?

Muhammad: Lenders do not appear to be extending to 25 years-plus. At the end of the day, the underlying markets are single B or B-minus-rated markets. The modernisation extended tenors for most projects. If I can get a tenor of 17 years for a hospital deal instead of 12 years, that’s a big benefit. While a 25-year tenor would be great, there won’t be much bank liquidity in the market for those tenors in sub-investment-grade borrower markets. Occasionally, for the right project, there is flexibility. But if the OECD tomorrow allowed 20-plus years for everything, only a few deals would use this flexibility.

This could change if the ECAs would allow for more repacks, thereby encouraging the institutional investor market. There could be challenges, as these types of funders are more sensitive to allegations of greenwashing and social washing. Institutional investors prefer certainty of drawdowns and duration. Projects in regions such as Africa often do not follow the original timeline, so the drawdowns are delayed in line with any delays in project milestones. Also, sovereigns don’t want a pre-payment penalty and that feeds into uncertainty. With a lot of African sovereigns, there’s a likelihood of delays in payments by a few days due to administrative delays. Bank lenders are quite agreeable to that sort of flexibility, while institutional investors are not used to such delays.

Henda: When the consensus extended maturities, there was euphoria about having better terms for obligors. For now, longer tenor activity is still manageable. The real test will be when volumes start increasing, and then we will see if there is capacity in the market. Clearly, being able to tap investor markets will be crucial as volumes go up. That is a priority in the hands of ECAs and obligors.

Camilli: We haven’t yet seen a deal flow on those very long tenors, though some are in the pipeline. In the vein of engaging institutional investors on longer tenors, an interesting development would be to structure transactions with different maturity tranches, so you can limit prepayment and fully drawn loans to part of the financing.

Paton: From our side, we are definitely seeing interest in longer tenors, particularly for water projects. This is typically linked to some form of direct lending whereby the ECAs themselves provide that tenor of funding. Institutional investors are interested in funding long-tenor ECA assets – the longer the better for them – but aren’t quite there yet. But another challenge we’re grappling with is on the operational side, given we may have to act as agent on a facility for 25 years door-to-door.

I’ll certainly be long retired by then, so this is a huge challenge. How do you price the agency fee and manage the operational risk?

Buck: To what extent are the OECD ECAs at a strategic disadvantage to non-OECD agencies? Is the consensus rule book being thrown out the window?

Wilkins: The benefit of the consensus is that it is a safe harbour from WTO, and there are no questions over state subsidies. Until the modernisation in 2023, everyone said the OECD Arrangement was becoming out of touch with the market, and therefore you’ve seen ECAs increasingly utilise non-OECD products, which are at potential risk of WTO scrutiny. OECD Arrangement members are probably not at a strategic disadvantage because a lot of them have introduced new products to manage growing competition; although exporters may feel disadvantaged. The consensus is probably never going to be flexible enough to suit all preferences.

Buck: There is growing evidence that ECAs are now doing more untied as well as tied business. Is that your experience?

Wilkins: It is likely. But you’re looking at the domestic schemes as well, some of which have come through the Covid-19 pandemic and there’s an overhang from those. Sace is probably the biggest European ECA with a big domestic portfolio, in addition to the Push programme, which is untied.

Hombravella: We have always seen Asian ECAs applying two sets of rules. They have a business that follows the consensus and another business that doesn’t, but we’re starting to see all the ECAs following the same route for reasons such as the energy transition.

Camilli: At the same time, it also contributes to promoting the momentum around export finance. Volumes have doubled over the last three years. There’s much more attention towards ECAs and what this banking market can bring compared to other financing alternatives, including tackling the energy transition in developed countries, which is relatively new for the ECA market. Yes, there is competition. It gives the market much more of an advisory approach, depending on which ECA you can work with and whether it’s a sovereign interest, content interest, import interest, etc.

Henda: I would not state it as OECD versus non-OECD. The role of ECAs is expanding. The definition of exports is evolving to include untied, free exports, those that promote national interests and direct exports. That’s the reality of today. It is not a playground of the OECD versus non-OECD. New needs are being answered, which is what the market was asking for.

Buck: Over the last 10 to 15 years, my perception is that the ECAs fundamentally do two things which are common across all of them, and that is their risk and tenor parameters are very similar. But outside of that, they’re very flexible.

Mitman: We don’t have any substantive claims or trade register data yet for this massive surge of domestic or untied ECA support. We mustn’t forget the importance of what the register did for us all in terms of regulatory treatment of ECA cover and what this could mean for the industry as a whole if that starts to get diluted.

There is also a question over the use of funds with untied programmes and the reporting of social or green under the LMA. And a question about the dedication of resources away from buyer credits as ECAs opt for quicker untied or domestic wins.

Buck: Just look at Export Development Canada and its exposure to Thames Water on an untied basis; they had to write off C$1bn. Now looking forward, what is the future of ECA finance? Where will the market move to?

Camilli: I am very optimistic. We have many more ammunitions and solutions. The ECAs are being embedded in almost all topics related to the energy transition. At the same time, they remain very relevant for emerging countries. This new mandate of national interest from developed countries has not come at the expense of emerging markets. Defence is a confidential sector, but there’s also a lot happening here. Unfortunately, given the geopolitical context, we can expect this will also remain an active sector. I’m positive also, given the agility and the willingness of the ECAs to continue innovating. I’m hopeful for better coordination between export credit agencies and DFIs.

Henda: Given the positive, friendly regulatory treatment, I expect this asset class to be a cornerstone of capital raising and capital funding structures in the future. Especially if you add to that the possibility of combining with the DFIs.

Hombravella: From my side, I’m very positive both on the ECA side and the DFI market. This is probably the highest point I’ve seen for the market over my career. Volumes are growing. They are huge in the defence sector and renewables for the energy transition. The shipping industry, both in cruises and cargo, is also having a great moment. From the DFI side, we are starting to see more flexibility from these entities to look at more structured solutions and institutional investors, making it easier to adapt to other sources of liquidity. Volumes in 2024 will be great and next year looks promising as well.

Paton: We’re seeing more ECAs coming into the market, with Saudi, Qatar and the UAE, which would suggest more activity from regions that are new to the industry. I can only imagine, overall, it will grow with more competition. At the moment, there is a greater focus from those countries in Sub-Saharan Africa.

Wilkins: ECA finance has always followed real-world demand. It continues to be relevant for investment in infrastructure, and there’s more flexibility now than ever before. There is a focus on the energy transition and heavy industry is investing in cleaner technology. That’s happening across high-income countries as well as emerging markets, so the future looks bright for ECAs.