Crisis, what crisis?

No other part of the world seems to suffer from crisis contagion as severely as Latin America. But banks need not shy away from this volatile region, argues Ignacio Ramiro, if they maintain a consistent approach to trade finance, as well as an eye for innovation.

In any overview of the Latin American trade and export-finance market written in the past ten years, one will find the same word written over and over again: crisis. Since the mid-1990s, the region seems to have reeled from one crisis to another in the manner of a punch-drunk boxer. From Mexico’s “Tequila” crisis in 1995, to the impact of the Asian crisis in 1997 and Russian crisis in 1998, to Argentina’s “Tango” crisis in 1996 and especially in 2001-2002, to Brazil in late 2002 and, most recently, to Venezuela – this is a region more vulnerable to crises, and more deeply impacted, it seems, than any other. Of the region’s countries, only Chile has managed to avoid a deep, systemic and, to the outside world, alarming economic crisis over the past two decades.

This has a major impact on the delivery of trade and export-finance services – not least because South America is a continent that has little sense of continuity. Country-risk ratings can plummet overnight. Seemingly copper-bottomed banks can founder. Popularly elected regimes can collapse. So how should trade financiers respond to such volatility?

Deutsche Bank’s view is that any international trade-finance bank should offer the very continuity the region lacks. Latin Americans are used to investors jumping in when the economic climate suggests it is becoming the “new Asia”, only to see the same investors vanish at the first sign of trouble. This is no way to develop a sustainable trade-finance offering. Confidence has to be built over the long term. This doesn’t mean a foolish approach to lending – for instance, lending in the face of a banking collapse as recently happened in Argentina. But it does mean remaining calm and committed to the region – seeing each crisis through with investor and borrower relationships intact and transactions meeting their repayment schedules and covenants, or being rationally restructured when this is unavoidable.

Doing so takes deep commitment. And throughout the past decades, Deutsche Bank has shown that commitment, financing the region’s tradeflows, export contracts and infrastructure and industrial projects. The bank has learned to ride the waves, not least because, while crises are part and parcel of Latin American economic life, they all pass and the region returns to normality soon enough. Such crises also have their greatest impact on short-term trade-flow business, which explains why these traumas, although dramatic enough, have less impact in Latin America than, say, Asia, where short-term trade-flow business enjoys far higher volumes.

This means that Latin American trade finance is far more geared towards medium to long-term capital goods and plant purchases, often related to project financings. And by their very nature, such transactions have to be structured towards riding out short-term economic problems – as does Deutsche Bank’s Latin American trade-finance offering.

Indeed, while flow business is important, the key business for Latin American trade financiers involves multi-tranche, multi-sourced transactions utilising a combination of export credit agency (ECA)-backed financing, commercial credits and other national or supra-national support bodies. These deals are complex and highly structured multi-pieced puzzles requiring a range of skills and techniques offered in a coherent and integrated way. They can also involve the use of new tools like credit derivatives or political risk insurance, as well as new uses for traditional tools such as capital-markets funding. It is for this reason that our Latin American structured and export-finance team is co-headquartered in New York and Madrid. Any trade-finance bank operating in the region has to place a very high priority on relationships with ECAs in Organisation for Economic Co-operation and Development (OECD) countries – particularly in Europe and especially with Compania Espanola de Seguros de Credito a la Exportacion (Cesce), the Spanish ECA.

Working in partnership with Cesce, Deutsche Bank has managed to close some interesting deals. An illustration is a mid-2002 transaction for Costa Rica’s Instituto Costarricense de Electricidad (or, more accurately, with its subsidiary Compania Nacional de Fuerza y Luz), which married financing from the Spanish government with commercial financing, provided by the bank and supported by Cesce guarantees. The US$53m deal financed the subterranean electricity grid in the city of San Jose, a project awarded to Abengoa of Spain. Some 50% of the financing consisted of a soft loan granted by the Spanish government through the Instituto Credito Oficial (ICO), with the remainder a Deutsche Bank-granted buyer credit supported by Cesce and ICO. Deutsche Bank was agent for both tranches, which were guaranteed by the Costa Rican government. The deal closed successfully despite adverse market conditions, showing the value of both trade-finance institutions and trade-finance techniques in such times.

Increasingly, success in ECA financing requires not only multi-party co-operation but also innovation. More and more, plain-vanilla ECA financings are not enough to get the deal done. One example illustrating the need for innovation even when financing ECA-supported projects – the El Sauz power plant in Mexico – was signed in March last year, with Deutsche Bank as lead arranger.

It was the first non-recourse trade facility to be arranged utilising a combination of Cesce political risk insurance and private funding. The non-recourse element was a two-year discounted facility for Spanish company Abener Enegia for 100% of the value of the engineering and procurement contract for turnkey revamping of the El Sauz power plant in Queretaro. We structured the deal in three tranches – a Cesce-covered facility, the non-recourse commercial facility and a Bancomext facility – and acted as agent in all three cases. In addition, Deutsche Bank led syndication of a US$56.8m buyer credit for the ECA-eligible content, which formed the long-term refinancing of a portion of the total contract with the Comision Federal de Electricidad, the plant’s owner.

Combining ECA financing with highly structured elements, helped by the full in-house integration of structured and export finance, is an important way around the ebbs and flows of investor risk appetite towards the region. Risk appetite is down in general, and more so in emerging markets, especially Latin America. Yet with bank consolidation and Basel II, this contraction of balance-sheet availability is likely to become a fact of life.

Structuring around the risks and lack of appetite – such as using a discounted non-recourse element to an OECD supplier in the El Sauz deal – is the only way to meet funding requirements and sustain deal flow, especially in markets like Latin America that demand longer maturities. One technique, in the case of an 80-85% covered financing against a 100% legal or commercial financing requirement, is to add either a commercial loan with a credit derivative bolted on or a capital-markets solution through a bond issue or private placement. It might sometimes be an expensive solution but, in the absence of sufficient appetite, it might also be the only way for essential deals to get away. And it is such dynamics that make trade finance in Latin America so vital and so interesting.

Another trend highlighted by the El Sauz project, and important for the development of the region as a whole, was the deepening of the relationship with Bancomext, the official Mexican ECA. This is vital for Deutsche Bank’s view of the future of trade finance in the region, where, in the bank’s opinion, the impact of economic crises on long-term development is often exaggerated.

Formerly pure extraction or agricultural-export economies, such as Brazil, Mexico and Venezuela – which once required extraction-type trade-finance facilities like pre-financing of oil deposits – are now moving up the value chain and looking for financial support on sophisticated capital-goods exports. This follows a general trend of a loss of dependency on primary product exports as these economies diversify their export incomes.

Trade financiers need to respond. Not only are such economies looking for medium to long-term financings to fund plant imports for construction and expansion of refining or manufacturing facilities, they are now also capital-goods exporters. This means developing relationships with indigenous ECAs, such as Banco Nacional de Desenvolvimento Econômico e Social (BNDES) in Brazil and Bancomex. BNDES, in particular, is now offering very attractive export-finance packages and, of course, the agency is free of the OECD consensus that creates a level playing field among the wealthier nations.

Such moves up the value chain are creating a knock-on effect regarding the way the region trades. Indeed, a regional feature is that, for all its common vulnerability to crises, the major economies in the region have traditionally operated largely in isolation, making it difficult for any trade-finance operator to have a blanket regional policy. Economies such as Brazil, Argentina and Mexico have historically traded with outside partners more than each other (e.g. Portugal, Spain and the US). Yet the changing nature of Latin American trade is undermining this, as Latin American economies begin to export capital goods to each other – a process being consolidated and accelerated by the growth of regional supra-national economic associations such as Nafta (Canada, Mexico and the US), Mercosur (Argentina, Brazil, Chile, Paraguay and Uruguay) and the Andean Pact (Bolivia, Colombia, Ecuador, Peru and Venezuela).

Yet moving up the value chain is a concern for all countries in the region, not just those in the trading clubs. And Deutsche Bank sees its role as a key facilitator of projects financings that can aid this process. The bank is increasingly using techniques that can be applied to all Latin American markets, for instance, using export flows from the region to secure financings – something that can even be applied to Argentina in the not-too-distant future.

Deutsche Bank has also become especially innovative in poorer, less developed countries reliant on agricultural production. One example is in the Dominican Republic Republic, where the bank is supporting the Ministry of Agriculture in a development programme aimed at modernising the production, storage, distribution and commercialisation process of the country’s agricultural sector. Supply contracts worth US$143.4mn have been signed with a range of commercial Spanish contractors to develop a wholesale central market in Santo Domingo, as well as a series of greenhouses, industrial freezers and slaughterhouses located around the country.

Deutsche Bank was mandated by the Dominican government and the Spanish exporters to arrange financing, which the bank organised as a series of loans aimed at assuring the individual financial viability and correct execution of each project. The loans, totalling US$103.8mn in 2002, with the balance due to be closed this year, were partially supported by Cesce and ICO. Deutsche Bank financed 100% of the contract values, with 85% covered through a buyer credit, bringing in a number of first-class international banks as participants.

It is through such deals that progress is made, even in a region as volatile as Latin America. There is no doubt that the larger economies are becoming less dependent on oil exports and that the smaller economies are managing to add value to commodities and foodstuffs prior to shipment. And the role of the trade financier in these positive trends remains key.

Ignacio Ramiro is director of global trade finance for Deutsche Bank in Madrid.