For a long time, export credit agencies (ECAs) have been the quiet achievers of global infrastructure financing. But as the global financial crisis and the European economic downturn took its toll on the ability of the commercial banking sector to fully fund large projects, sponsors began looking to ECAs such as South Korea’s Korea Eximbank to fill the funding gap. By John Arbouw.
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Of course, ECAs had always been involved in huge projects involving their nationals but recent LNG deals in Australia particularly has shown that sponsors are using the availability of ECA long-tenor and lower-margin funding as leverage to pressure commercial banks to lower their price ambitions.
In the recent US$20bn funding of the Ichthys LNG project in Northern Australia – the largest project finance deal in the world in 2012 – Kexim provided more than US$1bn and was the largest ECA funder after Japan’s JBIC.
On a global level in 2012, Korea Exim’s total financing volume reached W71.6trn (US$63.5bn) and this year it plans to increase this to W74trn with W24trn allocated to guarantees. As a result, Kexim led the South Korean ECAs’ achievement, which saw Kexim/K-Sure/KDB topping the PFI league table for multilateral developing country exposures.
As the role of ECAs expanded due to changing economic circumstances, Kexim moved into the project finance advisory business in July 2011 by establishing a financial advisory structuring department (FASD).
“Ever-changing market trends and events, including the still lingering financial crisis in 2008 prompted Kexim to reconsider its functions as a traditional ECA providing primarily loans and guarantees,” said Young-Pyo Hong, executive director at Korea Eximbank.
“FASD was established as part of Kexim’s Vision 2020 with the slogan: ‘Global Financial Partner, Connecting Korea to the World’. By rendering a tailored financial structuring and advisory service to project sponsors with significant [South] Korean interest, FASD supports [South]Korean project participants competing for large-scale overseas projects to capture a larger share of the growing global project market.”
FASD is organised in four teams, each covering specific industrial sectors to provide sector-specialised advice based on its global PF experience. According to Hong, FASD members assist South Korean companies from the early and often uncertain stages of project development to guide projects to achieve bankability.
“They are often involved in negotiations with host government bodies or commercial counterparties on behalf of project sponsors before the project’s contractual scheme is firmly established. Such early on involvement is typically followed by the participation of another financial institution(s) acting as financial adviser or joint financial adviser along with FASD, which is expected particularly to enhance ECA finance ability. Projects that are too small for a commercial bank to act as financial adviser can also be supported by FASD if it is viewed as important from policy perspectives,” said Hong.
Since its establishment in 1976, Kexim has played a crucial role in long-term export finance for South Korean exporters. Since the early 1990s, when privatisation drives combined with the growing scale of projects led to the flowering of PF, Kexim transformed itself into an active project financier offering its structured financial products.
The main area of Kexim’s project finance activity overlaps with that of South Korean exporters’ destinations. As they diversify into various regions and sectors, Kexim responds to their dynamic needs by providing them with customised financing.
“In recent years financing for natural resources development and environmentally sustainable areas such as water and sanitation has grown significantly while other conventional areas like oil and gas and petrochemical sectors have retained their importance,” said Hong. “However, as the role of [South] Korean exporters participating in projects evolved from EPC contractors to investors and developers, more structured financing methods are used and this in turn increases the volume of financing [per project] considerably.”
As a government policy-implementing bank, Kexim provides financial guarantees to covered lenders in order to encourage their participation in project financing, while aiming at leveraging liquidity of bank markets to maximise the amount of Kexim’s financial support to projects.
“The mix of direct loans and covered loans provided by Kexim to qualified projects can vary depending on a set of factors, including the market appetite of covered lenders, project size, and various other policy considerations,” said Hong.
“For instance, Kexim provided a much higher level of direct loans during the period of tight liquidity in the bank market to fulfil its role as a gap-filler. Kexim is actively incorporating different ways of supporting projects in line with evolving market trends. These include providing guarantees to project bond investors in the capital market and local currency loans and guarantees to name a few,” he said.
In line with other global ECAs, Kexim is driven by policy considerations in addition to the customary commercial, environmental and political risk considerations. Projects with a substantial amount of South Korean content, strategic importance of the relevant industrial sector, nature of the role played by South Korean companies and projects that create jobs in South Korea naturally receive strong support from Kexim.
In addition, Kexim is increasing its activities in priority sectors, such as renewable energy and information technology where South Korean companies are trying hard to establish a proven track record for market penetration.
Most developed countries have policies in place to promote small and medium sized enterprises (SME) and South Korea is no exception. Kexim provides loan-related services and other ancillary value added services, including consulting and advice for exports and overseas investment transactions.
Unlike other ECAs (in OECD member countries), almost 80% of Kexim’s funding comes from international borrowing. This particular aspect makes Kexim a benchmark issuer in the international bond market with its annual funding amount exceeding US$10bn, the largest amount issued by a South Korean institution.
Kexim has diversified its funding sources into 25 different currency markets such as yen, Australian dollars and Brazilian Real. Thanks to these diversification efforts, Kexim has gained a great capacity to provide sufficient liquidity with competitive pricing.
By leveraging the recent rating upgrades of Kexim to Double A level, Kexim broadened its investor base into high-grade funding sources. By adopting a more innovative and sustainable funding strategy, as shown in its recent issuance of a US$500m green bond, Kexim has obtained access to socially responsible investors.
For South Korean banks, the ability to access loan guarantees from Kexim meant they can offer more competitive pricing and longer tenors. Kexim’s financial guarantee is proven and has been well accepted by global commercial banks over the years. Its improved credit ratings in recent years have provided an added boost to the confidence of the banks in Kexim-covered deals.
“The interest of [South] Korean commercial banks in Kexim-covered PF deals is higher than ever. Last year, [South] Korean commercial banks participated in a Latin American transportation infrastructure transaction as covered lenders and more deals of a similar nature are under development,” said Hong. The result is that co-operation and project-specific meetings between Kexim and South Korean commercial banks are taking place on a far more regular basis than in the past.
South Korean banks traditionally have not ventured too far from their base and have lent offshore only to support their best customers. The upcoming float of the state-run Korean Development Bank and the expected reduction of the government’s stake in Woori Finance Holdings are signs that the South Korean banking sector wants to broaden its reach.
“We expect that [South] Korean commercial banks will seek a greater presence in the global PF market on the back of their ratings upgrade. To assist such efforts Kexim is facilitating the knowledge-sharing of expertise in global PF deals with [South] Korean commercial banks,” said Hong.
“We have taken the initiative of establishing a consultative body among [South] Korean commercial banks for closer collaboration in origination and execution of project financing deals. Kexim intends to proactively play a catalytic role to induce growing participation of [South] Korean banks in overseas project finance market as much as possible.”
But as Kexim and other ECAs start to play a more dominant role in global infrastructure financing, there is a growing concern that ECAs could become competitors rather than facilitators. Much of this concern can, of course, be put down to sour grapes from banks that resent losing the whip hand in dictating margins and tenors. And there is no doubt that sponsors are using ECAs not only as providers of the bulk of the finance but also as leverage against the banks that push for more commercial debt and shorter tenors.
According to Hong, ECA financing in OECD countries stemmed from the needs of their economies and it is designed with careful deliberations. “ECAs are voluntarily complying with internationally accepted guidelines and competing fairly in the market. As a result, in most of the cases ECA financing is welcomed even by commercial banks. Kexim is as committed as ever to designing its products in such a way that it will remain true to its role as a facilitator,” he said.
So what lies ahead for Kexim in 2013?
“As [South] Korean exporters’ financial needs evolve in line with their transformation from constructors to developers [and investors], we are planning to support the issuance of project bonds; measures to cover the bonds – structures to reflect the specific project characteristics – are also under review,” said Hong.
“As for regional distribution, Kexim’s PF tended to be focused on the Middle East and Asia in the past. But recently, as [South] Korean exporters diversify their partners toward Latin America and Africa, Kexim is enhancing its policies and capacities to meet the relevant financial needs. Indeed, we reviewed our credit policies and amended them to avoid potential obstacles. Several IR trips to the Middle East as well as the emerging regions [Africa and Latin America] are scheduled to take place within this month.”