60-second interview: Philipp Rossberg

Face to face | 11 February 2016
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TFR catches up with Philip Rossberg about joining Euler Hermes, the regulatory landscape, and which exports and regions look to be the strongest so far in 2016 

What inspired you to return to the German export credit agency from Citi and how did your banking career help you in your current role?

I have to say that I truly enjoyed my time in the UK more generally as well as the London banking market in particular. To me, the British have a lovely take on life, marked by a rather delightful combination of the ironic distance to the inevitable challenges (and, as the case might be, absurdities) of one’s daily toils, coupled with visible remnants of the stiff upper lip-attitude which seems to have first propelled the nation to a position of global prominence and then allowed it to relinquish parts of the latter with – certainly from a German perspective – rare grace.

Accordingly, the decision to relocate “back home” after four excellent years in London, first with JPMorgan and then with Citi, was not lightly taken. Having said this, the opportunity to re-join one of the world’s largest Export Credit Agencies (ECA) as a senior executive, operating right at the heart of one of the most vibrant export-based economies, was simply too good to pass on. Not to mention the imminent need to recover from the psychological duress one suffers when trying to find affordable property anywhere remotely near the London city centre.

In terms of the banking background’s impact on my current role, I believe that it certainly has played an important part in being offered this fantastic opportunity in the first place as well as allowing me to adequately fill my current function as the agency’s Chief Operating Officer. Most importantly, it has equipped me with a much better understanding of how different banks operate today and which challenges they face, as well as what alternative sources of funding might need to be borne in mind to ensure that major industrial projects abroad continue to have access to affordable and readily available long-term funding in the years to come.

 

Given the regulatory constraints on international banks, the contribution of export credit agencies to global trade is more crucial than ever. Have you seen an uptick in the volumes of applications coming into Euler Hermes?

It is interesting to see how you phrase the first part of your question as it implies a distinct differentiation between banks and ECAs as two alternative sources of liquidity for international trade and export finance transactions. It is not the first time I hear of this perception which inter alia has recently been mirrored by the European Banking Authority in one of its latest reports on the implication of Basle III.

Whilst there might be countries in which the above view is accurate (especially those where ECAs are set up as EXIM banks which act as direct lenders with little to no commercial bank involvement), I would argue that by-and-large, ECAs tend to be set up as pure-cover providers/insurers which require banks to fund and typically also book at least part of their deals on balance sheet.

Accordingly, regulation affecting banks’ ability to provide long term loans directly impacts ECAs’ position in the market and thus, by default, the ability of (German) exporters and their international client base to obtain financing for projects in challenging environments. To date, the effects of banking regulation on us as well as German exporters have been limited. Demand for our paper has in fact surged post-crises and remains at a historically elevated level (roughly EUR 25 billion total underwriting in 2014 which is likely to be slightly exceeded in 2015, compared to around EUR 17 billion in 2007).

Driven by Germany’s AAA-rating and the corresponding capital efficiency of booking Hermes-backed loans, our transactions continue to be priced extremely competitively in the banking market and the amount of balance sheet capacity allocated to our arguably somewhat illiquid product continues to be substantial.

We certainly hope that this will continue to be case and are keeping a watchful eye on those discussions in the regulatory space that could have a major impact on us, regardless of the strength of credit support provided by the Federal Republic of Germany – i.e. aspects such as the Leverage Ratio and/or the current discussion about the potential introduction of (non-risk weighted) large exposure caps for sovereign risks.

In terms of applications and deals right now, we have seen a decline in the overall number of transactions which has, however, coincided with an increase in large signature deals (e.g. in Egypt). In view of increasing geopolitical risks, I would expect to see a steady flow of deals going forward but, realistically, it takes a bit of crystal ball reading as we typically face conflicting trends. On the one hand opportunities open up because of an increasing risk perception and the much anticipated return of Iran to the market, on the other hand world trade has at times even been contracting in 2015 and German exporters face considerable headwinds in their traditional core markets and industries such as Russia and/or the energy sector. 

 

What sort of exports are you currently supporting and can you tell me more about your latest position on content percentage requirements?

The beauty of Germany’s exporting industry is that it is wide and deep, stretching across numerous sectors, different stages in production chains as well as diverse corporate structures ranging from SMEs via the Mittelstand to global champions, all of whom tend to be active in various international markets. As a function of this, we find ourselves in the enviable position of managing a naturally diversified portfolio. Nonetheless, some sectors clearly are a notch more equal than the others. Perhaps not surprisingly, shipping and aviation do play significant roles but so do large engineering transactions across industries such as manufacturing, petrochemicals and steel.

The engineering sector in particular is one where the question of foreign content has been hotly debated for an extended period of time. Bottom line, it is extremely challenging for German engineering groups to consistently produce the majority of their key components for large industrial projects domestically and to simultaneously remain competitive in the global market. The ongoing internationalisation of production chains is a fact of life that cannot be ignored and that, crucially, ultimately also is beneficial for the German industry as well as national employment as a recent study of the Munich-based IFO institute on has found.

On the back of these findings as well as its ongoing exchange with the industry, the German government has created the opportunity for exporters to request a case-by-case indication on whether the Federation would be willing to support transactions with more than 49% non-German content. A positive indication provides exporters with the necessary confidence to pitch for large multi-sourcing transactions by clarifying up front in how far we can support the related financings structures. The practical experiences of both the industry and ourselves with this new instrument have thus far been very positive indeed. We have reviewed more than 10 cases with foreign content quotas often well beyond 49% and, based on sound rationales presented by the respective exporters, the Government has to date been able to provide a positive indication for all of these.

 

Are you seeing as increase in export finance in emerging markets? Anything in particular to Africa? Why do you think this is?

Our share of Emerging Market (EM) deals is actually likely to decline on a year-on-year basis in 2015 (2014: 84%), but this doesn’t change the fact that the vast majority of business we write continues to be concentrated in this space. Generally, we would expect EM demand to remain reasonably strong against the backdrop of a deteriorating credit environment, where a significant number of the respective corporates, banks and governments face historically high levels of debt, paired with a partially eroding income bases, increasing the need for third party support in what might otherwise have been pure commercial transactions.

In this context, we certainly hope that the potential emerging market debt crisis that is being heralded by some commentators can be avoided, but must brace ourselves for potentially increasing claims (the current amount of claims is well below our 2014 figure of approximately EUR 500 million), carefully weighing the wish to support the German industry in challenging times with the Government’s duties as custodians of taxpayer money.

In terms of individual markets, our expectation is that amongst our traditional key EM, particularly Russia and Brazil are likely to remain sluggish whilst Turkey and China are expected to stay more or less flat. India has weathered the recent EM funding challenges remarkably well and is expected to feature more prominently in our underwriting ranking in 2016, but Iran certainly tops the list of where our exporters hope for the most significant upswing in business opportunities once the matter of outstanding debts has been successfully addressed.

Africa remains a very interesting market for German exporters and the government has reacted to increased demand by opening up its cover policy on selected countries such as Tanzania, Nigeria, Ghana, Mozambique, Ethiopia, Senegal, Uganda and Kenia. However, unfortunately, this move has to some degree coincided with the plunge in commodity prices and rate hike in the US, which have resulted in substantially (sometimes irrationally) increased costs of debt for African borrowers, adversely affecting our pipeline. By contrast, Egypt has been the country in Africa where we recently closed a major transaction in the power generation sector, reflecting the country’s huge push into infrastructure investments as well as the return of a degree of stability to a nation that has been a trading partner of Germany for centuries.

 

What do you look for when a bank comes to you with an export finance deal?

In an ideal world, we would like to see exporters bringing their deals to us given that they are ultimately the primary target group, which the government is seeking to support. Having said this, we certainly do not discriminate against banks. This is all the more true for a pure cover ECA like us (i.e. an ECA that insures/guarantees only), which remains dependant on third party (bank) funding for a very large share of its portfolio.

When dealing with banks or lenders more generally, what we look for is expertise in terms of structuring export finance transactions, a reasonably long term view on deals and/or clients as well as an underwriting sanity check in the context of our typical residual requirements (normally 5%). Naturally the transactions that are being presented also need to be economically viable and acceptable in terms of their expected impact on both Germany and the respective host country.

It is worth noting that we cooperate with an extensive network of national and international funders, ranging from smaller regional German savings banks all the way up to the world’s major financial institutions such as Citi, J.P. Morgan, HSBC and Deutsche Bank.

If you include participants in deals fronted by any of the aforementioned firms, the list would naturally get even longer. In this, I believe us to be rather lucky (though this sentiment might not be shared unanimously by the banking industry), in the sense that the significant fragmentation of particularly the German banking market allows us to tap into multiple sources of funding across deal sizes, including the important SME segment.

 

What do you consider to be a ‘dream’ deal?

A large transaction that allows us to simultaneously support a significant number of German exporters directly and indirectly across the value chain, featuring a high element of German content, a distinct developmental impact in the host country, no difficulties in terms of repayments as well as, very importantly, a TFR Deal of the Year trophy….

Philip Rossberg is chief operating officier of the German Export Credit Agency and will be speaking at TFR's Cross-Border Trade Forum Europe on 10 March 2016.

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