October 2018

Without risk distribution, the estimated US$1.5trn trade finance gap would be even larger. Industry gatherings such as the International Trade and Forfaiting Association’s (ITFA) annual conference bring dealmakers together from all over the world. Clarissa Dann reports on its 45th appearance, this time in Cape Town, South Africa

When it comes to originating and distributing trade finance risk profitably and safely, industry events are convenient facilitators – despite the emergence of fintech-crafted platforms offering self-service options.

Trade finance is a relationship business, particularly in the secondary market community. Whether one is a secondary bank, an issuing bank, a credit insurance purchaser or provider – trust is built through deal history and face-to-face contact.

The 45th annual International Trade and Forfaiting Association’s (ITFA) conference held in Cape Town, South Africa from 4-6 September 2018, was no exception – more than 200 delegates from 33 countries descended on the Table Bay Hotel at the V&A Waterfront. As an attendee since 2011 (Vienna), I was struck again by the number of familiar faces mixed with the new, and the sense of inclusion and family – as if I was at a recurring wedding party – but with new bridesmaids every year.

This was the first time the conference had been held in Africa, and the continent’s opportunities, along with hunger for information on how to manage associated risks was clearly a big draw – many delegates had travelled from Europe and China to meet existing and potential African clients and learn more about the market first-hand rather than from research reports.

IFTA Panel
Credit insurance in Africa and beyond. The panel from left to right: Andrew van den Born (Willis Towers Watson); John Lengtaigne (ATI); William Limb (Liberty Specialty Markets);  Andreas Ortiz (Santander); Andreas Voss (Deutsche Bank); Mark Hing (ABSA)

One delegate, Igino Corradi, Deutsche Bank’s Head of Credit Solutions business that carries out a lot of work in Africa said, “the secondary market for African trade finance assets is about to take off. More and more investors are getting comfortable with African risk. The continent is fast becoming the most exciting investment frontier for many banks, funds and insurance companies.”

This was evident in the discussions that came up in the panels and plenary sessions – first up being “Credit insurance in Africa and beyond,” chaired by Willis Towers Watson’s Andrew van den Born. “It’s always interesting to get the view of the insurers and secondary markets,” explained one of the panelists, Andreas Voss, Deutsche Bank’s Head of Trade Finance for Financial Institutions, Sub-Saharan Africa, afterwards. According to Liberty Specialty Markets’ William Limb, people are focusing on sovereign non-payment risk and there is a huge appetite for this business,” he said, estimating capacity about US$3bn. “Tenors and line sizes are increasing”, he added. However, this is squeezing yields and there are some countries such as Angola and Zambia where the risk is challenging and we therefore “find it hard to justify the risk return”. Preferred geographies are Kenya, Cote d’Ivoire, and Benin following its recent ratings improvement.

Deutsche Bank’s Voss provided a banking perspective, “Francophone Africa is very interesting, and we are seeing countries focus on agriculture and food processing. More European countries entering Sub-Saharan Africa don’t want to leave it all to the Chinese,” he added.

About the ITFA

IFTA Board

The current ITFA Board (left to right): Duarte Pedreira (Head of Young Professionals and African Regional Committee); Silja Calac (Head of Insurance Relations and Treasury); Andre Casterman (Head of Fintech Activities); Zeyno Davutoglu (Head of Education); Chris Hall (Head of Regions); Lorna Pillow (Deputy Chairperson and Head of Communication and Membership); Sean Edwards (Chair); Khilola Turaeva (Head of Institutional Relations); Paul Coles (Head of Market Practice); and Qian (Sophia) Xiao (Head of Asian Activities)

As for the ITFA itself, it has expanded considerably from its informal “club” style beginnings in 1999. Having morphed from the International Forfaiting Association (adding Trade to its title was more than just symbolic), it now covers trade credit and political risk insurance, supply chain finance and, most recently, fintech. This reflects the increasing role insurance plays in credit risk mitigation and the potential of fintech solutions to provide additional visibility to the purchase and sale of trade finance assets and credit risk protection.
Chaired by Sean Edwards, whose day job is Head of Legal at Sumitomo Mitsui Banking Corporation, the ITFA sets out to facilitate the expansion of trade, risk distribution (so much more than forfaiting these days) in emerging markets, and support the industry by improving governance and best practice, as well as shaping rules, laws and documentation that impact on its members and the wider industry.

So how do members conduct transactions with each other? The most common primary market trade finance deals are:

  • Issuance of typical trade finance flow products such as export letters of credit, letter of credit confirmations, guarantees
  • Issuance of syndicated or bilateral trade finance loans to banks or sovereigns
  • Issuance of syndicated or bilateral project finance loans
  • Origination of debt instruments such as negotiable instruments or other trade-related debt obligations

Primary market transactions such as these are then risk mitigated in a number of ways, the main routes being:

  • Funded or unfunded (and usually undisclosed) risk participations where an issuing bank offers an investor (bank, fund or insurance company) the opportunity to participate in the risk of an underlying letter of credit or trade finance loan. It does this using the Bankers Association for Finance and Trade (BAFT) Master Risk Participation Agreement (MPA) – relaunched on 4 September and an industry standard the ITFA and BAFT have worked together on for more than a decade
  • Full legal transfer of the trade finance or project finance loan from a bank to an investor (bank, fund or insurance company)
  • Credit or political risk insurance is purchased from various insurance companies
  • Loans are repacked into notes, which are a more suitable investment vehicle for institutional investors

Fintech options?

IFTA Session
The pre-conference fintech programme gets underway

A new element in 2018 was the pre-conference fintech session chaired by ITFA fintech committee chair Andre Casterman. “Already 2018 has been a record year for venture capital funding of trade finance platforms,” said Casterman in his introduction before explaining why collaboration between fintechs and the banking sector is set to grow substantially by 2020:

  • Fintechs in payments and trade finance are highly specialised and addressing specific needs, and will be increasingly partnering, sometimes competing
  • In turn, banks are adopting multiple fintechs in parallel which demonstrates their complementary offerings

Casterman said that fintechs offer “solid options for trade banks to modernise their trade finance propositions and address the trade finance gap challenge”. In addition fintechs, can help banks “bring trade finance to institutional standards and attract capital market investors”.

Five fintech demonstrations followed, one of which caught the eye of delegates who had just renewed car insurance policies online. Toredo is a platform allowing brokers and clients to access non-payment insurance online. Chris Hall, Liberty Specialty Markets’ Global Financial Risks Senior Underwriter (who also heads ITFA’s Regions Committee), explained that it was set up to compete with existing platforms in handling short-term low-premium, single-situation trade credit risks for customers, brokers and underwriters. “The market needs live ‘quote to bind’ technology minimising touch points and increasing transaction speed for this product segment,” he said.

A mixed bag – economic backdrop

ITFA annual conferences usually have an economic overview to set the scene, and this time the focus was on the host continent, Africa, courtesy of Robert Besseling from risk intelligence specialists EXX Africa, and Rand Merchant Bank’s Sub-Saharan Africa Economist, Celeste Fauconnier.

Africa is, said Fauconnier, “a far cry from where people thought we would be ten years ago”. In an economic overview, she opened the session with the observation that the former darling of the investment environment “has taken its time improving sustainable growth rates and bringing the middle classes up to the numbers expected”.

Investment-led economies, she said, have been the strongest growth drivers – with this trend looking set to continue until 2022. Commodity-led economies suffered from the end of the commodity super cycle and the impact of collapsed prices during 2015/2016. In particular economies dependent on one type of commodity such as Nigeria (oil), Zambia (copper) and Mozambique (coal, oil and gas) are particularly vulnerable. “Your investment-led economies are those where your governments have realised they need to invest in their own industries and we have seen how global investment has caught onto this.”

At 8.2%, with 100 million people, Ethiopia looks set, she said, to be the fastest growing economy, with Kenya, Uganda and Tanzania all set for 4% to 5% growth as oil and gas come on stream (see Figure 1).

Figure 1. Individual country growth rates           Source: Rand Merchant Bank

Besseling developed Fauconnier’s points, and said that Africa is fast recovering from the 2015/16 commodity price trough at a projected 4.1% average growth in 2018, thanks to a recovery in prices of crude oil and cobalt with growth being led by East and West Africa – while Central Africa lags. However, he noted, inflation has increased with a median rate of 5.4% across Africa and debt levels have crept up. “The recovery of the largest economies in Nigeria, South Africa and Angola will be absolutely crucial for a sustained recovery throughout the African continent.”

Sub-Saharan Africa does suffer from a perception that political tensions at country level could affect growth, something that Besseling reminded delegates of in his talk. “Politics is intertwined with these countries’ economic outlooks,” he said.

In South Africa, ‘Ramaphoria’ following the change of government, has now subsided and the conference’s host country had just dropped into recession with GDP declining 0.7% in Q1 2017. However, Ramaphosa is seeking US$100bn in fresh investment over the next five years and is hosting a series of road shows to priority target countries including the European Union, the US, Canada and China.
Angola’s economic diversification and oil sector reform following its political transition has been seen in the liberalisation through the privatisation of more the 70 state-owned companies including TAAG national airline, BCI trade and industry bank, and the ENSA state insurance company. The government is seeking to diversify from oil revenue dependence by developing its diamond, fisheries and agricultural sectors. The creation of a new oil sector regulator separate from national oil company Sonangol operations is an important step because “without new finds and associated investment, impending maturity in Angola’s offshore fields could see a decline in oil output of up to 370,000bbl/pd in six years – from the current output of 1.574 million bbl/pd.”

Besseling then shared his concerns that the Nigerian economy’s tentative recovery could end up being frustrated by electioneering – noting that government inertia had stalled economic reform. Incumbent Muhammadu Buhari is seeking re-election on 16 February 2019. Economic recovery, said Besseling, means unifying multiple currency exchange rates, sticking to the published Economic Growth and Recovery Plan, oil industry reform and Niger Delta compromise, and massive public spending plans with a record budget.

Access to finance

According to the African Development Bank’s (AfDB) second trade finance survey report, ’Overcoming Challenges’, the African continent suffers from a US$91bn trade finance gap (2014 data – the gap is generally agreed to be around US$100bn a year now). Irfan Afzal, Director of Syndications and Agency at Afreximbank, said that his organization sees its association with ITFA as part of its strategy to address this gap. Several factors, he said, have created this gap, such as “withdrawal of correspondent banking services by some international banks in the continent’s trade finance space”. He highlighted the lending concentration issue pointing out that the AfDB estimates that the 10 largest trade finance customers on the continent account for around 58% of the leading financial institutions’ total trade finance assets. Another speaker had commented that the banks are “awash with capital”, so the issue is hardly one of liquidity. Afreximbank, said Afzal, sees forfaiting as “an innovative financing instrument to address trade finance needs of SMEs in Africa” because it is characterised by “the elimination of non-payment to the exporter and addressing risks posed by FX or interest rate charges”.

China’s continued commitment to Africa, however, was illustrated by President Xi Jinping and leaders from 53 African nations who participated in the 2018 Beijing Summit of the Forum on China-Africa Cooperation (FOCAC) held on 3-4 September – which was why Afreximbank President, Dr Benedict Okey Oramah was in China rather than Cape Town. South Africa president Ramaphosa said that the eight major initiatives unveiled by China’s President Xi Jinping along with the US60bn worth of aid, loan and special funds will bring “tangible benefits”.

However, aside from this form of foreign direct investment, non-African international banks will always be less comfortable with the risk than African banks based on the continent, and the lack of reliable information that gives sufficient comfort to credit decision-makers remains a problem. Deutsche Bank’s Andreas Voss told flow that while Afreximbank’s customer due diligence repository platform (MANSA) is a great initiative, it would be helpful if a deal could be struck with SWIFT on the KYC Registry so that the African banks could connect to the utility most international banks use. Despite all this, international banks such as Deutsche Bank do brisk trade finance flow business supporting their clients’ trade in and out of the continent – such as crude oil out of Nigeria and refined products going the other way (refining capacity is somewhat underdeveloped in the country at present).

Another difficulty is the inefficiency of transportation. Delays at the Port of Lagos in Nigeria are factored into the cost of doing business there – “it takes several weeks to release a container in Lagos” reflected Voss. He said that while one could ship to Benin or Ghana that has less of a congestion problem, the road journey back into Nigeria takes two to five days because of all the border controls.

“We only have a certain risk appetite for sub-Saharan Africa and the interest of the secondary market in the region is essential to us“, says Voss. Limits in place are enhanced by support from supra-national institutions, such as IFC, the insurance market as well as bank investors.

Mad swimmer

Jean Craven
Jean Craven gives the keynote speech on trade finance fund investment

Former Standard Bank commodity finance expert, Jean Craven is not only the founding partner of Barak, manager to Africa’s largest structured commodity trade finance fund, but set up Mad Swimmer, a group of “ordinary South Africans doing extreme swims to raise funds for children’s charities”. Craven had completed the England to France Channel crossing in 11 hours 44 minutes – the 30th fastest out of more than 200 during 2017.

Craven’s passion for both his fund and marathon swims shone through his talk, which highlighted investor thirst for yield and the ability to take a long-term view and personal risk. “If you offer attractive yields, people will listen to you – the asset class is attractive and these days it is all about yield,” he reflected. The structured trade finance fund was launched in February 2009 with US$300,000 of the company’s own money just after the financial crisis, and the journey of unlocking African yield for an investor clientele largely based outside South Africa has taken the fund to more than US$1bn. “It was hard going,” he said. Today, there are around 150 investors, most from the pension fund sector, and Barak also works with the banking sector. “We are forming a lot of alliances with banks in transactions whereby we are we are willing to take first loss portions in deals and this offers the bank a more attractive return on capital.”

There was an offline discussion about suitable marathon swimming spots along the Cape Town coast afterwards. Apparently the sharks avoid the colder waters of the South Atlantic at Camps Bay, which was where your correspondent was inspired to try a post-conference two-kilometre outing (completed in a leisurely 50 minutes as the views were so stunning).

Financial reporting, Basel and risk participation

ITFA conferences ensure that delegates always get a full briefing on core legal and regulatory topics, and this event was no exception. The updated and revised BAFT MPA was explained by Sullivan & Worcester’s Geoff Wynne and EY’s Etienne Welgemoed demonstrating how accounting treatment of trade finance under International Financial Reporting Standards 9 (IFRS 9) impacts profitability, and HSBC’s Felix Prevost walked delegates through the Basel III reforms – in the form of ‘Basel IV’.

  • MPA. The Bankers Association for Finance and Trade (BAFT) MPA is a template master agreement for risk participations and funded participations in trade transactions, used to distribute trade assets. On 31 August 2018, in advance of the conference, BAFT published the revised English law agreement online (the New York law one is to follow), and Wynne’s presentation highlighted the main changes, such as a clearer divide between unfunded and funded participations (these have separate provisions now). The new agreement is available to BAFT and ITFA members from their websites. A helpful summary of the main features can be found in GTR’s ‘Trade finance’s new master risk participation agreement: 5 key changes”. Andrea Mommert from Deutsche Bank’s Distribution Desk in Frankfurt said that the BAFT MPA was “long awaited in the market and really addresses many issues that have come up since the first version was circulated in 2008 (such as IFRS 9, coverage of branches and affiliates). The new document should make the negotiation process much smoother than in the past.”
  • IFRS 9. With IFRS 9 implementation effective from 1 January 2018, all banks subject to International Financial Reporting Standards (IFRS) have to, under IFRS 9, assess their financial assets so that it is clearer what sits in the trading book and what belongs in the banking book. Welgemoed demonstrated how assessment involved three business models: hold to collect contractual cash flows, hold to collect contractual cash flows, and selling financial assets. The topic of impairment provisioning for trade finance was something the ICC included on pages 58 and 59 of the 2017 ICC Trade Register report – so delegates were looking that up after the presentation!
  • Basel IV. Subtitled ‘Levelling the playing field’, HSBC’s Prevost demonstrated how the revisions to Basel III set out to reduce excessive variability of risk-weighted assets across banks by introducing five proposed levers with a potential impact on trade finance products. These are: standardised approach to credit risk, internal ratings-based approaches to credit risk, operational risk framework, leverage ratio framework, and output floor. A helpful summary of what these mean in practice can be found on pages 56 and 57 of the 2017 ICC Trade Register report.
Left to right: Geoff Wynne (Sullivan & Worcester); Robert Nijhout (ICISA); Manuel López (Marsh) at networking drinks on the first night (madiba shirts sponsored by a certain insurance provider!)

Appetite outlook

Given the distances travelled to attend the 45th ITFA annual conference by more than 200 delegates, it was clear that the once small, intimate group of forfaiters has come of age and transformed itself into the main industry body for the trade finance secondary market.

“Cape Town, and more particularly the African market, is part of the DNA of this organisation – everything here felt right,” reflected ITFA Chair, Sean Edwards. “Our heartland, members and core products respond to this environment so well. For me, it’s heartening to see that our approach and philosophy adds real long-term value for all, whether established institutions or the new consumers of trade finance.”

Climb every mountain….view of Table Mountain from Lion’s Head, Cape Town, South Africa

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