According to the International Energy Agency, global energy demand will grow by a third by 2035, requiring more than US$48 trillion in investment. Emerging markets, many of them in Asia Pacific, are expected to account for more than 90 per cent of this growth1.
Both export, and import orientated energy markets have a keen eye on the opportunities this demand will bring.
Export Credit Agencies (or ECAs) in Asia Pacific have had, and will have, a key role to play in helping to support international trade and investment in energy and resources-related infrastructure, technologies and commodities.
Traditionally, the role of ECAs in energy project financing has been mainly focused on helping to boost the export activities of that ECA’s home country construction, engineering and energy technology companies. This has been achieved through tied lending or other support where there has been a market gap in available liquidity, or a need for insurance or other risk transfer, in relation to projects in countries with a high risk profile.
Depending on their mandates, ECAs can offer buyer credit facilities, direct financing, guarantees and commercial and political risk insurance to bolster private investment and assist in getting challenging or high value project finance deals completed. They can provide credit enhancement for securities or other funding to support future cash-flows from untested SPVs. Their involvement can help to improve bankability, reduce equity dilution and lower costs in a capital intensive industry.
In the wake of the Global Financial Crisis (GFC), regulatory restrictions and capital adequacy and liquidity requirements imposed by Basel III meant that credit and liquidity became scarcer. The global recession also saw energy and commodity prices drop in some sectors as demand fell. Venture capital and private equity became correspondingly more expensive. As a result, ECAs needed to step in to fill the funding gap with either credit support or direct loans where new projects were being undertaken. Commercial and political risk insurance offered by some ECAs also gave nervous commercial lenders the necessary protection and comfort to continue lending.
In the post-GFC market with more funding from US private equity and institutional investors, and higher banking and market confidence, do ECAs still have the same role to play?
The old normal
With more liquidity in some sectors in the current market, ECAs in Asia Pacific can play the ‘normal’ ECA role of supporting home-grown export industries and also providing country risk support.
The involvement of an ECA can continue to offer a number of benefits for high value long term energy infrastructure and resources projects.
ECAs can fill a gap in funding requirements for a project with high value contributions from deep reserves and at lower sovereign-level funding costs. The Ichthys LNG project in Western Australia required an enormous debt financing of US$20 billion. When it closed in 2012 it was regarded as the largest project financing in global finance markets at the time. 24 commercial banks funded US$4.8 billion in uncovered loans but the project needed US$11.2 billion in support from 8 ECAs giving direct loans, guarantees or insurance cover, in order to get the financing over the line2. At US$5 billion, Japan Bank for International Cooperation’s (JBIC) loan into the Ichthys project was its largest ever.
Large scale export infrastructure projects in Asia Pacific in the energy, resources and port sectors continue to look to ECAs to supplement and facilitate finance. This may be partially due to insufficient liquidity in the local bank market for commercial banks to fund all of the debt (covered or uncovered), the long lifespan of a project or a potential political or economic risk. ECAs will also be keen to be involved to ensure critical energy exports or imports are protected.
The A$7.2 billion Roy Hill mine project financing in Western Australia which closed in April 2014 was facilitated by A$2.35 billion in ECA-backed facilities (offered by Korea’s Exim Bank (KEXIM) and Korea Trade Insurance Corporation (K-Sure) and Japan’s Nippon Export and Investment Insurance (NEXI)) and by just over A$2 billion in direct ECA loans from KEXIM, JBIC and US Ex-Im3. ECA involvement helped to stimulate commercial bank financing from an additional 19 commercial banks which may otherwise have been wary of falling commodity prices.
Looking at Asia, energy development in Vietnam and Laos (for example) is also bringing increasingly high value Japanese and Korean ECA investment. The US$1.7 billion 1200MW Vinh Tan 4 Thermal Power Plant being developed by Vietnam Electricity Group is benefitting from a US$300 million loan from KEXIM and a US$338 million loan partially provided by JBIC. K-Sure is also providing cover for US$455 million of the commercial debt4. In Laos, the US$1.582 billion 1,070MW Nam Theun 2 hydroelectric power project involved support from at least three ECAs including Thai Eximbank supporting Thailand’s power offtake. At the time  this was reported as the largest cross-border power project in Asia and the largest privately financed hydro project globally5.
With a long term strategic focus, ECAs can offer loans or other support for longer tenors than are often available in the commercial market, particularly in Australia where tenors are typically around five years.
On the Gladstone LNG project, Australia’s ECA, Export Finance and Insurance Corporation’s (EFIC) facility had a 13 year tenor. ECA support in Ichthys also enabled longer tenors to be offered by the commercial banks benefiting from cheaper capital commitments, helping to mitigate refinancing risk. The tenor for ECA loans and insurance on the Surgil gas and petrochemicals project in Uzbekistan referred to below was 16 years. KEXIM can offer tenors of 18 years for renewables, hydro and nuclear projects and Chinese ECA financings have been known to offer tenors extending to 25 years.
As the Basel III matched funding requirements continue to impact the commercial bank market in the coming years, this aspect of ECA support will become more crucial.
Given their status as semi-governmental institutions, the cost of borrowing, capital reserves and return expectations for most ECAs is lower than that of commercial lenders – meaning that cost savings are often passed on to borrowers. This assists with blending of funding levels and through fixed rate CIRR (Commercial Interest Reference Rate) funding offered by most OECD ECAs, can reduce overall project costs. ECAs from non-OECD countries which are not bound by the OECD CIRR guidelines can offer even more preferential rates.
In addition to construction and credit risks which may arise on any energy project, those being developed in developing countries or volatile regions also carry political risks. Governments may topple, nationalise projects, freeze payments or breach their contractual obligations; bank collapses, coups, strikes, terrorist incidents, currency devaluations, changes in law and poor physical and legal infrastructure can all derail a project.
“Large scale export infrastructure projects in Asia-Pacific in the energy, resources and port sectors continue to look to ECAs to supplement and facilitate finance.”
ECAs continue to help investors to take country risk in emerging or politically difficult markets by providing skilled contractors, political influence, improved bankability and direct financing or political risk insurance, subject to the restraints of international sanctions.
One example is the leading role being played by Chinese ECAs in facilitating investment in new frontiers in Africa – a strategic market for China. In November 2013 it was reported that the Chinese central government would provide US$1 trillion in financing for Africa up to 2025, with China Exim Bank (CEXIM) accounting for 70-80 per cent of the total figure.6 In 2012, Korean ECAs provided US$1.8 billion for the Surgil gas and petrochemicals project in Uzbekistan, also offering commercial and political risk insurance.
In the Asia Pacific region, the opening of the market in Myanmar is likely to be another area of focus for ECA financing and political risk insurance. With Myanmar’s under-developed legal framework for large scale infrastructure projects, and ongoing political and military uncertainty, commercial lenders are likely to need support from ECAs to take on Myanmar country risk. As one example, in January 2015 the Japanese/Thai joint venture Toyo Thai announced that it is looking to JBIC to finance 80 per cent of the US$2 billion required in financing of its 1,280MW coal-fired power project in Myanmar, with the remaining 20 per cent of debt to be provided by other ECAs and commercial lenders7.
ECAs can also provide ‘soft support’ through their intragovernment relationships, political knowledge, diplomatic goodwill and reputational strength. They can offer the benefit of cooperation agreements and relationships with multilateral agencies (such as the Asian Development Bank and the International Finance Corporation (part of the World Bank)), offshore banks, private insurers and other ECAs offshore. ECAs can also use their local knowledge to assist offshore ECAs and other lenders to navigate onshore due diligence issues.
Changing role – adaptation and innovation
ECAs and their mandates are constantly evolving to adapt to changing market conditions, new opportunities, competition and political priorities.
Helping small and medium-sized enterprises (SMEs) to overcome financial barriers to market entry is now a key focus of most ECAs.
In Australia, EFIC’s expanded powers (which recently passed the Senate and received royal assent)8 to allow direct lending for export transactions involving all goods, not just capital goods, indicates an increased level of Australian government support for smaller scale contractors and suppliers to energy and resources projects.
Support for SMEs has also been a driver of US Ex-Im’s support of large project financings, where US manufacturers have been key suppliers of goods.
A focus on supporting SMEs is likely to increase in Australia given the structural obstacles for SMEs in accessing finance identified by the Final Financial System Inquiry Murray Report in December 2014.9 These obstacles echo those that apply to SMEs elsewhere and include:
- information asymmetries between lenders and borrowers
- greater requirement for collateral
- higher interest rates
- higher fixed costs of raising funds in capital markets
- onerous non-monetary terms
- fewer economies of scale.
Korea’s KEXIM is also focusing on assisting SMEs in line with government policy and its mandate. It has ear-marked 26.5 trillion won (approximately US$24.5 billion) for such purposes in 2015, an increase of 1 trillion won (approximately US$925 million) compared to 2014.10 In Japan, NEXI has offered insurance to support the export activities of Japanese SMEs since 2005. JBIC’s mandate includes six support measures aimed at promoting Japanese SMEs, including preferential loan conditions, specific credit lines and longterm local currency loans with fixed interest rates.
A number of ECAs now include support for overseas investment in, and acquisition of, natural resources as key policy aims.
As an export driven energy economy, Australia will be looking for investment and offtake from markets in Asia (and elsewhere) with a high energy demand but few viable natural energy resources.
Attracting energy resources investment in Australia and growing its energy export capacity and competitiveness are twin pillars of Australia’s Energy White Paper. According to the Bureau of Resources and Energy Economics (BREE), Australia’s resources and energy commodity export earnings reached A$195 billion in 2013-2014, and are forecast to increase at an average rate of 7 per cent per year from 2013- 2014 to reach A$274 billion in 2018-1911. According to the Energy Green Paper 2014, Australia is currently the world’s second largest exporter of coal, number three exporter of uranium, and number four exporter of gas12 and is looking to become the largest exporter of LNG by 201813.
For natural resource-challenged economies such as Korea and Japan, diversification of energy supply is a critical strategic concern.
In Japan this is particularly the case in light of the move away from nuclear energy after the Fukushima nuclear disaster. According to Japan’s FY2013 Annual Report on Energy (Energy White Paper 2014) Outline, Japan and South Korea were respectively 33rd (6 per cent) and 30th (18 per cent) in ranking of energy self-sufficiency for the 34 OECD countries in 2012. Pre-Fukushima, Japan’s self-sufficiency was much closer to South Korea’s at 19.9 per cent.
Korea reportedly relies on imports to meet 97 per cent of its energy demand.14 From an ECA perspective, energy projects feature strongly in KEXIM and K-Sure’s portfolios, and KEXIM has a specific mandate to provide natural resources development loans.
Japan’s debt financing of Train 1 of the landmark US$11 billion Freeport LNG Project in the USA in 2014 demonstrates its national strategic focus on energy diversification. At US$2.7 billion, JBIC’s direct loan was its largest in the USA.
The JBIC loan was supported by a commercial bank tranche backed by NEXI. The financing allows equity investors and offtakers Osaka Gas and Chubu Electric to source LNG on prices based on US natural gas prices, rather than being tied in to volatile oil-linked LNG prices.
For China, there is a strategic focus on mineral resources as well as energy imports. Chinese investment and ECA financing in Africa has partly been with an eye to securing lucrative and strategically important export contracts or repayment in kind with oil or minerals.
ECAs are continually diversifying geographically and looking at new emerging markets from a commercial as well as a strategic perspective. For example, ECAs (and multilaterals) are key players in opening up African markets to foreign commercial investment in the burgeoning energy and infrastructure space.
The continuing prominence of Asia in both the global economy and global energy demand means that Asia will continue to be a key focus for investment.
Japanese, Chinese and Korean ECAs continue to look to other parts of Asia to diversify and promote local technology, construction and engineering, and energy offtake. With an ever-increasing demand for energy Indonesia has been a key focus for those ECAs for many years. CEXIM was involved in the financing of a substantial proportion of Indonesia’s Fast Track 1 procurement process for 10,000MW of power in Indonesia in 2008-2009, with Sinosure providing backing for commercial debt tranches.
Looking at Japan, at US$1.64 billion, JBIC’s funding to projects in Indonesia over the last 3 years is more than three times that of the next largest financier (the ADB)15. Most recently (in January 2015) JBIC lent an additional US$313.7 million to Mitsubishi Corporation to support its investment in the US$2.8 billion Donggi-Senoro LNG Project. JBIC also participated in the project financing of the project in September 2014, alongside two other Asian ECAs (KEXIM, providing a direct loan of US$191.8 million and an insurance guarantee of commercial tranches, and NEXI, providing insurance guarantees)16. Japanese and Korean utilities are long term offtakers of the LNG, thus enabling Japan and Korea to benefit from a lower cost stable diversified energy supply.
Non-Asian ECAs are also looking to Asia for financing opportunities. In October 2014 Denmark’s ECA, Eksport Kredit Fonden, guaranteed approximately 80 per cent of the US Dollar tranche of the US$315 million financing of Energy Development Corporation’s 150MW Burgos Wind farm in Ilocos Nortes in the Philippines17.
The ‘new normal’?
If the ‘new normal’ of falling oil prices is maintained, then we are likely to see an increased focus on diversification of energy supply and alternative energy investments outside oil. ECA funding focus is expected to adjust accordingly.
ECAs can help E&P (exploration and production) companies finance new projects where traditional sources of financing are becoming scarcer. This can be achieved by providing direct finance, credit support guarantees and insurance to improve bankability and mitigate contractor and counterparty risk and bank exposures, as was the case for a number of projects during the GFC. For example, Vung Ro Petroleum, the sponsor for a new US$4 billion Phu Yen oil refinery project in Southern Vietnam, is looking to ECAs for a large proportion of the financing for the project18.
Other economic developments on the world stage are also focusing attention on ECA funding. KEXIM sees its ability to lend to Korean exporters and to local project developers as a key buffer against the weak yen, (relative) Chinese slowdown and Eurozone uncertainties. Its funding capacity for 2015 has increased from 79.7 trillion won (US$7.2.2 billion) in 2014 to 80 trillion won (US$72.5 billion).
Although not as active in this area as multilateral and development finance agencies, a number of ECAs have responded to a growing trend for socially and environmentally responsible investment and fossil fuel divestment by adapting their mandates accordingly.
JBIC amended its mandate in 2010 to establish a financial product called GREEN (Global action for Reconciling Economic growth and Environmental preservation) under which it has provided financing for clean energy projects in India, Malaysia, Colombia and other countries.
Korea’s KEXIM has included green financing as one of its priority sectors. In 2013 it issued a US$500 million five-year green bond, the proceeds of which are fed back into renewable energy, energy efficiency and low carbon projects19.
The Export-Import Bank of India has also entered the green finance arena, raising an oversubscribed US$500 million from a five-year green bond issue in March 2015.
In Australia, both EFIC and foreign ECAs could play an important role in helping to boost the renewables industry. New investment in greenfield renewables projects in Australia has fallen to an all-time low, largely due to continuing low energy demand and ongoing policy uncertainty around the national Renewable Energy Target. Of the few renewables projects which have been financed in the last few years, a number have had the benefit of support from the Clean Energy Finance Corporation (CEFC). In its first full year of operation, the CEFC invested A$930 million, supporting projects with a value of over A$3.2 billion.20 The future of the CEFC and green securitisation options are both uncertain under the current Australian government but green bonds could be a future initiative for ECAs.
The announcement in the UK in mid-February 2015 of a cross-party declaration to accelerate the transition to a competitive, energy-efficient low-carbon economy and to end the use of unabated coal for power generation (announced as part of the UK’s commitment to tackling climate change in the run up to the UN Climate Change Conference (COP 21) in Paris 2015) could also signal a change in levels of investment in the global coal industry. ECAs could have a significant role to play in facilitating green finance initiatives developed in light of Paris 2015.
In recent years there has been some interest from the Middle East, Malaysia and Indonesia in developing Shariah compliant ECA products. The German ECA, Euler Hermes, has supported Islamic finance transactions in the past. This could also be a new offering for Australian and Asian ECAs.
In light of on-going regulatory pressures for commercial lenders, and wider concerns about the Chinese slowdown, continuing volatility in financial markets and low commodity prices, export markets could go full circle and see ECA support being essential again to fill the funding gap for many projects. Export credit insurance is also seen as critical in some scenarios to mitigate political and non-payment risks.
ECA innovation – what next?
ECAs are also adapting to new market conditions and the challenge of operating in a more competitive environment by developing new products – including venturing into capital markets.
To bond or not to bond
ECAs involved in the projects sector have looked at the example of ECAs such as US Ex-Im, UK Export Finance and COFACE in the aviation sector, and have begun to consider ECA-wrapped project bonds. Investors who may generally otherwise be wary of taking construction risk can have the benefit of an unconditional and irrevocable guarantee supporting repayment of the bonds during the construction phase before project revenues become established.
Euler Hermes was a frontrunner in developing an innovative refinancing facilitation structure whereby a syndicate bank refinances its participation by taking a funded participation from a German covered bond issuer. Euler Hermes provides enhanced 100 per cent ECA cover through an on demand securitisation guarantee. ECAs in France, Belgium, Switzerland and the Netherlands have all also developed securitisation guarantee schemes.
KEXIM has also expanded its mandate to provide guarantees to support the issuance of project bonds.
In Australia, there is currently limited interest for ECAwrapped project bonds for a number of reasons. These include greater liquidity, construction risk, mixed appetite for fixed income securities and greater attractiveness of more mature longer term offshore bond markets. However, we anticipate this may be an area to watch in coming years as the market seeks alternatives to traditional debt financings. In appropriate circumstances, it is possible that under its mandate EFIC could issue a guarantee of a project bond in future – an interesting potential development.
Catalysing super bond investment
ECAs may be able to play a role in encouraging superannuation funds to invest in the bond markets.
Given investment mandate restrictions for superannuation funds relating to illiquid investments, ECAs could look to offer super funds a get out clause by providing support which would help to develop a liquid bond market. This could take the form of a government-backed infrastructure funding corporation providing credit-wrapping of infrastructure bonds or a bond redemption facility for eligible projects.
Securitisation guarantees along the lines of those offered by European ECAs could also be developed in Australia to encourage super fund investment in project-backed bonds.
Another interesting development amongst Asia Pacific ECAs is the ability to make equity investments.
KEXIM’s mandate was amended in early 2014 to allow it to make equity investments in projects where it has a lender or guarantor role without needing formal approval from the Ministry of Strategy and Finance. In October 2014 KEXIM took its first equity stake – US$7.15 million in the 54MW Semangka Hydroelectric Power Project in Indonesia, being developed by POSCO Engineering Consortium21. JBIC can also invest equity. This may become a new trend to facilitate projects across the region.
The gap in the market caused by capital adequacy and poor liquidity is perhaps closing but new challenges are presented by falling commodity prices, a relative Chinese slowdown and ongoing instability in financial markets. ECAs are proving adept at developing new mandates and products to deal with changing market conditions.
With a renewed focus on global trade and productivity in the wake of the G20 Leaders’ Summit in November 2014, it will be interesting to see what the future holds for ECA assistance and investment in energy infrastructure and resources projects in Asia Pacific.