The next incarnation

Structured export finance appears to be in a resting period for the moment during which banks and corporates absorb the many changes that have occurred over the past year. However, no one in the industry expects the quiet period to last much longer. Erika Morphy reports.

When Digital Projection International, a manufacturer of electronic projectors used in cinemas, theatres and pop concerts, won a mandate to supply 750 high-performance projection systems to a digital cinema chain in Mumbai, it turned to Royal Bank of Scotland (RBS) to get the necessary capital to meet its working capital needs. There were a number of complexities around the bespoke letter of credit (LC) that the company needed, but eventually the negotiations were successfully concluded and RBS was able to provide the company with an assignable revolving export LC and ongoing working capital.

It was an important deal for both bank and company, says Russ Grazier, a member of RBS’s international banking services team. For Digital Projection, the LC provided the means to further expand into the region. For RBS it was an opportunity to show off its financial and legal bona fides for a repeat customer. “Everyone came away from the table happy and that is what counts in the end,” Grazier says.

Quiet period

In many ways Digital Projection’s deal could be found in any university textbook on export finance: it is, quite clearly, a classic vanilla pre-export and export finance transaction, albeit on a smaller scale.

But while it may be classic, this sort of straightforward financing is also becoming a much more rare type of transaction, relatively speaking.

About a year ago, the export finance space found itself grappling with significant change as new players, capital pools and structures moved into this usually staid space: the introduction of new structural elements in deals – such as bond financing, for instance – as well as competing sources of capital from hedge funds and other institutional investors.

“It wasn’t easy,” says one banker, remembering the changes that developed over the past year. “In order to enhance our division’s profile and stand out competitively, we had to become a lot more creative – more than we would have ordinarily liked.”

Some of the more unpleasant changes – for banks, that is, not the clients – involved loosening of structures and documentation requirements. Some terms or standard clauses once typically used in a transaction are no longer routinely accepted anymore in documentation, for example. Also, in many markets – even the more unstable emerging countries – tier-two companies found themselves with enough capital markets gravitas to demand similar overtures that the banks were providing their tier-one counterparts.

Other examples of the fundamental shift that occurred last year included faster time to market and faster decision-making skills. Banks often found they would have to come up with a fully committed underwriting offer within days or a week if they wanted to play the lead role in a deal. If they weren’t willing to take on these additional risks to stay competitive, they had to be willing to walk away from a deal.

After such turmoil, Olivier Paul, head of export finance for BNP Paribas, says the export finance markets have been relatively quiet. “In the last six months we haven’t seen such a dramatic change as we did in the first six months,” he reports.

That said, few believe this holding period will last. Export finance is gearing up for its next incarnation. And the mid point of the year is as good a time as any to peer ahead. With no crystal ball available, assumptions need to be made about what export finance may look like.

For several years now, export credit agencies (ECAs) have been slowly moving away from the fundamental operating principal of national content to that of national interest. As the global economy becomes ever more competitive – especially in the face of ongoing Chinese and Indian development – many bankers expect, or at least hope, that ECAs’ mandates will loosen to become more flexible in content rules.

Global multi-sourcing, multi-production and pre-export strategies are other global economic realities that ECAs are expected to support in the coming years.

Balancing risk against innovation

In this environment it is tempting to predict that banks will fling themselves head first into the competitive mêlée with little regard to more conservative strictures that had previously governed their investment and finance decisions. However, there are signs that after the initial overtures to corporates, banks are stepping back to evaluate the events of the last year.

This is not to say lenders will begin to deny credit to tier-two banks or pull back to, say, a month-long underwriting period. Indeed, BNP Paribas’ Paul says many of the developments over the past year resulted in short-term pain for the banks that was good in the long run. “It was good for the client at the time – and good for us because it made us stronger and more competitive.”

Banks turned their newly developed risk-taking capacities in credit, performance and political risk into competitive differentiators. This greater capacity has not only protected banks’ own internal positions but also put them on a more favourable footing with local banks and local currency finance options.

Consider a hedge that ING Bank put in place last year to protect against the often wildly fluctuating coffee prices on the Brazilian exchanges. ING provided a financing facility to a local corporate to purchase coffee during harvest. Then it provided a hedging facility to protect the purchase on the international exchanges. Essentially, the company received support for its coffee inventory, offtake contracts and hedges from one bank. ING, in turn, had the certainty of knowing that the inventory it financed – and not some local bank – had been hedged.

“That way the company had its coffee inventory in place, its offtake contracts in place and its hedges in place – all from one bank.” For its part, ING had the certainty of knowing that its financed inventory has been hedged, which lowers risk.

New entities, more liquidity

The ubiquitous theme throughout most emerging markets has been the liquidity that has raised many corporate boats, some deserving and some, a few bankers might say, not so deserving. It is difficult to say when, if at all, these investment dollars seeking a home will recede and what might precede such a shock.

Indeed, the general consensus is that such an eventuality is not likely to happen – but rather, the levels of liquidity will gain even more momentum.

Some of the newest and most intriguing sources of financing, though, are coming from hedge funds, driven in part by the desire to pick up after Basel II.

As one example, consider EuroFin Asia: several months ago the Singapore-based EFA Group subsidiary, joined the small, but growing ranks of hedge funds investing in trade finance transactions. EuroFin Asia, the fund manager of LH Asian Trade Finance Fund, closed at least one deal earlier this year that it is willing to publicly cite – a finance facility for a local steel trader and distributor, Icon Metals – and is now working on a pre-export finance deal that involves warehouse receivables for a mining company, EuroFin director Francois Dotta says.

The structure of the deal itself is classic collateral/warehouse management, explains Dotta. “What is different is that we are seeing more mid-tier players pushing for this level of financing. And we are seeing more banks comfortable doing such deals.”

New competition and new demand: a timely confluence that illustrates what is happening through the export finance industry on just about all continents.