Beyond structured finance

The need for structured finance in Southeast Asia is diminishing thanks to ever-growing levels of liquidity in the region. As a result bankers are moving downstream to target smaller-sized companies that are offering growing opportunities. Erika Morphy reports.

Several years ago Pearl Energy was a small entrepreneurial oil and gas exploration, production and development company just setting up shop. Opportunities abounded, but the Singapore-based company was hampered by its lack of capital.

Fast forward five years. Having taken the prerequisite risks and leaps of faith any start-up must, Pearl Energy is now a much larger and more established company, of far greater interest to trade and commodity finance banks. Last year, for instance, it arranged an award winning $75m reserve-based lending facility with Natexis Banques Populaires’ Singapore branch from which the company is able to drawdown as the need arises. Unlike earlier facilities, though, these drawdowns do not necessarily have to be for project-related expenditures.

“At the time it was a great coup for us,” remembers Richard Allan Lorentz, chief business development officer and one of the company’s founders. “It was one of the first in the region.”

Perhaps this deal opened the floodgates for smaller companies. Or perhaps it is merely that the lending environment has changed in the region. Either way, Lorentz reports a greater receptiveness by banks towards small company risk than was present during his own start-up days.

“We are seeing a lot of companies like Pearl Energy start up now and looking for debt financing.” More often than not, he says, these firms receive it. True, financial innovation hasn’t evolved much, he says. The Natexis revolving facility has been about as creative as it gets – thus far, at least. But what the banks lack in creativity they make up for with their willingness to sit across the table with relatively small companies. “Banks are definitely competing for small company business – business they wouldn’t have touched all that long ago,” Lorentz says. One driver, he speculates, is that banks are hopeful of getting in on the ground floor of a small company in order to nurture a relationship with it as it grows. Another – probably the primary motivator – is the fact that there are few other games in town. “It is definitely a different environment now,” Lorentz says. “There are many different sources of capital for companies to pursue nowadays.”

Same old story

If what is happening in Southeast Asia sounds familiar, that is because it is. In Russia, in most of Eastern Europe and in Latin America, new sources of liquidity have changed – beyond recognition in many cases – emerging market trade and commodity finance dynamics. Simply put, the need for structured finance is no longer as great in these economies. One banker reports that the most activity for such deals in the region can be found in India – if one broadens the definition of Southeast Asia beyond the ASEAN nations of Indonesia, Thailand, Vietnam, Malaysia, the Philippines, Singapore, Myanmar and Brunei.

“A significant trend in this business would be the increased liquidity in the banking and corporate sectors, which is in line with the growth of regional economies, and also increased competition as more and more banks expand their trade and commodity financing capabilities,” says Catherine Low, managing director and head of trade and commodity finance at ING Bank, Singapore branch.

As they have in these other regions, in southeast Asia banks have responded with the usual tactics: they focus on closing as many bilateral deals as possible, they loosen structures, they expand the range of products offered in order to meet several financial needs along the supply chain, they move downstream to target tier two and tier-three companies.

Region by region

Each region, of course, is different and the banks’ responses to the finance environment reflect those regional variations. For instance, Low notes that besides a loosening of financing structures and compression in pricing, it is also getting more challenging to attract and retain good staff in this area.

There are other ‘quirks’ specific to the region. One banker from a French institution active in Southeast Asia says there is a great deal of related trade finance emanating from infrastructure projects underway in the region – finance flows that are supported by such export credit agencies (ECAs) as Hermes, Sinosure, EKN, Finnvera, and export support agencies in Japan. This has been the case for Vietnam, the Philippines and to a lesser extent, Indonesia. “Activity hasn’t been as strong as we had earlier expected for Indonesia, given the demand,” the banker says. “But we do expect to see related trade finance deals happen there within the year.”

ECA support, though, is relatively rare in other countries – but even that is subject to change depending on events. The military takeover in Thailand earlier this Autumn, for instance, could cause ECAs to re-enter the market. “Prior to what happened, Thailand’s market was so strong that ECA-backed financing was no longer necessary,” the banker says. “It had and has deep local currency bond markets that gave companies access to local currency financing. Now, though, with the new situation some companies might become more cautious. I think it is possible that ECAs will be returning to Thailand or at least become more active than they were before.”

A game plan for success

Not that banks are reacting passively to such events or to the larger market cycle.

When asked how ING differentiates itself in the region, Low notes that one of its strengths is its global organisation and its dedicated risk management expertise. “We can react very quickly as a result – getting 24-hour approval when there is, for instance, a sudden pick up in commodity prices.”

Other banks are focusing on Islamic finance trends that are beginning to gain momentum in the region. Deutsche Bank, for instance, is positioning itself in order to duplicate its success in Dubai in this part of the world.

Oon Li-Sar, Deutsche Bank’s head of trade finance in Malaysia, reports that the bank foresees a growth of Islamic finance in the region over the next few years. “Increasingly, Middle East investors have been focusing their interest in Southeast Asia because they want to diversify their activities.” By 2010, she says, Islamic finance is expected to constitute more than 20% of the banking and insurance markets in Malaysia.

A fixture in local economies

Above all, though, for a bank to successfully carve out a niche in the trade and commodity finance markets of Southeast Asia it must learn to cater to smaller companies. These smaller companies have always tended to dominate the economies in this part of the world. But as these markets grow stronger and as new sources of funding continue to enter the region, banks are finding themselves working with smaller firms than in previous years. That said, it must not be assumed that large corporates are not active in the region or not of interest to banks. Quite the contrary. For instance, ANZ recently announced it has provided a $65m borrowing base facility for Santos Limited’s oil and gas assets in Indonesia. ANZ is providing Santos – one of Australia’s largest oil and gas exploration and production companies – with a framework facility allowing it to add and subtract fields for its facility as its financing requirements change over time.

However, in order to grow, banks have had to look further afield than the large corporates entrenched in local economies. Again, much of this activity is a reflection of the region’s wider economic structure. ING’s Low, for instance, reports that there are strong opportunities in financing ‘middlemen’ that are increasing their presence in Singapore to take advantage of the financial, legal and logistical infrastructure in the city-state, particularly in the area of petroleum. Singapore, she notes, is the largest oil trading centre in the region, and the world’s largest bunkering market.

“The Singapore government, through International Enterprise Singapore [formerly the Singapore Trade Development Board], has been successful in attracting international companies to set up or to increase their trading presence here by offering them tax incentives,” she explains – one driver behind the growth of middleman operations. Banks that have the expertise in transactional financing of commodity trading middlemen, typically involving large value transactions and borrowers with a nominal capital base, can benefit from the growing presence of such middlemen in Singapore.

Also, as Roger Packham, Deutsche Bank’s regional head of trade finance – Asia Pacific, reports, even the smaller companies in Southeast Asia tend to be more globally active.

Corporates are reaching out for new global trade services, he says. A lot of companies have moved or are moving manufacturing to lower cost locations in Southeast Asia, such as Vietnam or Pakistan. “We are also seeing a strong demand for banking services from these multinational companies as well.”

But there are other sources of demand for banking services, he continues. According to Packham, there is a growing level of demand from local banks to partner with global banks. “Typically these partnerships are some form of outsourcing arrangement in which the global bank provides support for the local bank’s trade finance activities.”

Deutsche Bank’s strategy for addressing these separate but related trends is to, well, address both. The bank is working to increase its footprint by marketing directly to local corporates as well as the growing number of multinationals moving to these locales.

Requirements of these two groups – local and multinational corporates – differ, of course, he adds, with risk mitigation the common denominator. “Typically sellers want to cover risk and reduce DSO [daily sales outstanding] so it is not on their balance sheets. In this case we might be asked to provide short term [less than 180 days] without recourse financing to exporters,” says Packham.

Products the bank is developing or now offering to these groups include tools to better manage balance sheets, limited resource solutions as well as related supply chain financing.

Indeed, bankers agree supply chain financing has become a distinct trend among Southeast Asian economies, as it has in other parts of the world. Because the corporates tend to be smaller there is a determined push towards open account financing, at least among the corporates in a position to demand it from suppliers and/or clients.

Not all markets are ready for these projects; at least their regulatory frameworks are not. Trade liberalisation and the freeing of exchange controls are considered key for such products to work in these economies, bankers say, and not all of the markets can honestly report that they are suitably liberalised for that.

Once these reforms do occur, though, banks such as Deutsche – that is, those institutions focusing on providing global services to the area – will be well positioned to meet the new demand. Also, as these local corporates move into the international markets it is hoped there will be a pick-up in the growth of structured finance in the region.

Meanwhile, banks are stretching their operational mandates to make ends meet as much as possible. When asked about the types of deals ING is financing at the moment in the region, Low replied that syndication of loans now presents an attractive financing option, due to the high level of liquidity in Asia and a relative scarcity in syndicated trade finance loans. “We also do a lot of bilateral trade finance business. This is very attractive to us because it provides steady income and good returns.” And in Southeast Asia these days – indeed, in any market for that matter – that is nothing to sneeze at.