ECAs can lead liquidity search
Export credit agencies, once the stalwarts of international project finance, are expected to re-emerge as the search for liquidity in the capital markets intensifies into 2009. The aims and ambitions of each agency have therefore become important sources of study. By Rod Morrison.
Moving into 2009, it is likely that mega projects in the Gulf will require the whole range of funding sources. ECAs can now re-emerge as important players in providing liquidity to the projects market, but since they were last predominant in the mid-1990s the ECA market has changed. The OECD consensus governing these multilaterals is still in place but many agencies now adopt more flexible interpretations of the agreement. They now offer substantial direct loans to projects – some untied to any equipment sourcing. And on the traditional insured product ECAs are more flexible on what constitutes locally sourced equipment.
ECA finance does not necessarily come cheap. While the direct loans are usually very competitive, margins on the insured products have rocketed this year. Deals transacted in 2007 with low margins on the ECA tranches – 20bp to 25bp – found that the ECA tranches simply did not sell in syndication in 2008. These margins are now nearer 100bp plus the insurance premium.
Sace – The Italian ECA has become one of the more visible agencies operating in the region due to the introduction and marketing of its new untied product. This allows Sace to provide 100% guarantees on project loans to deals where there is no direct Italian equipment content if there is deemed to be a national strategic interest.
The definition of national strategic interest is not said to be tightly defined but it is believed to be linked to customers where Italian firms have good ongoing relationships. Given that Italian EPC contractors such as Technip Italia, Saipem, Snamprogetti and Danieli have healthy workloads and that the country has a leading role in the speciality steel industry, meeting the national interest criteria should not be a problem.
Qatar Petroleum (QP) was one of the first customers in the region to utilise the new programme. It was actually marketed by Sace under the new programme. The first deal transacted with QP by Sace was to provide a guarantee on US$500m of the US$1.6bn Qafco 5 fertiliser loan late year. This loan was a pre-crunch deal priced at 55bp to 65bp over 10 years, with a 70% bullet. However, Qafco is already a strong company with good cashflows and is rated A+. The second QP/Sace deal was transacted this summer, the US$3bn Ras Laffan C independent water and power project (IWPP). Sace provided guarantees of US$300m on the US$3bn deal.
Another customer benefiting is Sabic. Sace provide guarantees on US$500m towards the US$2bn of ECA funding required on this year's Kayan deal (see separate case study in this report). But not only that, the agency played an important leadership role. Nine agencies were invited into the deal.
The preliminary discussions on the deal came to end when Sace simply offered US$500m untied – which is said to have stunned the other agencies. ECGD, KEIC and Kexim were the eventual partners on the scheme. The deal was finalised late last year and then signed this summer. Sace had already provided US$500m towards Sabic's Yansab deal in 2006. Looking forward, Sace is said to be in the ECA group – alongside JBIC, KEIC and Kexim – for the US$12bn-plus Total/Aramco refinery scheme at Jubail.
The Sace product is said to be priced at just below equivalent uncovered commercial bank loan pricing. So it is not one of the cheaper options but it is readily available. In addition, the Sace team is now said to be competent and professional with good communication skills, not always a forte of the agencies in the past. Former project financier Alessandro Castellano is now chief executive officer (CEO) of the agency. He used to work at Morgan Grenfell in London, from which ECGD CEO Patrick Crawford also hails. Castellano then went on to Mediocredito and into Sace.
One of the agency's defining slogans is "Made by Italy", as opposed to "Made in Italy". Sourcing equipment for exporting countries was the main aim behind setting up the agencies in the first place. All agencies had a nominal 85% of content that needed to be provided by the equipment supplier before a credit guarantee could be provided. That rule is now very much open to flexible interpretation. The least flexible agency is said to be US Ex-Im.
US Ex-Im – The US agency has the power to be one of the main players in the project finance arena but its opportunities have been limited. This limitation is mainly imposed by the US Congress, which is against what are perceived to be corporate welfare programmes. Therefore, US Ex-Im has less flexibility on the 85% rule than most.
As an example, the agency was an early runner in the Kayan project – particularly given that KBR won an initial US$1bn contract on the scheme. But the contract was sourced from Asia and as a result the agency could not find the US goods and services required to meet the US$500m per agency target. US Ex-Im then had to drop out.
However, once US Ex-Im has justified its involvement it can play a significant role in any scheme. It has no limits on its participation. As one adviser said, if you can find US content worth US$5bn in a project, Ex-Im can provide US$5bn of cover. It offers full 100% guarantees on both its direct loan and insurance product. One recent deal was to provide US$590m towards the National Chevron Phillips (NCP) financing in Saudi Arabia last year.
Ex-Im officials are said to be expecting a big uptick in interest in US Ex-Im products, given the slowdown in the capital markets – although the uptick has yet to occur. However, with two big US-sponsored Aramco joint venture deals coming up in Saudi Arabia, US Ex-Im will at least be invited to the table. The project finance team is headed by Barbara Boyle.
Not faring so well in US multilateral circles is Opic, the agency that can provide support to US project sponsors. Ex-Im, of course, backs equipment suppliers. President Bush has not signed Opic's reauthorisation, which was due last year, but the agency still exists and will be keenly awaiting a new president.
ECGD – One agency that did get into the Kayan deal was the UK's ECGD – which is perhaps a surprise as it managed to provide US$500m of guarantees. The UK manufacturing base is not what it was, a decline accelerated since New Labour came to power in 1997. And ECGD has never been used as a tool of government policy as some other ECAs have.
Therefore, ECGD has dropped down the ECA pecking order. But on Kayan it was helped by US contractor Fluor, which did its work from Camberley, and by the involvement of Teesside-based Simon Carves, which is now owned by Punj Lloyd of India, ABB and Angus Fire. Most of ECGD's business now relates to arms sales, at 80%, but the Kayan deal shows it can still play a role.
Coface – The French agency is said to have a very traditional stance on project finance but nevertheless it has made some reforms. Its big deal this year was Yemen LNG, where it covered US$423m under the traditional ECA 95/95 political and commercial risk programme. The credits backed the involvement of Technip in the scheme.
However, the agency has now reinvigorated an existing programme to provide backing to project sponsors, as opposed to contractors. It has lessened the overly strict criteria on the programme to make it more attractive. In addition, the reformed programme goes further than standard political risk cover by covering contract frustration by host governments.
JBIC/Nexi – The Japanese have been the mainstay of the multilaterals operating in the region – even during the boom times. JBIC's natural resource loan programme and overseas investment loan (OIL) programme have provided very cheap and large direct loans to projects, and this will continue. The direct loans can be provided to projects when a Japanese company is a shareholder, sponsor or offtaker in a project. There have been many examples of JBIC utilising the product, the most recent being providing half the US$3bn debt required on the Ras Laffan C IWPP this summer.
The more traditional JBIC ECA style programme is provided in joint venture with Nexi. JBIC will provide 60% of the JBIC-Nexi facility while Nexi will provide 40% – as occurred on Yemen LNG when the two put in a US$200m tranche. JBIC and Nexi work closely together as they come under the same ministry back home.
JBIC is currently being reorganised, and by October it will be merged into a bigger institution called Japan Finance Corp. JBIC will, however, retain its name for its overseas activities. The Middle East region is overseen by International Finance Department 2 under the new organisation. It is headed by director general Toshiro Machii and deputy director general is Kentaro Tsuboi, who is the chairman of the PF committee of the bank. It has two divisions – Division 1, headed by Masayuki Tanimoto, focuses on natural resources while Division 2, headed by Tetsuya Oura, covers petrochemical and infrastructure projects.
Kexim/KEIC – There is more competitive tension between these two South Korean agencies as they fall under different ministries. Kexim provides a range of services, akin to JBIC, while KEIC provide the more traditional ECA style products, akin to Nexi. On Yemen LNG, Kexim provided US$400m split between a US$240m direct loan and a US$160m 100% insured tranche. The mix between the direct loan and insured portion can vary, depending on the project, from 50% for the direct loan to 100%.
On the US$1.5bn Qatar General Transport Company (QGTC) LNG ship financing, KEIC provided a US$450m ECA guarantee on part of the loan. The two agencies came together on the Ma'aden financing – Kexim provided a 100% direct loan alongside Saudi soft loan institutions PIF and SIDF in a US$2bn tranche, while KEIC insured U$200m of the US$2bn commercial bank facility.
Kew-hyuk Byun heads the Kexim PF department. Under him are four teams: team one, headed by In-seong Bae, is in charge of oil and gas and refineries in Asia and America; Team 2, headed by Hwan-joon Yang, covers the petrochemical sector and refineries in the Middle East, Europe and Africa; Team 3, headed by Kyu-yeol Cho, is responsible for water, steel, transport and the power sector in the Middle East and Africa; and the final Team 4 of Yong-mong Kim is in charge of IT, infrastructure, the power sector for Asia, the Americas and others.