New clients, blurred product lines and OECD changes: The export finance bank perspective

GTR speaks to a group of senior export finance bankers about the seismic changes gripping their industry in the wake of the energy transition, the Ukraine crisis and supply chain friendshoring. Many banks are adapting their products – and approaches – to meet demand from new types of clients with different needs.

Roundtable participants:

• Richard Hodder, global head of export agency finance, Citi
• Edward Bullen, managing director, co-head of structured export finance, SMBC
• Cécile Camilli, global head of development & structured export finance, Société Générale CIB
• Werner Schmidt, managing director, global head of structured trade and export finance, Deutsche Bank

GTR: What’s the most surprising change or development you have seen in your bank’s export finance business in the past year?

Camilli: In the past, export credit agency (ECA)-backed transactions were mostly targeted towards emerging markets and worked to mitigate political risks. But this is changing as ECAs take on a catalyst and enabler role within the energy transition and have begun assuming risks related to these new technologies, developers and startup models. At Société Générale, we have seen an increasing volume of transactions in developed countries – notably in Europe – and towards project finance structures, as well as corporate borrowers. The spike in energy transition-related project finance deals was not really evident last year, as the due diligence processes for these transactions can be more complex and the time to market longer. Banks are having to contend with new types of clients and technologies, but I expect these to peak in 2023 and beyond.

Activity has centred on the battery, hydrogen and renewable energy sectors, while Société Générale is also supporting heavy emitting industries moving into lighter CO2 emissions production models, like green cement and steel. As a result of the Inflation Reduction Act in the US, investments are clearly picking up for batteries, as well as clean mobility. In my view, there will be some landmark cross-border ECA-backed transactions taking place between Asia and North America as a result. Korea is one country that could benefit, given LG, Samsung and SK are key players in electric vehicle (EV) supply chains. Meanwhile, Japan is looking to grow its role within hydrogen and ammonia supply chains.

Having said all this, the volume of loans in emerging markets is here to stay, it’s not one instead of the other, and there has not been a loss of capacity in emerging markets. I expect the overall volume of ECA and development finance institution (DFI)-backed transactions will pick up, and we should see a sustainable increase over time.

Hodder: From Citi’s perspective, it is noticeable how quickly the business is evolving to focus on the energy transition. We expect a significant percentage of all the bank’s ECA transactions in 2023 will have a green element, which is fantastic. More broadly, the ECA business will be at the forefront of Citi’s push to facilitate financing for the energy transition space and to meet group emissions targets. This means changing the composition of the bank’s balance sheet and moving away from some of the more carbon-intensive industries.

Another interesting development has been the growing focus on the financing of wider supply chains linked to a larger transaction. Citi recently closed a €500mn facility for Spanish energy firm Iberdrola supported by the Norwegian ECA, Eksfin, which backed the construction of a wind farm in the North Sea. The deal provided a significant volume of finance for contracts the company has placed with a number of Norwegian exporters who are providing cabling and ancillary infrastructure. The overarching framework provided the company with a flexible drawdown approach to support ongoing procurement. This will be a key area of interest in the coming 12 months for Citi and the agencies are also keen on those structures, because it means they can move en mass, supporting multiple exporters under one flexible facility.

Schmidt: There are some major, long-term trends shaping the industry. The clean energy transition is gathering pace, and there will also need to be a massive transformation among others in the automotive, steel and cement industries, which all require a lot of adaptation. Diversifying supply chains is another important topic, and so too is the massive infrastructure investment required in emerging markets and developed markets. The task is massive, and we need all hands on deck to finance all these megatrends.

One of the notable changes is the rebalancing of ECA volumes between high-income country business and emerging markets. Second, it is striking how quickly agencies have adapted, not just their policies and regulations but also how they deploy products. There is a lot more flexibility around all the untied schemes in the green transition space and in terms of energy security. This is a big topic for Germany and other countries. Since export finance as a business may have typically long lead times, the scale of these trends will become apparent over time. But we increasingly see ECA-backed tranches being relevant structuring elements within project finance situations. There is also a growing volume of corporate risk being taken as a result of the transformation in certain industries like vehicles and batteries as well as steel manufacturing.

Banks are not reducing their appetite in emerging markets. The growth trend in developed nations is a new development, but we as a bank maintain our activity and focus on emerging markets. Clearly, there are some markets, such as in Africa, where projects will be delayed into the next year. But this is the nature of the business.

Bullen: The changes to the OECD consensus have been a long time in the making, and I envisage they will make a huge difference to the export finance offering. Look at what is now available in terms of tenor, in terms of flexibility on repayments. All those factors are exceptionally positive in terms of creating capacity. Going forward, it will be interesting to see how the market absorbs these changes and to what extent the ECAs use this newfound flexibility. Will the agencies all start adhering to the new rules en masse or act depending on individual transactions? I suspect the latter, but let’s see. Another question is how will the banks react? All of the changes included in the modernisation package are very positive, in terms of greater flexibility, but commercial banks are uneasy about lending for such long periods.

GTR: How are export finance banks responding to wider shifts in the market, such as the blurring of product lines in trade and export finance, as well as changes in the ECA space? Are you altering your operations, or looking to develop new products? What would trigger any internal changes?

Hodder: Citi’s export and asset finance business sits within the wider treasury and trade solutions group, so our business is perfectly placed for any shift in the industry towards trade.

It is an interesting time. If we look at some recent successes in the North American market, Citi is working on quite an innovative commodity-based structure with the Export-Import Bank of the United States, which will tap into wider issues surrounding energy security.

In this sector, there is a growing focus on short-term facilities underpinned by traditional commodity-backed security arrangements.

Citi also recently closed a US$300mn facility with Export Development Canada (EDC) for one of our commercial banking clients in Canada looking to invest in wind farms. The company was facing large demands on their balance sheet – to provide security and guarantees – over the next five years. This means they have a significant need for standby letters of credit (SBLCs) to support the provision of performance bonds and guarantees during the construction phase of these projects. The SBLCs were wrapped by EDC, and Citi is finding that the agencies are keen to support these types of transactions, particularly where there’s an underlying strategic rationale.

The trade offering from ECAs is becoming much more structured and bespoke in nature.

That’s where you need the structuring skills from the main ECA team to deliver, while linking in skills and knowledge from trade finance departments, such as for commodity finance or standby LCs.

Bullen: While trade and export finance teams have always been connected, there are areas – or supply chains – where these lines are becoming increasingly blurred. In the natural resources sector, ECAs are being leveraged to secure access to key resources and to create new centres of manufacturing expertise. Everybody wants to be the hub for new battery technology, wind technology, and for hydrogen and carbon capture. ECAs have been encouraged to play a key role in that. The trade finance side is proving crucial in this field. The ECAs are looking to step in and support trade finance or similar activities to secure natural resources for their domestic economies, ranging from natural gas in some cases, through to rare earths and minerals that are required in production, for example of batteries.

We’re looking to adapt to market changes the whole time, which means developing new products within the structured export finance space. The same products are there, but there are ways to adapt to market needs. This means working with ECAs, using what agencies have in their respective armouries, and refining the products to assist our clients. The obvious example which we led was the Trafigura financing covered by Euler Hermes in 2022. This was an adaptation of an existing Euler Hermes product to suit an immediate need that had arisen as a result of the conflict in Ukraine and the fact Germany no longer wanted to buy Russian gas.

Camilli: There has been an obvious trend towards untied products in recent years, which have been well used by the Asian ECAs for some time and now European agencies are developing their offerings quite extensively. These can serve different purposes such as critical supply of commodities or promoting specific industries at home. For tied products, there has also been a lowering of national content requirements in recent years which has grown the ability of ECAs to onboard foreign engineering, procurement and construction companies and exporters.

In response to these market trends, we are developing our advisory services for businesses and exporters, guiding them towards extended ECA solutions made available. Energy transition projects encompass a variety of sectors, technologies and sponsors, and are growing in scope and size. As such, there’s a real need among those various stakeholders for more advisory and more lead roles to be able to manage pre-arrangement. Financial advisory roles are traditional roles in project finance, but there is more scope and justification to step in and serve these advisory roles in overall export finance deals.

Société Générale’s export finance has a team dedicated to project and asset finance that works alongside various sector specialist divisions, whether for mining, power, renewable energy or shipping. These teams are co-operating closely to respond to the widening palette of ECA products in the market. With the Ukraine situation, the geopolitical evolution in Europe and Asia as well as the global economy context and inflation, some countries are increasingly looking to secure access to strategic goods and commodities, and there is now a focus on the overall supply chain approach.

Take the mining sector, for instance. ECAs are involved in the mining of critical minerals such as lithium, copper and cobalt, and further down the supply chain, they are backing the production of EVs. There is an increasing number of EV projects in Europe, the US as well as emerging markets, as those regions look to secure their own production and serve their respective markets. Recycling is another core part of the chain. Across this whole supply chain, Société Générale’s export finance team will work with the metal and mining industry team to bring ECA capacity on non-recourse transactions and optimise debt capacity in the sector.

Schmidt: The requirements surrounding export finance have not altered. What has changed is the risk scenarios facing export finance banks. There is a trend towards high-income countries, which have fewer non-financial risk issues when compared to emerging markets but entail higher residual and commercial risk elements. As such, the organisation itself doesn’t necessarily have to change, but we are enhancing our capabilities in other ways. Export finance banks need greater oversight of sector and technology risks, in particular, when it comes to transition projects, such as wind, solar and green hydrogen. Therefore, it’s important to connect with colleagues and partners, both within the bank and outside to structure efficient financing solutions. The product suite is there, it is just a case of how you package deals. We for instance closely collaborate with our project and natural resource finance colleagues as well as the newly formed cross-products structuring unit that looks for innovative solutions and works with our export finance team.

GTR: Which elements of the new OECD Arrangement modernisation package do you expect will have the greatest impact on your business?

Camilli: The market is yet to see how the OECD Arrangement modernisation will come into play. it has only just been negotiated, and there is yet to be the first transaction using the new terms and parameters. The main item is the extension of maturities for green and climate projects. The scope of the Climate Change Sector Understanding, annex 1, now goes beyond the renewable energy and water projects and encompasses the broader green and climate projects. That is very good news. It also provides more flexibility in terms of tenors, with the ability to go up to 22 years and to adjust the repayment profile based on the cash flow of the project or the obligors. The question now is whether the banks will have the ability to provide those more aggressive or longer tenors, which are borrower-friendly – with a 22-year repayment period, plus the construction, you could reach 30 years. It would depend on the underlying borrower profile and the associated residual risk. For the right relevant projects there will be appetite, but whether this is going to be done on a systematic basis is another question. For me, the next area of focus for the OECD Arrangement participants should be introducing changes related to social projects. These have been left on the side in terms of annex 1, which is clearly climate oriented. But could an annex be included to also offer the same type of flexibility – in terms of tenors or other more advantageous features – for social projects? The real impact would be on premium, which so far has only been touched for very long tenors.

Schmidt: The longer tenor change and alignment of tenors across high-income and emerging markets are hugely important and crucial given the trends surrounding the energy transition and a growing volume of export finance business in Europe and other high-income countries. There are even longer tenors for the sustainable projects possible now, and with more flexibility in terms of repayment profiles, it is a very good move. Take green hydrogen, for instance. These types of projects require more flexibility in terms of repayment schedules, but also longer tenors. The OECD reform in this context is spot on and will support the rebalancing of the business between emerging markets and developed markets and the broader trends observed there.

There is some debate about how quickly – and to what extent – banks will use the new flexibility. From my perspective, the banking community is well equipped to provide longer-tenor financing, but in addition, collaboration with other financial market investors may have to be considered. Larger volumes and longer tenors in the ECA market may ultimately require more teaming up with non-bank financial investors who are keen to invest long-term – pension funds and insurance companies, for instance. This is a theme which has been around and discussed for many years but may need to be revisited. In any case, Deutsche supports this push towards longer tenor financing.

I envisage there could be two types of involvement of investors who may look to tap the export finance market: some may wish to engage directly in project finance or export finance situations as a lender of record, willing to take on project risk. Others may prefer to act as the funding entity only, backed by a government guarantee. In Germany and other countries, securitisation guarantees are available where investors enjoy 100% state protection and do not take on an underlying project or counterparty risk. But from an ECA perspective, it may be a bit more challenging to accept financial investors as beneficiaries under their cover directly as general terms and conditions may need to be adapted, and there is still little experience with players in this part of the financial sector.

Hodder: Over the last 10 to 15 years the industry has been asking for more flexibility, a broader application of the product and additional support for greener projects. It is a great success for the market that these changes have now come through. The lengthening of tenors on the transactions is one area I’m excited about, and it will be interesting to see how the market evolves as a result. Export finance banks are sitting in a very competitive marketplace and anything that we can offer to provide more attractive terms to our borrowers curries favour. I expect there will be a relatively swift move within the market to maximise tenors where possible and where it suits the borrower. The fact these longer deals will facilitate energy transition-related projects strengthens the argument for doing so. Having said this, it will not necessarily be easy for export finance banks to stretch out into periods as long as 20 years, or longer, even with the ECA wrap. These very long tenors are not always where credit authorities want commercial lenders to be conducting activity.

Bullen: I like the flexibility on repayments. SMBC has first and foremost been known as a project finance bank, and ECAs are core to this segment. There was a feeling amongst sponsors and borrowers that the original OECD Arrangement criteria were too rigid, and as a result, deal making could be cumbersome. Ultimately, a one-size-fits-all approach doesn’t really work. Some projects need a lot of front-end capex and more time to build up to full-scale operations, and therefore cannot support significant levels of early debt service. Now with the recent changes, in certain instances the borrower will be able to postpone debt service payments in the early years – this will really help and make ECA financing that much more attractive for the sponsors.

The biggest impact is going to be in renewable energy. This has not so much to do with the flexibility on payments, but certainly in terms of tenor. These projects can be marginally more expensive for energy production versus traditional sources, but by extending the tenor, these deals may prove more competitive for sponsors.

GTR: How do you see the future of export finance developing? Might we see the product used more innovatively, and if so, how?

Schmidt: Despite various economic and geopolitical challenges, export finance will have a bright future in the coming decade. A lot of funding is needed for the transition and more broadly, infrastructure investment. Due to budget constraints, governments will not be able to fund everything, and a public-private partnership is necessary. ECAs – through traditional forms of support and untied financing – are ideally placed to add liquidity in the market and support all these investments. Therefore, the demand will rather go up than down. This is being reflected in our current deal pipeline, which is busier than ever. There is a lot of momentum on the untied side, in particular, since ECAs have relaxed and made their schemes more flexible.

I also foresee more blending between export finance and untied financing on certain projects. You could have a traditional ECA tranche financing equipment sales, and at the same time, untied financing may be structured on the back of offtakes related to such projects. This is already happening in the market, but it could play an even greater role as near or friendshoring initiatives gather pace as well. By way of example, in the battery industry, microchips and steel manufacturing, there are a lot of projects and initiatives where both, equipment and untied financing may be a feasible solution.

Bullen: It’s already being used incredibly creatively, but I’m sure recent changes made by the ECAs – which are a big step forward for the industry – will mean banks use the product more, as will borrowers and sponsors. There is now added flexibility, and if you look at the huge demands arising out of the decarbonisation agenda, there is a growing need for capex. How much can the banks fill and how much can the capital markets fill on their own? There is certainly room for ECAs to play a significant part, too.

Camilli: I am very optimistic about the future of export and development finance. The market will continue to see some innovations from ECAs. Clearly, they are watching each other and competing to some extent. This is taking place as the ECA market is moving away from the oil and gas industry, while agencies are also committed to growing their support for sustainable projects and national strategic interest as a whole. The market is also seeing interest from a wider investor community, which is quite an interesting development. There is clearly a wider base of investors, which includes banks, as well as institutional investors, that are starting to grow their presence on ECA and DFI-backed transactions. These new types of investors are attracted by the low residual risk, and it fits nicely with their ESG commitments and engagements. This is all very promising for the market. One area to watch is the potential growth in blended finance offerings involving DFIs, which could increase the engagement of the private sector.

Hodder: There have always been untied facilities around in the market, but the segment evolved somewhat during the Covid-19 pandemic, and a lot of new types of products were released by the agencies. UK Export Finance rolled out its export development guarantee scheme and the Korea Trade Insurance Corporation introduced similar initiatives over the past three years. We expect this evolution will continue and maybe be applied on a broader basis.

Meanwhile, I expect the market will continue to show greater flexibility and application of the more traditional OECD credit structures. Looking at the volume of business going on in the market right now, the focus on Europe is significant. There’s a lot of demand for the product on the continent, and the agencies are doing a good job of facilitating that, whether through domestic and untied schemes, or more flexible structures.

The view has always been that the export finance business is anti-cyclical. When the markets are good, businesses do not need the ECA product. Well, for the next 10 years, there is likely to be sustained demand for the product in the energy transition space, regardless of the economic situation. It is going to give us a very strong decade of support for the industry in general.