Of all the export credit agencies only US Ex-Im and Germany’s Hermes provide commercial banks with a readily available means of using their agency-covered loans as assets in covered bond programmes. The agencies go to third party insurers to cover the 5% not covered by the ECA facility and then charge the premium back to the originating bank.

Other ECAs could be following suit, be­cause international project finance banks will find their balance sheets increasingly squeezed under the proposed Basel III rules. There is little evidence that this support from the German and US agencies has fed through to pricing, at least compared to the impact of broader political and economic factors. But the pricing bene­fit could become more apparent in the future: ECA-covered financing, despite its quasi-sovereign nature, does not fare well under the draft regulations for bank capital calculations.

Under the first pillar of Basel 3 – the leverage ratio, which determines how much capital a bank must carry in relation to its assets – ECA-covered loans are currently treated in the same way as non-performing loans, despite their much lower risk profile. The ECAs and their association, Berne Union, are lobbying the Bank of Inter­national Settlements for changes to the provisions and trade and project bank­ers are hopeful that changes will be made.

ECA-covered project loans also suffer under the liquidity coverage ratio, calculated as a bank’s stock of high quality liquid assets divided by their net cash outflows over a 30-day time period. The ratio would measure a bank’s ability to convert assets into cash within a 30-day window, and would need to be a minimum of 100%. Banks cannot assume that there will be a liquid secondary market even for well-performing project assets covered by a prominent ECA. Sources of funding for ECA-covered debt such as asset-backed commercial paper conduits evaporated after the crunch. A more stringent liquidity test will see banks favour more tradable assets such as government bonds.

The net stable funding ratio also creates a similar problem for export credits, where­by banks have to improve the amount of long-term funding to match their long-term assets. The ratio is calculated by divid­ing the available amount of stable funding by the required amount of stable funding. Assets are assigned a required stable funding factor (RSF). Broadly this is divided into five categories, which range from 0% for cash and securities with less than one-year maturity, a 5% weighting for unpledged high quality liquid securities such as sovereign bonds, a 20% weight­ing for corporate and covered bonds with a proven record of liquidity, 85% weighting for all retail loans with a maturity of less than one year and 100% weight­ing for loans with a maturity of more than a year and all other assets. The problem for export credits is that ECA-covered loans are presently excluded from the government-backed asset class with a 5% weighting. Bankers argue that the weight­ing assigned to export credit is manifestly unfair, given the ECA assets should be considered as more liquid than higher risk assets that will be harder to move when a crisis hits.

“Unless there is a programme to refinance ECA debt we cannot say that it is liquid,” says Noburu Kato, co-head of SMBC’s European structured finance de­part­ment. “ECAs can give their consent for sales of covered loans in the secondary mar­ket but a refinancing scheme is need­ed to tap a wider investor base. It is very important to increase the liquidity of their products.”

The squeeze on banks’ balance sheets has not had any discernible effect on the pricing of US-Ex-Im and Hermes-covered debt compared with other ECA facilities. US Ex-Im debt is priced lower than its counterparts most likely as a consequence of the fact that it benefits from alternative investor bases, including institutional in­vest­ors that do not need to cover the liquidity premium paid by banks.

The lack of a clear difference in pricing on Hermes facilities compared with other ECA facilities suggests that the Basel 3 provisions have not yet begun to bite. However, according to Kato: “We are seeing some upward pressure on pricing in ECA cover. Most commercial banks are looking at post-Basel 3 pricing.”

With around only 13 active international project financing banks the role of ECAs will remain important. In fact ECAs are moving into markets such as European renewables to provide commercial cover in markets where they have not previously been active. NEXI, for instance, recently provided cover for a Eu226 million ($336 million) debt facility for Guzman Energia in Spain, a concentrated solar project sponsored by FCC and ­Mitsui and funded by BBVA and Mizuho.

And in March 2010, Mitsubishi bought a 15% stake in Acciona Termosolar, the holding company for 200MW of CSP capacity, paying Eu38.1 million in equity providing Eu7.7 million as a shareholder loan, and mobilising a Eu300 million NEXI-backed loan from Mizuho, BTMU and Development Bank of Japan.

Outside Europe, First Solar is set to use a bond guaranteed by US Ex-Im to fin­ance its $450 million forthcoming solar photovoltaic portfolio in Ontario. The deal, if it closes successfully, would be the first use of an Ex-Im-backed bond for a renewables project, and only the second-ever ECA-backed bond for a solar project, after SunPower closed the Eu195 mil­lion Sace-backed Andromeda bond in December 2010.

Beyond the renewables sector, on multi-billion project financings globally ECAs are usually the first port of call. Nord Stream 2, the second phase of the Russia-Germany subsea gas pipeline, is illustrative of margins available to commercial banks for covered paper and ECAs’ continued importance to large projects. When they closed at the end of February, the debt facilities comprised a 10-year Eu825 million commercial bank tranche, a Eu830 million 16-year tranche from Hermes, a Eu570 million 16-year tranche from UFK, and a Eu550 million 16-year tranche from Sace. The Hermes tranche was priced tightest, although this could be a reflection of the geopolitical importance of the project to Germany, and therefore German lenders. The ECA/UFK debt was priced at 110bp, 120bp and 115bp respectively and, like the commercial tranche, compares favour­ably to the 160bp, 180bp and 165bp on the phase 1 deal.

In the Middle East, ECAs continue to have a significant impact, often eclipsing the participation of commercial banks. On Sumitomo and Kepco’s upcoming Shuweihat 3 IPP financing in Abu Dhabi JBIC and KEXIM will each provide $400 million – 35% each of the debt requirement, and the commercial banks are providing $350 million 20-year debt.

While ECAs continue to play a crucial role in project financings, banks worry, as ever, that direct ECA lending may crowd out commercial lending as appetite returns. Better the ECAs provide support to banks to recycle their ECA-covered loans.