At TXF Venice (June 2017), panellists discussed how export finance has grown out of its ‘state-owned’ image since the global financial crisis into a vibrant and vital channel of liquidity and how it needs to further evolve to attract new talent
Dan Sheriff: How we can make export finance more accessible and does export finance have an image or visibility problem?
Simon Sayer: The very fact you have asked that question suggests the business probably does have an image problem! I always describe structured export finance as a team sport, but it is a minority sport with not many of us doing it. In fact it has always been a bit of a niche. It is not a scalable business, we don’t generate deals out of thin air – these are real transactions going around the globe. There is a finite supply of deals that fit the export finance model, there is a right size for the business, and that right size is determined by what is going on in the economy, the trade finance world and then the finance world because we are about a business that provides finance to buy equipment. It’s been around a long time – UKEF started in 1919 and US Ex-Im Bank in the 1930s – and in some respects it has failed to reinvent itself, with one major exception.
The global financial crisis that started almost ten years ago was a shot in the arm and developed the business rapidly. There were new products, new ideas and it was vastly more relevant to the international market place and the bank’s clients. Suddenly it was a very exciting place to be and we need to continue the momentum from the crisis and ensure it is a product that continues to reinvent itself and realign itself to today’s needs.
Dan Sheriff: So there were some image problems and the best thing for export finance was the global financial crisis?
Simon Sayer: It’s a funny thing to say but what it brought home is that our business has a social impact, it is client oriented, it is developmental and task and solutions oriented and it is rewarding place to be.
Topi Vesteri: Export credit agencies manage their risks well enough so we don’t make the headlines with huge losses…
Simon Jones: The global financial crisis was a wakeup call to the banks, agencies and the market. In the analysis of “does it have a problem?”, it is certainly very niche, uses long term liquidity and following the crisis there have been new issues such as AML and KYC and increased regulation affecting balance sheets. There is a long list of negatives, but there are positives. ECA teams don’t generally make many losses. Today there is a broader use of export credit within the OECD and it is now seen as a “gap filler” more regularly in the US, Australia, Spain and Italy etc. Corporates use it to diversify funding sources. Also they recognise its value given the increased volatility we have seen since the crisis given there was a pretty benign period between 2000 and 2007. When financial markets are dislocated big borrowers use export credit more and more. In banks, it now fits both distribution and lending models – there are some banks that want to lend, and others that want to arrange and advise.
In addition, major capital expenditure involves strategic decisions of your major clients. The product, although very niche, and therefore is not used as much as the capital markets or syndicated loan markets, but it can give banks access to clients at the most senior levels as well.
Gabriel Buck: It has a huge image problem. We have made this so complicated that it is difficult for others outside of the ECA world to really understand what export finance is all about. We have made it into a religion with our version of the Bible “the OECD rules & regulations”. As a result, as an industry, we have become so focused on these rules that it is difficult for the market to understand why it is so complicated. A lawyer once described this business in six words. “It’s a loan with a guarantee”, that is what an export credit is. But we have made it our own little world, full of rules and regulations – with more bickering about who has broken the rules than doing the business.
Simon Jones: We do make it too complicated.
Topi Vesteri: As ECAs, we are the good guys, we do the health checks, and make sure we know the customer.
Gabriel Buck: Don’t get me wrong I love this business, I have met really interesting people, it is a dynamic business, and I have never done two transactions the same. But we have made it really complicated, and it is hard for banks to attract new people because they don’t understand what this market is about. When you look at the question of image, this is the problem.
Dan Sheriff: How would you attract new talent to the industry? What is the pitch and what sort of people are you trying to attract?
Gabriel Buck: You have to make it mainstream. That is the role of the ECAs and banks. They have to simplify and process the proposals in a much timely manner. It is difficult to get a young person to come into this business when you tell them the transaction they will be working on could close in two years’ time. Look at the volumes compared with the bond market, the loan market or even project finance where there are fewer rules and regulations – they attract people.
Simon Sayer: I have a different viewpoint. We have a tendency to increase the self-importance of our businesses, which I think is a very simple business. That is one of the image problems. People think it is so simple they think “Who would want to spend their career lending money with a guarantee?” But when they come and work in the business and see the complexities, the intricacies, the nuances and the way the financing works, and I think this is really key for millennials and younger generation when they see the social impact, the developmental aspects, and the international nature of the business, this is where the excitement really takes hold and it becomes a much brighter picture for attracting talent into the business – which is true for the juniors we have on our team.
Simon Jones: If you can get the graduates in after their rotation, perhaps in their first or second job and show them the end results, and what it means to deliver an aircraft, show them a ship launch, touch a telecoms infrastructure project in Malawi, then it feels exciting.
Topi Vesteri: I agree with the Simons. We find it easy to recruit young people. They do say that it is better to work for an ECA than a bank because in an ECA you can still take some risk!
Dan Sheriff: What type of people are you looking for? Has this changed in ten year?
Topi Vesteri: We are recruiting young people who majored in finance. When you get them on board they are burning to do the real thing.
Gabriel Buck: When globally over the last 4 years you have 20 exporters that count for 61% of the volume of the business and then on the buyer side only 9 names who in the last four years have issued ECA debt on a year by year basis, this summarises the image problem. Despite all the other aspects of social infrastructure, support for cross country trade etc which I get we are only touching a very small population. This business must change or else everything becomes too narrow and we don’t become relevant.
Daniel Sheriff: Simon [Sayer], in your experience how much of this is about communicating with borrowers and exporters and how much of it is communicating internally with your relationship managers (RMs) to get product out there?
Simon Sayer: This is a good question. After the crisis, we are now much better integrated into the infrastructure of the bank. We used to spend a lot of the time doing our business ourselves because it was too complicated to explain to the RMs, it was too nuanced and they didn’t want to, for example, spend a week in Lusaka. The product has become more relevant to clients throughout the rest of the bank and contributes to the increased focus on supporting our clients.
One of the challenges we have is that our deals earn over a 15 or 16-year period. Most of our RMs want to talk about what sort of money is coming through the door now. So we have made a shift in the way we incentivise our RMs by looking at the total revenue over the term on a net present value basis, to reward them for selling in our product.
Gabriel Buck: We have to find ways of incentivising the industry to speed up the delivery.
Dan Sheriff: Topi, your experience at Finnvera is educating domestic exporters to understand what you have got and, from the Berne Union perspective, seeing how other ECAs spread the word?
Topi Vesteri: I joined Finnvera from a commercial banking background and made a rule that if we were lending more than US$50m we had to visit the company and meet the management. So we went to the Philippines and met telecoms operators – they said we were the first they had met! Now it is commonplace – the borrower does a deal, loves it, and wants to do a second or third. With the mid-caps and SMEs you have to hold their hands a lot. We started training programmes, not just for them but also the account officials in the banks serving the corporates so they could understand how to use ECA products.
Simon Sayer: Training is a really important tool for promoting the business. If you bring people into an ECA or a bank early in their careers it is a powerful way of getting some experience of the product and it is also a great way of spreading the word and getting it familiar with more borrowers.
Topi Vesteri: We should swap staff and send banks to ECAs!
Simon Sayer: But even more powerful is to train the borrowers, who are the end users.
Dan Sheriff: Let’s go back to the original question around the image problem. Has some of the discourse and conversation around US Ex-Im Banki changed perceptions for the worse?
Gabriel Buck: There was a similar problem with ECGD 10 or 15 years ago. Just like US Ex-Im, ECGD was providing a net contribution to the exchequer. But there was not enough praise coming from end users, so it was seen as a state subsidy to banks and to big exporters. This was not resonating with the public. You have get the industry, the exporters and the buyers to say this is an integral part of the way we do cross-border trade and explain the benefits both economically and geopolitically in terms of why we do what we do. The more that industry at a higher level becomes the spokespeople for the business the more political support there will be.
Simon Sayer: What has happened in the US does not tell us anything about public opinion. I would guess that around 90% of the US population don’t know what the US Ex-Im Bank does, and the same for UKEF in the UK. But, this tells you everything you need to know about politics and how export credit support has become a bit of a political football.
Topi Vesteri: I think in a smaller country depending on exports there is a different story. We have been making money for the Finnish taxpayers, not losing it and even the man on the street is aware of this.ii
Gabriel Buck: I was on the “Cole Review” looking at export finance and what the UK government need to do to support SMEs and mid-caps to increase export growth. We found that as soon as you went outside the M25, the knowledge of export finance fell off a cliff. So we only had a London-based knowledge base. The manufacturing, exporting capabilities outside London had no knowledge that even UK Export Finance existed. The lesson is to get industry more heavily involved. The voice from industry is going to be 20 times more powerful than it is from the banks.
Topi Vesteri: one of our colleagues, the Danish ECA, EKF, went as far as to have TV commercials to increase knowledge of SMEs.
Simon Sayer: Was it “possibly the best ECA in the world”.iii
Dan Sheriff: It does help when your best export is renewables. Not all ECAs have that.
Simon Jones: Topi’s point about the size of the country is important and the relevance of ECAs in the country is also a big factor. The US is one of the largest exporter countries in the world; it has the deepest capital markets and is the second biggest trading nation. However, it is unlikely to be a problem today if US Ex-im Bank does not return fully because the markets are liquid. However, if it is closed and there is significant geopolitical or economic turbulence, then the effect will be felt. However, I am still a believer that ECAs are there to plug market gaps and not to compete in the commercial market.
Gabriel Buck: I repeat what I said earlier - When 61% of the volume of exports supported by ECAs is done by 20 exporters then there is a problem.
Simon Jones: But a big project for GE brings with it a supply chain of many smaller companies.
Simon Sayer: There is a lot of new data coming into the market from China and other markets that are setting up ECAs. Despite the fact that one of the largest ECAs in the world is on hold, the market is still growing.
Gabriel Buck: People are not interested in the detail. The headlines were all about US Ex-Im Bank being Boeing’s bankers. Of course that was incorrect but that was how the market, popular press, US public and Capitol Hill were looking at US Ex-Im Bank – Boeing’s bank. We are back to the image problem. ECAs have to get industry to speak up for them more widely.
Dan Sheriff: How do you measure success in terms of the way you communicate to government and shareholders? Is it all about how much you return to the taxpayer?
Topi Vesteri: Today you have to measure your impact very systematically. It is not good enough for an ECA to measure its own impact and you need an impartial third party confirming this impact. You have to explain how many jobs you have created or maintained by helping the company win the contact. It is challenging and you are in the end answerable to the taxpayer even if you are self-sustaining, so you need to know your impact.
Simon Jones: Countries are actually looking to support home exports a lot more, and protectionism has crept back in so domestically the image problem might not be so much of a problem. Yes there is a big issue in the US, but the government is looking at how to support US exports more. And look at how UKEF has performed in past three or four years. Since Brexit was announced there has been a big rally in the UK of support for exports and inward investment. And in the Netherlands there is talk of “Invest NL” and FMO teaming up with Atradius to corral more home driven support for the Dutch economy.
Gabriel Buck: The top KPIs to measure success are: high profitability per head count; low use of economic capital; high impact with key relationship clients; cross-selling into other areas of the bank; and the ability to attract and retain best staff in the market. You ignore these at your peril.
Simon Sayer: I wrote a few things down about what winning and losing looks like for our business. Winning means having a strong and resilient industry with new joiners in people and new institutions coming into the market. It means export finance being part of treasurers’ and governments’ due diligence when they go through their list of potential sources for long-dated funding. It means products and maybe platforms for capital markets investors to join the party in a more accessible way – they want to be here. It means new ECAs coming into the market set up in developing countries who recognise the importance of ECAS to help promote their domestic industries. For me it means more future interaction with the private sector as well. So much of the private sector being here at this conference means that this is the right way to go, it means that that risk is underwritten and priced correctly and it is a signal that ECAs are more engaged with the way businesses operate in the private sector.
Losing means having this conversation at next year’s conference about self-justifying and having to explain our business – again.
TXF Venice, The Global Borrower’s Summit, took place 7-9 June 2017 at the Hilton Molino Stucky Hotel Venice. Deutsche Bank was one of 15 partner supporters
iFollowing a period of deauthorisation, the Export-Import Bank of the United States was reauthorised on 4 December 2015 but limited to transactions of US$10m
iiIn Finland Finnvera keeps its financial surplus in its own balance shet for future losses. The current fund is €1.8bn and it has made a surplus each year since 1999.
iiiA reference to the Danish beer company Carlsberg’s 1985 advertising campaign, “Probably the best lager in the world”
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