Strong growth can only be built on solid infrastructure, explains Pravin Advani, J.P. Morgan’s Global Trade Executive, Asia.
With the International Monetary Fund forecasting 7% growth in Asian Gross Domestic Product in 2012 and beyond, having the right infrastructure in place to support this growth is vital. India has said it needs to double infrastructure spending to US$1 trillion in the next five years. Across the whole of Asia, infrastructure spend is forecasted at US$8 trillion over the next 10 years.
Although both political will and economic drivers are firmly in place, the challenge is to fund such major capital intensive projects. Post-recession, capital and commercial debts are making a gradual comeback once again. However, the long-term nature of infrastructure projects, along with their huge investment, means that Export Credit Agency (ECA) funding continues to play a key role in the foreseeable future.
Put simply, ECA funding offers governments a valuable tool to ensure that nationally important projects get up and running, while giving banks the confidence to lend large sums on a long-tenor basis at attractive rates. This win-win arrangement was a prevailing force in 2011 and looks set to carry on throughout 2012.
From ports to power generation and from roads to rail, ECA-backed financing was on the move in 2011. As competition for capital heated up and demand escalated, pricing rose, pulling more banks into the market, with all the major players from the US and Europe keen to take a slice of the action.
A key driver was growth in intra-Asian trade. For example in the airlines industry, the pressing need to renew ageing fleets was driven not so much by the need for long-haul East-West flights but by intra-Asian North-South travel. In other sectors such as power, interest in generators from China got a boost with the China Export & Credit Insurance Corporation (Sinosure) stepping in to support buyers’ financing arrangements. If numbers tell a story, Sinosure provided total cover of US$196 billion in 2011, firmly placing it as one of the most significant ECA providers globally.
Times are changing. Besides Sinosure, other Asian ECAs such as the Korea Trade Insurance Corporation (Ksure) and Japan’s Nippon Export and Investment Insurance (Nexi) are also stepping up their activities and giving their western counterparts a run for their money.
With most intra-Asian deals being financed in US dollars, the ability of banks to go long on the greenback is increasingly crucial. Being a US-headquartered bank, J.P. Morgan is in a more favourable position compared to their European counterparts, but the latter remains active in the market in spite of the challenges.
Another prevailing trend in the ECA market is that, as lending rises, the need to recycle debt through secondary markets becomes more apparent.
A record year
From where we are standing, 2011 was a successful year for the firm in ECA-backed financing. In addition to clinching the accolade as the “Best in ECA Financing in Asia” at The Asset Transaction Banking Awards 2012, J.P. Morgan also clinched several long-term ECA deals in Asia as the sole arranger and underwriter. While J.P. Morgan is perhaps best known in the ECA world as a long-tenor funder of commercial aircraft purchases, we are growing our presence in a variety of sectors such as Oil & Gas.
Besides having a strong balance sheet and a real commitment to long-tenor financing, having the right relationships is vital to meeting needs. As a bank with a long history in Asia, we bring our regional understanding and expertise into play alongside our US and European connections. In terms of our partnership with the US Ex-Im (Export-Import Bank of the United States), we are ranked first both by the number of transactions and value in the US Ex-Im Bank Aircraft Authorizations League Tables, as of 30 September 2011.
In Asia, as an example of our working relationship with Asian ECAs, we are the first bank headquartered outside Asia to sign the “Export Credit Insurance LC Policy” agreement with Sinosure. Under the agreement, J.P. Morgan will provide Chinese exporters with a wide range of trade finance solutions, while Sinosure will provide the firm with insurance cover on export letters of credit issued by financial institutions in favour of the Chinese exporters.
The depth and breadth of our relationships enable J.P. Morgan to gain perspective on the needs of all parties on the deal and build a solution accordingly. It also means that we have the experience and contacts to get the paperwork and execution done quickly and effectively.
Clouds on the horizon?
So in many ways, ECA-backed financing is in a sweet spot. For banks, the risks associated with long-tenor are mitigated by ECA guarantees. For buyers and their governments, financing of key projects is possible at attractive rates – even in countries which traditionally carry more risk. And for suppliers selling high-value equipment, having a national ECA behind them can help the deal get done.
However, in the world of finance there is never a cloudless sky. As banks come to terms with Basel III, there is a possibility that pricing may need to go up to accommodate new capital requirements. Under Basel III, the longer the tenor, the less liquid the loan and therefore the higher the capital required to be held against it. While the exact nature of these changes and their implementation remain unclear, one thing seems certain: it will not eliminate the need for ECA risk mitigation or the projects they finance.
Another potential constraint could, ironically, be due to ECAs’ growing success. Even the biggest banks have credit limits when it comes to individual clients, countries or sectors. So as new projects seek funding, banks may need to sell outstanding debt in secondary markets in order to ‘free up’ space for new deals. With a strong investor base including insurance and pension funds, J.P. Morgan is able to find the right solutions for our clients and help them through the process. This trend looks set to continue in 2012.
With growth momentum expected to stay strong in Asia in 2012, both the public and private sectors are likely to continue to increase their infrastructure spending to sustain booming economic activities. Leading the way in the region are China, India, Vietnam and Indonesia, where the large number of infrastructure projects are expected to continue to drive the demand for ECA deals. Without a doubt, the year 2012 looks set to be another bumper year for ECA deals.
Global Trade Executive, Asia
J.P. Morgan Treasury Services
Tel: +65 6882 7132