German exporters once again achieved record foreign sales in 2018. As uncertainty in the area of exports has risen, the demand for ECA financing and Hermes-covered financing in Germany has increased again, explains Werner Schmidt, Head of Structured Trade & Export Finance Germany from Deutsche Bank, in an interview with the German publication ExportManager
Political risks are back. How does the altered risk situation in export finance affect you?
Political uncertainties are far more significant for our customers’ business activities and for banks now than during the previous decade. Some political decisions have led to uncertainty in the markets and in the export economy. This is delaying investment decisions, increasing the time and expenditure for project risk and feasibility analyses and consequently also the lead times for our business deals. While major financing deals were previously concluded within six to twelve months, they can now take two or three years.
And what is your response?
Financing through an Export Credit Agency (ECA) is intended precisely for these situations. It offers security and stability. The financial crisis had already shown that export finance was one of the few long-term instruments also available in that volatile situation. The largest export financing deals were actually made during that time. And the export credit insurance companies also supported considerably higher volumes than in “normal” times.
What aspects do you need to take into account when assessing risk?
Export finance supports investments abroad and facilitates exports of German products to other countries. This includes major infrastructure projects and investments in machines predominantly in developing countries but also selectively in “high-income countries”. These deals involve political as well as commercial risks that affect the financial viability of the projects and therefore must be covered. Among other things, these risks depend on the political and economic conditions in the respective country. Growing uncertainties hamper export activities and affect the demand for financing
However, as already mentioned, demand for export finance is normally higher than for other types of financing in difficult times.
Does that mean that export finance is more sought after when there are risks involved? And other types of financing are more likely to be considered in normal times?
There is still a great deal of liquidity in the financial markets. This is partly due to the low interest policy of the central banks. There is strong competition for investment opportunities and numerous options other than export finance. Deals are financed via the capital market or via classic loans without Hermes cover. But in the present climate, there is greater uncertainty and therefore a greater need for risk protection. This comes in two categories: cover for the commercial risk and cover for the political risk. Besides covering these political risks, the state-provided export credit guarantee offers a certain degree of assistance, depending on the type of restructuring or loss involved, e.g. at government department level.
Is there a shift in cover volumes taking place from countries such as Russia and Turkey to other countries because of higher political risks?
Although the number of transactions has gone down in recent years, the transaction volumes in export finance have actually gone up. Business has therefore become more volatile. There has been no significant and sustained decrease in credit cover noticeable in Russia and Turkey, and volumes remain high. But there are now more countries involved, e.g. Egypt, Iraq, and some countries in Latin America and Africa. The regional distribution of business has thereby become more diverse. But the focus is still on a small number of countries, including Russia and Turkey.
What effect do the smaller number of transactions and rising volumes have on margins?
I can only speak for medium and long-term financing, but the short-term trade financing business is probably developing in a similar manner. Export finance is an area of business involving a high level of customer proximity that is very transparent and banks are keen to engage in. Consequently, there is a great deal of competition, which is still growing. While the number of transactions is currently on the rise again, it had gone down in recent years. Because of the good liquidity situation, other financing products such as capital market solutions, bonds and classic loans are competing with export finance.
Companies doing business in Russia, for instance, have been able to finance their investments with five-to-seven-year deals in foreign currency in the local market without requiring export finance.
What is the significance of classic country risks in this context?
Compared to other types of credit, export finance offers very good performance. The International Chamber of Commerce (ICC), which is very intent on ensuring transparency with respect to the loss history, has reported relatively low loss ratios. The country risk does not generally correlate directly with losses. But political decisions do affect individual projects, as exchange rate fluctuations may influence the creditworthiness of businesses, for instance. That is the area where we potentially expect risks to rise, but only time will tell. Having said all this, it is more likely for individual deals to fail than states.
How do you deal with non-financial risks?
Where due diligence checks are concerned, non-financial risks such as reputational or money laundering risks have increased in importance. This affects the feasibility of projects and you need to carry out meticulous checks to determine which risks are relevant and whether I, as the credit provider, am prepared to accept them.
This requires considerably greater transparency and verification with respect to a deal’s feasibility. In regard to the discussion about sanctions imposed by third countries, especially the USA, the rule is that regulations imposed by foreign countries are not to be taken into account in view of the boycott prohibition. However, the revision of Section 7 of the Foreign Trade and Payments Ordinance (AWV) seems to allow the consideration of sanctions by third countries that do not coincide fully with EU sanctions. This facilitates Hermes-covered deals in Russia, for instance. Previously, companies and banks were in a dilemma when it came to deals in Russia because of different US and EU regulations.
What effect is increasing regulation having on your business and your threshold values for transactions?
There are two main areas to consider: One involves the regulations affecting capital adequacy requirements and the assessment of balance sheet items as well as the consideration of securities in export finance deals. The other area is to do with the previously mentioned non-financial risks (money laundering, Know Your Customer (KYC), etc.). These are regulations – which, by the way, include environmental assessments and social standards – that we welcome.
This article was first published in German by Export Manager, issue 13, 13 February 2019.
Head of Structured Trade & Export Finance Germany, Deutsche Bank
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