The quiet reinvention of ECA financing
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.
Indeed a confluence of trends has created a greatly increased requirement for both ECA covered and ECA direct financing in the infrastructure market. At the same time, ECAs have been under mounting pressure to support their exporters and developers in overseas businesses as a means of driving productivity forward, particularly as most of the world recovers from the effects of the financial crisis.
Kow points out that, in particular, there is growing interest in deal structures that incorporate the capital markets placement of a bond as part of an ECA-backed financing arrangement. An ECA-guaranteed bond is similar to a government bond since the underlying transaction is guaranteed by an ECA, which is usually a government agency. As a result, these bonds attract a ready pool of institutional investors from banks, pension funds and insurance companies, especially those in the US and Europe.
Henda says that over recent years the business has been constantly evolving and finding its place in the universe of services. He points out that after every recent crisis, whether Lehman Brothers or the more recent global liquidity crisis, the ECA business has been able to re-engineer itself. “In recent years, regulatory changes in particular have meant we have had to make a number of adjustments.” he says.
Peter Luketa, global head of export financing at HSBC, adds: “The ECA product has evolved. All governments want to support exports in order to get out of crisis.”
|Sumanta Panigrahi, at Citi Asia|
Sumanta Panigrahi, regional head for export agency finance for Citi Asia, says that recent developments mean the ECA business is now complementary to more traditional financing and capital markets: “It has become very relevant since the financial crisis.” Kow stresses that ECA-backed financing offers wide-ranging benefits: governments benefit from greater export flows, exporters sell more goods, banks can reduce, or in some cases all but eliminate, the risk of financing deals and buyers are able to secure long-term financing at lower rates.
Level playing field
For the most part, ECA deals are carried out using an OECD set of guidelines, which are designed specifically to avoid unfair competition being generated by an ECA offering excessively generous financial terms to assist exports from its own country.
This, according to Ruairi Brown, associate director in structured export financing at Standard Chartered in Singapore, ensures a level playing field for official support in order to encourage competition among exporters based on quality and price of goods and services rather than purely on financing terms.
ECAs broadly offer two main categories. The first is buyer’s credit financing; this is the traditional product offered by ECAs, which requires an underlying supply contract between the exporter and the buyer. The second is untied financing, which does not require an underlying support contract, but can be provided on the back of an off-take arrangement (the borrower is generally a supplier of a commodity to a buyer in the country of the ECA) or an equity investment (the sponsor or equity investor in the borrower is from the same country as the ECA).
Brown says that ECA financing can more granularly be broken down into three areas. The first is corporate or sometimes sovereign loans with ECA support, the second is project financing, especially outside the US and Europe, often with multiple ECAs working together.
The latter has never been more clearly demonstrated than when eight export credit agencies (from Japan, Australia, Korea, France, Germany and the Netherlands) and a syndicate of 24 commercial lenders came together on a $20 billion project financing of a liquefied natural gas project in Australia sponsored by Inpex Corporation and Total. The financing effort for the Ichthys LNG project started in 2011 and the final documents were signed in late 2012. The Ichthys project comprised the development of two gas liquefaction trains with an annual combined design capacity of 8.4 million tonnes. The financing was the largest project financing ever arranged in the international finance market, according to Inpex Corporation.
The third category is untied financing, which is also sometimes part of project finance deals: this is based on strategic financing in order to secure important commodities, primarily oil & gas.
One banker points out that the fact several parties are involved in export finance means it is an asset that has value for banks. “There are the exporters, borrowers, clients. And ECAs themselves have been very helpful with respect to making sure regulators understand the needs and value of the business. It requires the efforts of everyone to ensure better treatment at the hands of global regulators, which in turn leads to more opportunity for all.”
Bankers point out that the recent past and short-term trend is not necessarily encouraging for ECA financing, pointing in particular to Singapore as an example of a historically strong ECA financing market that is actually down about 50% year on year. And Singapore is not alone. Volume and demand have come down as companies have struggled to meet their expansion needs; hampered by continuing uncertainty in the global economy. Another reason for the recent stall is that at the moment the terms of an ECA guarantee facility versus the terms of, for example, a commercial loan are not especially beneficial.
Because of the changes in government in India and China in particular, there has been a degree of uncertainty that has hurt business coming from and to both countries. However, most market observers expect that business to rebound when the political and economic outlook in both countries is more assured.
HSBC’s Luketa highlights the steady rise in the volume of ECA-backed deals being done since the worst of the financial crisis. “Last year you probably had about $120 billion of deals done in the sector and if you compare that to a pre-Lehman world, a typical figure would be more like $30 billion to $35 billion. That puts into context the growth we have experienced in recent years.”
The last couple of years have been especially active in the aviation sector – the Middle East has ordered large numbers of Boeing and Airbus aircraft. Now the business has reached something of a plateau and a $100 billion year would seem to be the new norm, with 2012 proving exceptionally good.
In another notable recent deal, Saudi Electric Company in 2012 signed the largest ECA-backed corporate financing in Saudi Arabia to develop the Rabigh VI thermal power plant on the Red Sea Coast. Korea’s Exim bank and Korea’s Trade Insurance Corporation (K-Sure) backed the transaction. The deal also provides another good illustration of the collaborative nature of many ECA deals. HSBC acted as the structuring bank, coordinating arranger and mandated lead arranger on the 15-year $1.4 billion loan. Sumitomo Mitsui, Mizuho, Bank of Tokyo Mitsubishi and KfW Ipex were the other mandated lead arrangers.
Also in 2012, Standard Chartered provided a multi-billion dollar sole underwritten loan backed by ECAs Eurler Hermes, UK Export- Finance and Coface.
ECA deals are happening all over the world as countries and companies look beyond their domestic markets, in response to the economic turmoil seen around the world in recent years.
It is not every bank that can get involved, regardless of how attractive the opportunity looks. “Yes you need to provide balance sheet but in a more selective way. You need a certain capital base in order to take risk,” says BNPP’s Henda.
“From Chile to Mexico, Angola to Tanzania and Mozambique to Singapore, ECA finance is becoming a truly global business” adds another banker.
In the future, according to Luketa, local-currency financing could be the next step of development for the ECA business. He says: “It used to be that dollars were the main currency but now you are seeing some local-currency financing. For example, we have been seeing some ruble-denominated ECA deals. I think the renminbi will be there soon too. You are seeing a rise of the Asian ECAs – Korea, for example, is winning lots of deals on the back of the flexibility of its ECA scheme. Non-bank appetite for ECA is growing.”
Panigrahi at Citi, adds: “Export and agency financing was active through the 2000s, but then things started to change and the export part of this expanded, with governments taking more interest in this aspect. It is now an integral part of the national interest for many countries for creating jobs and opportunities.”
Henda says that although the need for balance sheet is clear, human capital and expertise remain just as important. “This is something you do not gain overnight. Knowledge is every bit as important as the capital and the resource. You have to focus on the sustainability of the business. It is about long-term partnerships; the provision of solutions on a global but selective basis.