In the last decade Export Credit Agencies have emerged as big players in the project financing market. They offer many benefits not the least of which include favourable terms and conditions and improved bankability of a project.
Last December saw the signing of the US$20bn facility for Ichthys LNG project in Darwin - one of Australia’s largest ever project financing deals. It’s quite a feat at a time when credit is scarce and raising large amounts of debt is notoriously difficult. So, how did the sponsors do it?
A look at the project’s list of financiers reveals that Export Credit Agencies (ECA) account for more than half of the total US$20bn debt. JBIC, Nexi, EFIC and five other ECAs together are providing over US$11.2bn – either in the form of direct loans or guarantees. In fact, due to the substantial lending by ECAs, the amount available to commercial lenders was scaled back.
The Ichthys LNG project financing illustrates the growing opportunity ECAs offer in financing projects.
A sponsor may find it difficult to finance its project with debt due to a low or no credit rating or because the risk profile of the project is unattractive to conventional lenders. In these circumstances, a sponsor will often turn to equity to finance its project.
However, equity financing dilutes existing shareholdings and diminishes the return on equity for these shareholders. Consequently, it can be considered more expensive than debt financing.
Using debt not only avoids equity dilution, it also captures the effects of leverage. Therefore, experienced sponsors invariably look for alternatives to equity financing.
One such alternative is to involve ECAs in a project financing.
ECAs were originally established to help domestic companies export to international markets. They provided insurances or guarantees which reduced exporters’ risk of not getting paid when sending goods overseas.
During the last decade ECAs have expanded their activities and are now significant players in the project financing market.
An ECA is backed by its government and can offer terms and conditions not otherwise available in the debt market. For example, many ECAs such as the US Import-Export Bank or the British ECGD offer a direct loan with a term of 12 or even 14 years and with highly competitive interest rates. Moreover, if certain requirements are met, ECAs can often offer facility amounts which are not available on the conventional debt market.
Another factor which can advantage borrowers is that ECAs directly compete with other ECAs for business. And since more and more countries are establishing ECAs, competition will intensify and lead to even better conditions for borrowing sponsors.
When an ECA gets involved in a project, it can lead to a “halo-effect”. Commercial lenders might not rely on a sponsor’s risk assessment or credit rating, however, if an ECA enhances the project company’s credit rating with a guarantee over the envisaged loan or is involved in the project with a direct loan, more conventional lenders might take a different view on the project’s risk profile.
For international projects ECAs can draw on exclusive government information on the political situation of the country in which the project is located. This gives the ECA superior knowledge of any political risks inherent in the project.
ECAs enjoy not only financial but also political backing by their government. Thus, their involvement can be a diplomatic bonus, facilitating potentially sensitive negotiations in country.
The one draw back of involving an ECA is that it is an additional party at the table which can complicate the negotiation of project documentation. ECAs often have specific requirements such as the off-taker being an entity established in the relevant home country of the ECA.
However, the myriad advantages far outweigh this shortcoming - shown by the fact that ECAs were involved in almost US$1.8 trillion worth of business world wide in 2011.
All in all, project sponsors would do well to consider involving ECAs in their future projects.