COVID-19 and financing in emerging markets
Development finance institutions and export credit agencies are called to step into the breach during economic downturns. How are they responding to COVID-19? Are they still open for business in emerging markets? How have financing terms changed? Representatives of six such institutions talked about these and other questions during a call in early May. The following is an edited transcript.
The panelists are Tony Bakels, director of credit, legal and special operations at Dutch development bank FMO, Georgina Baker, vice president for Latin America and the Caribbean, and Europe and Central Asia at the International Finance Corporation, Koffi Klousseh, managing director and head of project development at Africa50, Luke Lindberg, senior vice president of external engagement at The Export-Import Bank of the United States, and Tracey Webb, vice president for structured finance and insurance at the US International Development Finance Corporation. The panel was introduced by Sarah Devine and moderated by Ken Hansen with Norton Rose Fulbright in Washington.
MR. HANSEN: Tracey Webb, has COVID-19 prompted the US International Development Finance Corporation to offer any new products or programs or to make interesting changes to normal procedures?
MS. WEBB: With respect to new products or programs, technically “no.” We are prioritizing the hardest hit regions. We are also trying to think beyond the immediate and medium term by shoring up supply chains. One thing that COVID-19 has exposed is the vulnerability of world global supply chains.
MR. HANSEN: Luke Lindberg, what is happening at the US Export-Import Bank as far as new products and programs?
MR. LINDBERG: ExIm is viewing this mostly as a short-term liquidity problem. We do not see what is happening as creating any longer-term structural issues. Our objective, as always, has been to focus on US workers and on figuring out how we can support them when the private sector is unable to do so.
Here are a couple key things that ExIm has done in response to COVID-19.
On March 12, we provided some program waivers and deadline extensions as well as additional flexibility in our working capital program and our multi-buyer and single-buyer short-term insurance programs.
On March 25, the ExIm board adopted four temporary relief measures. First, we implemented a new bridge financing program for foreign purchasers that provides bridge loans to get them through this time. Second, we outlined a program to offer progress delivery payment financing where ExIm is supporting pre-export payments to manufacturers. Third, there is a real need in the supply chain for short-term liquidity, and we have responded with supply chain finance guarantees. We are working with our lending community and banks to purchase receivables and provide liquidity to the supply chain and have the buyer purchase or transfer the credit to the bank at a discounted rate.
The last item, which we finalized in April, is a temporary expansion of our working capital guarantee to simplify and reduce our fees, expand the definition of inventory from export-related inventory to any inventory that could potentially be exported, and increase our guarantee from the traditional 90% to 95%. This should help make private lenders better able to keep lending. The word of the day for us is flexibility.
MR. HANSEN: Staying in Washington, Georgina Baker, what is the International Finance Corporation doing differently in response to COVID-19?
MS. BAKER: The IFC board has approved an $8 billion COVID-19 response program that allows us to move very fast into four areas.
Of that $8 billion, $2 billion is going to financing in two- to seven-year buckets for clients that either face significant disruption of labor force, disrupted supply chain, or even on the positive side, significantly higher demand for their goods and services because they are online retail, pharmaceutical, clinics or hospitals.
Another $2 billion is directed to financial institutions and supports our trade finance program where we are extending credit lines, extending tenors and increasing credit lines.
An additional $2 billion is dedicated to portfolio programs on supply finance, critical commodities and trade finance.
The final $2 billion is for our working capital solutions and supply chain finance.
That is all shorter term. It is really to work with our existing clients to say, “How can we support you? How can we help you in this economic downturn?” Cash is king. You may have a sustainable long-term business, but if you do not have cash today, the business can dry up. We are ready, and we have $8 billion already approved.
We are looking at ways to be counter-cyclical because that is the huge benefit that development finance institutions can bring to crises like these. We are looking at many different initiatives, and we will make a second approach to our board. As of today, we are focused on short-to-medium-term capital and getting cash out for existing clients.
MR. HANSEN: Moving overseas, Tony Bakels, how is FMO responding to COVID-19?
MR. BAKELS: We are seeing similar trends. Our traditional products are loans and equity investments, typically with a tenor of five years for financial institutions and up to 18 years for project finance. The objective of this long-term finance is really to create value by helping clients expand their activities.
With this crisis, our focus is shifting. Instead of creating value, we look more at the preservation of value and making sure that our clients get through this crisis. Instead of long-term finance, we are now also looking at short-term finance with liquidity support to help clients weather the next six to 12 months. It might be with additional loans. Another simple way to do it is to re-structure existing loans and defer the payments. We have streamlined our procedures, including by delegating the authority to approve such restructurings to our front-office staff.
MR. HANSEN: Koffi Klousseh, has COVID-19 prompted Africa50 to offer any new products or programs or make adjustments to its procedures?
MR. KLOUSSEH: We are an infrastructure platform owned by African states. Generally, our work is long term in nature because it is infrastructure. However, the first thing we have done in the short term is to donate cash to a number of initiatives on the ground in Africa. It might not be obvious to people in the US or in Europe, but staying in business when you are in Africa right now is not easy. We have done a lot to make sure people have internet access and can communicate remotely.
We are also continuing to fund our equity commitments. We have projects under construction, and it is important to us to continue funding as much as possible.
Third, it is important to us to signal that we are open for new business. A lot of stakeholders in the business community are looking to Africa50 for a signal that business can continue in Africa.
In the short-to-medium term, we are looking at a shift in our investment policy toward a greater share in social infrastructure like hospitals and education. We have fast tracked a number of investment initiatives in order to provide services to the African population in terms of health and sanitation.
We also have views about how to help in the long term. One is related to what we call asset recycling, which is to help countries that have a lot of infrastructure on the balance sheet to sell and monetize it, thereby freeing resources for governments to tackle the very important issues and problems of COVID-19.
MR. HANSEN: I understand from friends who do sovereign lending that the phones are ringing off the hook from finance ministries looking for financing or re-schedulings. What are you hearing from existing borrowers? Are they asking for help or are they staying quiet until you call them?
MS. WEBB: The phones are ringing off the hook. Even business models that have been working well are facing short-term liquidity needs. The demand has been tremendous, and we are working on trying to meet client needs.
MR. HANSEN: Tony Bakels, how about at FMO?
MR. BAKELS: Our story is similar. So far we have mainly received requests for restructuring. That seems to ease the immediate pain. So far between 10% and 20% of our clients have approached us or are expected to approach us in the next few months. We have received fewer requests for new money, but that is of course also because the crisis has only just started and most companies have buffers to get through the first one or two months. There will be requests for new financing. This may just be a period of silence before the storm.
MR. HANSEN: Can you say anything that can be shared with a small group of friends about how you are responding to those requests?
MR. BAKELS: I think we all realize that the need is there. These are not requests out of luxury, but out of need. We have been working closely with other DFIs to respond quickly to these requests.
MR. HANSEN: Georgina Baker, rounding out the DFIs in the room, what is IFC hearing from its existing customers?
MS. BAKER: Most clients are in evaluation mode, but the crisis is just beginning. They are looking at how long they think this will last and, if it lasts six months to two years, what will happen to their businesses. They are trying to deal with the day-to-day stresses. Now is not a great time to be borrowing because the markets are so uncertain and pricing is fluid. We are looking shoring up the finances of clients that have businesses with long-term potential.
As I mentioned, we have $8 billion delegated authority from the board to move quickly, but that is not all we are doing. For any existing client whose needs fall outside that program, we are working on an expedited basis. Brand new financings are hard because of an inability to travel and appraise businesses. But clients that were in good standing and are no longer clients because their equity was recently sold or the loan was recently paid off are ones that we are also reaching out to and saying, “How can we help, and what can we do to support you?”
MR. HANSEN: Georgina has flagged some of the challenges in dealing with new projects and new customers. Among other things, it is hard to do a site visit. It is hard to get to know a new team.
Koffi Klousseh, you said Africa50 is moving more into social infrastructure. That means new projects. How are you managing to do that given the obvious challenges?
MR. KLOUSSEH: New pipeline is very difficult. We have to deal with our present pipeline and make sure that projects that we have started reviewing move forward as much as they can.
Let me shift the question a little bit from pipeline to portfolio, which is where things are uncertain and difficult. Evaluation of where things are with our existing projects will dictate our openness to new business.
For example, we have important investments in power plants with offtakers that are not being paid regularly by the customers, and that is affecting the business seriously. We have to devise good plans to reschedule payment of debt, making sure that we allow breathing room to weather the storm. The question is how to do that with our partners, other DFIs and sponsors around the table and not in a silo.
MR. HANSEN: How about at ExIm? Are you seeing much new business? You clearly have a lot of new programs.
MR. LINDBERG: Because of our four-and-a-half-year hiatus from the marketplace, our portfolio is a bit older than perhaps some of our counterparts around the world. We have been engaged with some clients on restructurings.
With respect to new interest, we have seen a dramatic uptick in letters of interest. Part of that is due to the new relief measures we rolled out and part is that we have significant overall capital that we can still lend. We have a $135 billion exposure cap, and we are still sitting on about $48 billion of that.
We are countercyclical. If there is ever a time to need ExIm, now is a perfect example. We have seen an increase in pipeline opportunities.
Deteriorating market conditions
MR. HANSEN: What impact has all of this had on underwriting standards? On the one hand, maybe they are a little tighter because everyone is a little gun shy. On the other hand, maybe they are a little more flexible when you are looking at the creditworthiness you would like to see in a project sponsor or an offtaker.
MR. BAKELS: Our risk appetite is not changing, so as much as possible we are maintaining our existing standards. For existing clients, we want to preserve the investment and to be a reliable partner at moments like these. We may do things differently for short-term lending to existing clients even if our overall risk appetite has not changed.
Going forward, it is indeed a big dilemma because the environment is becoming more risky. We may have to adjust. The adjustments might include requesting additional collateral or requiring higher equity levels, better pricing or more government support for projects. How exactly that will work is still on the drawing board, but I do not think our conclusion will be to relax our overall underwriting criteria.
MR. HANSEN: Georgina Baker, how about at IFC?
MS. BAKER: I completely endorse what Tony said. There is a constant tension between the two sides of the shop, between risk and operations, to be as responsive as possible to clients. Risk argues, completely legitimately, that now is not the time to lower standards and then find in a year or two that our portfolio is severely affected. As of now, we are not reducing credit standards because we have so much business with clients of good standing.
Where that will stand in six to nine months remains to be determined. We will try to respond to clients that have needs that are not being met by our current facilities, and where necessary we will adapt and adjust.
MR. HANSEN: IFC has been a leader in its B loan program. How has COVID-19 affected the availability of commercial partners and co-lenders?
MS. BAKER: There has been a big impact. When you compare the first quarter of 2020 to 2019, global lending is down 15%. Part of that is because borrowers are drawing on revolvers or working capital facilities and are shelving fundraising for acquisitions and capital expenditure plans. Banks are also refocusing on their core clients with strong fundamentals. I think we are going to see second- and third-tier clients losing out because banks will focus on their best clients.
Funding costs seem to be settling at least 50 basis points higher than pre-pandemic levels. There has been an increase in bilateral loans or club deals instead of general syndications. Banks are not interested in pursuing new clients or expanding their client bases.
On the positive side, we have 10 to 15 financings that are expected to close by the end of the year. These are deals that were in process before the crisis hit, everybody received credit approval, and banks are sticking by those transactions even though market conditions have deteriorated.
MR. HANSEN: Luke Lindberg, commercial bank partnerships are fundamental to ExIm as well. What are you seeing in the availability of your traditional commercial-bank guaranteed lenders, co-lenders and insured lenders?
MR. LINDBERG: I will break it into two buckets. A lot of people had been waiting for ExIm to resume full operations, so there are some deals in the pipeline that people have been excited about. So far, on the medium-to-long-term side, we have not had a problem finding co-finance opportunities or folks willing to lend alongside us or take our guarantees.
On the shorter-term side, ExIm Chairman Kimberly Reed just completed a listening tour of all of our delegated lenders. I have been moderating those calls alongside her and listening to what is happening with them. The issue that was raised most frequently was increasing our working capital guarantee above the 90% level to 100%. We just increased it to 95%. It is not surprising that financial institutions want a full guarantee, but we think a 95% guarantee is a useful move to help weather this short-term liquidity crisis.
MR. HANSEN: During the 2009 crisis, there were large financings fully guaranteed by ExIm that could not close because, notwithstanding the US government guarantee, the lenders could not find the liquidity to fund. This prompted ExIm to open the spigots for direct lending. You have not seen that kind of constraint in availability so far I take it?
MR. LINDBERG: We have not.
MR. HANSEN: That is a piece of good news. Koffi Klousseh, Africa50 focuses on the equity side of deals, but presumably those deals all want to see debt. Are you making adjustments?
MR. KLOUSSEH: We have not seen any change. This is due in my view to the fact that there have been special envelopes that are dedicated for Africa that allow the deals being discussed to be completed.
As a matter of fact, we are in discussions with some of the DFIs around the table, namely IFC, and we are executing mandate letters, so there is still a transaction mindset. For existing commitments, we do not see any difficulty. What might be a bit more challenging is meeting the conditions to disbursement when these commitments have to disburse.
Many of our projects rely on some type of sovereign or government guarantees, and the standing of these governments and the appreciation commercial lenders will have of these governments being able to make good on their guarantees will have a strong bearing on whether financing is obtained. So we will see.
MR. HANSEN: Every institution with us here today has been an important source of capital for renewable energy projects. The dramatically depressed oil price has led to concern about the ability of renewable energy projects to compete effectively in the near and medium term. How has the depressed price of oil affected your portfolio and your prospective pipeline? Tony Bakels, could we start with FMO?
MR. BAKELS: The oil price is only one of the considerations we are faced with at the moment. The immediate concern is the drop in demand for electricity, which is up to 30% in some markets. When that happens, curtailment starts with the most expensive electricity sources. It then becomes important to distinguish between old renewable projects and new ones.
Projects that were built three or more years ago tend to have high power purchase agreement prices. For this portfolio, we have some concern that at some point governments, as offtakers, will be under pressure to start renegotiating tariffs. We think these portfolios may be at risk even though we have legally binding offtake agreements. However, it is only a small percentage of the total electricity supply, so overall we expect that this part of the portfolio will remain performing.
If you look at new projects, then we think that renewable energy is highly competitive, even with a low oil price. Storage is more of a challenge than oil prices for solar projects because obviously solar can only be used during the day. If you find a good solution to store electricity so that it can be available 24 hours a day, we think it allow solar to thrive even with low oil prices.
MR. HANSEN: Tracey Webb, what is the view on renewables at DFC?
MS. WEBB: Let me revisit underwriting standards first. I think the real differentiator right now is whether lenders are disbursing into existing deals. At DFC, we are disbursing into transactions, and we are accessing the capital markets. One of the projects we are disbursing into is an oil transaction. While we did not lower our standards, we looked closely at material adverse effect clauses, and we ran the model with new short-term oil projections. We are not changing our standards, but we are continuing to be a reliable partner to our investors.
Decreased oil prices have affected projects that were in process. We have already lost major projects as oil companies cut back on their capital expenditures.
The impact on renewables will be an issue, particularly with the weaker government credit support. We continue to disburse into that sector by looking at where we think the tariff is compared to the best projections we can get for medium-term oil prices in the same geographic region.
MR. HANSEN: Georgina Baker, what impact are low oil prices having on IFC’s operations?
MS. BAKER: Our support for renewable energy projects will continue. We require that at least 35% of our projects must be climate related.
We are supporting projects that are very competitive to oil. The last solar project we financed in my area of coverage was in Uzbekistan where we got a price of 2.67¢ per kilowatt hour, which is very competitive. To the points that were made earlier, when there is a government agreement to pay a fixed capacity payment, governments have a serious fiscal issue when there is low demand for electricity. We are seeing that in Africa, Pakistan and other parts of Asia where there are huge offtake payments that must be made. This is a very big risk for our portfolio. Whether this lasts for six months or two years will dictate how big of a problem it is.
We are continuing to develop projects in markets that are more mature. For example in Mexico, where it is a merchant market and there is no reliance on government guarantees, we are engaging with a solar project because renewables can be competitive. The pipeline is continuing, but only in more mature markets.
Although renewable energy can be competitive, many of the power purchase agreements that have been signed with governments will face difficulties that we will have to work through. We have seen governments in Europe and Latin America say, “We cannot afford to take this hit and you, the electricity suppliers, must reduce the tariffs.”
MR. HANSEN: A few years ago there was an ExIm chairman for whom I worked, Jim Harmon, who was fond of saying that anybody could make money in a bull market, but it was in a bear market where you could show your clients that you could make a difference. He said that during the Asian economic crisis. The question for this crowd is: what opportunities does COVID-19 give your agencies to stand out? Is there any upside to all this?
MR. KLOUSSEH: That is a tough question to be frank. It is hard at this stage to see the opportunities clearly. The market is changing right before our eyes. We are in an observation mode as to what might or might not work.
What I would say is that the crisis has shown the frailty of certain sectors within Africa, including the health sector, education, and information and communications technology in terms of last mile collection. Everything that relates to decentralized power generation has become a priority. In order to test people for coronavirus, you need to have refrigeration, you need power to operate testing centers, and you need power to operate small medical units. Governments have asked us to try to develop public-private partnerships to implement these projects quickly.
MR. HANSEN: Tracey Webb, is there any upside to COVID-19 for DFC?
MS. WEBB: There are obviously no good options here, and I think this situation is going to have a larger impact than we realize. Social upheaval will often accompany a time like this, so we may see more demand for political risk insurance.
I hope that we can demonstrate that we will be a reliable partner. Historically, our portfolios have performed well during periods of low demand, crumbling supply chains and high prices, but I think this is really going to test everybody.
MS. BAKER: At IFC, we are seeing opportunities because we are being so proactive and pushing things through at a very fast rate. We hope this will change the way that IFC operates.
I think many DFIs, and IFC is no exception, are seen as being relatively slow moving compared to commercial banks. Our staff are really invigorated to move fast under crisis-response conditions and asking why we cannot do this all the time. This provides a glimmer of hope internally. We love being quick. Let’s always do this.
It is also testing our ingenuity. We are looking at programs to support manufacturers of personal protective equipment because we see that there will be high demand in many emerging markets that do not have enough today. Hopefully, they will not need as many as have been needed in some of the developed countries because of the difference in demographics, but let’s be ready.
The biggest struggle that we have is in responding to the informal, unregulated sectors where the needs are huge. Remittances have dropped by something like $3 billion globally. These are cash flows that many people in the informal sector depended on, and we are struggling to come up with something that helps in that area. At a minimum, we are hoping to work with governments that were not passing the right legislation to support digital finance so that it is easier for people to send remittances in the future, even if that will not solve the problem today.
The informal sector is front and center in my mind in terms of what multilaterals can do. The informal sector can be 50% of some countries’ economies and much of what governments and banks are doing is helping the formal sector. This may not be such a positive ending to my comment, but I hope that we come up with something that can respond. This is where the need is great.
MR. HANSEN: Tracey Webb, has COVID-19 changed DFC’s equity and debt allocations for the fiscal year 2021?
MS. WEBB: We are hoping for a tremendous increase in 2021. I do not think we will see a difference in how we allocate between debt and equity.
MR. HANSEN: Tony Bakels, how is FMO streamlining risk due diligence for the sake of speed and given the realities that in-person diligence is not possible?
MR. BAKELS: We are really improving our digital due diligence skills. For most existing clients, we accept that if you have only done the digital due diligence, that can be sufficient. We are also looking at solutions working with local partners. There may be co-lenders that have offices in the country or we may work with consultancy firms or accounting firms that could do at least part of the due diligence on our behalf. The most innovative thing I have heard is to work with drones, but how that exactly will work still remains to be seen.
MR HANSEN: Koffi Klousseh, there has been a big push to get more institutional investors to invest in African infrastructure, directly and through private equity. What have you been hearing from the institutional investor community?
MR. KLOUSSEH: We are seeing institutional investors globally exercise more caution. We are going through a crisis, as we said. We do not know what the risks are going to be. We do not know the prices and returns that investors will require. It is harder to assess, especially for infrastructure, governments’ ability to support infrastructure properly. We are fundraising right now, so this is something we are experiencing in real time.