A tough job – but somebody’s got to do it

Pity the export credit agencies: staying within the confines of OECD rules while keeping exporters happy is not easy, and they could be forgiven for feeling that they have a fairly thankless task sometimes. But many have made a real effort lately to keep up with ever-changing demands and shed their reputations for red tape, with varying degrees of success. Erika Morphy reports.

When Robert Caldwell, a structured-finance attorney with Clifford Chance, says that export credit agencies (ECAs) have become more flexible in their attitudes and business approaches, he speaks from the heart.

Based in Hong Kong, Caldwell was the lead attorney advising lenders in last year’s landmark $2.9bn BASF/Sinopec petrochemical deal in Nanjing. This particular transaction was the largest ECA-supported limited-recourse financing in China at that point; it was also the first market risk-based limited-recourse financing in the Chinese petrochemical sector and the first involving both domestic- and foreign-currency lenders and export credit on a pari passu basis.

To bring the deal to fruition, inter-creditor solutions had to be developed to accommodate both domestic- and foreign-currency lender requirements, as well as the ECA’s requirements, which in this case was Hermes. “It was an interesting and complex deal that came together nicely,” Caldwell says, and beyond that would not comment specifically on the transaction. But in general, he says, ECAs, or at least many of the ones he has contact with, are becoming easier to work with than in recent years. “They have recognised that these projects can be far from straightforward and are changing their ways as a result.” For example, he says, many are revamping procedures to better reflect international bidding realities. “It is increasingly no longer the case that you would have one contract for a turbine from one supplier and you can write a line of cover for it. More and more deals are emerging where there might be 30 different contracts that qualify for cover.”

Nor is Caldwell alone in his assessment. After an informal survey of several bankers and end users, Trade & Forfaiting Review found most tend to agree that ECAs are indeed shedding their old reputations as cumbersome and bureaucratic.

The bad news? There are a number of issues still pending in the ECA community – a group that also includes the OECD as the arbitrator of what is fair and possible among these agencies – that need to be resolved, and soon. These issues range from the broad brush, such as defining once and for all what the unilateral national interest is for any given country, to the more specific question of how newer ECAs outside of the OECD umbrella will participate in the development of rules governing these agencies.

The ECA’s soon-to-be elevated status can be traced to that looming financial realignment known as Basel II. Whatever else it has done, it has pretty much killed long-term, greenfield, cross-border project finance in emerging markets. So in short, without the ECAs or other multilateral support, it will be difficult or impossible to be able to fund long term in emerging markets.

Not that project finance has exactly been booming anyway in the past few years. “To some extent these issues have become less intense since the late 1990s because international development projects have been in a lull,” says Kenneth Hansen, a project-finance partner at the Washington office of Chadbourne & Parke. “A lot of those project developers have hunkered down with the weakened global economy and are trying to maintain their existence at home instead of developing global power or telecoms projects abroad,” he explains. “Politically, though, it adds up to fewer fists pounding on the door and fewer voices demanding action for change.” Hansen is in a position to know. He used to be general counsel of the US Export-Import Bank (Ex-Im Bank) in the middle and late 1990s. Now, he counts several of these agencies among his clients.

It’s not fair

There are a number of issues that ECAs must confront if they are to move ahead with their missions in the coming years, agrees Carlos Muñoz, president of Muñoz Investment Banking Group in Arlington, Virginia. He was also president and CEO of the US Overseas Private Investment Corporation (OPIC) in the late 1990s.

The issue of favourable financing, for example, is always surfacing, he says. Basically the OECD has set rules of engagement for export agencies that prohibit “unfair government influence”. “ECAs are always receiving complaints [from exporters] that their competitors are receiving more favourable terms from their ECAs,” he says. Unfortunately, in some cases it is true. “The big-ticket items, such as Airbus or Boeing, are so complicated that I think it is easy to take the rules to the edge of what is permitted. Those sales are huge and no ECA wants to see their exporters lose out.”

Indeed, while no one interviewed for this article was willing to speak on the record about this touchy subject, it is clear that some ECAs have developed reputations for pushing up to and past the acceptable limit of OECD rules. It is well known that one Western institution in particular adopts a more flexible attitude than its counterpart agencies towards what is permitted and not under the rules of engagement. In short, if these rules don’t make mention of a certain issue or structure, for example, this agency is more likely to feel free to proceed in contrast to another agency that perhaps would proceed more cautiously or outright decline the transaction.

Tax-lease structures are a prime example. There has been a small handful of deals over the years – not many – where a competing ECA to the agency in question guaranteed financing that was combined with tax leases. As the competing agency takes a conservative view of what is permitted under the rules of engagement, the agency found it very difficult to reconcile these rules with the needs of the lease investor and develop true combinations of a tax lease or structure and guaranteed financing. The other agency, however, is very open to tax-lease structures.

This is not to say the agency is in the wrong (that’s for the OECD to decide). But nationals from other countries might and indeed do point to this agency’s practices as both unfair and as a roadmap for their own ECAs to follow.

A related issue is that of market windows, which is another highly sensitive subject. A few countries have such agencies that in effect finance the non-ECA portion of a deal, thus providing a package transaction. It allows an ECA to provide a much more comprehensive and competitive financing package under the guise of commercial financing. Other countries that don’t have such agencies are, naturally enough, preoccupied with this subject given that they cannot compete on the same level.

Another issue where the lines sometimes blur is local content, Muñoz says. In the era of globalisation this once simple issue has become terribly complex, with an exporter in the UK likely to be owned by a company from Germany with French shareholders and factories in Germany and the Czech Republic. “The bigger companies have more places they can go,” Muñoz says. “They are playing the ECAs off of each other when the product is a combination of content from different locales. The ECAs can take ownership of the deal and compete for financing.”

No corporate is going be pounding fists on doors, as Hansen put it, about this particular problem. But in response governments are putting in place new restrictions – especially in the EU – on how far they can favour their own nationality, and these restrictions are only likely to increase. The “Made in EU” issue is on the European Commission’s table and, respectively, under discussion in the North American economies as well.

“The general principle among ECAs is that we are not trying to compete against each other as ECAs,” says John Ormerod, director of strategy and communications at the UK’s Export Credits Guarantee Department (ECGD). “What we are trying to do is facilitate exports from our respective countries and make sure competition is on a level playing field.”

The problem is that there are a number of newer ECAs from such countries as Brazil, China and India that are not part of the OECD mandate, and thus do not participate in the discussion of the rules or guidelines that are occasionally revamped. This past December, as one example, the OECD rolled out its common approaches for evaluating the environmental impact of infrastructure projects supported by ECAs. “The question is: are these countries going to remain outside the international system of a level playing field for ECAs, or can we invite them into complying with the arrangement even if they are not members of the OECD?” Ormerod says. “This is a big issue for them; they don’t want to sign up for something for which they have no access in negotiating the terms.”

The guidelines established for corrupt practices is another area under discussion, Ormerod says. “There is a general consensus that the OECD needs to tighten these up as well.”

Getting better and better

Although bankers and other observers of the ECA community can opine ad nauseum about their stances on these issues, for the most part they tend to fly under the radar of corporates. In part this is due to the move away from supplier marketing among ECAs and the banks who service them towards buyer marketing. In another words, while at one time, say, Deutsche Bank would have gone hunting within Germany for exporters looking to sell to emerging markets, now it looks in emerging markets for big buyers who want to source a variety of goods from any OECD country for a given project. The thinking is that by the time an individual exporter in Germany sees the deal, it’s as subcontractor and the real decisions on “what” and “from where” and “financed by whom” have already been made at the emerging-market end.

Meanwhile, the areas in which corporates do pay attention – is the agency user friendly? Is it flexible? Does it stay up with the times in its products and processes? – have almost become almost non-issues in recent times.

“In general the ECAs are more flexible than in earlier years because they realise they must keep up with a changing environment and more demand on the part of private-sector companies – as well as each other,” says Terina Golfinos, managing director and head of structured export finance Americas at ING in New York.

The ECGD, for example, is shifting its business model to that of a trading fund because it wants more autonomy from the government’s system, Ormerod says. “We need to be freed from the annual negotiations with Treasury. We need to run more like a business if we want to serve our constituency.”

Ex-Im Bank is another agency that has revamped and reorganised its internal structure – albeit not in the same manner as ECGD – to improve its customer service. The results are obvious to Bruno Mejean, senior vice president of structured finance of Nord/LB’s New York office. “I sense there is a willingness to look at new approaches and new avenues on the part of the staff,” he says. “They have relationship managers to deal with companies now, and this closer contact with their constituents has caused them to reappraise their products and procedures.”

Golfinos agrees, saying the agency bends over backwards to be flexible and get deals done, but does so in a very orthodox fashion. “I have seen them take on or be willing to consider novel structures, such as using different types of collateral, for example, or sharing collateral with private-sector entities,” she says.

Such comments make Jeffrey Miller, senior vice president and head of export finance at Ex-Im Bank and de facto driver behind many of these changes, beam with pride. “We try to adapt ourselves to what our customers need,” he says. “The export community is a rapidly changing one and we like to pride ourselves on being nimble enough to change with it.”

In a few respects Ex-Im Bank has not stayed up with the times. Multi-source financing, to name one, is a non-subject at the bank, as the management probably would like to forge such agreements with their ECA counterparts yet is stymied by a political climate long resistant to this issue. So while most European ECAs have several multi-source agreements in place, the US has very few.

In other areas, though, Ex-Im Bank is leading the pack in product development. It is, for example, looking to expand its reach in local-currency lending and sub-sovereign financing, Miller says.

Municipal projects are becoming ever more the purview of the ECA community, Miller says. “Development banks go to lower-income countries; meanwhile, middle-income countries need financing as well. ECAs have to be involved in financing infrastructure, whether it is through the municipalities or large infrastructure projects.”

Ex-Im Bank became active in this area in 2001 and has since backed deals in St Petersburg, Moscow, Sofia, Kiev and Prague as well as cities and states in Mexico. In some place, though, it can be a somewhat delicate issue if they do not have the authority to launch such borrowing endeavors. Sometimes Ex-Im Bank reportedly uses a back door to get the deal done, usually via the local-currency route – in another words, a city or state may not be able to borrow abroad but it can usually borrow in local currency.

Miller points to other new areas of concentration for Ex-Im Bank, such as dealers’ finance for capital-goods equipment and expedited processing of medium-term programmes as well as new sectors to support, like IT.

Ex-Im Bank, of course, has been active in guaranteeing financing for hardware and telecoms. Now, however, the agency is exploring the possibility of intangibles, or intellectual-property exports. “I am not sure about software yet,” Miller says. “But we definitely see a role for ourselves with IT systems. Right now we are sending teams out to explore all the possibilities.” Miller, in fact, helped establish a group within his division – the Business Initiatives Group – to focus on new product development and initiatives. “Some 40% of exports today are services. Our history has been in capital goods; we need to evolve along with the business community if we are to fulfill our mission.”

Erika Morphy is US correspondent for Trade & Forfaiting Review.