INSIGHT INTO THE NEXT 20 YEARS OF EXPORT CREDITINSIGHT INTO THE NEXT 20 YEARS OF EXPORINSIGHT INTO THE NEXT 20 YEARS OF EXPORINSIGHT INTO THE NEXT 20 YEARS OF EXPORT CREDITINSIGHT INTO THE NEXT 20 YEARS OF EXPORT CREDIT

Corporate executives interviewedfor this articleAArthur Pilzer, vice president at BechtelEnterprises

Tim Gaul, capital markets manager, CIS –EMEA, syndications & export credit agencyfinance at Caterpillar Financial

Gernot Bruch, head of export and projectfinancing at Linde

Axel Schäfer, head of corporate exportfinance at Herrenknecht Group andfounder of the SSP Competence Networkfor Export Finance

Michihiko Tsuchida, risk & investmentmanagement department, MitsubishiInternational

Mark Kleinman, general manager of sales &project finance, General Electric (GE)

Timothy Conroy, formerly director ofstructured finance at Daimler FinancialServices

Nigel Taylor, senior vice president, projectand structured finance at Airbus

Baudoin van Robais, project & exportfinance director at Alstom Holdings

Mario Schrenkel, head of treasury andfinancing at Doosan Skoda Power

Tatyana Kartushina, deputy head of debtfinance department, treasury, at SiberianCoal Energy Co (SUEK)

ECAs often find themselves caught betweenthe conflicting demands of their governmentmasters and the corporates they support.And – as exemplified by coordinated effortsto block the reauthorisation of the Export-Import Bank of the United States (US Ex-Im)– they can be an easy, symbolic target withinbroader political rows.

How then can exporters and borrowers

navigate the politicsthat swirl aroundECAs, and howdisruptive has the USEx-Im saga been sofar?

Less politicspleaseAlthough “no one inthe market believes

that US Ex-Im is going to be abolished,” itcould be reborn with severely clipped wingsand this would be disastrous for US jobs,argues Arthur Pilzer, vice president at BechtelEnterprises.

Although Bechtel prefers to buy from USsuppliers, it would be forced to look furtherafield if adequate US Ex-Im financing werenot available. “A more restricted US Ex-Im willforce large international companies likeBechtel to source more from overseas.”

Caterpillar has direct experience of the USEx-Im controversy. The ECA’s support in late2013 for the sale of Caterpillar equipment toAustralian miner Hancock Prospecting for itsRoy Hill iron ore project came under fire by aUS miner that claimed the financing waseffectively subsidising a foreign competitor.

The transaction was ultimately approved,but big customers need to plan ahead withpurchases for large projects, and uncertaintyover the ECA’s future makes this harder.While the banking industry largely sees USEx-Im’s future as secure, the uncertainty canpersuade some Caterpillar customers to lookelsewhere for support and consideralternative sourcing, says Tim Gaul, capitalmarkets manager, CIS – EMEA, syndications &export credit agency finance at CaterpillarFinancial.

Rows like that over US Ex-Im “are verydetrimental to the interests of the nationalexport industry,” says Gernot Bruch, head of

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Helen Castell

Corporate wish list: what exportersand borrowers need from ECAsHelen Castell discusses, with some of the world’s biggest exporters andborrowers, the changing role of export credit agencies (ECAs), the impact ofpolitical wrangles in the US and how ECAs might better harmonise and fine-tune their rules to help corporates compete.

export and project financing at Linde. Lessfrequent users of ECA coverage mayultimately export less because they do notfeel they have the tools to mitigate risksinvolved in export transactions, he says.

ECAs do not distort the market“I am very surprised by the discussion in theUS,” says Axel Schäfer, head of corporateexport finance at Herrenknecht Group andalso founder of the SSP CompetenceNetwork for Export Finance, which providesexport finance services for SMEs. It is “basedon wrong assumptions on the role andimportance of ECAs. They do not distort themarket.”

Euler Hermes, for example, generates asurplus for Germany’s federal budget everyyear, he notes. “It is not a subsidy butsomething we exporters pay for with a risk-adequate premium.”

“Useless power struggles” betweenRepublicans and Democrats over US Ex-Imhave created a handicap for US exporters inobtaining ECA cover, says Michihiko Tsuchidafrom Mitsubishi International’s risk &investment management department. “I findit a pity.”

Not everyone has witnessed disruption. GEhas pushed the normal volume of dealsthrough US Ex-Im this year. As a “very bigsupporter” of the ECA however, it is engagingitself closely in the debate and is a keenpromoter within political circles of US Ex-Im’simportance, says Mark Kleinman, seniormanaging director and general manager ofsales & project finance for General Electric(GE).

More flexibility on foreign contentOne area where all exporters want moreflexibility from ECAs is on their sometimesonerous restrictions regarding foreigncontent.

While some ECAs have relaxed these rulessince the financial crisis, US Ex-Im has not.This is one area where it is now “lesscompetitive” than its peers, says Pilzer.

ECAs should take a longer-term view ofwhere parts are manufactured or whatoffsets might be, says Kleinman. ExportDevelopment Canada (EDC) and HungarianExport-Import Bank, for example, approachforeign content “in a more holistic sense thanequipment by equipment,” he says.

Globalisation and more complex supplychains give ECAs no option but to be moreflexible in their definitions of eligibility, says

Bruch. One way to dothis could be todetermine nationalinterest not solely bythe origin of goods orservices, but based onthe value that anexporter ortransaction adds tothe national economy,he argues.

As with mostGerman companiesthat sourceinternationally, “third-country content aswell as local content is sometimes achallenge to us,” saysSchäfer, underlining“an urgent need forimprovement.”

“While it isunderstandable that an instrument based onthe state budget needs to take into accountnational interest, I believe the current system– for example in Germany to require at least50% national content in each transaction – isno longer justified,” he says. Foreign contentin German exports has grown in recent yearswith no negative effect on German jobs, whileusing global value chains helps to generateextra business for German exporters.

Even if ECAs do require a certain nationalcontent, it would be more manageable toapply this to the entire portfolio of anexporter rather than for each individualtransaction, Schäfer argues.

Reduce red tapeTo build a commercial vehicle in the US, amanufacturer must typically source at least3,500 lines of components, notes TimothyConroy, recently retired from DaimlerFinancial Services, where he was director ofstructured finance.

Under US Ex-Im rules, a manufacturermust detail the country of origin for each ofthose components, including requiring theirsuppliers to verify where the raw materials forthose parts were sourced. US manufacturersface severe penalties if an audit showsvendors provided false information.

Price specification changes also mean thatup to a fifth of the vendors supplying partsfor a specific truck are liable to change eachyear, meaning that manufacturers have torepeat the process.

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Axel Schäfer

Mark Kleinman

For this reason, manufacturers haverequested US Ex-Im alter its rules, allowingforeign content to be measured according to“average past performance” of productsrather than needing to be recalculated everytime a part changes. This would cut down onpaperwork and reduce the time it takesmanufacturers to deliver their product tocustomers, Conroy says.

Caterpillar’s business model is a case inpoint of how complex global supply chainshave become, says Gaul, who wants ECAs toadapt their criteria to reflect this.

ECAs typically require a direct contractualrelationship between a domestic factory andthe overseas buyer/borrower. Like manyglobalised manufacturers however, Caterpillarsources products from whichever factory inits global supply network makes logisticaland regulatory sense, then sells to customersvia its independent dealership network.

Level the playing ground As ECAs like China’s Sinosure, which is notbound by OECD rules, start to support theirexporters more aggressively, agencies indeveloped countries are under pressure tomatch their terms.

ECAs in OECD countries should developcriteria that are competitive compared withthose offered by emerging market agencieslike China’s, although they should not seek toexactly replicate them, says Tsuchida. Toachieve this, OECD ECAs need to coordinatetheir activities “more closely and frequently.”

“The issue of competition among ECAs willbecome increasingly relevant,” says Bruch atLinde. The OECD Arrangement on OfficiallySupported Export Credits may need to berevisited to capture the increasing array ofproducts ECAs offer, he says.

Even within the OECD, certain ECAs havea much broader remit than others. TheExport-Import Bank of Korea (Kexim), forexample, is able to provide equity to somedeals it finances – something normallyrestricted to development banks – notesBechtel’s Pilzer.

“We want to avoid a very uneven playingfield where [non-OECD ECAs] can startdoing extremely attractive uneconomiclending but get away with it,” says NigelTaylor, senior vice president, project andstructured finance at Airbus. “I don’t think atthe moment we’re paying as much attentionto it as we should.”

It’s not a simple case however of OECDECAs taking the lead from emerging market

agencies however.Governments couldinstead work to bringnon-OECD ECAs intothe fold, he says. Tothis end, dialogue isalready producingresults.

The ExportInsurance Agency ofRussia (EXIAR), forexample, issupporting Superjetalongside France’sCoface and Italy’sSace. Therefore,despite not being amember of theAircraft SectorUnderstanding – anOECD agreement thatrequires ECAs inOECD countries that

support civil aircraft helicopters and aircraftto give the same terms around the world –Russia will “have to be bound by what theFrench and the Italians are doing,” he notes.“International cooperation will encouragesome standard approach to export credit.”

Work together even better As big infrastructure financings get biggerand more complex, “it’s going to beabsolutely necessary that there will beanything from three to five or eight ECAs,DFIs and commercial banks in a deal,” saysPilzer.

This is to an extent already happening.Bechtel’s $6 billion expansion of theJamnagar refinery in India, which completedin 2008, involved financing from US Ex-Im,Sace, Hermes and several other ECAs.

The downside is that such deals takelonger, with lenders needing to agree onsecurity packages and ECAs with differentcriteria needing to find common ground, henotes. That said, ECAs’ project finance teamsare expanding, as is their ability to worktogether.

When more than one ECA is involved,transactions can take more time, delayingprojects and forcing exporters to shouldermore risk, says Baudoin van Robais, project &export finance director at Alstom Holdings.

The recent financing of Panama’s metrosystem, for which Alstom supplied metro carsmade in Spain as well as engineering,electromechanical and other support

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Michihiko Tsuchida

Nigel Taylor

services, pulled together both Coface andSpain’s Cesce. While the financing didultimately succeed – the metro launched thissummer – “it was quite complex tocoordinate” both ECAs, he says.

Trend for multi-ECA deals willcontinueThe trend for ECAs forming clubs in the earlystages of a financing will continue, saysBruch. These arrangements might becomemore formal over time with bilateralmemoranda of understanding used to ironout differences related to environmental andsocial assessment, for example.

With deals involving multiple ECAs, it is “aconstant challenge… to get them to all cometogether and make a decision at pretty muchthe same time and on the same terms,” saysTaylor.

That said, Airbus benefits from the AircraftSector Understanding and has worked withthe same three or four ECAs for more than20 years, meaning its ECAs “work togethervery well.”

Coordinating multiple ECAs is also muchmore straightforward with pure exportcredits than with project financings, in whichAirbus is only rarely involved, he adds.

GE has completed “a few” co-financings,usually with two ECAs in a deal, and finds “itis extra work to bring the two together – theyhave to do a fair amount of coordination,”says Kleinman. However, “we’ve found it to bedo-able”.

ECAs “seem to want to work together,”aware that this is “good for everyone’seconomy,” he notes. Many are “changing,recognising that it is much more of a globalvillage”.

Find a templateWorking together is still relatively new forECAs, and the process will become smootherwith experience, says Kleinman, likening it tothe early days of creating bank syndicates. “Itwas very hard for them to coordinate theirown criteria, and then after a while they had atemplate and it worked.”

Conroy flags up his “especially goodexperience with co-financings.” To support alarge commercial vehicle transaction inZambia, US Ex-Im and Mexico’s Bancomextworked closely together, despite not having aformal co-financing agreement.

US Ex-Im is providing a guarantee toBancomext, which in turn will providefinancing for 85% of the transaction with 15%

equity coming fromthe customer. Aremarketingagreement providesextra security for allparties by allowing anauthorised dealer toresell equipment inthe event of customerdefault. The twoECAs’ flexibility andwillingness to worktogether has been“outstanding,” hesays.

ECAs are realisingthe benefits ofworking together,even on transactionsthat are not massiveor especially complex,says Mario Schrenkel,head of treasury and

financing at Doosan Skoda Power. When oneECA for example offers re-insurance toanother due to a significant share of contentcoming from that country, this helps free upthat ECA’s country limit. ECAs also benefitfrom transferring information and expertise,he says.

Expand remit, capacity and productportfolioECAs should make efforts to cover higher-risk countries, and accelerate efforts to rollout new products like direct credit andcapital markets coverage, corporates say.

Doosan Skoda, for one, has noticed aslowdown in promotional activities for certainterritories and customers, with ECAs“imposing additional or discouragingmeasures like lower-than-standard insurancecoverage,” says Schrenkel. Although ECAswork hard to find a solution for exporters,sometimes their country limits are insufficientto cover a transaction. Financing aBelarussian project, for example, can be achallenge for some ECAs and banks.

ECAs will eventually take a moreprominent role in structuring largetransactions, predicts Linde’s Bruch. Theymay also start looking at new business linesin addition to new debt products. Korea’sKexim, for example, has established afinancial advisory and structuring team, henotes.

Not all change is good, however. Ifanything, ECAs have moved away from their

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Baudoin van Robais

Tatyana Kartushina

traditional remit of supporting exporters tofocus more on the needs of export/projectfinance banks and on importers/borrowers,Bruch argues. Exporters seem to be viewedas mere auxiliaries – “a necessary evil.”

More direct creditMore ECAs offering direct credit tocorporates would “help a lot,” says TatyanaKartushina, deputy head of debt financedepartment, treasury, at Siberian Coal EnergyCo (SUEK).

Bruch too asks that ECAs develop newdebt products to help broaden sources ofliquidity.

Prior to the financial crisis, US Ex-Im wasone of just a handful of ECAs that offereddirect credit. Although more ECAs, includingUKEF, have recently “stepped up” with directcredit initiatives, US Ex-Im’s lending rate isbased on the US Treasury’s so is still morecompetitive than most, says Pilzer.

UKEF’s launch this spring of its ExportRefinancing Facility is one example of howECAs can respond to corporates’ needs withinnovative new products, says van Robais at

Alstom. The facility enables

UK-based exportersto offer long-termfinancing to overseasbuyers that requireloans of more than£50 million ($81million) to financecapital goods andservices for large

projects. UKEF also guarantees repayment ofbonds issued by the buyer to later refinancethe initial loan, allowing it to access finance atlow, fixed rates. If the buyer is unable torefinance, UKEF becomes the lender untilalternative funding is found.

The facility not only extends ECA backingto big, longer-term projects – which is awelcome trend seen at many ECAs – butgives exporters extra confidence and stability,says van Robais. “It’s a great product.”

Stronger government efforts to harmoniseOECD CIRR interest rates via a coordinationof their state-owned agencies would alsoenable ECAs to better support exporters andtheir customers, he adds.

Expand capacity for bond financingECAs have already shown greater capacity tosupport aircraft bond financings – withCoface and UKEF backing severaltransactions over the past couple of years forAirbus customers – and more of this wouldbe welcome, says Taylor. “It’s allowed a lotmore volume to come into this business.”

ECAs should also work to provide greatercurrency coverage, he adds. Although Airbustends to sell in dollars, this could change andis already not the case with many exporters.“What happens if the Chinese want to buy inrenminbi?” he asks. “ECAs could really helpexporters here.”

Consortium partner risk cover, offered asan option together with ECA export cover,would be another helpful product, says Bruchat Linde, noting that as projects get biggerand more complex, exporters often have towork with other contractors.

More clarity on ECAs’ policies regardingsupporting lending by non-banks likeCaterpillar Financial would be useful, saysGaul. While Caterpillar Financial does havethe opportunity to fund under US Ex-Imguarantees through its ‘delegated authority’programme, some ECAs will not support itslending on a buyer credit basis and withothers “there are grey areas.”

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Mario Schrenkel

Corporates face export financeskills shortageHaving staff who understand how ECAswork is crucial for the exporters andborrowers who rely on their support.

Arthur Pilzer, vice president at BechtelEnterprises, worked at US Ex-Im for 27years and says this helps him guideclients through the process of applyingfor ECA finance.

As well as knowing the culture at USEx-Im and retaining close workingrelationships with many of its seniormanagement, he understands the“nuances” of its rules and where theymight be stretched. “They’re not allwritten down very clearly,” he notes.

Many companies are in critical need ofstaff with experience of ECA financing,agrees Conroy, who is keen to work inthis area as a consultant formanufacturers.

The application process for medium-term financing through ECAs is complexand time consuming, making it difficultfor manufacturers to process accuratelyconsidering the many barriers – forexample language, time and cultural –that they face, he says.

Support SMEsWhen and if US Ex-Im is reauthorised, it will come under pressure to refocus itssupport on SMEs, predicts Pilzer at Bechtel. Large corporations “will have toprove that commercial financing is notavailable on the same terms,” he says. “That’s where the US Ex-Im legislation isprobably heading.”

ECA support to cover SMEs’ country andcredit risk is “indispensable” for longer-termprojects ranging from two to seven years,says Tsuchida at Mitsubishi.

The Czech Republic’s Export Guaranteeand Insurance Corporation (EGAP) hasdeveloped a product specifically for SMEs,notes Schrenkel. It seems to have expandedits know-how in this area though cooperatingon transactions with ECAs like Hermes,Korea’s K-Sure, UKEF, Coface and Belgium’sONDD, all of which have developed a well-functioning system to promote SME exports,he says.

Although Caterpillar hardly falls into thecategory of SME, some equipment itproduces sells from $20,000. Providingcapacity for “small-sized transactions” couldtherefore benefit bigger firms at the sametime as supporting SMEs, says Gaul,predicting UKEF’s direct lending initiative willbe especially helpful here.

Indirect exports One way ECA support for SMEs coulddirectly benefit Airbus is in the area of“indirect exports”. If components supplied tothe company by SMEs were used on anaircraft that then became an export, “wewould encourage that they would be able toaccess UKEF funding,” says Taylor.

Working with SMEs on lots of smallertransactions would require more manpowerthan many ECAs currently have. That said,ECAs are often accused of only helping bignames, making any move to support theentire economy via smaller firms “a politicallymotivated and important approach for theUK,” he says. “Euler Hermes is very big onSMEs. UKEF needs to do something.”

Hermes is indeed “extremely open to helpSMEs,” notes Schäfer at SSP, which since itwas founded seven years ago has helpedfacilitate nearly €2 billion ($2.55 billion) ofECA finance for SMEs with deals ranging insize from €100,000 ($125,000) to €100million ($125 million).

Germany’s ECA “tries everything to coverthese small tickets” and stretches right up toits acceptable limits – “they really take risks”,he says. The agency is able to approve SMEapplications within a few days, andsometimes within hours. “That’s sometimesvery important to the exporter.” ■

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