Five ways export finance could be simplified

Export finance can be a complex and lengthy process. From ECAs with sophisticated approaches to portfolios but lacking the staff to process deals quickly, to piles of unnecessary paperwork for SME exporters – there are many hurdles to any ECA-backed deal. And it is an oft-voiced sentiment, particularly among commercial bankers, that ECA staff and processes, either by design or habit, make export financing far more complicated than it needs to be. TXF has canvassed ECAs, exporters, and financiers for suggestions on the five best ways to make export finance more accessible.

One: Less documentation

• One exporter cited a quick and easy solution to the unnecessary piles of paperwork - a single document for exporters to apply for ECA cover.
• ECAs need to have a faster process to delegate deals to banks, especially for short-term loans.
• ECAs need a simpler approach to SME business. Current processes delay banks from making credit decisions because of the framework provided by the ECAs. “Maybe using a less complex portfolio approach for deals less than five million would help,” says one banker.
• Exporters also highlighted the need for clarity in contracts. “There needs to be clear sentences in contracts explaining what constitutes content and what is not,” says one exporter. In France, for example, the 20% minimum content requirement for ECA cover can often leave exporters confused on what goods and services constitute content.

Two: Less rules

With Basel IV just around the corner and Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements, adhering to strict governance is now a feature of most export finance deals.

The most critical element of regulation in export finance is the leverage ratio (LR), which currently penalises banks holding high-quality assets, such as export credits.

• The EU Commission has now proposed an exclusion for the LR for non-EU ECAs which is expected to come into force on 1 January 2018. According to one banker, a 0% LR will spur an increase in the volume of bigger ECA-backed deals.
• More needs to be done to lobby regulators. Members of the Export Credit Working Group of the European Banking Federation have been instrumental in developing the groundwork for the empirical evidence that convinced regulators of the low risk inherent in ECA-enhanced lending.
• Depending on the procedure of the respective ECAs there is sometimes a period of several weeks/months from an initial commitment to final approval. During this period, the bank’s commitment is always subject to final ECA cover, i.e. conditional. For such a period a lower Credit Conversion Factor (CCFL) than 50% should apply, says one banker.
• A CCFL of 50 % ignores that an ECA-backed export credit is not easily disbursed in a stressed scenario. Disbursements are always linked to the presentation of shipping documents/service certificates. Therefore, a natural hurdle is raised to prevent parties from receiving instant disbursement. Such period may last two to three years, even on some occasions, up to five years.
• During the lifetime of the loan (up to 18 years according to OECD sector understandings) the LR will be applicable. At present, the additional equity consumption resulting from such a leverage ratio seems to be the major threat to more accurate business predictability. Any hurdle will be seen as a potential showstopper for a deal.

Three: One-stop shop

• A unique contact point enabling exporters to have access to all products available in each country including export finance, insurance, investment and hedging.
• “The ‘one-stop shop’ would significantly reduce the workload for exporters, ECAs and financiers,” says one exporter. “Someone who knows commercially all the ECA products and is therefore in a positon to advise on the actual tools for the business.”

On 1 January 2017 France’s ECA, Coface, transferred all its activities across to the public investment bank Bpifrance enabling direct guarantees from the French state. SMEs can now tap export financing from one of the subsidiaries of Bpifrance and then insurance from another subsidiary of Bpifrance. Not only does this benefit the SMEs, it creates a very strong ECA presence in the market.

Belgian’s ECA Delcredere Ducroire also merged with the Credendo Group this year offering investment, financing, and insurance.

ECAs agree with exporters that a ‘one-stop shop’ would enhance SME exports, and many are looking to Bpifrance and the Credendo Group as templates.

Four: More ECA staff

ECAs are significantly understaffed and underpaid compared to banks, which beyond the inherent conflict, can cause lengthy deal queues and delays. “Public sector pay means a public sector pace, whereas bankers are paid at a different one,” says one banker.

• More staff mean a quicker approval process and deal timeline. Although, ECAs would have to ask for more government funding.
• Less ECA involvement in deals and better communication.

Bank perceptions of ECA staffing vary. Dutch ECA, Atradius, is perceived as very ‘hands off’ and employs around 12 people. Thus, the ECA approval process and approach to assessing portfolios can take far too long. Alternatively, “Sace is a hardworking ECA but wants to be involved in everything which slows things down. Conversely some things move quickly because they’re more involved,” one banker concludes.

Five: ECAs should take on more risk

• ECA risk models often work on a case by case basis looking at a portfolio of credits, sector and geographies. Digging deep on the credit of SMEs is not practical on an execution level.
• ECAs need to find a level of exposure across all those variables that they are comfortable with, and therefore avoid the need to dig deep on the credit of an SME.

Having a less sophisticated approach will significantly speed up deal timelines - and also increase exposure. But as one banker suggests, “this method could act like a loss leader. If ECAs focus on difficult countries, accepting work on financial statements from certain SMEs, while working with new local banks (many exporters can’t find local banks viable for ECA backing), then SMEs can do more business".