By Peter Hoflich

With the once-popular tool of relying on capital markets, bond issuance or syndicated loans for much-needed funds for trade finance now becoming a thing of the distant past, a great deal of innovation has gone into squeezing liquidity out of any possible source. And so, as the pendulum swings from private enterprise to public institutions through a wide array of government support problems, eyes have shifted back to the export credit agencies; once-important institutions that had been out of fashion for a time, their steadiness has been a crutch for many desperate institutions seeking to keep trade flowing while relying on the stability of sovereign institutions for support.
Given the national interest in promoting trade in order to preserve jobs, some view this support as a clear part of the government’s mandate to provide a steady alternative to private institutions that are fumbling their role in supporting trade and managing risk. “As governments have to bail out banks [that] are in a fix, the bailout might as well be done from the start by underwriting some of the commercial and credit risks appropriately,” says Martin Chai, head, trade finance, CIMB Investment Bank. “The public sector may be much more objective and able to sustain the level of discipline to ensure appropriate risk-taking to support the real economies. Trade finance activities, being one of the contributors to the real economies, should definitely be a priority to be promoted by the governments.”
The new role of the export credit agencies (ECAs) seems to already be widely-acknowledged by the financial services industry, which understands the fear that had gripped capital markets and turned pricing into an irrational beast. “They were totally unfashionable and viewed as expensive, now they are a good provider either of supported liquidity or direct liquidity,” says Sanjeev Kumar, managing director of RBS’s corporate finance and risk solutions group. “And being aware of how to access that, not just for large projects but even for shorter term deals, is something that countries in this region really should be thinking about; it’s a very useful source of liquidity.”

Band of brothers
But even when the ECAs themselves don’t have the firepower individually, collectively they have serious muscle. “ECAs are considering new ways to extend limits,” says Jae Ha Han, manager, business development, Korea Export Insurance Corporation (KEIC), a state-owned corporation that insures and provides guarantees against political and commercial risks in order to facilitate and promote Korean exports. “What KEIC is considering is co-insurance with other ECAs; for example, if one ECA’s limit is not high enough to cover a bank’s deal, then other ECAs can come together to fill up the shortage. We are considering this kind of support for short-term discount underwriting.”
The role of the ECAs is also increasing in importance as the nature of trade evolves, shifting away from markets like the US and Europe with shrinking demand, and more to regional trade. “Nowadays we have seen, from the ECA point of view, the trend that short-term commodities trades have shifted from the traditional markets to the emerging markets,” says Chen Yang, general manager of the risk department at Sinosure, China’s only policy-oriented insurance company specializing in export credit insurance. Moving into new geographic markets also means a different approach to risk and different skills are required. “In Sinosure’s portfolio, we have seen clear signs that the top three traditional markets for short-term commodities trade had been the US, Europe and Japan; but nowadays this has shifted more and more to Asian countries and other emerging markets.”
This is also the case for medium- and long-term export credit insurance, an area of ECA specialty as banks tighten their control on their riskier businesses. For Sinosure, its medium- and long-term exposure is more than 40% in Asia; this presents serious challenges of its own. “For the time being, everybody can see that risks are accelerating, especially we have seen accelerating risks concerning sovereign risks in certain countries like Pakistan and Sri Lanka nowadays,” says Chen. “Meanwhile, while Sinosure is doing our due diligence in risk assessment and pre-warning, we have also issued—and are going to issuesome of our new initiatives.”
Chen notes that with the geographic shift, there is also a shift in the types of financing that companies are seeking, which includes more letter of credit (LC) transactions, putting ECAs like Sinosure in the position to find more opportunities to work with banks, a shift away from the more competitive relationship that they had with banks in the past.

Sign o’ the times
But despite the criticism that ECA transactions are more difficult to do and typically take a long time to get documentation, the ECAs themselves are changing with the market. “Usually ECAs are criticized for rigid pricing systems, but nowadays we are doing our best to provide quick and quality service to clients,” says Chen. “We are going to issue two important policies. One is we would, on some conditions, allow instalment payments instead of down payments, like in the old days. The other policy is concerning premium financing, which means that Sinosure is developing some particular policies which would facilitate premium financing for clients.” The new approach to speed and service is a welcome relief for some banks, which have managed to see the time needed to put a deal together come down by as much as 75%.
Given their role of protecting domestic trade, ECAs can also be rigid in terms of the types of transactions that they will insure. But even this is changing as the need to keep trade flowing becomes acute. “Medium- and long-term underwriting is very important for KOEIC,” says Han. “One of our new initiatives in the medium- and long-term is overseas business credit insurance. This product covers not only tied-to-export-lending, but also untied-to-export lending. Even though it supports untied-to-export lending, still Korean interests should be facilitated by the participation of Korean companies, such as shareholders, or even off-takers.” Sinosure has reached a similar compromise, loosening national content principles, and dropping requirements for the minimum amount of national content for shipments it guarantees, but this has been effectively lowered to 50%.
With concerns that a slowdown will trickle through the supply chain, steepening an acute drop in trade activity, ECAs have emerged as a steady backbone to work with banks, corporations and SMEs to keep trade flowing relatively smoothly. As the parties involved solve the various problems that arise, from political risk to restrictive caps and limits to their behaviour, there is hope that support levels will remain high enough until green shoots take hold.