Export credit agencies have learned to live with adversity: just a few years ago many observers, including some self-doubting agency officials themselves, were predicting their inevitable demise. Except they did not die; instead, they carved out a role for themselves that has since seen them evolve into some of the most commercially-minded of public sector players, in some cases zealously taking on arranging roles for big-ticket deals.

But if all this commercial positioning seems at odds with the spirit of governmental organizations, which are bound by public scrutiny - not to mention bureaucracy, the fact remains that at the end of the day they are controlled by their respective governments, which decide who they are, and what they can do. Moreover, in practical terms ECAs worldwide are also still constrained by complex procurement rules that govern their ability to raise money.

What is more, they are often viewed as lacking the agility and pace of their private sector counterparts. With sponsors painfully aware, possibly now more than ever, that time means money, some still argue that the added complexity agencies bring to deals could well mean just another headache for company finance directors.

"Are they able to analyze commercial risk? Some would argue no," snaps a German project financier.

Changing roles

Yet for all their baggage, the bilateral agencies have started to pull their weight in the last couple of years, and - defying their detractors - have now become an inexorable feature of most big-ticket deals, especially in emerging markets. And what they bring to the table in terms of guarantee provision for risky deals could arguably offset any concerns about their swiftness.

"The psychology has changed," notes an executive in a European project finance bank. "It's more of a plus [to have ECA's on board]. It probably makes our lives slightly easier in difficult markets," he says.

"Sponsors would like things generally to move more quickly. But markets are tougher now. We're still all government institutions and we have certain procedures," says Barbara O'Boyle, head of project finance at US Ex-Im. But the agency has spent the last few years trying to act more commercially, she points out.

But it is not just US Ex-Im that is evolving its approach to project and export finance deals. Generally speaking, this new attitude is borne out in many ways, depending on the agency. At one end of the spectrum sits Canadian export credit agency EDC, widely viewed as the most nimble and commercially oriented of the agencies. At the other end sits groups like Japan Bank for International Cooperation (JBIC), the Japanese agency, which takes an arguably less commercially oriented view on its projects, but, with its strong government backing, is still fiercely competitive.

But the point is that agencies are being ever more driven by competition for the bottom dollar. In a sense, this is nothing new. But it is the candour with which this is happening that is noteworthy. "ECAs are very sensitive to this competition, and they should be: they're in business. Fundamentally, it's a mercantilist approach. This is an economic philosophy that has negative connotations, but the reality is that increased competition is inevitable -  and even desirable," says a project finance lawyer close to the market.

At the same time, ECAs are being forced to temper such supposed competitive streaks to cooperate with one other with increasing frequency. Large and complex projects invariably need more than one ECA on board. Deals like Nanhai in China - which witnessed tremendous ECA cover from 5 agencies in what was Asia's largest deal - suggest that their relevance is far from over.

From a total debt package of $2.677 billion, $400 million of the offshore debt is being sourced from the five agencies: US Ex-Im, GERLING NCM, Hermes, JBIC and Nippon Export and Investment Insurance (NEXI).

That deal went for the standard multisourced approach: an equity component equal to 40% of the total project cost and a debt financing comprising $1.977 billion (equivalent) from domestic banks (including senior secured RMB and US$ base and standby debt facilities) and $700 million in offshore financing from eight international commercial banks.

A source close to the deal points out that offshore debt was not even strictly necessary on the deal: "This deal was really a one off. It was the choice of the sponsors to share the risk and not be hand in hand with only Chinese counterparties, and so they mixed ECAs with local financing."

Matching different lending policies

Still, close cooperation between ECAs is seen as one of the most effective ways to approach big ticket deals in difficult markets. Perhaps the most striking recent example of this was Vietnam's Phu My 3 power deal - it called for the development of a complete intercreditor document template for its multilateral and ECA support from JBIC, ADB, MIGA and NEXI.

The deal - backing the construction of a 717MW combined cycle gas turbine plant - includes political risk coverage, up to 97.5% by NEXI. It also marked the first time ADB has extended its guarantee without a counter-guarantee from the Vietnamese government. Another first: MIGA provided political risk insurance on the interest rate hedging.

In a display of newfound unity, this is the first deal in which all four institutions have participated together. Given the divergent lending policies and aims of each institution, the negotiations are understood to have been particularly complex. But more often than not, such an approach is becoming the norm, rather than the exception.

But still, there are considerable difficulties involved for the lead agency in the case of very large multisourcing transaction.

"There's no question it makes it more difficult and cumbersome," admits O'Boyle. But, she says, "sponsors have to make a decision. On Nanhai for example they wanted cover from a lot of countries, so having a wide range of umbrella cover from ECAs made sense. Of course it doesn't always make sense."

"Maybe there's more complexity, but some would call it challenge in the structuring," notes a German project financier.

Broadly speaking ECAs are cut from a similar cloth as their multilateral peers - both fulfill the role of backing private sector investments where commercial counterparties need extra support; they fill the gap, so to speak, in sectors which require vast amounts of capital - such as oil and gas and petrochemicals - or in developing markets with higher risk premiums.

ECA flexibility

The question is why sponsors should prefer ECA support; or, put another way, how is it that ECAs now tend to pick up so much of the slack, as the profusion of recent ECA-backed dealflow might suggest?

"The conventional wisdom is that multilaterals are portentous, labyrinthine organizations," says a partner at an international law firm, heavily involved in ECA deals. "The difference is that ECAs provide flexibility - flexibility, speed and ability to participate with commercial banks. It's just easier. People see ECAs as more of commercial lenders than governmental organs, and are therefore more likely to go for more market oriented institutions."

So, on this view, the perception of ECAs as lumbering monoliths is changing. In fact, suggests the lawyer, despite their public sector constraints, ECAs are responding to the demands of the market, and actively fighting to remain relevant.

EDC is good example of an agency that is in many respects paving the way for its industry peers. "We made a decision a while back that the role we're going to play in project finance is to mobilize capital, rather than being only a provider of risk capacity," says Derek Layne, Head of Project Finance at EDC. "Ours is a model of trying to create capital, an arranger of risk capacity in partnership with the commercial banks and the private political risk insurance market." He believes that "development models that see commercial banks providing funds but ECAs retaining almost all the risks may prove to be unsustainable in the long run." With many governments finding their coffers squeezed, it is a model that makes sense.

"Our other colleagues are finding that more and more they need to take a commercial view to mobilize capital more effectively," he adds.

Multi-product approach

EDC has pioneered the multi-product offering. For example its $600 million deal in December 2001 backing the sponsors of the 1,060MW La Rosita power plant in Baja California, Mexico. The project involved both lending and political risk from EDC. The agency also acted as lead arranger. The so-called 'multi-product model' helped maximize the participation of the banking and PRI markets.

How far the other agencies have gone in this regard is an open question. Says one market participant, "they're not there yet. It's a work in progress at best."

To this extent, JBIC is a good example of an agency that relies heavily on support from the Japanese government. "They're definitely viewed as less of a market-oriented player than other agencies," says a lawyer familiar with JBIC. The agency has been involved in a number of high profile, big-ticket debt projects, with loan commitments running as high as $190 million per project.

On the whole, JBIC loan commitments are increasing in parallel with current market conditions. Whereas JBIC used to lend an average of 30%-50% of debt with a maximum of 60% - the maximum has become the norm. And JBIC is not only being asked to lend more, but take on riskier lending. As a result, the agency even upped its pricing, to almost match commercial bank margins.

With demand on the bank increasing, JBIC, like many of its peers, is increasingly looking at multi-sourced financing. But some market observers are questioning the sustainability of JBIC's approach. "How do you put $4 billion into a deal and hold it for 15 years? It certainly goes counter to any credit philosophy," says a US-based project financier.

Sakhalin and BTC

Despite such scepticism, the agency is positioning itself for a prime spot in growth markets for project finance: the Middle East, Russia and China. "Just look at the deals going on today - they're everywhere: Sakhalin, Dolphin, Nanhai," says the source. "When you see the market you clearly see that JBIC is providing large amounts, and they're holding it."

The agency is indeed working on the $10 billion Sakhalin II oil and gas development in Russia - set to be the world's largest ever project financing. The deal also involves a team of ECAs - and, as such, a great deal of complexity. The financing will bring on board ECGD, US Ex-Im and SACE as well as JBIC, giving the relative comfort of shared exposure on a risky project.

Sakhalin II is expected to lead the way in Russian liquefied natural gas (LNG) production and open up the Far Eastern market, though the success of the project ultimately hinges on the growth of the far eastern LNG markets

Sponsors on the project are Chiyoda Corporation, Tokyo Engineering Corporation, Nipigas and Khimenergo.

The LNG sector is an increasingly important focus for ECAs, even though there are few deals likely to come to market in the near term. Of those that do come to market, the most important will be to finance the multi-billion-dollar Tangguh LNG venture.

The schedule for the project is understood to be threatened by the Sakhalin project, which is likely to come to the market in the next few months, before Tangguh is ready.

More importantly, Sakhalin has a lead over Tangguh in securing sales contracts, including in Asia. Tangguh's sponsors (BP, Mitsubishi/Inpex, Nippon oil, Kanematsu and LNG Japan) will want to sell into the Asian market first, before they approach European and North American buyers, since supplying European and North America entails higher shipping costs and a longer shipping cycle, and is a less profitable prospect.

Of the big deals coming to the market with major ECA backing, perhaps none has been bogged down with as much controversy as the BP-led Baku Tbilisi Ceyhan (BTC) oil pipeline project. Much of the controversy revolved around environmental and social concerns raised by the project - some of which, according the more vocal NGOs, still persist.

But such criticism aside, the deal is notable for its substantial bilateral backing: the deal comprised 6 ECA backed loans. Financing was made up of $1.2 billion in syndicated debt, which was launched to banks recently. ABN Amro, Citigroup, SG and Mizuho are joint bookrunners.

Total project cost is $3.4 billion project and funds both upstream expansion of the AGC field in Azebaijan and the pipeline itself.

US Exim putting up $150 million, Nexi $120 million, the ECGD, Coface and Hermes contributing $100 million to $150 million, and Sace $50 million.

Aside from the ECA- backed loans; the deal includes 12-year A loans from IFC and EBRD; 10-year B loans from EBRD and IFC, a 10-year Opic loan, a $180 million JBIC tranche and $1 billion in equity.

Pricing on the ECA loans is dependent on cover: US Exim and and ECGD are providing 100% cover; Nexi is providing 97.5% political and 95% commercial; Sace the same cover at 95% and 90% respectively; Hermes and Coface 95% commercial and political. Opic is only offering 100% political insurance. B loan pricing starts at 225 bp ratcheting up post construction to 270bp.

The project is backed by pre-completion guarantees from the sponsors and a debt service undertaking when the pipeline opens.

"This is a deal where you clearly have all the major ECAs involved," explains Marie-Laure Mazaud, head of project finance at Coface. "It's been done in the same spirit as Chad Cameroon but with a different structure."

Financial competition healthy?

All these examples demonstrate the growing prominence of multisourcing and ECA backed financing for heavily capital-intensive projects in challenging markets. But they also underscore another fact which is at the heart of the growing debate over agencies' respective market orientations: all ECAs are inescapably essentially competing against each other, despite OECD guidelines that they provide the same terms. "The idea is that competition should take place on technical terms, not financial terms - but this tends not to be the case," says one agency insider. "The philosophy is that we should not compete on financial terms, but the way sponsors are approaching deals, this is very difficult to avoid."

The source continues: "It's not the intention of ECAs to do this but the market makes us compete. The sponsors want the best price and they want to limit the number of ECAs. They also want to make sure that if they get an ECA on board they'll be able to execute in the time frame necessary."

"Still, at the end of the day, I would say it's more about competition of management skills within each organization," the source adds.

Notes Rajesh Sharma, Director - Energy Project Finance: "At a general working level you still have to be aware that the developer community out there is concerned about time and cost issues associated in dealing with ECAs. EDC tries to be responsive to these issues."

These examples would also suggest that ECAs are becoming indispensable for such deals. But another reason for ECAs renewed prominence is actually much more prosaic. On the one hand, a lack of private capacity is spurring greater public support. "Private political risk insurers are really hurting. Lloyd's has contracted anywhere up to 50%. You say Guinea to them and they say goodbye,"says Gerald West at MIGA. "That's where the multilateral and bilaterals have proved their countercyclical role."

At the same time, the impact of the Basel II has also brought multilateral and ECA financing to the fore. Basel II has in effect repositioned ECAs role in the credit risk market and, in a sense, enhanced their role where they remain relevant. The new accords also affect ECAs when it comes to determining when zero weighting applies. The new accord allows national supervisors to decide if guarantees should qualify for capital relief

Plugging Basel II gap

Under the higher capital requirements demanded by Basel II, banks in the industrialized world will have to make increased provisions for loans to their counterparts in emerging markets.

"It comes down to where the project finance banks are," says Sharma. "A number of well-known arranging banks have pulled out of the project financing business and as a result the number of arranging banks has shrunk. ECAs will need to work alongside banks to effectively plug this gap. In addition, ECAs are better equipped than the banks to handle political risks associated in dealing with tougher markets, as such the role of ECAs is likely to remain important in the world of project finance."

Looking at the market more generally, project finance activity has slowed down worldwide, with the exception of pockets of activity in Middle East and China petrochemicals

"The fact is that people have become more risk aware," says a German project financier. "This is due to the fact that a lot of things have gone wrong in the last few years, including Basel II."

Another factor driving the prominence of the agencies is the reduced availability of long-term investment insurance from some of the private players. This has lead to a lot or reinsurance and co-insurance agreements with ECAs

The trend is to say that ECAs have their role back because only a handful of private insurers can offer investors substantial capacity for tenors in excess of five years.

"There has certainly been increased demand for PRI cover [from ECAs] over the last couple of years, but this phenomenon has almost run its course. The PRI market is back, back very strongly," says Michael Clarey at EFIC. "As far as PRI is concerened, ECAs dominance has diminished somewhat because the private players have come back to the market."

For EFIC, that has meant that the agency has been increasingly keen on taking funding risks on projects. "But in the longterm project market, ECAs will play an ever more useful role since the larger banks are much less interested in lending against project risk than before, as evidenced by the departures of JPMorgan and Bank of America," says Clarey.

As for the agency's commercial approach, Clarey is clear: "It's very clear that our shareholders wanted us to fulfill a gap role. There's no incentive for us to take on a private sector role. We provide financing where the private sector cannot. In fact, we operate on a commercial basis that at times even puts us at a disadvantage vis a vis our counterparts [who are actively funded by their governments]," he adds.

Nevertheless, in the broader scheme, general ECA competitiveness will always remain irreducibly constrained. As one project finance lawyers puts it: "The real issue is that they [ECAs] will never be on the same playing field [as commercial lenders]. They are just not as fleet of foot." The question is whether governments will ever allow them to be so.