Change is good?

Opinion | 5 May 2017
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Are export credit agencies competing with or complementing the private sector? How much of the slack can they pick up post-derisking? And how far should their remits be pushed? Panellists at the Excred27 event in London debate what direction export agencies should take

Diana Smallridge: Jonathan, what do you see ECA doing in the 2020s and what do banks want ECAs to be?

Jonathan Joseph-Horne: In terms of banks and ECAs, I think it's true to say that the lines have become blurred. If we rewind the clock a few years, we would see a model where in most cases banks provided the finance and ECAs provided the guarantee. It was a model that was followed reasonably rigidly although there were some notable exceptions. I think something which has happened over recent years, and was accelerated by the global financial crisis, is an increased blurring of those lines.

The model of banks lending and ECAs guaranteeing them still exists today of course and it's a very valid model. There are scenarios where it is exactly the right model, but by no means is it the only solution available today. I would go as far as to say we have more different methods of finance for ECA transactions available today than at any stage in the product's history. I think this is very positive from the banks' perspective, and very positive from the borrowers' perspective.

In terms of looking forward, this might sound a bit of a cliché but I think it's fair to say banks would very much look for a partnership that is in tune with the blurring of those lines. We would like to see continued reliability and consistency from the ECA (something that has been a historic strength of the ECAs) as well as conformity between the ECAs, for example in areas such as the development of standard loan documentation.

Looking at the general role and mandate of an ECA in the 2020s, the first thing to bear in mind that 2020 is really not that far away. We've already seen a strong emphasis from ECAs on product development, and I very much applaud this approach of developing products and solutions in anticipation of future downturns. I suspect we might see a continued evolution from export "credit" agency to export "finance" agency as some ECAs move more and more into the field of financing transactions, albeit usually alongside banks in some form. I also wonder if we will we see the evolution of more Export-Import banks and a focus on supporting domestic trade and import trade flows, which might chime in part with more protectionist trade policies?

Finally, I think we've seen a tremendous focus from some agencies on expanding the level of foreign content which is covered by export credit agencies and I wonder if the logical evolution of this might be to increase levels of cover for local content.

Diana Smallridge: On that last point about export-import finance, I want to ask Jim as the
US Exim agency, to give us a few broad points, one being the impact you see the current situation on Exim banks business and going forward into the 2020s, how do you see Exim banks being able to respond either through their mandate or
a product offering?

James Cruse: The future is easier to talk about than the present. So for 2020 I can at least be optimistic that from our point of view, if the trends we see continue to hold, much of what Jonathan said is what we anticipate. We think that for an ECA to be effective in 2020, it needs to have a lending capacity to meet various issues, whether it's liquidity issues, competition issues or other issues, not the least of which is the fact that there is a bit of an uneven playing field right now between those ECAs that can lend and those ECAs that can't. Therefore we think if you're going to be effective, you need to have that tool.

In terms of the issue of risk appetite and the issue of new types of financing, I don't see these as new products as much as most ECAs will have them be broader and have all of the products. Right now you have ECAs that are experts in direct lending and the Europeans are better at fitting their risk appetite to a transaction. The Americans and Canadians are good at small business and capital markets. I think as you move into the 2020s, for an ECA to be effective, they will have to have more, if not all of those tools, depending upon the situation at that time and the liquidity of banks.

So I think the next five years are going to be very challenging for ECAs to develop, not new products, as much as all ECAs having a breadth of products that meets the nix of needs.

Louis Taylor: The role of ECAs is to provide certainty of support in an uncertain market and the landscape is very uncertain. I think that the politics certainly has an effect on how ECAs operate but so too does the economics and really, so too does regulation. Right now, regulation is the thing that I am most concerned about.

Certainly at UKEF our mandate, we think, is good for all weathers. No viable export should fail in the UK owing to finance or insurance issues. Jonathan talked about the need for consistency and conformity and certainly we've seen the need for a coordination approach by ECAs on a single set of documentation approach, a single set of environmental due diligence, all of those things that make an ECA offering more competitive.

I think the thing that does really change the whole world is protectionism, because if organisations are there essentially to level the playing field and the playing field is full of artificial obstacles, it becomes a sport where the race is to race to the bottom in terms of pricing, and that is a very different world that we could be going into.

The UK government has been very clear that the UK absolutely wants to be open for business and the thing we really want is more trade, freer trade and fairer trade, so protectionism is not going to be coming from the UK government.

I think the government's commitment to export credit agencies was shown last year when the chancellor announced four measures to reinforce UKEF's capacity. Within our overall maximum exposure limit, our risk appetite was doubled from £2.5bn to £5bn, maximum country limit was doubled from £2.5bn to £5bn, we're able to actively manage our portfolio and we are now able to guarantee financing in 40 local currencies.

In terms of product suite, there are a variety of things we're working on. Jim mentioned direct lending and that is something we see as being an increasingly important product, as Jim does, largely as a result of liquidity. We always talk about bank capital regulations, but frankly it's the liquidity rules around LCR that I think are really encouraging that.

In terms of SMEs, I think we all need to be much closer to SMEs than we perhaps are but the issue is to address that market and how you access it. Over the next two months we will be rolling out in the UK what we're calling a "bank delegation" system whereby instead of us underwriting each SME exposure as if it were a million dollar
project, we're simply going to delegate the use of our guarantee within given credit criteria to the banks, who can simply inform us that we're guaranteeing a working capital facility or any
other type of support.

I think this shows that ECAs need to have a huge cabinet full of lots of different products, many of which will go unused and gather dust for a while, but all of which will have their time. Having the breadth of product range is really important.

Diana Smallridge: Let's move to Al at the EDC, which has a traditionally different business model to European ECAs and of course US Exim bank.

Al Hamdani: In a nutshell, our two main product lines are financing and insurance. We started as a traditional insurance guarantee provider but over the course of various macroeconomic events, we have evolved and now have a very strong lending arm. We try very hard not to compete, we try to be a partner, a complement and a gap filler. We try to evolve our products so that they are suitable for the market at the time. And that's really been the traditional model.

We direct fund loans and that's always been an interesting story because once upon a time, I think banks didn't want other non-banks to fund loans. Then we went through a crisis and I remember at the time, I was actually getting calls from banks saying that they actually wanted us to fund loans and they wanted to guarantee us, so it's a very interesting dynamic.

The dimension that I want to add is, and I don't know if its unique to EDC, but we look back on all our traditional offerings and we try to leverage something which we have which is non-financial, which is really knowledge of trade and knowledge of international business.

As a result, we have been able to facilitate connections with our exporters and buyers in other markets so we're looking for a way to channel our knowledge. I think when you look at it from a value stream perspective, what that means is we're trying to move ourselves a little more upstream in the exporting journey. So in addition to all the good stuff around financing and insurance, we're also looking at this element now of how can we take some of that knowledge and package it for the companies that aren't ready to export, but have an interest in doing so.

So they see an opportunity, whether its Brexit or Trump or the EU, how can we channel our knowledge to them so they absolve themselves of the noise and see where some of the real opportunities lie. So we're moving our business model more in that direction, trying to be more upstream, packaging knowledge, investing in digital platforms, investing in the networks that we have to really increase the value offering. I think it's
a net win.

Diana Smallridge: Gheeta, could you give us your perspective from India?

Geetha Muralidhar: I just totally disagree with all three panellists. Lending should not be the end result. There's a banker sitting here on our panel. He has a lot of money with him and any other banker here will agree, they have a lot of money. They are flush with money. All they want is the comfort of the insurance and the guarantee because they've got to work through the regulation and various other compliances and issues. Why should ECAs jump into lending directly?

There is a very clear research and a report being done in the UK that says more exports are possible by increasing the insurance support to lending, rather than funding the lending. It's a very clear conclusion.

So I'm with the Europeans when it comes to the role of ECAs doing more insurance, but not direct lending. Maybe the experience in India is already well known to the reinsurers in the market; we have believed in insuring the lending all through the last 50 years and we have seen the banks have befitted immensely and they continue to draw the support. And in the good times and the bad, ECDC has always been there.

This is an organisation which insures about US$45bn and we have gone through all the sharp changes that have occurred across the world, we have gone through them all, we have survived threats of being merged, getting wiped out, but today the government very clearly recognises that this is an institution which needs support, so they're working on how to strengthen the institution and how to enhance its role.

Because as you all know, India being so vast, export has never been one of the priorities in the economic planning, but now I think the new government is slowly realising that it needs export and we are working towards that.

Diana Smallridge: Geetha you're my favourite kind of panellist. Someone who sets up a debate. I'm going to ask Jonathan to respond and then the direct lenders please.

Jonathan Joseph-Horne: Well, at the risk of being boring, I have to agree with all four. I think there is a place for an ECA that only provides the guarantee product and the banks do what the banks have always done, which is lend money. I also think there's a place for products which, where necessary, can step in alongside the banks and perhaps will take on parts of the risk or tenor spectrum that banks might wish to distribute or avoid as part of their efficient management of funding and capital.

What I don't think there is a place for in the market is a one-size-fits-all approach, where the banks lend the money and ECAs only provide
the cover. Equally, I don't think it's healthy for the market for ECAs to be fully focussed on always providing funding or direct lending themselves - I think the right point is somewhere between the two. So, I'm delighted that there is a difference in views amongst the panel and long may it last.

Al Hamdani: I don't have a lot to add but what has to stay the course is the adaptability and flexibility so I agree, what would be absolutely wrong is a one-size-fits-all model, or a one-time-fits-all model. My observation is that the agencies that have done very well have been responsive to market needs, be that in terms of how they work with the commercial markets, or be that in terms of how they evolve products.

Louis Taylor: I would just add that, not to pour too much cold water on this, there's more agreement than disagreement. Gheeta's right, we should not habitually be throwing cash at transactions, we should be there to guarantee them more often than not. But as I mentioned, there are some circumstances where direct lending is the most efficient way of supporting a transaction. Our £3bn direct lending facility was initiated really with the intention of supporting transactions of £50m or less where the banks really didn't see the value in putting together a syndicate and the deal would then fail.

Actually, it hasn't really turned out that way but nevertheless, we're still finding our feet a bit.

James Cruse: I would simply add to this idea of being responsive and having different tools in your cabinet. When there is a national policy or strategy for example, be it for small businesses or in terms of dealing with attempts to reshape the environment, you will need those tools, and there are times when you're filling the gap. I will also add that what I think is coming in the next few years is much more use of direct loans.

Louis Taylor: As much as we're talking about direct lending, the product range should broaden out to include capital markets because if the banks can't provide liquidity or funding, an alternative of ECAs providing direct lending is to guarantee a capital market transaction and we've certainly been active in that. Having these alternative structures from ECAs can really help develop the market.

Diana Smallridge: Al mentioned advisory services and upstream as a product in your shop window. Is this something the other ECAs are looking at and how do you do that on a profit or at least costs recovery basis?
Al Hamdani: It's a good question because we refrain from using the word advisory because that's a space that our agency is definitely not in, in the sense that we understand it. The costs recovery element is also interesting because in essence, there is an upfront investment that needs to be made in bringing together the knowledge you have and making it available, be that by way of the product, the content, and there's the question around is anyone willing to pay for that in a profitable way.

The quick answer is that we actually are not doing that as a profit making business in its own right. It's a service which when you look at our balance sheet as a whole, it's not a loss leader but it's a service we provide in the hope of providing insight so they export, and then use our products moving forward.

Geetha Muralidhar: With India being so vast we have about 58 offices, all the remotest corners possible. We literally have to handle the exporters, guide them, starting from getting their import exporter code, all the way to how to approach the bank, how to look for importers abroad and so on. So our officers have been doing these sorts of advisory services but I don't think we have ever prized it.

Diana Smallridge: I have a few questions from the audience. Here's the first one. When ECA's use more of the private insurance market, do you not see the danger that they cannibalise the capacity for banks, which also use the same instruments?

Al Hamdani: We use the reinsurance market. We use them as means and not means to provide capacity so I hope that no matter how you cut it, the same capacity is being provided and its effectively being shared. I hope its win-win but I'd be interested in hearing how the reinsurers who are often buying from our business would answer that question.

Geetha Muralidhar: In India we are regulated by the insurance regulator so we are subject to all norms. We have a reinsurance back-up all from the private reinsurers, not the national re who just have a minor share. So we have half a dozen in the consortia backing us.

Diana Smallridge: I've got another question from the audience. Is there really a need to increase access to ECA coverage when you've got a vibrant private market?

Louis Taylor: Well I think the whole purpose of ECAs is to be there when the private market is not. When the private market is not there depends on the economic, political and regulatory situation, so we're a shock absorber really. We're a credit enhancer and those are the roles we play. So I think offering maximum accessibility to all of that is really important.

Diana Smallridge: Jim, I have a question for you from the audience. Is there a future for US Exim
in the Trump administration?

James Cruse: It is difficult to say at this point. What I would say is that when we switched the lights off in June 2015, we were a fairly modest institution in terms of its aggressiveness. So when the lights go back on, if they do, that's the least likely outcome, that we would return to what we were in 2015. It's either up or down. It's not, go back to what you were.

Because if the bank doesn't have a larger strategic role to play and have its own strategic goals, such as funding domestic infrastructure,
it's not going to come back.

Diana Smallridge: Louis, I have a couple of questions from the floor for you. What percentage of capital market transactions do you guarantee? And does UKEF see Brexit as an opportunity to do more for exporters, for example, short term trade credit insurance?

Louis Taylor: The proportion of capital market transactions that we guarantee is still very small. That's because you need a certain size of transaction to do a capital markets issue but I think this is going to increase, as in India last week and we were talking about the possibility of guaranteeing masala bonds.

In terms of Brexit, Jim got his inevitable question and I got mine. As I said, our mandate is good for all weathers, in or out of the EU. We're there to promote British exports and to ensure that no viable British export fails. That doesn't change. Who knows what effect Brexit will have on the UK economy? It's very often the case when people talk about negotiations, they assume that we're negotiating with a static counterparty and the whole world is dynamic.

Jonathan Joseph-Horne: I'd just like to make a comment on the capital markets element of that question. Capital markets is a very interesting topic in the ECA world. It comes up very frequently and I think there has been a lot more talk about capital markets than delivery of capital markets solutions.

I agree fully with Louis that the direction of travel in terms of the number of ECA capital market deals is upwards, but it is coming from a very low base and I think it will remain a relatively low base. Five to 10 years ago everybody was predicting that we would by now have a market dominated by ECA capital market placement. It's not the case. It is important product and it will increase in volume but it's coming from a small base and will remain one of a number of solutions in the toolbox.

Louis Taylor: One of the things we are doing is helping banks to create conduits where they originate loans that are guaranteed by UKEF on the balance sheet and they can then securitise and distribute them out of the conduit into the capital markets as UKEF guaranteed paper. So it allows them to put a portfolio of loans together and clear out their balance sheet so it helps them their capital and liquidity levels. So to an extent, the volume of ECA paper in the capital markets is down to the banks themselves too.

Diana Smallridge: Finally, how do you all see the future? Are you optimistic or pessimistic about
the 2020s?

Geetha Muralidhar: I would say that protectionism is going to be the top risk that we need to worry about. In the last 10 years it's said that about 2,800 trade restrictions have come in, and this is all pre-Trump. And there have been 500-odd disputes in the WTO forum against the US and the EU. Thankfully, until today there has not been a dispute on export credit.

I would add that the ECAs, the credit insurers, and the distinction between commercial and political is long gone. So we need to stand by the customer if the payment doesn't come, period.
As long as the customer is not at fault.

James Cruse: I'm optimistic, but in the context of protectionism. So I'm optimistic for ECAs in the industry in the sense that exports I think are going to be more strategic in the future than in the past and therefore the role of ECAs in the private sector will be more important. It may not be good for the world as a whole but it might be good for this industry.

Louis Taylor: Well the world is full of pessimists but the optimists are always right so, always optimistic.

Al Hamdani: I'm going to say 'hear hear' because as a risk guy, you'd think I'm a pessimist but I'm actually the one who asked the question this morning on opportunities. It is a pessimistic environment out there but collectively, we have to find ways to make that glass half full. So, optimistic.

Jonathan Joseph-Horne: I'm definitely optimistic, mixed with a little realism as well.

The panel discussion, 'The changing role of ECAs: A window onto the 2020s', was held at the Excred27 event in London, March 2017

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