Sunday, March 30, 2014

Dealogic Trade Finance Data – 2013 Overview

Dealogic is an organization that provides services to investment banks. In particular, it is known for its production of data sets for the banking industry. Here is a summary of its trade finance data for 2013.

Industry Total

Total Trade Financing

Total trade financing amounted to 124 BUSD in 2013. How much is 124 BUSD? To get an idea of the magnitude, keep in mind the following comparisons. Total trade financing in 2013

  • represents half of total lending by Chinese banks in 2012;
  • represents roughly 6 % of total Chinese merchandise exports in 2013;
  • corresponds approximately to Qatar’s total merchandise exports in 2013.

Over the four quarters of 2013, trade financings were pretty much evenly distributed.

ECA Financing

ECA financing totaled 71 BUSD in 2013. Again, to give you an idea about the significance of this number, consider the following comparisons. ECA financing in 2013

  • corresponds roughly to Iran's merchandise imports in 2013;
  • is about 3 % of total outstanding international claims of French Banks;
  • is only 0.35 % of the gross market value of the global OTC derivatives market on June 30, 2013.

ECA financing deals were evenly distributed over the four quarters of 2013.

Industry Distribution

Total Trade Financing

In 2013, top ten banks absorbed 50 % of the trade financing market. However, none of the top ten banks holds a particularly outstanding position. HSBC, JP Morgan, and Mitsubishi UFJ performed slightly better than other top ten banks.

ECA Financing

Compared to the entire trade financing market, the ECA financing market is more concentrated: Top 10 banks account for 56 % of the total value of ECA deals. Among the top 10 banks, the picture is the same as for total trade financing: No bank has an outstanding position; HSBC, JP Morgan, and Mitsubishi UFJ slightly distinguish themselves from the other players.

Number of Deals of Top Ten Banks

Total Trade Financing

727 deals closed in 2013. Q4 2013 has been particularly strong: 42 % of the deals of top 10 banks were closed by the end of the year. BBVA obviously experienced an exceptional fourth quarter.

ECA Financing

340 deals closed in 2013. Generally speaking, they are evenly distributed over the year; only Q3 has some more deals and accounts for 32 % of ECA deals signed by top ten banks in 2013.


Dealogic Trade Finance Review

Wednesday, March 19, 2014

Infrastructure Investing. It matters. – Swiss Re and the IIF are “building a robust infrastructure debt market“.

The insurer Swiss Re and the Institute of International Finance have written a report about infrastructure finance. They explain that we need to fill, in the near future, an important infrastructure financing gap by diversifying sources of funding.

Long-term investment acts as a financial market stabilizer.“

We need additional infrastructure investing.

Global annual infrastructure spending requirements will increase from USD 2.6 trn today to around USD 4 trn by 2030. In times of economic stagnation, this is good news; not only because investing as such stimulates the economy but also because good infrastructure increases the production capacity of an economy and raises its productivity.

Infrastructure benefits people? - Extract of Swiss Re / IIF Report

The bad news is that Swiss Re and the IIF believe that traditional finance will not meet this demand: European banks are deleveraging and will have to deal with higher regulatory capital charges for long-term assets. In emerging markets, private capital markets are still in their infancy.

More diversity in sources of funding for the real economy is essential.”

Today, banks dominate infrastructure financing. However, infrastructure investment means long-term investment with an asset life spanning 25 – 60 years. That is why long-term investors such as pension funds, insurance companies, mutual funds, sovereign wealth funds, endowments and foundations should come into play.

The obstacle for these investors is that they don’t simply buy assets to hold to maturity. They need to be able to adjust their portfolios if necessary. Today, they cannot do so because there is no liquid infrastructure debt market.

The need for diversification of funding sources is stronger in Europe than in the U.S., as bank financing plays a much greater role in Europe, compared to the U.S.

In Europe, lack of diversity in intermediation represents a major impediment to the financing of the real economy.”

We need a robust infrastructure debt market.

To create an infrastructure debt market, Swiss Re and IIF have established a “wish list”:

  • Create a global, transparent, harmonized, and accessible infrastructure asset class
  • Promote information sharing and disclosure
  • Reduce regulatory policy uncertainty
  • Mitigate the pro-cyclicality of regulatory changes
  • Harmonize legislation for infrastructure investments
  • Review Solvency II and other regulatory capital charges on the insurance industry for long-term investments
  • Strengthen investors’ rights in cases of sovereign debt restructuring and facilitate the restructuring process
  • Develop best practices for bond documentations (aligned contractual terms such as applicable law and reporting requirements) and due diligence by international financial institutions and multilateral development banks

Pooling infrastructure assets.

A major idea put forward in the report is pooling infrastructure assets in a securitization-like structure. More specifically, infrastructure debt could be sold to a special purpose vehicle that issues asset-backed notes to long-term investors in a second step. Development banks and institutions as well as commercial re-insurers could enhance these notes.

This structure would have the advantage to allow a flexible handling of different projects inside the investment pool.

The idea to boost infrastructure financing by diversifying funding sources is certainly not new. Nevertheless, the report is still interesting as it gives a good overview about the topic and current initiatives.


Additional information from Swiss Re is available here.

Sunday, March 16, 2014

Sovereign Debt Restructuring Part 2 – IMF lending and IIF restructuring guidelines

In my first post on the topic, I have looked at Paris and London club principles and ended by describing some fundamentals for bond restructuring. Today, I will turn to two other institutions which are also inevitable in sovereign debt restructurings, i.e. the International Monetary Fund (IMF) and the Institute of International Finance (IIF).

But first, let's have a look at some numbers from recent sovereign debt restructurings.

Recent restructurings took, on average, roughly eight months. On average, the debtor country's debt/GDP ratio was 122 % before the restructuring and meant to fall by 1/3 within five years after the restructuring.

Dealing with the IMF

IMF Headquarters in Washington

In one way or another, every defaulting sovereign will talk to the IMF. Besides carrying out debt sustainability analysis, the IMF can grant loans to states in difficulty, either on non-concessional or on concessional terms. Non-concessional lending conditions are oriented at arms’ length terms whereas concessional lending constitutes a form of subsidy to low income countries (LIC).

“When we [the IMF] lend, we like to see sovereign debt restructuring really as the exception, not the rule.” (Sean Hagan, IMF, 11 October 2013)

Non-concessional IMF lending

“IMF loans are meant to help member countries tackle balance of payments problems, stabilize their economies, and restore sustainable economic growth.” (IMF Website – Lending by the IMF)

The IMF provides five types of non-concessional lending facilities. They all come with confusing names and acronyms. To tick the right box, the IMF asks two basic questions:

  • Who can benefit?
  • In which situation?

At this stage, I suggest you click through some slides that I have prepared on the topic. My hope is that this is easier to grasp than a detailed description of each credit line.

From the fund's [International Monetary Fund] perspective, when we lend, we like to see sovereign debt restructuring really as the exception, not the rule. (Sean Hagan, IMF, 11 October 2013)

Concessional IMF lending

To understand which concessional lending facilities the IMF proposes, let's tweak the above questions somewhat:

  • Who can benefit in which situation?
  • What are the lending terms?

Debt sustainability

One criterion is key for any of the above IMF facilities – debt sustainability. As a matter of fact, the fund requires that the debtor country has prospects to regain access to private capital markets within the time-frame when IMF resources are outstanding. Recently, however, the debt sustainability criterion has (in the context of the European sovereign debt crisis in May 2010) been softened. Today, the IMF is also willing to lend if there is a high risk of international systemic spillovers, following a debtor country’s possible default.

“But while the Fund always takes contagion concerns into account when it designs and implements its lending policies, it should not allow these concerns to override or supersede its primary duty to help members resolve their underlying balance of payments problems.” (IMF Website – Lending by the IMF)

IIF Restructuring Guidelines

The Institute of International Finance (IIF) has put in place several guidelines for any sovereign debt restructuring process. They are called “Principles for Stable Capital Flows and Fair Debt Restructuring in Emerging Markets”. Their application is voluntary for the parties.

The IIF has set up four principles:

  • Transparency and timely flow of information: Debtors must give creditors the information necessary for the latter to appreciate the economic and financial information of the sovereign debtor. If the debtor country reaches agreements with individual creditors, it should inform other creditors about it. Creditors, in turn, grant confidentiality of non-public information.
  • Close debtor-creditor dialogue and cooperation to avoid restructuring: This includes namely the debtor taking structural economic and financial reforms and the borrower helping with the implementation of such reforms.
  • Good faith actions: When a restructuring becomes inevitable, debtors and creditors should engage in a restructuring process that is voluntary and based on good faith. Contractual rights must remain fully enforceable. A creditor committee should serve as intermediary between the debtor and the different classes of creditors. On the debtor side, the country should resume debt service as a sign of good faith, if possible.
  • Fair treatment: Affected creditors should be treated fairly and without discrimination, especially as regards the voting process.


Sunday, March 9, 2014

Humanomics – What made us rich?

On November 27, 2013, Deirdre Mc. Closkey, Professor at the University of Illinois, held the 2013 John Bonython lecture at the Centre for Independent Studies. She explained how our societies got rich and what they can do to ensure future economic growth.

“This argument that I am making can be called humanomics – economics with the humans left in.”

I retain three key points that she identified:

1. Capitalism is good for societies.

“A life in business is not the worst life, ethically, that one can imagine.”

“Capitalism is an altruistic way of organizing society.”

“I have seen worse behavior in the church than in most businesses.”

2. Innovation is paramount for the development of states.

“Innovation made the modern world, not investment.”

“It's discovery that made it all. So it's got to be non-routine. And the problem with most economics is that it's routine.”

In Deidre's view, innovation can sometimes lead to economic downturns. A recent example is the role that played securitization techniques (a financial innovation) in the 2008/09 financial crisis. However, this does not speak against innovation as such. It is simply a proof that people tend to overdo new things.

“That [securitization of mortgage loans, causing the financial crisis in 2008/09] was a financial innovation. That was a good thing done too much. We are humans. We got a new toy, we are gonna play with it! And then we get depressed.”

3. Societies need to defeat the heritage of patrimonial rights to embrace innovation.

Deirdre cites the example of nobility that disappeared in Europe in the 19th and 20th century, leaving space for the constructive destruction of innovation.

“I accept that there are political situations and social formations and cultural habits that might, for a while, prevent an economy from sharing this amazing engine of creativity.”

“We can see the future in China and India. […] Both of them had an ideological change. The change is, instead of shooting entrepreneurs, to encourage them.”


You can watch the lecture here. An audio version is available here.

The lecture was organized by the Centre for Independent Studies.

Thursday, March 6, 2014

Sovereign Debt Restructuring Part 1 – “It's not about who got a better deal.”

What happens if a state is about to default on its debt? To say it right away, there is no clear answer to this question. The reason is that there is no international insolvency law that can be imposed on sovereigns.

In absence of a clear framework, restructuring practices have developed. First, these practices depend on the type of creditor involved. This is part of the first post on sovereign debt restructuring. Second, there are two international bodies which have a particular influence on the topic, i.e. the International Monetary Fund (IMF) and the Institute of International Finance (IIF). I will discuss their function in a second post.

“It's not about who got a better [sovereign debt restructuring] deal but what was fair vs. unfair about intercreditor [issues].” Nazareth Festekjian, Citi, 11 October 2013

From a sovereign debtor perspective, it makes a difference whether your creditors are other sovereigns, commercial banks, or bondholders.

1. Dealing with sovereign loan creditors in the Paris club

If a state owes money to another state, this debt is restructured in the Paris club.

What is the Paris club?

“The Paris Club has remained strictly informal. It can be described as a "non institution".”

The Paris club is not a formal organization but only an informal group of sovereign creditors. Hence, it has no specific date of foundation. The first meeting with a debtor country was held in 1956 when Argentina agreed to meet its public creditors in Paris.

The club’s role is to find coordinated and sustainable solutions to payment difficulties experienced by debtor nations. Paris club creditors can hold their claims on other sovereigns either directly as a government or through appropriate institutions, including export credit agencies. However, a debtor country is invited to a negotiation meeting with its Paris club members only after it has concluded an appropriate program with the IMF that demonstrates that the country cannot meet its external debt obligations.

Associated members can actively participate in negotiation sessions, subject to the agreement of permanent members and of the debtor country.

In addition to its members, observers also attend the Paris club negotiations. Those observers are IMF, World Bank, OECD, UNCTAD, European Commission, African Bank of Development, Asian Bank of Development, European Bank for Reconstruction and Development, and Inter-American Bank of Development.

The Paris club holds monthly sessions in Paris, prepared by a Secretariat General. Chair and Secretariat General of the Paris Club are run by senior officials of the French Treasury.

Which rules govern Paris club restructurings?

The Paris club has developed two types of restructuring rules:

The type of restructuring that the Paris club applies depends on the type of payment difficulty that the debtor country faces. If the debtor country is temporarily unable to pay, although its economic fundamentals are sustainable (This is called a liquidity problem.), creditors will help by rescheduling the debt service. If however, its inability to reimburse is recurring because its debt level is unsustainable (This is called a solvency problem.), rescheduling of the debt will be carried out on concessionary terms, canceling debt partially.

Which countries are indebted vis-à-vis Paris club members?

2. Dealing with private commercial bank loan creditors in the London club

If the Paris club is a “non-institution”, the London club is a “non-club”. As a matter of fact, the London club gathers only for each restructuring and unifies the commercial banks that have lent to the particular debtor. As a consequence, there is no permanent membership or club structure at all. The term “London club” simply exists because significant restructurings of commercial bank debt with emerging market countries (Peru and Zaire) took place, in 1976, in London. Today, renegotiations of commercial bank debt with sovereigns don’t even take systematically place in London.

On the merits, common features of any London club restructuring include

  • the use of refinancing, i.e. the swap of old debt for new debt, at a lower than the initial price,
  • exit bonds convertible into local currency,
  • debt for equity swaps, and
  • buy-back operations.

The restructuring process usually involves a bank advisory committee (BAC), also called steering committee of commercial banks. In addition, the IMF is regularly involved in London club restructurings to ensure that creditors’ positions are aligned and economic programs are commercially viable.

3. Dealing with private bondholders

“A decade ago, we were dealing with the beginning of [the sovereign debt restructuring of] Argentina. I am not sure whether we are [now] towards the end or the middle or still at the beginning.” (Randal Quarles, Carlyle Group, 11 October 2013)

For a sovereign, dealing with private bondholders is, obviously, more difficult than dealing with loan creditors, simply because the number of investors is much higher. To reach a common agreement with bondholders on a restructuring, two basic approaches exist:

The IMF has developed a statutory approach, i.e. a set of rules which intend to impose a sovereign debt restructuring mechanism (SDRM) on bondholders. The SDRM proposal has six central features:

  • A supermajority of creditors can accept new lending terms for all creditors.
  • The SDRM prevents disruptive litigation by creditors during the debt restructuring negotiations.
  • The debtor shall negotiate in good faith.
  • Transparency shall reign among creditors.
  • Any fresh private lending (“new money”) shall be senior to existing debt.
  • Creditors and borrowers shall benefit from a dispute resolution forum.

However, the SDRM remains theory today, as there is currently no majority among UN member states to adopt the mechanism in an international treaty.

“While creditor participation has been adequate in recent restructurings, the current contractual, market-based approach to debt restructuring is becoming less potent in overcoming collective action problems, especially in pre-default cases.” (IMF Research Paper on Sovereign Debt Restructuring – April 26, 2013)

The market-based approach consists of inserting collective action clauses (CAC) in bond indentures. These CAC regulate the decision-making for bond restructurings prior to issuing the bond.

Again, nothing of the above is carved in stone, every restructuring can be different. Especially, as countries always have different types of creditors, the mechanisms will have to be combined for a comprehensive restructuring of a country's debt.