Is ECA debt now part of the trader funding furniture?

The evolution of the ECA product suite is a sign of the times. In recent years economic turmoil has arrived hand-in-hand with social and political upheaval, and like many financial institutions, ECAs have been forced to respond. New policies and frameworks now sit alongside the traditional export credit contract. Agency finance can now turn its attention to coffee beans and construction projects alike.

This evolution remains subject to change. As an example, the EU’s State Aid Temporary Framework came to an end on 31 December 2023 – this legislation offered EU countries greater scope to support their domestic corporates through the unusual market conditions that existed during the COVID-19 pandemic. Those COVID-era ECA liquidity deals might be gone, but it is reasonable to ask if the strategy that underpinned them lives on. Which products will remain part of the furniture, and which will be left behind?

An evolving product suite

In 2022 the announcement that Euler Hermes would support Trafigura’s credit lines in return for key commodity supplies came as a shock. Trafigura had not agreed to export anything from Germany, nor was the deal tied to anything beyond general corporate purposes. For a European ECA, this was far from business as usual.

ECA involvement in the commodities value chain is not unusual. Historically oil & gas is one of the largest sectors in export finance and ECAs have an ongoing role in maintaining the infrastructure of commodity production. In the past this has included mega-deals for facilities like Russia’s Amur gas processing plant and Mozambique’s $15 billion LNG project. To this day oil producers benefit from ECA support for FPSOs, refineries and more besides.

In addition, mining companies are drawing more volumes as ECAs look to make up some of the shortfall in available financing for critical minerals projects.

Oil & gas support may be on the decline as ECAs establish roadmaps to phase out their exposure to fossil fuels. The latest word from negotiations around the OECD Arrangement on Officially Supported Export Credits is that a ban on fossil fuel deals could come into force.

ECA-trader deals are a different proposition. First and foremost, they are not export credit transactions, but are rather untied. While there are competing definitions among ECAs on what can be described as untied, these deals invariably fall outside the scope of the OECD Arrangement. The majority are related to newly developed import strategies that reflect an increasingly flexible and broader ECA mandate.

Where once ECAs limited themselves to traditional buyer credits tied to exports, many are now pursuing a more holistic approach. This can include investments that will generate opportunities for export in future or general corporate deals that support domestic industry. Trader deals would fall into the latter category.

For European ECAs, this is a fresh approach to exports. In Asia, this product is established – the Abu Dhabi National Oil Company has in the past secured $3 billion deals with the likes of Kexim and JBIC in return for offtake agreements.

The context for this development is the volatility that hit commodity markets and supply chains in the wake of Russia’s invasion of Ukraine. Overnight, two major producers of energy and agricultural products were removed from the commodity value chain. Importers were forced to look elsewhere for their goods and traders dealt with the ensuing market dislocation.

One banker explained the challenges of this situation to TXF: “A huge need existed – demand for cash on one side, demand for energy on the other.” Traders needed emergency financing to cover margin calls as commodity prices fluctuated. Governments in Europe needed an alternative to Russian gas supplies as winter approached at the end of 2022. One solution presented itself.

Euler Hermes brought this emerging trend to the market’s attention by issuing a full guarantee for a mammoth $3 billion Trafigura financing in December 2022. In return the German market received critical LNG supplies for the winter months. 25 lenders featured on the deal. Notably, German financial institutions were prominent across the ticket in the name of national interest, from Deutsche Bank and Helaba to IKB Deutsche Industriebank and ODDO BHF.

An $800 million deal related to deliveries of critical non-ferrous minerals to German industry further demonstrated the pattern. Energy and metals were considered to be both essential and scarce for German exporters. Euler Hermes, through its Untied Loan Guarantees (UFK) scheme, expanded its mandate to meet the demand.

Trafigura and Euler Hermes adapted quickly but others followed. SACE has been characteristically forward-thinking in this regard. Under its strategic imports programme, SACE has secured LNG through deals with Gunvor, Vitol, Mercuria and Trafigura. Gas purchases, whether rightly or wrongly, are increasingly seen by governments as an acceptable halfway house between sustainability and security in energy supply, with LNG now coined a transitional fuel.

Cooling market conditions

In 2024, the industry dynamics have evidently changed. Market conditions are no longer overheated and consequently demand for commodity finance has fallen away somewhat. Over time, supply chains have been rerouted and energy sources have been found.

What started as a solution to critical commodity demands has since become a useful tool for developing export-import strategies.

The ECA-trader relationship can be just as effective for countries looking to directly increase their commodity exports. US Exim and Saudi Exim have both signed deals with Trafigura in the past year to increase procurements and connect their producers to Trafigura’s international customers. Abu Dhabi Exports Office (ADEX) has closed deals totalling $235 million with Trafigura and BGN for similar purposes.

Most recently, SACE closed a $500 million deal with Olam Food Ingredients for the import of coffee beans. Italy has a number of strong coffee manufacturing companies - Lavazza, Caffe Borbonne and more besides. While the commodity in question is not critical, the deal supports a Made in Italy strategy that will boost exports in the long-term.

Crucially, no deal has approached the $3 billion Euler Hermes gas deal in size. At $598 million the Vitol-SACE agreement signed in August 2023 marked the largest deal by volume in the months since. Trafigura has secured more than $5 billion in total from ECAs, but they are by far the most active borrower in this space. What’s more, taken in the context of average commodity finance volumes, the ECA-trader product is no more than a drop in the ocean.

According to TXF Intelligence, in 2023 Gunvor closed five separate financing deals with volumes over $1 billion. Mercuria agreed close to $10 billion while Trafigura closed more than $16 billion across seven deals. These credit lines were closed during another year of bumper profits - speaking at the Financial Times Commodities Summit in Lausanne recently, outgoing Trafigura CFO Christophe Salmon remarked that the big trading houses no longer have any urgent demand for capital.

The TXF Perspective

In this context, what role does the ECA-trader deal play? The sentiment in the industry is that there is plenty of appetite on the ECA side if the right incentives are in place. This view is supported by a stable pipeline of deals. In April Trafigura announced yet another agreement, a $560 million deal with JBIC offering direct lending in return for LNG supplies. Japan is particularly vulnerable to volatile energy prices given its dependence on gas imports and this transaction has offered some protection through a long-term procurement deal.

For traders export finance now offers a pocket of liquidity that backs up their existing war chests. It is unlikely that volumes will grow beyond existing levels. The greatest demand will likely emerge in the Middle East, where ECAs are keen to build relationships with traders as a means of diversifying their exports beyond their traditional fossil fuel customers while connecting them with quality materials, critical minerals and suppliers. Beyond this, demand simply does not exist as it did in 2022.

The relationships themselves will likely come in handy in the long-term. If trade fragmentation is set to continue, commodity traders are well-placed to navigate geopolitical uncertainties. There is also every reason to suspect that supply chain disruption will return in future as the impact of climate change is felt. Future demand for ECA financing cannot be discounted.

It is also worth noting some of the wider commentary around the commodities business. Pricing on ECA facilities has always been described as attractive. Traders reaped enormous profits off the back of an energy crisis that materially impacted living standards across Europe. To some it will be a matter of frustration that government subsidies are still being funnelled towards commodity houses to help fix the dislocation that they are benefitting from.

The US Justice Department’s recent investigation into corrupt practices in Latin America has also shone a light on a ‘brown envelope’ culture that raises concerns around the traders’ relationships with government.

There is room for growth in this space if ECAs are willing to accommodate some of the smaller players in the industry. For those unable to compete with the largest trading houses, a new source of financing would represent a lifeline as banks continue their flight to size and credit quality. While this is a possibility, for now it is a faint one – the larger traders have the logistical capacity and due diligence procedures to incentivise ECA involvement.

The ECA-trader deal has certainly earned its place in the export finance furniture and will remain a steady source of funding. Its long-term future, however, is less certain.