Trade finance: Forfaiting for fun and profit

It's hard to imagine Wall Street star Michael Douglas, all red suspenders and slicked-back hair, playing a trade financier. Trade finance has never had charms for the Gordon Geckos of banking. Trade financiers don't wear fancy suspenders. Their characteristic fashion statement is said to be brown shoes. There are no big swinging dicks, no million-dollar bonuses. Instead of Douglas, a casting agent might pick Rowan Atkinson.

But this image needs updating. The modern trade financier may not be flamboyant, but he's well dressed and highly paid and may even have a colourful personality. Take Andy Ripley. A former England rugby player, he has made a name for himself as one of London Forfaiting Company's most successful executives. He has just left to study trade finance at Cambridge University. At the age of 50, he's also trying to win a place in the Boat Race crew. This is more like Chariots of Fire than Mr Bean. The new image is attracting bright and aggressive people into the business. Structured trade finance is all the rage, and all the banks want a slice of the action. Why?

"Trade finance offers a source of real value-added business," says Luigi La Ferla, director of trade finance at Deutsche Morgan Grenfell. "All the banks want to have a trade-finance team. It has become glamorous." Not just glamorous but also profitable, though it's still unsophisticated. Compared with the growth and increasing complexity of emerging market debt trading in the past decade, trade finance has stood still. Less than seven years ago Peruvian debt was trading at 4% of face value. Paper was swapped between US and European banks. "You take my awful Polish paper and I'll take your Peruvian stuff" was the gist of the argument. Then screen trading developed, loans were restructured into Brady bonds, and new money was lent.

In the meantime, nothing much changed in trade finance. Bankers will argue that one of that market's strengths is its dullness. Trade paper continued to be serviced even during the depths of the problems of the 1980s in Latin America. There is still little screen-based trading. Because deals differ widely in their structures, they are hard to price using simple methods. There's constant talk about developing a screen-based system but nobody has yet done so. Screens would add liquidity. Despite the turmoil in Asia, there has been no selling frenzy. But this lack of volatility also implies a lack of liquidity. There are investors stuck with paper they no longer want - they realize the return does not justify the risk. They face the difficult decision of either taking a hit or holding on and becoming an investor.

This is one reason why banks have been trying to introduce the capital markets to the business. As spreads in syndicated loans diminished, a compelling argument could be made that trade-finance deals could be sold down in increasing numbers, reducing the risk for the arranger and creating a healthy margin for the investor. Despite the fallout from the Asian currency and stock market crisis there are still hopes this can be achieved. "New deals are not getting done yet, prices are going up, but companies and financial institutions are going to have to adjust to the fact that there is a new benchmark of prices," says Roy Bennett, assistant general manager, forfaiting and syndication, at Standard Bank. "Prices were too fine for emerging markets and this has been a necessary correction."

It is the first time in more than a year that things have been quiet for trade financiers. With most banks catching on to the notion that trade finance, particularly if it is labelled structured, is sexy, anyone with more than a year in the market has been called an old hand. Last year world trade grew by 4%, compared with economic growth of just under 3%. The 1997 UN conference on Trade and Development predicts similar growth for this year.

In Andy Ripley's new book, Forfaiting for Exporters, he claims that more forfaited paper is being traded than at any previous time. The market is estimated at between $30 billion and $50 billion, though some market players are dubious about this figure. If true, however, it gives forfaiting around a 5% share of world trade.

In the world of trade finance, when the phone rings it's now sometimes a headhunter. The entire team at Union Bank of Switzerland moved to Belgium's Kredietbank - more the behaviour of a star equity or debt-origination team than what is expected in this market. The team, led by Ian Brigden, had an impressive portfolio of deals, including more in the pipeline. One was to Sociedade Nacional de Combustiveis de Angola (Sonangol), Angola's state-owned oil company. The team hoped to lift some of this success for their new paymasters.

In August they failed to win the Sonangol deal for Kredietbank, with UBS's new team managing to cling onto it, even though they had to offer improved terms. The $400 million prepayment finance facility is the fourth deal arranged by UBS for Sonangol since 1989. It is a three-year deal, fully underwritten by UBS. The pre-export facility to Sonangol is backed by a commercial oil supply lifting arrangement with BP. Pricing is about 200 basis points over Libor.

Although not wanting to gloat, UBS's Champagne is understandably delighted that his bank managed to hold on to the deal. "The fact is that you find a lot of institutional loyalty among clients," he says. "Even though there may be a lot of personal loyalty and a good relationship, clients still want to consider the size of the institution, its credit rating and its ability to offer merchant-banking skills."

Other banks have also geared up. NatWest Markets spotted the potential of structuring deals with a view to widespread syndication. However, it has been hampered by the uncertainty about the bank's future and a certain naivety in some of its deals. Other bankers say they are more often seen buying than selling. A fast turnover of personnel has not helped. "They've restructured more times than Brazil," says a rival banker. At the end of last year NatWest bragged that a deal in Russia was in the bag. The proposed $500 million trade financing for Russia's leading diamond producer, ARS, is only now in the market, one year later than syndication was originally planned for.