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Perspective
31 March 2017

$50bn and counting: GE EFS unlocks alternative ECA support

US Exim’s lack of a quorum and inability to approve transactions over $10 million has necessitated some key changes in strategy at GE Energy Financial Services (GE EFS). Bob Psaradellis, GE EFS managing director and global capital advisory leader, and Guto Davies, global ECA leader, talk financing, manufacturing and how to develop $50 billion of global ECA contractual capacity when their previous primary ECA has been handicapped out of the big-ticket market.

TXF: Since US Exim big-ticket availability stopped, GE has developed strategic ECA alliances with non-US ECAs – a $12 billion export financing agreement with UKEF in 2015 for example. How successful has the strategy been and how are you looking to develop it further?

Bob Psaradellis: Diversifying away from US Exim was driven by necessity when the bank failed to get re-authorised in 2015. While it has since been re-authorised, a lack of quorum at board level means it can´t approve deals greater than $10 million – not much use to a big-ticket client base like that of GE.

We decided to look at what we had done with other ECAs, those with which we have always worked. We knew we had to do things differently if we were going to remain competitive and continue serving our customers. So, we made some decisions about where it made sense to locate and expand production plants and developed framework agreements with ECAs in those countries. The strategy has resulted in over $50 billion of ECA capacity availability to GE worldwide.

Guto Davies: One thing I´d add – we had to change the relationship we had with the institutions that are key to what we do, and the support that we provide our industrial business and our customers. The ECA relationships changed from transactional to strategic, and we’ve built the infrastructure to manage these relationships.

The ability of the original equipment manufacturer (OEM) to bring financing to the table is increasingly important, and we´re seeing it creep into the evaluation criteria that sponsors use. Our ability to bring a strategic ECA partner – one that is forward thinking, commercial, flexible, and innovative - helps us win business.

TXF: Given the ECAs have different costs of borrowing, do you only build relationships with ECAs backed by strong sovereign ratings? And if so, does it influence where GE builds manufacturing bases abroad?

BP: The manufacturing bases that GE has are where they are and we work with those ECAs to find solutions for our customers. In large infrastructure projects ECA financing is not sole-sourced in one geography. Products that we manufacture in one location will be one piece of a very large jigsaw that will rely on other manufacturing bases to provide the complete solution.

ECAs that may have high cost of capital or high cost of insurance would sit behind a larger ECA and then that cost differential eliminates itself through the reinsurance agreement because they then share the premium. But if the project equipment is solely sourced from one location, then that is the ECA solution that goes to the customer.

TXF: Different ECAs have different local content requirements. How do you manage those expectations?

GD: When we evaluate a tender we choose the right partners - either from a supply chain or a contracting perspective. We work with construction partners on a regular basis, and we´re enhancing and developing the relationships that we have with our peers within their organisations as well. This ensures that, when we´re putting proposals on the table, we have comprehensive turnkey commercial, technical and financial solutions to address both the customer’s needs and those of ECAs.

TXF: A recent GE EFS deal for 500MW of mobile power plants for PLN came with direct loans from ECAs and no commercial bank debt. Is this a one-off or long-term strategy?

GD: Different sponsors have different views of what works for them. For the PLN deal, the cooperation between EDC and Hexim was the perfect solution. PLN was attracted by the fixed rates and the long tenor.

The PLN deal was also unique because of our scope of supply. We were providing a turnkey solution, which is not always the case. On larger infrastructure projects, sponsors will have their own financial advisors and we will act in a supporting role, coordinating the activities between the sponsors, our industrial business, and the financial advisors, ECA’s and MLAs. We have the capability in-house to be able to support our customers with this type of structuring, if it is requested.

No two transactions are ever the same. Our sponsors will always have a view on currency preferences, tenor preferences, fixed rate versus floating. So, the role that we have is really making sure that we are engaging with the sponsor and delivering the right solution.

There is always going to be a role for banks to play in this space. Post-Lehman, banks were heavily constrained by liquidity and needed ECAs to step in. The ones that stepped in the most were those with direct lending capability.

The situation demonstrated that ECA direct lending is a differentiator. It is attractive to certain buyers even if it is not always the cheapest option: For example, in certain currencies for certain tenors, a floating rate or swap structure might get you a cheaper rate.

TXF: Do you think international banks could become less significant as partners than they are now?

GD: No, although I think some banks are happier working with ECA direct lending structures – in effect serving as arrangers and allowing the ECAs to act as the lenders.

Some banks have liquidity challenges and part of our role whilst working with customers is to help them evaluate the optimal solution in support of their business. But, we don´t see banks going away from this space, they remain an integral part of the process.

TXF: By developing more local and regional banking partners have you been able to unearth new pockets of liquidity?

GD: There are two regional elements to our strategy - one of them is the commercial banking market and the other is smaller ECAs from countries where GE has a manufacturing base.

On the commercial banking side, GE has a regional corporate structure within each jurisdiction. Within each of the regions we typically have direct interaction with the regional banks - and their role would be to look at the smaller ticket lending, leasing, commercial loans, to support the smaller, more transactional dealings that we have with customers.

The other element, smaller and less well known ECAs, are very useful in terms of capacity sharing with other ECAs.

TXF: Did the GE/Alstom merger bring any unexpected new ECA relationships?

BP: The Alstom acquisition also brought us a relationship with the Swiss ECA, SERV, which is a good example, along with UKEF, of a commercially minded, forward thinking, flexible ECA, that is very keen to support our footprint within their territory.

The relationship with SERV is in its early stages, but they´ve been supporting the Alstom businesses in Switzerland for many years prior to the acquisition and are adding tremendous value to GE’s customers.

TXF: What has been your experience in accessing DFIs and institutional investors for projects? And what type of opportunities and structures do those parties tend to be most interested in?

BP: We are building stronger relationships with DFIs. Not just ones in the US but internationally. We need to have the capability to bring capital from these institutions to complement ECA financings on multi-sourced project financings.

In addition, we have the ability to bring in third party equity. Last year, we had success with this on the Merkur project - GE´s first commercial scale offshore wind project. We sourced and arranged €1.6 billion of third-party capital, including debt and equity, working with two trusted partners on the private equity side that we brought into that deal -  we plan to do more of that.

When you´ve invested $40 billion, as EFS has cumulatively since 2004, it means you´ve also mobilised several times that number in third party capital around partnerships and lenders in those investments.

TXF: Are you looking to continue to use your own balance sheet to the same extent going forward?

BP: GE EFS remains a principal investor in the energy space. It is a distinct advantage to have balance sheet and principal investment capability. Sometimes we invest to attract other capital, but mostly we invest and take on larger positions, which is our core competence.

TXF: How important is your ability to offer debt to complement GE sales contracts?

BP: In the United States (US), GE EFS has built its reputation as a lead arranger for new build power plants and continues to be a leading provider of debt. We´ve been at the forefront of lending into merchant power plants in the US and we remain active.

Outside of the US, we´ve largely been an equity investor. That´s a function of several things, but where it makes sense for the company and customer we´ll continue to deploy capital across the capital structure.

TXF: With regulation limiting bank appetite for long term lending, could GE EFS end up playing a more prominent role as a lender?

GD: Our focus would be in developing other pools of capital – from institutional investors for example. Pension funds and these types of institutions see ECA-backed projects as very attractive investment vehicles, relative to buying gilts for example. They could get a guarantee from UKEF, and achieve a better return from that than buying government bonds for the same effective risk.

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