Pounds, politics or sense
Sponsors want change. Bankers want change. Even the ECAs want
change. But opinions on how to make more effective use of ECAs and
whether politics should take a backseat to commercialism are as
diverse as ECAs themselves.
The gulf between approaches taken by export credit agencies (ECAs) is widening and project finance deals done by a number of export credit agencies in the first half of 1999 reveal very different approaches. Canada's Export Development Corporation (EDC) is leading the pack among those agencies adopting a commercial approach. Others, such as US Exim, have been less responsive to such trends (see boxes). And others ? notably Coface ? are entrenched in conservatism.
Says Laurent Devin, vice-president in project finance at Banque Nationale de Paris in London: ?Different export credit agencies have different behaviour. Some of them are quite clever in assessing the project risks. UK's ECGD is an example of that and Italy's Sace, despite being smaller, is working along those lines. Conversely, France's Coface is very conservative and not willing to look at projects where governments are not at the front.
?Inevitably there is a strong relation between governments and agencies: the former makes recourse to the latter. This makes it impossible for agencies to play a commercial banking role despite the option of direct lending.?
But sponsors and financiers recognize that agencies are becoming more pragmatic and less political. A senior financial officer working for a London-based sponsor remarks: ?Export credit agencies are slowly but surely becoming more commercially oriented and more apt to meet time frameworks. Agencies are further up the learning curve than private insurance companies.? One Italy-based project finance manager explains: ?Export credit agencies are becoming more aggressive. Enormous progress has been made to satisfy the needs of the sponsors and become more open to their requests. The situation is completely different to what it used to be 10 years ago.?
Repayment periods have lengthened and political risk coverage extended. In September 1998 agencies from participant countries to the Organization for Economic Co-operation and Development (OECD) including the US, Canada, the EU and Japan agreed to modify rules affecting guarantees given by agencies. This meant an extension of the repayment period to a maximum of 14 years with up to 2 years grace period but with an average repayment life not exceeding 7.25 years.
This makes life much easier for sponsors and makes export credit agencies more attractive.
There is no way most private insurers can match that. The maximum they can achieve is a period of 4 to 7 years. Conversely, some private insurers such as US' Sovereign and Zurich have extended their maximum tenor close to the ones offered by the main export credit agencies (see Project Finance, September 1999).
Tenors aside, a major headache for sponsors is having to sit at two different negotiating tables when projects reach financing. One table is shared with the commercial banks and the other with the agencies. This process is regarded as both too time-consuming and expensive for both sponsors and commercial lenders. Says one financier: ?It would be better if commercial banks and agencies sat together. It would save sponsors' legal costs and deals could close more quickly.?
No-one disputes the importance of ECA support but some ECAs are more useful than others.
According to Stephane Lebeau, manager in structured finance at Electricité de France (EdF) in Paris: ?The crisis in emerging markets, such as south-east Asia and Latin America, over the last two years has taught sponsors a lesson. Extended political risk cover is needed and only export credit agencies can offer that. By extended political risk cover I mean covering obligations undertaken by governments on state utilities' tariffs. But few agencies offer that ? for those that do there is a bright future.?
But even at the best ECAs, sponsors want more changes to better the economics on deals.
?The risk premium sponsors pay to agencies is very expensive and the when a sponsor is looking at the overall costs a project implies, risk premiums feature highly. In countries such as Vietnam and Laos premia between 15% and 20% are expected. A further issue that should be tackled is the duplication of work sponsors need to do when submitting due diligence to commercial banks and agencies. Agencies such as US Exim require sponsors to have both external financial advisers, which can be expensive. Others such as France's Coface rely on due diligence done by lead arrangers. It will be a nightmare if sponsors are unable to harmonize due diligence. What we need is also a review of the September 1998 OECD agreement. Longer repayment schedules are needed,? adds Lebeau.
Says Stefan Gerig, senior vice-president at ABB Structured Finance in Zurich: ?In emerging markets the involvement of an agency is a must. Private insurers cannot offer the same and require more expensive fees.? Gerig is clear on the difference between commercial lenders and export credit agencies: ?It would be a distortion of the market if export credit agencies would become direct lenders without submitting themselves to market criteria. That would set an unwanted precedent for commercial lenders. The main problem with the agencies is their sometimes bureaucratic approach to deals and the extensive due diligence that sponsors need to submit to them before approval.?
Moments of crisis in the market emphasize the ECA role. ?I hope rationality will return to the market: you just do not do deals in countries with BB ratings without the support of the agencies. The emerging market has been depressed in the last couple of years but there is hope for the year 2000?, Gerig concludes.
Standardization is the message to agencies according to Mikael Karlsson, vice-president, Middle East & Africa at ABB Energy Ventures in Zurich: ?All agencies are trying to be commercially oriented and they do have a distinct role to fulfil. But changes are needed as well. It would be useful if agencies would draw up some common rules that sponsors and financiers could work with.
More co-ordination would help together with standardized terms and conditions. The absence of it makes negotiations with agencies a very lengthy and expensive process especially when dealing with different ones at the time.?
On the difference between sponsors and private insurers Karlsson is clear: ?At this stage private insurers cannot offer the same as agencies. Large deals with repayment periods in emerging market rule out private insurers.
A power deal in India could be an example of this. But private insurers could play an interesting role in insuring equity finance.
There is scope for insurers to complement the function of agencies. US Exim can offer direct lending in the post-construction period on a fixed interest rate that is agreed at the closing date. This type of lending is very attractive for sponsors and it would be interesting if undertaken by other agencies and extended to the pre-construction period as well. Credit risk should also be covered under the political risk insurance offered by the agencies. The case of governments failing to comply with power purchase agreements underwrote by state utilities with project sponsors is a clear case where such insurance would be needed. At this stage most agencies, including US Exim, fails to offer that to sponsors.?
Export credit agencies behaving like commercial lenders, is something that banks do not welcome. Says Delphine Queniart, vice-president in project finance at Société Generale in Paris: ?The option of using private insurers is less proven and reliable.
There is no point in export credit agencies offering commercial risk since banks know more about it.
Risk premiums to be paid to export credit agencies can be very expensive: in countries such as Laos and Vietnam premiums can be as high as 20%. It is something that needs to be looked at when considering the overall cost of the project. A key issue is harmonization of due diligence that both banks and sponsors need to submit to agencies. It will be a nightmare if no progress is being made in that direction. While some agencies, such as France's Coface, rely on due diligence by lead arrangers, others, such as US Exim, do require external advisers. What is really needed is extended political risk. By that I mean cover of any kind of obligations undertaken by public entities.?
Some agencies are meeting sponsors' demands for more standardized rules. The one-stop-shop arrangement is one example of that. It takes place when a number of different agencies are involved in one project meaning that the agency with the largest share of the deal takes a lead role making the sponsor negotiates one single agreement to be valid for all the agencies involved in the deal.
This arrangement was launched by UK's ECGD in 1995. Since then ECGD has negotiated agreements with a number of agencies such France's Coface, Belgium's OND, Canada's EDC and Japan's Jexim. Italy's Sace is expected to sign a co-operation agreement with ECGD within the next two months. Says Philip Curry, managing director of Bechtel Enterprises in London: ?The one-stop-shop arrangement is an interesting option to make deals more viable.
Export credit agencies are growing up.
The window to access capital markets can open and close. Using an agency's guarantee can help that when capital markets are not available. I prefer agencies to play a role in guaranteeing rather than lending in order to leverage commercial banks. But in countries where premium quotas are over 20% it becomes very difficult for sponsors to meet the agency's requirements. I would be happy with more flexibility from the agencies' side.?
An example of flexibility is the idea of implementing tailor made solutions that agencies can work out with sponsors in specific deals. The notion of being able to negotiate the repayment schedules according to annual revenues from the project is the concept behind it. And that is very attractive and responsive to developers' needs. Says Sven De Smet, adviser in project finance at Tractebel in Brussels: ?My experience with France's Coface has been a positive one.
Financing of the $55 million expansion of Manah power plant in Oman is going to be the first project finance deal to be done on a tailor made repayment scheme.?
The crisis that hit emerging markets in Asia, Eastern Europe and Latin America over the last two years has made developers aware of risks and potential failures that nobody can afford to repeat. No sponsor, financier or agency would like to replay nightmare scenarios like the ones affecting power projects in Pakistan (see Project Finance, May 1999).
Whether this will mean more cooperation by the different parties at the negotiating table is not clear. Demand for cover on behalf of commercially minded agencies is still strong.
Despite the growing competition from private insurers, the limited experience that sponsors have with them still plays in favour of agencies.
Similarly, as traditional project finance markets deregulate ? notably power ? ECAs may become involved in backing deals into first tier markets. Like US Exim and the European ECAs in their backing for Boeing and Airbus exports respectively, the ECGD does not rule out backing UK power players in their bid to break into deregulated European power markets as the compertition for market share across the continent intensifies.
Whether agencies will be able to strengthen their positions in the project finance market ? be given the budgets to do so and find ways of better using them ? and back their exporters and developers will depend on their ability to put politics in the bottom drawer and lure sponsors and financiers with flexibility, low premiums, long-term repayment schedules and extended political risk coverage.
Easier said than done.
EDC leads the way
Canada's export credit agency is set to achieve a record year. In the first half of 1999 the Ottawa-based Export Development Corporation (EDC) underwrote 17 project finance deals for a total value of $630 million. Says Sandy Reid, head of project finance at the EDC: ?There is great demand for agencies that have a commercial approach.?
EDC's project finance unit has been operational since 1995 and in 1998 it merged with the structured finance division that is now headed by Peter Hepburn. Sandy Reid heads the project finance division that employs 16 people.
In 1999 the EDC has been busy funding a number of projects across Europe, the Middle East, North Africa and the Americas. Key projects for the EDC have been the financing of the Q-Chem $850 million petrochemical project in Qatar, the Sidi Krir $500 million power plant in Egypt and the $2.260 billion Antamina mining project in Peru.
EDC has funded 14 other project financings since the beginning of the year. Those include seven telecom projects in Romania, the Slovak Republic, the Netherlands, the UK, Ireland, France and Spain. Other projects include the Merchant Co-Gen power plant in the US and the Profertil $640 million petrochemical plant in Argentina.
The target for 1999 is to achieve a figure of $1.4 billion worth of project finance deals.
Telecoms is a sector that together with power and oil & gas attract most of EDC's financing.
The countries where Canadian exporters are mostly active and where EDC offers them support are in the Americas, Europe and the US. Over the last tow years EDC has been avoiding the Asian market where conditions are still far from idealistic due to high risk and lack of interests on behalf of Canadian exporters, says Reid.
Reid values the role of export credit agencies in markets where there is limited capital availability on behalf of commercial private entities and where there is high political risk. EDC can also function as arranger for political risk insurance. Reid refers to the EDC as ?known party in the project finance community and being reckoned as such.?
The last deal to be underwritten by the EDC is the $850 million Q-Chem plant in Qatar (see Project Finance, August 1999). Q-Chem is the largest project finance deal to be signed in the Gulf region this year and represents renewed confidence by international financiers in Qatar after a downturn in the last quarter of 1998.
Sponsor of Q-Chem is a venture between Qatar General Petroleum and US' Phillips Petroleum.
A consortium of 24 banks has arranged the deal that was signed on August 27 in London. Says Sandy Reid: ?The large arranging group shows a move away from the past to reduce risk and to raise more capital.?
EDC has also participated in the financing of the $500 million Sidi Krir power project in Egypt. Sidi Krir, one of Egypt's largest private infrastructure investment, involves the construction of a 2x325MW thermal power plant near Alexandria (see Project Finance, May 1999). US' InterGen, local First Arabian Development and Kato Investment are the sponsors.
In Peru EDC supported Canada's companies Noranda, Rio Algom and Teck Corporation in the Antamina project providing $135 million worth of financing. EDC played a double role as both arranger for the financing and political risk insurer.
Consensus among sponsors is that EDC is the most receptive to the needs of the market.
With smaller size financing but a bigger number of deals signed, as compared to other export credit agencies highlighted in this survey, EDC keeps the door open for the demands of Canadian sponsors.
US Exim sees more coming through
Asked to compare the agency's performances in 1998 and 1999 Barbara O'Boyle, vice-president and head of project finance at the Export-Import Bank of the United States (US Exim) in Washington, talks about the difference between night and day. Translated that means in 1998 no project finance deals were submitted for approval to the agency's board of directors.
This year nine deals are under consideration but none have been approved yet.
This is a far cry from the agency's best performance to date when the US Exim underwrote financing worth $2.6 billion in 1997. But ?there has been a big influx of applications in the last nine months?, O'Boyle adds.
The agency's project finance division was established five years ago and since then 26 deals have been funded for a total of $6.5 billion. The next deal for US Exim is the financing of the $1.4 billion Madero oil refinery project in Mexico. O'Boyle expects to obtain approval to go ahead from the board of directors by the end of the third quarter of 1999.
Following the US government's effort to strengthen relations with a number of sub-Saharan countries such as South Africa, Senegal, Ghana and Uganda, a key project is the $3.5 billion oilfield development in Chad and related 1,050km oil pipeline to neighbouring Cameroon. Project sponsors are US' Exxon, Shell and France's Elf Aquitaine.
Exxon will be the operator. An environmental study of the project is underway and both Exim and the World Bank are looking at involvement.
Barbara O'Boyle hopes for more deals coming through in the CIS and Turkey, where opportunities in both the oil & gas and power sectors are particularly relevant for US sponsors.
Financing of the TransCaspian undersea gas pipeline from Turkmenistan to Turkey via Azerbaijan and Georgia is high on Exam's interested deals list. US Exim funded a $750,000 feasibility study of the project while an international consortium headed by PSG International is developing the project.
At the end of August 1999 Shell International joined GE Capital and Bechtel in the consortium. O'Boyle comments: ?The US government has indicated an interest in the TransCaspian project but a true assessment cannot be made yet.? As signs of hope begin to emerge in Asia, US Exim hopes business in the region will pick up again.
Compared to the performances by other leading export credit agencies and relative to its size, US Exim has been behind in the number of deals approved. The impact of US government sanctions against India and Pakistan prevented the agency being involved in projects in those countries. Sanctions in those markets were lifted at the beginning of 1999 and there is confidence in larger sums being underwritten in the future.
O'Boyle remains convinced of the necessity of export credit agencies' in emerging markets where ?other financiers do not dare to get involved?. In the year 2000 Exim aims to increase the share of business in the Americas, which represents only 20% of the agency's project finance activities.
A London-based project financier defines US Exim as ?very bureaucratic? and reluctant to get easily involved in deals. The volume of deals at the Washington-based agency does not compare with the ones achieved by its Canadian and Australian counterparts. Canada's Export Development Corporation and Australia's Efic have a more commercial approach to both financiers and sponsors and actively pursue deals in the project finance market. US Exim is faced by more aggressive competitors that by supporting their countries' business abroad will make life more difficult for US sponsors.
ECGD transforms?
The UK export credit agency ECGD is coming to the end of the consultation process in a review that could totally transform the way it works.
The Mission and Status review, which ECGD holds every five years, is carried out by its own staff, but government ministers will review the evidence, and the agency may have a new mission statement by April next year.
The review comes at a crucial time for ECGD.
As the private sector takes on longer tenors and more challenging risk profiles, the review will ask whether the public sector has any role at all in export risk management. It may be that its role will change, shifting the agency towards development projects and programmes for small and medium-sized companies.
Says Vivian Brown, chief executive of ECGD in London: ?There is some latitude about how big the issue is. Five years ago, it was unclear what would become of our status, whether to become another agency.? Now the question is what new activities ECGD can take on to justify its existence without impinging on the private credit insurance market.
The review process has involved sending a questionnaire to its exporters asking which markets and risks UK exporters face, and how far ECGD goes to meeting their requirements.
The fact that ECGD is a government body restricts its activity in many ways, but promotes it in others. Its stated mission at the moment is as follows: ?To help exporters of UK goods and services to win business, and UK forms to invest overseas, by providing guarantees, insurance and reinsurance against loss.? And it must do that within a break-even budget, so that it does not incur loss for the UK taxpayer. That brings a complicated set of criteria for cover. As Brown says: ?We do, by the very nature of our business, operate in the risky end of the market.?
The UK government has an agenda of alleviating debt and poverty in the world's poorest countries and integrating those countries into the international trading community. One conclusion of the report may be that ECGD could do more as part of this effort. Says Brown: ?Perhaps we ought to do more in even riskier markets.? But that in turn would put higher risk on taxpayers' funds. It is exactly this contradiction that the review is tackling.
Although ECGD indirectly helps thousands of small and mid-sized exporters in the UK though its support of large projects, the review assesses whether it should do more to reach those smaller enterprises directly. But Brown denies that such a move would threaten the private sector facilities that are already available. He says: ?There is no sense that we want to compete, but we could maybe help smaller companies exporting capital goods ? goods that require long-term periods of credit. Those exporters should be able to get flexibility and a product range at ECGD.?
And he adds: ?I think that generally, UK firms are not disadvantaged as a result of relying on the private sector. We do not get a stream of complaints saying that private insurers are too expensive, although it can be the case in certain markets. We are very unlikely to go back to the way it was before privatization.?
But to increase the demands on the private sector for taking risks in emerging markets is unrealistic. The fact that ECGD is a public body gives it the long-term view that some markets need. Says Brown: ?We need to recognize that for some markets, we need to be there for the long term. That is in a sense why we are in the public sector. We really can work though feast or famine.?
Sace looks for the new millennium
Sace is a relatively new name among the export credit agencies involved in the project finance community. Says Massimo Pecorari, head of structured finance at Sace in Rome: ?I would like to transform Sace into an Italian Ex-Im bank. Being able to provide Italian exporters with direct lending and insurance would be an interesting challenge. At the moment we have a constraint in the human resources' front.?
Pecorari heads a team of nine people working for the structured finance division that was established in 1997. After a disappointing performance in 1998 with only 3 projects signed for a total of $700 million, Sace needs to do more. In the first half of 1999, Sace did not underwrite any project finance deals and Pecorari admits that only 2 deals will be signed by the end of the year worth $200 million.
But the pipeline for 2000 is full. Sace's target for 2000 is between 6 and 8 project finance deals to be signed for a total of $1.8 billion. Busiest regions for the Italian export credit agency are Middle East & North Africa, Eastern Europe and Latin America where the Italian exporters and contractors have been traditionally active.
In the Eastern Europe region the Blue Stream $2 billion gas pipeline project is the one that will keep Pecorari's team busy for the second part of 1999 and 2000. The project involves the construction of an undersea pipeline for the transfer of Russian gas to Turkey across the deep waters of the Black Sea. A consortium that includes Russia's Gazprom and Italy's Ente Nazionale Idrocarburi is responsible for the development. Sace is working hard for the appointment of both financial and legal advisers on Blue Stream but at the time Project Finance was going to press the likely winner yet to be disclosed.
Mediocredito Centrale, Banca Commerciale Italiana and WestLB arrange the commercial debt. Sace is negotiating with a number of export credit agencies interested in having a role in the project. Those include Japan's Jexim, UK's ECGD and Germany's Hermes. Sace is expected to guarantee funds for the project for a total sum of $800 million. According to Pecorari a decision on Jexim's involvement in the financing of Blue Stream was expected for the first half of October this year.
Sace has also expressed interest in the development of the Ilisu dam in eastern Turkey (see Project Finance, September 1999). The project is under criticism due to the heavy implications on the local natural and social environment (see Project Finance, September 1999). According to Pecorari, Sace has issued a sovereign risk guarantee worth a total of $200 million for Ilisu.
In the Middle East & North Africa region Sace is looking at projects in Oman, Egypt and Jordan. The biggest one is the $1.1 billion Sur fertilizer plant in Oman. A consortium of Indian and Omani companies is responsible for the development. Italy's Snamprogetti is one of the winning contractors together with France's Technip and Greece's Consolidated Contractors International. Arrangers of the commercial debt portion are Arab Banking Corporation, JP Morgan and Banque Nationale de Paris (BNP). Sace is working alongside France's export credit agency Coface with an interest on behalf of UK's ECGD.
At the beginning of 1999 the Sur project was under question due to a change of mind on behalf of the Indian sponsors. At the end of August BNP was able to confirm the commitment of the sponsors to the project and the support given by the Indian government. Both the Omani authorities and Sace welcomed the news and are now fully working on the project.
In Jordan Sace is working with an ABB-led consortium for the development of the $300 million Al Samra power plant. The plant will be developed on a build-operate and transfer agreement and will have a capacity of 350-400MW.
In Argentina Sace wants an involvement in the privatization and 30-year concession of 32 airports that constitute the bulk of the Aeropuertos 2000 project. Its value is $2.1 billion with the Export and Import Bank of the United States having an interest in the financing.
Increasingly Sace is playing a more aggressive role and despite its small size it has a good potential for supporting Italy's industry abroad. Moreover Sace is fighting a battle towards an endorsement of a more commercial approach along the lines of its main international competitors. The challenge is ahead.
Efic waits for Asia to pick up again
Since January 1999 Australia's Export Finance Corporation (Efic) has not signed a project financing. This follows a disappointing performance in 1998 when only three deals for a total of $60 million were signed (see Project Finance, November 1998). The main reason behind this negative trend has been the general downturn of business activities in Asia over the last two years. Says George Bolton, director of project finance at Efic: ?South-east-Asia is traditionally the largest market for Australian exporters and for the agency. Nothing has been happening there over the last two years.?
But with Asian angst dissipating, ?the year 2000 will be good with two or three project finance transactions expected to close?, adds Bolton. ?This year has been already much better due to the significant improvement in the performances of Asian economies. A country to follow closely is the Phillipines?, says Angus Armour, general manager in export and project finance at Efic.
For 1999 the agency has one project in the pipeline. In the second half of the year the Australian export credit agency will sign a $10 million financing for a UK-sponsored sugar refinery project in Vietnam, a country whose economic growth in 1998 has exceeded strong regional neighbours such as Thailand.
To overt the crisis in Asia, Efic has implemented a global approach meaning involvement in project finance deals beyond markets closer to home. Turkey and the Middle East are regions where the agency is planning to increase its activities alongside the ones on behalf of Australian exporters.
In the year 2000 the agency will follow power and port projects both in Turkey and the Gulf region. Says George Bolton: ?Turkey has a great need for international developers and financiers, but it is a country difficult to do business with. Turkish laws regulating the build-operate and transfer agreement do not make life easier for foreign developers and financiers.?
Efic is also looking at Iran with interest.
Australian companies are active in a number of Iranian sectors - mining and oil & gas.
Australia's Broken Hill Proprietary has been negotiating with local National Iranian Gas Company for the development of a $2.7 billion gas pipeline going from south-eastern Iran to neighbouring Pakistan. Bolton is sceptical the agency will play a role before other international financiers will open the way. He says: ?I cannot see project finance transactions happening there in this century.
Maybe in 2001 but I would not like the agency to be the first one involved.?
But it is in a period when difficult market conditions are prevailing that the role of an export credit agency can be most effective and challenge commercial banks in successfully financing projects. Says Bolton: ?Our approach is to participate in the market gap where commercial banks fear to get involved. Efic is not specifically competing with commercial banks but we are interested in commercially viable transactions.?
Efic is looking forward to keep a role in the project finance market both at home and abroad. Efic's biggest project in the pipeline is financing for the $3 billion gas pipeline connecting gas fields in Papua New Guinea to Queensland in north-western Australia.
Once delivered to Australia the gas will feed local power plants.
First gas delivery is expected in 2002 when the project will be operational. Sponsors of the project are Chevron, Merlin Petroleum, Oil Search, Orogen and Petroleum Resources.
Chevron is the operator. The project is making progress and negotiations have taken place between the sponsors and potential offtakers.
In August 1999 an agreement between the Chevron-led consortium and Australia's Ergon Energy secured a 20-year offtake contract.
Financing for the gas pipeline is expected to come to the market in the second half of 2000.
Says Angus Armour: ?Most of the preliminary work has been done. There will be need for political risk insurance and Efic will play a role in the financing of the project.? Among others ABN Amro is understood to be bidding for the arranging mandate.
Efic is confident business in Asia will return and is looking forward to a market similar to pre-1998.
The gulf between approaches taken by export credit agencies (ECAs) is widening and project finance deals done by a number of export credit agencies in the first half of 1999 reveal very different approaches. Canada's Export Development Corporation (EDC) is leading the pack among those agencies adopting a commercial approach. Others, such as US Exim, have been less responsive to such trends (see boxes). And others ? notably Coface ? are entrenched in conservatism.
Says Laurent Devin, vice-president in project finance at Banque Nationale de Paris in London: ?Different export credit agencies have different behaviour. Some of them are quite clever in assessing the project risks. UK's ECGD is an example of that and Italy's Sace, despite being smaller, is working along those lines. Conversely, France's Coface is very conservative and not willing to look at projects where governments are not at the front.
?Inevitably there is a strong relation between governments and agencies: the former makes recourse to the latter. This makes it impossible for agencies to play a commercial banking role despite the option of direct lending.?
But sponsors and financiers recognize that agencies are becoming more pragmatic and less political. A senior financial officer working for a London-based sponsor remarks: ?Export credit agencies are slowly but surely becoming more commercially oriented and more apt to meet time frameworks. Agencies are further up the learning curve than private insurance companies.? One Italy-based project finance manager explains: ?Export credit agencies are becoming more aggressive. Enormous progress has been made to satisfy the needs of the sponsors and become more open to their requests. The situation is completely different to what it used to be 10 years ago.?
Repayment periods have lengthened and political risk coverage extended. In September 1998 agencies from participant countries to the Organization for Economic Co-operation and Development (OECD) including the US, Canada, the EU and Japan agreed to modify rules affecting guarantees given by agencies. This meant an extension of the repayment period to a maximum of 14 years with up to 2 years grace period but with an average repayment life not exceeding 7.25 years.
This makes life much easier for sponsors and makes export credit agencies more attractive.
There is no way most private insurers can match that. The maximum they can achieve is a period of 4 to 7 years. Conversely, some private insurers such as US' Sovereign and Zurich have extended their maximum tenor close to the ones offered by the main export credit agencies (see Project Finance, September 1999).
Tenors aside, a major headache for sponsors is having to sit at two different negotiating tables when projects reach financing. One table is shared with the commercial banks and the other with the agencies. This process is regarded as both too time-consuming and expensive for both sponsors and commercial lenders. Says one financier: ?It would be better if commercial banks and agencies sat together. It would save sponsors' legal costs and deals could close more quickly.?
No-one disputes the importance of ECA support but some ECAs are more useful than others.
According to Stephane Lebeau, manager in structured finance at Electricité de France (EdF) in Paris: ?The crisis in emerging markets, such as south-east Asia and Latin America, over the last two years has taught sponsors a lesson. Extended political risk cover is needed and only export credit agencies can offer that. By extended political risk cover I mean covering obligations undertaken by governments on state utilities' tariffs. But few agencies offer that ? for those that do there is a bright future.?
But even at the best ECAs, sponsors want more changes to better the economics on deals.
?The risk premium sponsors pay to agencies is very expensive and the when a sponsor is looking at the overall costs a project implies, risk premiums feature highly. In countries such as Vietnam and Laos premia between 15% and 20% are expected. A further issue that should be tackled is the duplication of work sponsors need to do when submitting due diligence to commercial banks and agencies. Agencies such as US Exim require sponsors to have both external financial advisers, which can be expensive. Others such as France's Coface rely on due diligence done by lead arrangers. It will be a nightmare if sponsors are unable to harmonize due diligence. What we need is also a review of the September 1998 OECD agreement. Longer repayment schedules are needed,? adds Lebeau.
Says Stefan Gerig, senior vice-president at ABB Structured Finance in Zurich: ?In emerging markets the involvement of an agency is a must. Private insurers cannot offer the same and require more expensive fees.? Gerig is clear on the difference between commercial lenders and export credit agencies: ?It would be a distortion of the market if export credit agencies would become direct lenders without submitting themselves to market criteria. That would set an unwanted precedent for commercial lenders. The main problem with the agencies is their sometimes bureaucratic approach to deals and the extensive due diligence that sponsors need to submit to them before approval.?
Moments of crisis in the market emphasize the ECA role. ?I hope rationality will return to the market: you just do not do deals in countries with BB ratings without the support of the agencies. The emerging market has been depressed in the last couple of years but there is hope for the year 2000?, Gerig concludes.
Standardization is the message to agencies according to Mikael Karlsson, vice-president, Middle East & Africa at ABB Energy Ventures in Zurich: ?All agencies are trying to be commercially oriented and they do have a distinct role to fulfil. But changes are needed as well. It would be useful if agencies would draw up some common rules that sponsors and financiers could work with.
More co-ordination would help together with standardized terms and conditions. The absence of it makes negotiations with agencies a very lengthy and expensive process especially when dealing with different ones at the time.?
On the difference between sponsors and private insurers Karlsson is clear: ?At this stage private insurers cannot offer the same as agencies. Large deals with repayment periods in emerging market rule out private insurers.
A power deal in India could be an example of this. But private insurers could play an interesting role in insuring equity finance.
There is scope for insurers to complement the function of agencies. US Exim can offer direct lending in the post-construction period on a fixed interest rate that is agreed at the closing date. This type of lending is very attractive for sponsors and it would be interesting if undertaken by other agencies and extended to the pre-construction period as well. Credit risk should also be covered under the political risk insurance offered by the agencies. The case of governments failing to comply with power purchase agreements underwrote by state utilities with project sponsors is a clear case where such insurance would be needed. At this stage most agencies, including US Exim, fails to offer that to sponsors.?
Export credit agencies behaving like commercial lenders, is something that banks do not welcome. Says Delphine Queniart, vice-president in project finance at Société Generale in Paris: ?The option of using private insurers is less proven and reliable.
There is no point in export credit agencies offering commercial risk since banks know more about it.
Risk premiums to be paid to export credit agencies can be very expensive: in countries such as Laos and Vietnam premiums can be as high as 20%. It is something that needs to be looked at when considering the overall cost of the project. A key issue is harmonization of due diligence that both banks and sponsors need to submit to agencies. It will be a nightmare if no progress is being made in that direction. While some agencies, such as France's Coface, rely on due diligence by lead arrangers, others, such as US Exim, do require external advisers. What is really needed is extended political risk. By that I mean cover of any kind of obligations undertaken by public entities.?
Some agencies are meeting sponsors' demands for more standardized rules. The one-stop-shop arrangement is one example of that. It takes place when a number of different agencies are involved in one project meaning that the agency with the largest share of the deal takes a lead role making the sponsor negotiates one single agreement to be valid for all the agencies involved in the deal.
This arrangement was launched by UK's ECGD in 1995. Since then ECGD has negotiated agreements with a number of agencies such France's Coface, Belgium's OND, Canada's EDC and Japan's Jexim. Italy's Sace is expected to sign a co-operation agreement with ECGD within the next two months. Says Philip Curry, managing director of Bechtel Enterprises in London: ?The one-stop-shop arrangement is an interesting option to make deals more viable.
Export credit agencies are growing up.
The window to access capital markets can open and close. Using an agency's guarantee can help that when capital markets are not available. I prefer agencies to play a role in guaranteeing rather than lending in order to leverage commercial banks. But in countries where premium quotas are over 20% it becomes very difficult for sponsors to meet the agency's requirements. I would be happy with more flexibility from the agencies' side.?
An example of flexibility is the idea of implementing tailor made solutions that agencies can work out with sponsors in specific deals. The notion of being able to negotiate the repayment schedules according to annual revenues from the project is the concept behind it. And that is very attractive and responsive to developers' needs. Says Sven De Smet, adviser in project finance at Tractebel in Brussels: ?My experience with France's Coface has been a positive one.
Financing of the $55 million expansion of Manah power plant in Oman is going to be the first project finance deal to be done on a tailor made repayment scheme.?
The crisis that hit emerging markets in Asia, Eastern Europe and Latin America over the last two years has made developers aware of risks and potential failures that nobody can afford to repeat. No sponsor, financier or agency would like to replay nightmare scenarios like the ones affecting power projects in Pakistan (see Project Finance, May 1999).
Whether this will mean more cooperation by the different parties at the negotiating table is not clear. Demand for cover on behalf of commercially minded agencies is still strong.
Despite the growing competition from private insurers, the limited experience that sponsors have with them still plays in favour of agencies.
Similarly, as traditional project finance markets deregulate ? notably power ? ECAs may become involved in backing deals into first tier markets. Like US Exim and the European ECAs in their backing for Boeing and Airbus exports respectively, the ECGD does not rule out backing UK power players in their bid to break into deregulated European power markets as the compertition for market share across the continent intensifies.
Whether agencies will be able to strengthen their positions in the project finance market ? be given the budgets to do so and find ways of better using them ? and back their exporters and developers will depend on their ability to put politics in the bottom drawer and lure sponsors and financiers with flexibility, low premiums, long-term repayment schedules and extended political risk coverage.
Easier said than done.
EDC leads the way
Canada's export credit agency is set to achieve a record year. In the first half of 1999 the Ottawa-based Export Development Corporation (EDC) underwrote 17 project finance deals for a total value of $630 million. Says Sandy Reid, head of project finance at the EDC: ?There is great demand for agencies that have a commercial approach.?
EDC's project finance unit has been operational since 1995 and in 1998 it merged with the structured finance division that is now headed by Peter Hepburn. Sandy Reid heads the project finance division that employs 16 people.
In 1999 the EDC has been busy funding a number of projects across Europe, the Middle East, North Africa and the Americas. Key projects for the EDC have been the financing of the Q-Chem $850 million petrochemical project in Qatar, the Sidi Krir $500 million power plant in Egypt and the $2.260 billion Antamina mining project in Peru.
EDC has funded 14 other project financings since the beginning of the year. Those include seven telecom projects in Romania, the Slovak Republic, the Netherlands, the UK, Ireland, France and Spain. Other projects include the Merchant Co-Gen power plant in the US and the Profertil $640 million petrochemical plant in Argentina.
The target for 1999 is to achieve a figure of $1.4 billion worth of project finance deals.
Telecoms is a sector that together with power and oil & gas attract most of EDC's financing.
The countries where Canadian exporters are mostly active and where EDC offers them support are in the Americas, Europe and the US. Over the last tow years EDC has been avoiding the Asian market where conditions are still far from idealistic due to high risk and lack of interests on behalf of Canadian exporters, says Reid.
Reid values the role of export credit agencies in markets where there is limited capital availability on behalf of commercial private entities and where there is high political risk. EDC can also function as arranger for political risk insurance. Reid refers to the EDC as ?known party in the project finance community and being reckoned as such.?
The last deal to be underwritten by the EDC is the $850 million Q-Chem plant in Qatar (see Project Finance, August 1999). Q-Chem is the largest project finance deal to be signed in the Gulf region this year and represents renewed confidence by international financiers in Qatar after a downturn in the last quarter of 1998.
Sponsor of Q-Chem is a venture between Qatar General Petroleum and US' Phillips Petroleum.
A consortium of 24 banks has arranged the deal that was signed on August 27 in London. Says Sandy Reid: ?The large arranging group shows a move away from the past to reduce risk and to raise more capital.?
EDC has also participated in the financing of the $500 million Sidi Krir power project in Egypt. Sidi Krir, one of Egypt's largest private infrastructure investment, involves the construction of a 2x325MW thermal power plant near Alexandria (see Project Finance, May 1999). US' InterGen, local First Arabian Development and Kato Investment are the sponsors.
In Peru EDC supported Canada's companies Noranda, Rio Algom and Teck Corporation in the Antamina project providing $135 million worth of financing. EDC played a double role as both arranger for the financing and political risk insurer.
Consensus among sponsors is that EDC is the most receptive to the needs of the market.
With smaller size financing but a bigger number of deals signed, as compared to other export credit agencies highlighted in this survey, EDC keeps the door open for the demands of Canadian sponsors.
US Exim sees more coming through
Asked to compare the agency's performances in 1998 and 1999 Barbara O'Boyle, vice-president and head of project finance at the Export-Import Bank of the United States (US Exim) in Washington, talks about the difference between night and day. Translated that means in 1998 no project finance deals were submitted for approval to the agency's board of directors.
This year nine deals are under consideration but none have been approved yet.
This is a far cry from the agency's best performance to date when the US Exim underwrote financing worth $2.6 billion in 1997. But ?there has been a big influx of applications in the last nine months?, O'Boyle adds.
The agency's project finance division was established five years ago and since then 26 deals have been funded for a total of $6.5 billion. The next deal for US Exim is the financing of the $1.4 billion Madero oil refinery project in Mexico. O'Boyle expects to obtain approval to go ahead from the board of directors by the end of the third quarter of 1999.
Following the US government's effort to strengthen relations with a number of sub-Saharan countries such as South Africa, Senegal, Ghana and Uganda, a key project is the $3.5 billion oilfield development in Chad and related 1,050km oil pipeline to neighbouring Cameroon. Project sponsors are US' Exxon, Shell and France's Elf Aquitaine.
Exxon will be the operator. An environmental study of the project is underway and both Exim and the World Bank are looking at involvement.
Barbara O'Boyle hopes for more deals coming through in the CIS and Turkey, where opportunities in both the oil & gas and power sectors are particularly relevant for US sponsors.
Financing of the TransCaspian undersea gas pipeline from Turkmenistan to Turkey via Azerbaijan and Georgia is high on Exam's interested deals list. US Exim funded a $750,000 feasibility study of the project while an international consortium headed by PSG International is developing the project.
At the end of August 1999 Shell International joined GE Capital and Bechtel in the consortium. O'Boyle comments: ?The US government has indicated an interest in the TransCaspian project but a true assessment cannot be made yet.? As signs of hope begin to emerge in Asia, US Exim hopes business in the region will pick up again.
Compared to the performances by other leading export credit agencies and relative to its size, US Exim has been behind in the number of deals approved. The impact of US government sanctions against India and Pakistan prevented the agency being involved in projects in those countries. Sanctions in those markets were lifted at the beginning of 1999 and there is confidence in larger sums being underwritten in the future.
O'Boyle remains convinced of the necessity of export credit agencies' in emerging markets where ?other financiers do not dare to get involved?. In the year 2000 Exim aims to increase the share of business in the Americas, which represents only 20% of the agency's project finance activities.
A London-based project financier defines US Exim as ?very bureaucratic? and reluctant to get easily involved in deals. The volume of deals at the Washington-based agency does not compare with the ones achieved by its Canadian and Australian counterparts. Canada's Export Development Corporation and Australia's Efic have a more commercial approach to both financiers and sponsors and actively pursue deals in the project finance market. US Exim is faced by more aggressive competitors that by supporting their countries' business abroad will make life more difficult for US sponsors.
ECGD transforms?
The UK export credit agency ECGD is coming to the end of the consultation process in a review that could totally transform the way it works.
The Mission and Status review, which ECGD holds every five years, is carried out by its own staff, but government ministers will review the evidence, and the agency may have a new mission statement by April next year.
The review comes at a crucial time for ECGD.
As the private sector takes on longer tenors and more challenging risk profiles, the review will ask whether the public sector has any role at all in export risk management. It may be that its role will change, shifting the agency towards development projects and programmes for small and medium-sized companies.
Says Vivian Brown, chief executive of ECGD in London: ?There is some latitude about how big the issue is. Five years ago, it was unclear what would become of our status, whether to become another agency.? Now the question is what new activities ECGD can take on to justify its existence without impinging on the private credit insurance market.
The review process has involved sending a questionnaire to its exporters asking which markets and risks UK exporters face, and how far ECGD goes to meeting their requirements.
The fact that ECGD is a government body restricts its activity in many ways, but promotes it in others. Its stated mission at the moment is as follows: ?To help exporters of UK goods and services to win business, and UK forms to invest overseas, by providing guarantees, insurance and reinsurance against loss.? And it must do that within a break-even budget, so that it does not incur loss for the UK taxpayer. That brings a complicated set of criteria for cover. As Brown says: ?We do, by the very nature of our business, operate in the risky end of the market.?
The UK government has an agenda of alleviating debt and poverty in the world's poorest countries and integrating those countries into the international trading community. One conclusion of the report may be that ECGD could do more as part of this effort. Says Brown: ?Perhaps we ought to do more in even riskier markets.? But that in turn would put higher risk on taxpayers' funds. It is exactly this contradiction that the review is tackling.
Although ECGD indirectly helps thousands of small and mid-sized exporters in the UK though its support of large projects, the review assesses whether it should do more to reach those smaller enterprises directly. But Brown denies that such a move would threaten the private sector facilities that are already available. He says: ?There is no sense that we want to compete, but we could maybe help smaller companies exporting capital goods ? goods that require long-term periods of credit. Those exporters should be able to get flexibility and a product range at ECGD.?
And he adds: ?I think that generally, UK firms are not disadvantaged as a result of relying on the private sector. We do not get a stream of complaints saying that private insurers are too expensive, although it can be the case in certain markets. We are very unlikely to go back to the way it was before privatization.?
But to increase the demands on the private sector for taking risks in emerging markets is unrealistic. The fact that ECGD is a public body gives it the long-term view that some markets need. Says Brown: ?We need to recognize that for some markets, we need to be there for the long term. That is in a sense why we are in the public sector. We really can work though feast or famine.?
Sace looks for the new millennium
Sace is a relatively new name among the export credit agencies involved in the project finance community. Says Massimo Pecorari, head of structured finance at Sace in Rome: ?I would like to transform Sace into an Italian Ex-Im bank. Being able to provide Italian exporters with direct lending and insurance would be an interesting challenge. At the moment we have a constraint in the human resources' front.?
Pecorari heads a team of nine people working for the structured finance division that was established in 1997. After a disappointing performance in 1998 with only 3 projects signed for a total of $700 million, Sace needs to do more. In the first half of 1999, Sace did not underwrite any project finance deals and Pecorari admits that only 2 deals will be signed by the end of the year worth $200 million.
But the pipeline for 2000 is full. Sace's target for 2000 is between 6 and 8 project finance deals to be signed for a total of $1.8 billion. Busiest regions for the Italian export credit agency are Middle East & North Africa, Eastern Europe and Latin America where the Italian exporters and contractors have been traditionally active.
In the Eastern Europe region the Blue Stream $2 billion gas pipeline project is the one that will keep Pecorari's team busy for the second part of 1999 and 2000. The project involves the construction of an undersea pipeline for the transfer of Russian gas to Turkey across the deep waters of the Black Sea. A consortium that includes Russia's Gazprom and Italy's Ente Nazionale Idrocarburi is responsible for the development. Sace is working hard for the appointment of both financial and legal advisers on Blue Stream but at the time Project Finance was going to press the likely winner yet to be disclosed.
Mediocredito Centrale, Banca Commerciale Italiana and WestLB arrange the commercial debt. Sace is negotiating with a number of export credit agencies interested in having a role in the project. Those include Japan's Jexim, UK's ECGD and Germany's Hermes. Sace is expected to guarantee funds for the project for a total sum of $800 million. According to Pecorari a decision on Jexim's involvement in the financing of Blue Stream was expected for the first half of October this year.
Sace has also expressed interest in the development of the Ilisu dam in eastern Turkey (see Project Finance, September 1999). The project is under criticism due to the heavy implications on the local natural and social environment (see Project Finance, September 1999). According to Pecorari, Sace has issued a sovereign risk guarantee worth a total of $200 million for Ilisu.
In the Middle East & North Africa region Sace is looking at projects in Oman, Egypt and Jordan. The biggest one is the $1.1 billion Sur fertilizer plant in Oman. A consortium of Indian and Omani companies is responsible for the development. Italy's Snamprogetti is one of the winning contractors together with France's Technip and Greece's Consolidated Contractors International. Arrangers of the commercial debt portion are Arab Banking Corporation, JP Morgan and Banque Nationale de Paris (BNP). Sace is working alongside France's export credit agency Coface with an interest on behalf of UK's ECGD.
At the beginning of 1999 the Sur project was under question due to a change of mind on behalf of the Indian sponsors. At the end of August BNP was able to confirm the commitment of the sponsors to the project and the support given by the Indian government. Both the Omani authorities and Sace welcomed the news and are now fully working on the project.
In Jordan Sace is working with an ABB-led consortium for the development of the $300 million Al Samra power plant. The plant will be developed on a build-operate and transfer agreement and will have a capacity of 350-400MW.
In Argentina Sace wants an involvement in the privatization and 30-year concession of 32 airports that constitute the bulk of the Aeropuertos 2000 project. Its value is $2.1 billion with the Export and Import Bank of the United States having an interest in the financing.
Increasingly Sace is playing a more aggressive role and despite its small size it has a good potential for supporting Italy's industry abroad. Moreover Sace is fighting a battle towards an endorsement of a more commercial approach along the lines of its main international competitors. The challenge is ahead.
Efic waits for Asia to pick up again
Since January 1999 Australia's Export Finance Corporation (Efic) has not signed a project financing. This follows a disappointing performance in 1998 when only three deals for a total of $60 million were signed (see Project Finance, November 1998). The main reason behind this negative trend has been the general downturn of business activities in Asia over the last two years. Says George Bolton, director of project finance at Efic: ?South-east-Asia is traditionally the largest market for Australian exporters and for the agency. Nothing has been happening there over the last two years.?
But with Asian angst dissipating, ?the year 2000 will be good with two or three project finance transactions expected to close?, adds Bolton. ?This year has been already much better due to the significant improvement in the performances of Asian economies. A country to follow closely is the Phillipines?, says Angus Armour, general manager in export and project finance at Efic.
For 1999 the agency has one project in the pipeline. In the second half of the year the Australian export credit agency will sign a $10 million financing for a UK-sponsored sugar refinery project in Vietnam, a country whose economic growth in 1998 has exceeded strong regional neighbours such as Thailand.
To overt the crisis in Asia, Efic has implemented a global approach meaning involvement in project finance deals beyond markets closer to home. Turkey and the Middle East are regions where the agency is planning to increase its activities alongside the ones on behalf of Australian exporters.
In the year 2000 the agency will follow power and port projects both in Turkey and the Gulf region. Says George Bolton: ?Turkey has a great need for international developers and financiers, but it is a country difficult to do business with. Turkish laws regulating the build-operate and transfer agreement do not make life easier for foreign developers and financiers.?
Efic is also looking at Iran with interest.
Australian companies are active in a number of Iranian sectors - mining and oil & gas.
Australia's Broken Hill Proprietary has been negotiating with local National Iranian Gas Company for the development of a $2.7 billion gas pipeline going from south-eastern Iran to neighbouring Pakistan. Bolton is sceptical the agency will play a role before other international financiers will open the way. He says: ?I cannot see project finance transactions happening there in this century.
Maybe in 2001 but I would not like the agency to be the first one involved.?
But it is in a period when difficult market conditions are prevailing that the role of an export credit agency can be most effective and challenge commercial banks in successfully financing projects. Says Bolton: ?Our approach is to participate in the market gap where commercial banks fear to get involved. Efic is not specifically competing with commercial banks but we are interested in commercially viable transactions.?
Efic is looking forward to keep a role in the project finance market both at home and abroad. Efic's biggest project in the pipeline is financing for the $3 billion gas pipeline connecting gas fields in Papua New Guinea to Queensland in north-western Australia.
Once delivered to Australia the gas will feed local power plants.
First gas delivery is expected in 2002 when the project will be operational. Sponsors of the project are Chevron, Merlin Petroleum, Oil Search, Orogen and Petroleum Resources.
Chevron is the operator. The project is making progress and negotiations have taken place between the sponsors and potential offtakers.
In August 1999 an agreement between the Chevron-led consortium and Australia's Ergon Energy secured a 20-year offtake contract.
Financing for the gas pipeline is expected to come to the market in the second half of 2000.
Says Angus Armour: ?Most of the preliminary work has been done. There will be need for political risk insurance and Efic will play a role in the financing of the project.? Among others ABN Amro is understood to be bidding for the arranging mandate.
Efic is confident business in Asia will return and is looking forward to a market similar to pre-1998.
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