The quiet reinvention of ECA financing

By:
Anuj Gangahar
Published on:

As banks become more and more unwilling to take on commercial debt financing and governments seek to expand exports to boost recovery, export credit agencies are taking on new, expanded roles.

What does a Russian livestock owner do when he wants to increase the longevity of his herd?

It might sound like the start of a bad joke, but in the case of Russia’s Bryansk Meat Company this was a serious question that found an answer in the Australian government’s export finance and insurance corporation.

The agency provided a $46 million export finance guarantee that is being used to help the export of Australian breeding cattle to Bryansk in order to set up a cattle-breeding and beef-production plant in Russia.

So if you ever find yourself tucking into a Tajima Fullblood Wagyu, king of Australian steaks, in one of Moscow’s finest steakhouses, you might have this deal and the bank that arranged it, in this case HSBC, to thank.

This is just one example of a financing deal backed by an export credit agency backed. ECA financing, until quite recently, was largely confined to emerging markets as a result of the mitigation of political risk these quietly influential agencies provide to commercial lenders.

Since the global financial crisis, however, continuing pressure on bank liquidity has resulted in a smaller number of banks with the appetite and balance-sheet capacity to fund large infrastructure projects. As a result of this, and because of the shale-gas revolution changing the economics and dynamics of many of the world’s largest infrastructure projects, ECA financing is becoming more important in the developed and developing world.

In 2012 the G7 group of countries’ ECAs supported deals worth around $76 billion (mostly through guarantees or direct loans); add to this the total for all of the other Organization for Economic Cooperation and Development ECAs combined plus China and the figure is more like $120 billion. Some industry sources told Euromoney the actual figure is probably much higher than this, but accurate global figures can be difficult to come by.

Most OECD countries have export credit agencies whose primary objective is to support export capital of goods and services from producers in their own countries. They do this by supporting the long-term financing requirements of the buyers of these goods and services. ECA financing is used across industries including, in particular: aircraft, shipping, power, satellites, infrastructure (for example, cement or steel plants) and petrochemicals.

In 2012, Ex-Im Bank, the export credit agency of the US, the world’s largest, supported more than $35.8 billion in export financing.

US Ex-Im direct loans have greatly increased as a proportion of its commitments, as have its capital market issuances. Like all other ECAs, it does not compete with private-sector lenders, but rather assumes credit and country risks that the private sector is either unwilling or unable to accept. In its 78 years, Ex-Im has supported more than $550 billion of US exports.

The leading export credit agencies tend to be relatively low profile, but this does little to diminish their importance. The other big-four ECAs alongside Ex-Im are Kexim of Korea, JBIC of Japan and Coface of France.

“The business is effectively loans and trade finance,” says a head of project finance in Asia, says: “The reasons the business is particularly interesting and potentially lucrative for banks is that there are two sets of clients. There are the ones for whom we are doing deals – large corporates and the likes, many of which are existing clients. And then there are the ECAs, of which there are about 65 globally.”

Today, according to Adeline Kow, head of the export credit agency group for Asia Pacific at JPMorgan treasury services, ECA-backed financing is increasingly looked upon as an alternative form of financing used by companies for imports so that they can reserve their borrowing capacity for other capital needs or strategic investments. “This is a marked progression from its role of a risk-mitigated tool for supporting import and export of goods and equipment,” she says.

“We support exports, employment and innovation across sectors and geographies, in the emerging world but increasingly in the more developed world too,” says Yasser Henda, head of ECA finance at BNP Paribas.

He adds that the bank sees opportunities to broaden the reach of its ECA business. “We are in growth mode,” he says. “We have a sound balance sheet and a good risk appetite. I would say it is new business as usual.”

Confluence of trends

Export credit agencies themselves are private or often quasi- governmental institutions that act as intermediaries between governments and exporters to issue export financing.

For those banks that remain in the market, and there are less than there used to be, tightened regulatory requirements for the management of bank capital have been specified under Basel III.

Banks now have to assign a higher percentage of their liquidity to back long-tenor commercial debt financing and this has placed pressure on commercial debt financing. However, a far lower risk weighting and therefore capital requirement is associated with ECA-backed finance, leading to a resurgence of these deals.