Media Coverage
Trade Finance Holds its Own Amidst the Credit Crunch
by Richard Barovick
For the international trade finance fraternity, the Export-Import Bank's annual Washington conference is a welcome networking opportunity, a rare chance for over a thousand professionals to catch up, swap yarns, share market intelligence.
At the April 2008 gathering, Ex-Im’s own news was limited. But, this year more than ever, participants listened intently to the luncheon speaker: Lawrence Lindsey, an economist and former White House official, prognosticated on the course of the mounting credit crunch.
His forecast: the end was probably in sight for the crisis in mortgage lending, but others would follow, in auto loans and credit cards.
And that led to a buzz around the room: how would trade finance fare in this increasingly hazardous financial environment? The consensus, readily gathered, was clear: so far, so good, no serious problems had yet emerged.
Since then, however, a growing perception is that the enduring crunch has been joined by a rising arc of oil prices, along with other raw materials costs. It’s now, therefore, seen as a double whammy: exporters and importers—or many of them—are living with both a squeeze on their financial liquidity and mounting costs of doing business.
What, then, has been the impact on trade finance? Two answers can be found out there: the short version and the long version.
The short version
The short version is that trade finance has weathered the storm without substantial damage, but has not escaped it. Lenders and credit insurers have revised their perception of risk, and, accordingly, have increased the price of their services, while becoming more selective in approvals. Exporters and importers, meanwhile, are tugging at one another to negotiate favorable payment terms and bolster liquidity. Some foreign buyers are pushing for longer payment periods, or just plain paying slowly.
The more damaging side is that several sectors—residential building, construction materials, automotive, plastics-based production—have lost some or a lot of their access to financing in the U.S. and abroad. And, some smaller exporters have experienced a loss of access they had earlier enjoyed. The bottom line: there’s been some pain, but it has been contained within specific parts of the trading economy.
The long version is to ask, and answer, why trade finance has managed to avoid (so far) the severe dislocation that began with mortgages and migrated to other sectors, damaging financial institutions and squeezing their customers.
The quick answer: trade transactions are mostly short-term, and are largely self-liquidating arrangements; lenders and insurers have become highly sophisticated in managing trade finance risks, including the use of massive Internet-based information platforms, while the resources available have grown dramatically, as many more lenders and insurers have entered the field.
Let’s look first at what’s been happening so far.
For starters, lenders and insurers, as expected, have become more cautious and raised the price of their services. Many of the pros in the field, when asked, respond with similar points, but express them in contrasting ways.
“Financial institutions have pared down their level of exposure,” says Bruce Proctor, Managing Director of JPMorgan’s Global Trade Services unit in New York. “They are somewhat less open and less aggressive in responding to opportunities.”
At Atradius Trade Credit Insurance in Baltimore, Brett Halsey, CEO, counts several corrective actions to reflect the new risk profile. First, the company has cut back involvement in specific sectors, among them construction, building materials, plastic resins, specialty retailer operations, textiles, and paper.
Second, with insolvencies-bankruptcies and claims back to normal levels from a more benign environment over several years, Atradius is now more selective in choosing customers, taking a closer look at customer experience and loss ratios. And while the average premium rate has seen a slight increase, the credit committee’s careful scrutiny of each country’s risk profile has helped keep prices under tight control.
In Houston, Tom Wells, managing director of Vinmar Finance, a specialty trade finance company (part of global plastics marketer Vinmar Group), stresses the double whammy angle: higher costs are raising working capital needs of exporters and importers, at a time when lenders and insurers are more cautious. “There’s no lack of credit, but borrowers need more to do the same volume of business, and the lender limits they face are tightening.”
Gary Mendell, president of Meridian Finance Group in Santa Monica, California, a credit insurance broker and financial arranger, stresses that buyers are pushing suppliers to offer longer payment terms, but are also paying their invoices slowly. “That is creating more demand for credit insurance, and premiums are rising a bit.”
Until recently, insurers have been limited in hiking rates because of the intense competition they face, but, Mendell added: “If six insurers look at a deal, and only one is willing to do it, that insurer can write its price.” And, he reports, exporters with existing policies can usually continue to cover the same buyers, but, “if a company does not have a policy, it can be harder to place the coverage.”
Carey Fiertz, head of Export Risk Management (Salisbury, Connecticut), a credit insurance specialty broker, finds banks now more selective in the medium-term equipment deals they take on, while charging more. Lender “spreads” (the amount over and above the standard base rate) can be significantly higher. “On a $5 million deal, the interest rate recently was often 1 to 1.5 percent over LIBOR (the London inter-bank standard), but lately it’s been 2 to 2.5 percent. And “some sectors are tough; banks can be reluctant to finance them, sometimes even with insurance coverage.”
At the same time, smaller exporters appear to be facing a squeeze in their access to credit, perhaps inevitably, since they are typically more reliant on outside financing.
In Miami, Stephen Fancher, who runs the Florida Export Finance Corporation, a state government unit, reports that, “it is definitely hitting some of the smaller people that we deal with. These firms are facing trouble in accessing finance and in dealing with slow payments by foreign buyers.”
Meanwhile, the credit crunch also opens opportunities for institutions that have escaped the crunch, to expand their trade finance operations. Bruce Proctor at JPMorgan emphasizes it’s a good time to re-invest in the sector. “We are pursuing growth in key markets for trade services, accelerating product development, adding people and expanding our technology base.” In buoyant places like the Middle East, for example, “we are shown quite a few deals, especially in infrastructure projects.”
In New York, at First Capital, a diversified finance company, Anthony (Tony) Brown, International Managing Director, smiles: “We have been boring consistently on trade finance. We have money to lend, and have not been distracted. We are reaching out to companies that are not getting finance from their lenders, or are facing restrictions.”
And at Atradius in Baltimore, Brett Halsey calls the recession “an opportunity to reach new clients who are realizing the value of trade credit insurance.”
