2024: A leap too far for another ECA debt record?
After a record-breaking year, ECAs must face the challenge of ensuring that activity remains strong in 2024. Demand for low-cost financing is high in the current interest rate environment, but what sectors will benefit the most from export finance as defence deals and low-carbon technology make headlines?
By all accounts, breaking records is a tricky business. History-making requires maturity, dedication, resources and, above all else, the right set of circumstances. But once those records are broken and the dust settles, what comes next? This is the question that faces the export finance industry after a year of tremendous activity. Uncertainty is inevitable in light of ongoing macroeconomic pressures but export finance is better placed than most to weather those headwinds. Some fall in deal volumes is likely but regardless, the changing face of the industry offers plenty of food for thought.
At the time of writing, TXF Intelligence has recorded around $180 billion of export finance activity for 2023, up from $105 billion in 2022. This is an increase of more than 70% and marks the most active year on TXF’s database by some distance. ECAs offer a counter-cyclical product, so the drivers for this remarkable upsurge can be found in the problems that have reduced liquidity elsewhere.
2023 saw interest rates spiral to levels previously unseen in the 21st century. Inflation has pushed up the costs incurred by exporters and project developers, and financial institutions have been forced to adapt in order to spread risk efficiently. Traditional sources of funding have struggled to meet demand in this environment. However at the same stroke, appetite for debt financing remains strong.
In this context, many would no doubt welcome a fall in ECA volumes in 2024 if it was accompanied by less volatile market conditions. However, there are no guarantees that interest rates will fall or that borrowers will be able to rely on alternative funding sources in 2024 – capital markets in particular have suffered over the previous 18 months.
The consequences of the OECD’s efforts to modernise its export finance package will continue to make themselves known over 2024. In particular, some have expressed concern over the decision to extend tenors to 22 years for green deals and 15 years for other sectors. The cost associated with increased tenors may yet discourage widespread uptake of the new financing terms, particularly in emerging markets.
Crystal-ball gazing might be a fruitless endeavour, but the real insights on the changing nature of the export finance industry will come from the 2023 data. Sectors, deal structures and tenor lengths have all evolved as new demands are placed on ECAs in light of geopolitical developments and the pressure of the energy transition.
547 deals were recorded in 2023, up from 447 in 2022. This is a notable increase of 22% but it is also far more modest than the volumes suggested. While the industry was certainly productive in 2023, this shows that volumes were largely driven by bigger tickets. On the one hand, it is a reminder of the increasingly prominent role that ECAs play in supporting major project financing deals. On the other, inflationary pressures have most likely helped to exaggerate some of the gains made in overall volumes. Borrowers now require more debt than ever to cover costs and contingencies.
Should oil & gas finally be consigned to the past as a staple of the export finance industry? In 2023 the $3.1 billion Balikpapan refinery expansion deal made waves with the support of Kexim, K-Sure, SACE and US Exim but it stands as a rare example of a big-ticket fossil fuel transaction. Volumes of almost $19 billion over 26 transactions suggest that there is still a healthy pipeline in this space, even if ECAs are withdrawing from high-profile upstream projects.
The potential reputational damage associated with fossil fuels is now well-established in export finance. In 2024 ECAs will continue to face pressure from environmental campaigners to avoid controversial new projects like the East African Crude Oil Pipeline. In the past few days alone the Biden administration has paused progress on the Calcasieu Pass 2 gas export hub in response to climate experts, who have described the project as a ‘carbon mega bomb’.
On the evidence of 2023, ECAs still have appetite for deals that facilitate business in the oil & gas industry. This includes deals for equipment and infrastructure like FPSO vehicles. The petrochemicals industry has also benefitted from strong ECA support in 2023, with multi-billion dollar deals for Ras Laffan, Ineos’ Project ONE and Lotte Chemicals’ LINE project.
The headline deals in this space have come in the form of guarantees for commodity traders. While no single transaction has reached the size of the $3 billion Euler Hermes – Trafigura deal from 2022, a steady pipeline has emerged with volumes averaging at around $500 million per deal. Vitol, Mercuria, Gunvor and Trafigura have all tapped ECAs in 2023 and in return provided support with both the import and export of critical commodities.
ECA involvement in the mining industry increased in 2023 as more countries looked to secure supplies of battery-grade metals. The POSCO salt lake lithium project in Argentina secured the support of K-Sure, and in 2024 expect to hear further updates on the Kachi lithium project, the Nouveau Monde graphite mine, the Mont Sorcier iron ore project and more besides.
However, it is not yet clear whether ECAs are willing to substantially up their commitments in the metals business. Metals & mining ranked as TXF’s seventh largest sector in the export finance industry in 2023. There is certainly room for growth, but at present ESG considerations have slowed the pipeline. The problem appears to be intractable – ECAs demand a high level of due diligence while the mining industry has long suffered from reputational issues and poor governance procedures.
This is not to say that mining deals are impossible. Rather, there is work to be done to show that ECAs can move beyond expressions of interest to provide a reliable source of alternative financing for the industry.
Defence has never been a major source of export finance activity but that could be set to change if governments continue to target rearmament in the wake of Russia’s invasion of Ukraine and China’s hostility towards Taiwan. Poland’s mega-deals with Korea captured headlines last year, but Kexim’s lending limits stand in the way of a fresh set of agreements. In 2022 France established its own defence agreements with Indonesia as part of an $8 billion deal to export fighter jets. While ECA involvement in arms contracts is not unheard of, Kexim’s struggles provide a cautionary tale. Export finance capacity is not unlimited and there are many industries that derive greater benefits from low-cost financing.
Watch out for the contrasting fortunes of green and social deals in 2024 – ECAs have made great strides in supporting low-carbon technology, but emerging market infrastructure is still a neglected space. The renewables market was powered by ongoing demand for wind in spite of rising costs, with major new deals for Baltic Power and Hai Long. The NEOM Green Hydrogen financing was a landmark moment for renewable fuels. Already 2024 has brought further details on pathfinder deals for H2 Green Steel and Northvolt’s battery gigafactory expansion.
The message from each of these projects is clear: long-term commitments in the form of offtake contracts and shareholder engagement are crucial if lenders are to take on technology risk. It will be hoped that they can establish a template for others to follow – the carmaker Stellantis is expected to announce its own €3 billion gigafactory financing in the coming months with the support of Bpifrance and Euler Hermes.
By contrast 2023 was not a vintage year for social projects in emerging markets. 2022 boasted some award-winning deals in this sector, with Côte d'Ivoire closing a flagship Bpifrance-backed deal for the Metro d’Abidjan as well as an EKN-backed deal for a drinking water project. 2023’s downturn should be seen in the context of rising default rates among sovereigns across Africa. The impact on infrastructure development has been clear. Kexim postponed further progress on all of its Ghana projects until November 2023, when debt talks with lenders were finalised. In addition, the absence of specific definitions and regulation for social projects at EU and OECD level continues to hurt the sector.