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27 November 2019

TXF Asia 2019 Export, Agency & Project Finance – Top 10 takeaways

TXF Asia took place in Singapore earlier this month to discuss the growth of ECA and agency financing in the APAC region. Jonathan Bell, editor-in-chief and director at TXF explores the changing face of financing in the region and outlines some of the key opportunities and trends emerging from the conference.

In the first half of 2019 the APAC region resumed its place at the top of the leader board as the most active region for export credit agency (ECA)-backed business. Perhaps this comes as no surprise given the huge amount of infrastructure work required and currently being pursued in the region. At the same time, the major Asian ECAs have increased their footprints across the region over the past 12 months, and this activity has been bolstered by some large multisourced deals involving other OECD-based agencies.

The largest such deal in the APAC region (so far) this year had support from both China Exim and US Exim. Given the US-China trade wars it is highly ironic to see these agencies taking an equal split in the $6.92 billion Australia Pacific LNG refinancing. That transaction also had 14 commercial banks come in on the $2.12 billion commercial loan portion. 

Elsewhere, what a mixed bag of transactions the region is seeing – from big legacy coal-fired projects in Vietnam to the development of huge offshore wind farms such as Yunlin and Formosa 2 in Taiwan, all backed by ECAs.

The controversial $1.9 billion Van Phong supercritical coal fired plant in Vietnam, which closed in April this year, was backed by Japan’s JBIC and NEXI, and contrasts strongly with the $2.6 billion Yunlin offshore wind farm in Taiwan backed by Atradius, EKF and Euler Hermes. And, sponsors of the $2.2 billion 1.2GW Nam Dinh 1 coal-fired power plant in Vietnam – ACWA Power and Tekwang Power – are also tapping Sinosure’s big ticket coverage to fund the scheme, with financial close expected by year-end. JBIC also supported a $200 million deal with Vietcombank for a solar park in April.

The power sector continues to command much of the focus for the ECA-backed loan market in Asia, although conventional will continue to outstrip renewables. Going forward, much of the region will also be looking at the gas-to-power value chain, and we can also expect the continued conversion of certain power plants to gas in a number of important ECA markets.

The oil & gas sector will also be a major focus and the really big deal of the year – which looks set to close imminently – is the $15.3 billion Pengerang Refining and Petrochemical Integrated Development (RAPID) downstream scheme in Malaysia (also known as Project Marigold). Full financial close on the $9.7 billion partially ECA-covered project financing backing the scheme was originally targeted for April but the deal has been continually pushed back. ECAs involved in this mega-deal are: JBIC/NEXI, CESCE, Kexim, SACE, K-Sure, Euler Hermes, Bpifrance, UKEF and China Exim. More than 20 commercial banks are involved in the deal also.

And looking ahead at next year, sign off is also expected on a multisourced $3 billion downstream oil & gas facility in Singapore. Watch this space for further progress and details.

But that’s enough on the deal front, so moving on, here are some of my key takeaways from TXF Asia 2019: 

1) In terms of economic growth, weakening domestic demand across Asia has impacted manufacturing and consequently there has been a drop off in investment. But this is also a global picture. Global FDI fell by almost 20% in 2018 to $1.2 trillion from $1.47 trillion in 2017. The drop brings FDI flow back to the low point reached after the global financial crisis. China growth is forecast at 6.2% for 2019 and 6% for 2022. Countries experiencing significant economic growth within APAC include Bangladesh, Azerbaijan, Kazakhstan, Fiji and Papua New Guinea. Vietnam can be expected to be a big beneficiary of the trade wars affecting China.

2) As far as fortunes go for major Asian ECAs, most seem to be readjusting various parts of their focus and moving in positive and proactive avenues, attempting to try and become more sustainable and embrace ESGs while also having to deal with legacy project issues.

Sinosure has finally completed its internal restructuring. This year there is more of a focus on the quality of projects (and how they apply capital) and sustainability. There has also been an upgrade of products within short-term cover and investment cover. Co-financing will be a major focus for the agency going forward.

JBIC has an extensive pipeline of business, with projects in Vietnam and Bangladesh being particularly strong this year. LNG projects seem to have increased in importance – although resultant product does not have to go to Japan providing Japanese companies are involved in the project. On the coal project front, the agency says it will continue to support these projects but only for plants using cleaner technology ie ultra-supercritical. 

NEXI recently launched a green innovation insurance policy with 97.5% cover. The agency is also looking to work on more renewable energy projects – wind, solar and thermal. LNG receiving terminal projects can expect to also be high on the list of supported projects. Natural resource related projects will continue to be a focus for some time. Increased cooperation with other agencies in Africa and the Middle East is also on the cards.

K-Sure has positively gone out to promote eco-friendly projects with its customers. The agency has also incorporated changes to its corporate responsibility actions and is providing more support for SMEs. On the shipbuilding front, there is a much greater focus on building eco-vessels. 

3) For European and other ECAs, it would appear to be all hands to the tiller as exporters target big projects across APAC – particularly in the power (conventional and renewables) and oil & gas sectors. And the scale of some of these projects is seeing a good number of big deals being concluded on a multisourced basis.

Some very brief notes from the panel: SACE notes that India, Bangladesh and Vietnam are key countries of focus. Bpifrance is involved in a number of water and sanitation projects, among several other sectors. EFIC – now Export Finance Australia – notes that it has a range of projects across Asia, but pinpoints Papua New Guinea as one market of key interest for 2020, and says that next year will be big for the oil & gas sector. Credendo noted that they are involved in a large infra project in Bangladesh (thought to be a major port). EDC, which operates more like a bank than an ECA, noted that it was very much interested in China, although at the moment political tensions were holding back business. In Australia, earlier this year, EDC was one of the financiers in the $1.7 billion of term loans backing the Port of Melbourne refinancing. UKEF noted that it had £4 billion of exposure available for Indonesia. One recent deal for UKEF in that market is a clean energy deal converting a diesel plant into a gas-fired plant. The transaction included Islamic financing. UKEF also has the ability to finance in many local currencies, including Indonesian rupiah. 

4) The view from some of the major borrowers reflects their desire to work ever closer with the agencies as ECA and DFI support continues to be vital on many of the large-scale projects taking place in the APAC region.

A prime example is the renewables industry in Taiwan where offshore wind projects are utilising ECAs for 50% of the debt financing. This is totally different to the offshore wind financing set up in Europe. For example, the Yunlin wind power project, which closed in May this year, has 50% financing from ECAs Atradius, EKF and Euler Hermes. The deal also has 19 commercial banks involved. This deal has provided a viable financing template for other Asian offshore wind projects.

The telecoms sector is also getting a good deal of support from ECAs, something which we saw last year and continues through this year. Most recently, in September, India’s Reliance Jio Infocomm secured a $1 billion K-Sure-backed financing to support the supply of Samsung Electronics equipment, with pricing on the deal just as low as Reliance Jio’s 2018 K-Sure-covered loan. These deals have helped India leapfrog in the telecoms sector to have a solid 4G digital network capability.

Big Indonesian corporate borrowers have had a much quieter time with ECAs this year than in 2018. Some energy/power borrowers note that there is a much bigger focus on renewable energy than before, and in part, that has come through pressure from ECAs. But borrowers note that ECA financing still provides competitiveness for them. 

5) The DFIs and MFIs were prominent at TXF Asia and the overall consensus was that these institutions should be taking more risk, including more equity exposure to projects.

OPIC noted that it is transitioning to a new institution known as International Development Finance Corporation (DFC), which once formed will be able to support projects where there is no direct US involvement. MIGA expressed that it was increasing investment related to climate change goals and helping developing countries. KDB noted that it had put its first overseas project finance focused group in Singapore. AIIB noted that it was now able to fund in five local Asian currencies, and that long-term local currency capability was very helpful for many borrowers. With 85% of financing focused on emerging Asia, the agency is focused on being ‘lean, green and clean.’

It is also pertinent to point out that DFIs appear to have been more focused on some fairly large projects this year across APAC. While some of these projects are natural targets for the DFI sector, there will always be some questions as to why some projects could not have been picked up and financed at least in part by private commercial banks in tandem with ECAs.

Just looking at Indonesia alone – in March this year, the ADB and IFC financed the $222 million Riau natural gas power project. And in June, IFC and KDB refinanced $200 million for the Asahan 1 hydro project. One deal in July, the $285 million JICA financing of the Jakarta waste & water project seems a natural shoe-in for the DFI sector though. 

JICA also financed part of the Matabari coal-fired power plant in Bangladesh this year with a loan of $336 million to the Ministry of Finance.

Elsewhere in APAC, the DFIs got their teeth squarely into rail. In India, the AIIB financed $335 million for the Bangalore Metro Rail project in June, while the EIB provided a further $563 million. And in Thailand in June, the ADB provided direct financing of $315 million for the Northern Bangkok Monorail project.

6) The private credit and political risk insurance market in Asia is continuing to see growth, and it is evolving in Asia just as it is in other parts of the world to encompass the digital age, as well as focusing more on the client rather than the risk per se. One thing is clear, there is huge potential in Asia, and the growth of the sector in Singapore has been quite remarkable.

In terms of scale, one broker noted that in the past six months their firm had received 1,224 enquiries, and of those some 60% came from banks, 361 were from commodity traders and 205 were from exporters looking for cover of non-payment from their buyers. Of the total enquiries, some 83 were related to pure project finance.

The private market loves supporting ECAs, although it tends to see more commercial banks than ECAs directly. Inevitably, private insurers are currently looking to diversify because of the risk profile around the globe. China and India carry a lot of exposure for the underwriters. Consequently, they are looking to spread more to South-East Asia and other regional markets.

7) Sustainability and environmental goals across Asia is a massively mixed bag and arguably it is the most conflicting global region for clear paths of success. The taxonomy of sustainability is said to be a major issue, as is the concept of green equity. Most see the state of play at the moment as the mere beginning of the ‘sus-journey’ for Asia.

Overall, Asia is beginning to make good ground on renewables, although with so much focus still on coal-fired power plants and the continuation of the financing of legacy supercritical coal plants, such as the $1.9 billion Van Phong Power plant in Vietnam which closed in April, there is inevitably a long way to go. Coal plant financings remain a large part of the industry in Vietnam, China, India, Bangladesh and Indonesia.

Wind power projects are making a much bigger impact in certain APAC markets eg India, Taiwan and Australia, but as mentioned above, it is in Taiwan where offshore wind is utilising around 50% ECA financing to meet the needs of project fulfilment. That said, Orsted Wind closed a $799 million commercial loan in Taiwan in June this year, as opposed to using the ECA market. The $2.61 billion Yunlin wind project in May this year followed on from the $629 million Formosa 1 wind project in June 2018 supported by EKF.

Bankers are adamant that the issue of risk weighting on sustainability-linked loans needs to change if more banks are to become more actively and heavily involved. Certain banks are working closely with EU regulators to try to get rules amended. We will try to keep you posted on any new developments.

8) In terms of what the TXF Asia 2019 delegates thought – 30% said the biggest concern for ECA business was low pricing, 22% said it was overcapacity and 18% said it was lack of demand from the market. On the question of preferred tenor, 46% said it ought to be 11-15 years, while 34% said 6-10 year. But of course that entirely depends on what you are financing and many other variables.

On the question of which countries offered the most opportunities – the audience responded with Vietnam, Indonesia, China and Bangladesh in that order.

In terms of what excites the delegates most – 32% said it was opportunities with smart cities of the future and infrastructure, while 29% opted for executing sustainable deals.

And as far as the OECD consensus is concerned, 75% of the audience thought it could do with considerable reforms, while 19% thought it was completely obsolete, and 6% believe it needs no change.

9) Business in Central Asia is booming partly on the back of the China-initiated Belt & Road Initiative (BRI), with Kazakhstan now being named ‘the buckle of BRI’ because of its strategic location. The financial woes of the past – particularly with the banking sector in Kazakhstan have been largely settled, and Uzbekistan is back in favour with an increasing amount of business being done in that market. Azerbaijan is also seen as a market of favourable opportunities.

Kazakhstan is the transhipment hub for BRI with two million containers a year transhipping between Kazakhstan and China. In the last five years, some $18 billion has been invested in Kazakh infra-transport. The country has a new FTA with Vietnam and is poised to sign one with Singapore.

Korean companies are heavily involved in Uzbekistan, and K-Sure has a significant profile in the country. The country’s automotive sector is developing rapidly particularly with EVs and Korean help. Tashkent even has a metro planned for the city. The ADB says that only 20% of the hydro potential in Uzbek has been developed.

Turkmenistan has the fourth largest gas reserves in the world and currently most of the gas exports are going to China. Two new pipelines are planned – one to take gas to India – although this is quite controversial as it would have to run through Afghanistan and Pakistan – and the other pipeline taking gas to Greece. 

10) From the communities sessions: If the export finance industry really wants to prepare itself for the future, the feeling is that it must drive diversity and inclusion in its hiring processes. This includes celebrating the talented experts from under-represented communities who are already creating waves as well as widening participation through outreach. Within the sector there is a real determination to bolster gender, ethnicity, age and socioeconomic diversity in senior positions, something which can only be achieved by putting the matter on centre stage. Broadening the export finance talent pool will only enrich the industry, creating fresh avenues to dealmaking. 

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