The global financial crisis had one upside: it catapulted Asia to the top of the heap. The region has become an engine of global economic growth, driving significant trade and commodities flows. “Growth is driven by emerging markets, which in turn generates dynamic South-South trade flows and strong demand for commodities,” said Jean Francois-Lambert, HSBC global head of business development, trade and supply chain.
What’s interesting in this new world order, however, is that while many companies rely on traditional trade finance, it’s not the only game in town.
Use of more intricate trade structures, typically centred around large bilateral relationships in high-value and usually cross-border commodities flows, is central to financing some of these heavily Asia-linked trade flows. While commodities still play the major role, “more and more consumer-goods companies are interested in securing their commodity requirements and therefore are interested in structured trade finance solutions,” said Francois-Lambert.
Use of trade credit insurance structures, for example, is growing in the telecoms and technology sectors. Export credit risk insurance and export credit agencies (ECAs) are also becoming more relevant, driven in large part by receivables and other financing structures for governments or quasigovernment entities.
As one of the few sources of long-term credit available, ECA activity has been boosted by the large government stimulus packages. These stimulus packages are targeted principally at infrastructure projects, but also involve some capex projects. Constrained capital markets combined with local countries’ massive requirements for infrastructure investment during the next two decades also support the trend, underpinned by the region’s impressive economic growth. The International Monetary Fund (IMF), for instance, expects the economies of two of its biggest players, China and India, to grow by 10% and 8.8% respectively in 2010.
Telecommunications, consumer electronics, pharmaceuticals and electronics durables sector trade flows from across the region also require a variety of sophisticated trade services from their banks, including complex receivable financing structures. “In terms of customising and bespoke structures, we are seeing more hybrid solutions, which could be with recourse, without recourse, or partial recourse depending on how the receivables financing is structured,” said Standard Chartered’s Neil Daswani, regional head, transaction banking, North Asia.
Such structures are more prevalent in mature markets such as Taiwan, as compared to the nascent markets of countries like China, though demand is developing there as well. The need for structured and customised financing deals is also increasing in Korea, resulting in some innovative cross-border deals, as companies from both China and Korea look to establish overseas operations, ranging from manufacturing, logistics and distribution centres elsewhere in Asia to factories in Africa. “We have been seeing a significant number of multinational companies [MNCs] and corporations from Korea move beyond their domiciles during the last decade or so, but we are now also seeing increasing numbers from China setting up overseas. As such, we have done a number of structured receivables services solutions, which are long-tenor in nature and involve capex purchases, either by sovereign or quasigovernment entities or telecoms operators, or a mix of those buying entities.” said Daswani.
These types of structures are spreading quite rapidly, partially as a result of Chinese telecom vendors’ involvement in capex projects. Such projects are driving bespoke solutions for banks’ receivables services, and have resulted in some of the most interesting innovations, says Daswani. Typically, these entities look for banks and financiers to take long-dated receivables — as tenures for telecommunication sector purchases have grown from short-term to mid- and even long-term due to elongated subscriber payback periods — onto their books and to fund long-term working capital requirements. Some of these are insurance credit-backed, which require intense structuring, especially when they are combined with a bank’s own exposure to the counterparty or when multiple countries are involved.
This might take the form of a telecom vendor selling into emerging markets and requiring credit protection and country risk cover on the debtor over a long tenor. “In this instance, and given the large facility size, this would be structured in partnership with insurance and other banks using a combination of clean and insured covers. Such deals are made more complex by the roles played by the various parties and by the multiple jurisdictions,” said Daswani.
One example of such a model, structured by Standard Chartered within the electronics industry, involved a Korean company exporting to Taiwan and requiring 100% financing against its receivables on a non-recourse basis. The company needed a competitively priced solution to meet its cross-border working capital requirements, but which at the same time took its receivables off its balance sheet. “This required a receivable financing facility using a combination of both local insurance and clean exposure structured across multiple countries,” explained Daswani.
Trade credit protection extended to MNCs as they move into frontier markets in Africa and the Middle East, helps these companies manage their balance sheets or mitigate risk, or more often provides the company with a combination of the two. Trade credit insurance is one important tool to achieve this objective, but equally important is the bank’s own local footprint in these markets which enable it to support large MNCs with their financing requirements.
What’s clear now is that multinational banks can’t simply expect that their blue-chip name will carry the day and give them business. A bank needs to be well-established in the country it’s doing business, and be perceived as one that is going to stay the course through any crisis.
This story was first published in the October 2010 issue of FinanceAsia magazine.
