On financial triage: In viro veritas 3
TXF’s ‘in viro veritas’ series looks at the effects of the Coronavirus Covid-19 pandemic on trade and export finance. The first in the series was an early stage call to action, the second showed ECAs picking up their activities and this, the third, looks at more a coordinated response from institutions.
Financial commentary is medicalising, unsurprisingly. I’ve found it in my own writing, but also hearing export finance banks talking about ‘we’ve triaged’ our clients. “We’ve gone through our existing book, triaging, engaging with ECAs, looked at where we are on a deal by deal basis, looking at each sector and on a wider basis to see which clients will need respite and which are experiencing stress, and we’ve been looking at previous contracts to see where there are issues,” one export finance banker said.
Welcome news for the bankers themselves is that the Basel Committee announced on 27 March it has delayed implementation deadlines of Basel III for another year, pushing deadlines back to January 2023 (and transitional arrangements way out to 2028). Those regulations were there to solve the last banking crisis, and bank liquidity is not getting explicit help this time around, but internal risk capital weightings will have less pressure/scrutiny. Separately, one insurance professional says, keeping up with the medicalisation theme: “You might be able to ask the question (not attributable to me) as to whether what we have now is different to the ‘banking crisis’ of 2008-9. That was about the ‘heart’ whereas this now is about the ‘arteries’. Or was that banking crisis a test run for what is coming next?”
Stepping into marketable risks
Perhaps mindful of that, also on 27 March, the European Commission published the news that it was temporarily relaxing its 2013 rules on what constitutes marketable and non-marketable risks for short term export credit insurance, changing all risk to non-marketable. That was after a rapid consultation only initiated on 23 March. “The ICC was one of the 64 respondents,” Henri D’Ambrieres at HDA Conseil told TXF. “We highlighted the need for this measure based on some market indications received last week and data from the 2008 crisis.”
By way of background, the EC normally sees marketable risk as short term business (up to two years credit) on buyers in the EU and certain other developed countries. Short term risks in the developing world and all medium and long term (MLT) risks are ordinarily defined as non-marketable. Until now, EU ECAs are only permitted to write non-marketable risk.
Obviously export finance is a small portion of the liquidity and risk crunch potentially faced along supply chains, but this is a welcome and necessary move. Interesting too is the relaxation of pressure on ECAs themselves to ask permission to make changes, just to notify after the fact.
The consultation highlighted what it called an ‘imminent insufficiency of private insurance capacity for exports to all countries’, while demand for insurance is expected to rise during the crisis. TXF spoke to Sian Aspinall, managing director at credit and political risk insurance broker, BPL Global. “The specialty insurance market in London and globally is continuing to function well, thanks to almost all parties having tried and tested business continuity planning (BCP) systems that are working well and thanks to electronic placing,” she observes.
“Obviously for the single situation trade credit insurance market, the severe economic uncertainty and the disproportionate impact on certain industry sectors are proving challenging, though our experience to date evidences that insurers are typically honouring commitments and maintaining support on existing transactions. In the last week or so since we fully implemented home working, we have both placed new policies and obtained quotes from insurers on new business,” she adds.
Cooperation and capacity
Under the umbrella of the Berne Union, the cooperation between private insurers and ECAs has improved in recent years (a TXF keynote interview with the Berne Union will be published soon). Alongside the private market, ECAs increasingly reinsure each other in the market, and capacity has been increased, though data is not always clear. Those with reinsurance agreements will be better placed to weather claims. Valentino Gallo founding partner at Javalyn Partners, told TXF there is stress in the SCF business where private insurers [among others] play a major role.
“The strong banking sector and the unprecedented injections of liquidity by the central banks should mitigate the pressure on private insurers if the economic activity would restart relatively rapidly. In the project finance sector the activity of the private insurers is relatively limited; each project has its own story. For many projects currently under construction there could be completion delays and cost overrun issues which would require to all parties involved to sit around the table and agree on bespoke restructurings.
Sitting around tables may already feel like a fond memory, but it’s interesting to hear exporters and project financiers already adapting to the strange new normality. As one financier at a European EPC contractor told TXF this week from her apartment, where she would normally be on the road in Africa, the Americas or Asia, “With a lot of these large projects, they have the momentum of inertia, so movement is still happening slowly... But the next couple of weeks will be crucial to test if the inertia stops, or if we can continue with current capabilities. Banks have continued to be doing well for us, have continued delivering and helping things move internally and their services haven’t stopped, which is good.”
Action roundup: More ECAs stepping up
ECAs individually have certainly been stepping up in the past couple of weeks with improved terms, flexibility and payment holidays. Highlights include:
On 25 March US Exim ramped up its support by financing flexibility programmes such as bridge financing, pre-delivery/PXF, SCF guarantee, and working capital guarantee programmes.
Spain’s CESCE will be providing guarantees for Spanish exporters, mainly SMEs and self employed workers, through the banks to provide working capital solutions, among other wide-ranging incentives in packages totalling around €20 billion as part of the government’s €200 billion package announced on 17 March.
Poland’s KUKE is widening its scope for coverage for capital goods exports and is taking on 100% of commercial and political risk from exporters or banks financing or refinancing new export transactions with more than two year tenors, at least until the end of the year.
Enterprise Singapore, the de facto ECA, enhanced its Enterprise Finance Scheme (EFS), augmenting its working capital and trade loans’ size and tenor, upping the risk share of the government to 80% and allowing loan moratoriums in certain cases to improve businesses access to credit.
On 24 March, Turk Eximbank launched a support package which will extend repayment terms along with other incentives to mitigate a slump in export orders alongside the government’s $15 billion relief package.
Coordination with risk participation and blended finance
Some facilities are directed specifically at the medical sector too. The ADB, for instance, has directed $200 million through its supply chain finance programme to support companies (via banks) critical to fighting Covid-19 to boost production of test kits, masks, and ventilators. On 30 March Standard Chartered announced it has committed $1 billion financing working capital and preferential loans for exports and imports to support to companies helping tackle the virus.
Where will it stop?
The limits to support in the crisis are unknown. “While there has been action in certain very high visibility sectors such as aviation and shipping, the ECAs may be setting themselves with other sectors wanting similar treatment in due course, it will be difficult to resist,” cautions the export finance banker.
AE Housman, the poet, pointed out in 1922 those who follow the physical sciences can use facts and experiments to test their opinions. “When a chemist has mixed sulphur and saltpetre and charcoal in certain proportions and wishes to ascertain if the mixture is explosive, [he] need only apply a match. When a doctor has compounded a new drug and desires to find out what diseases, if any, it is good for, [he] has only to give it to his patients all round and notice which die and which recover.” He was medicalising the study of dead poets a century ago.
While we are still in the middle of the financial triage stage of the response to the crisis, there are those looking beyond. One is what happens after the demand and supply shock as China picks up, the other is what happens to global supply chains if we have to move, in the phrase of Toscafund’s chief economist Savvas Savouri, from the dominant philosophy of ‘just in time’ in supply chains, to ‘just in case’. What will the financial store cupboard look like in the future as corporates look to stockpile inventories (and cash)?
TXF’s ‘in viro veritas’ series looks at the effects of the Coronavirus Covid-19 pandemic on trade and export finance. You can find the first and second articles in this series below:
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