Export financiers spread their wings

by Simon Pirani

New frontiers are opening before export financiers in the CIS. The secular, long-term rise in oil prices means that Azerbaijan, where ABN Amro has signed two ground-breaking deals, has joined Kazakhstan and Russia as a viable target. And the beginnings of Russia’s industrial revival open up transport, manufacturing and agriculture, as well as telecoms.

Among the large Russian borrowers, packages that combine ECA-backed finance other unsecured finance are in vogue. ECAs are starting to look at corporate risk without a state guarantee, and to work with Russian banks who buy machinery for on-sale or leasing to industrial clients (see Trade Finance July-August 2005).

Ron Hansen, managing director (structured export finance), at ING Bank, said: “Several top tier Russian corporates have combined long-term export finance deals with syndicated bank lending and/or bond issues to fund their business plans. Competition there is tough and pricing for the banks is under pressure.

“The market is also going to the second tier corporates. For them, getting ECA cover remains a challenge, but if you have security, in the form of a pledge, or mortgage on a ship deal for example, then you can get the deal done.”

Christine Lipton, associate director (project and export finance) at HSBC, agrees. “In the market for business to the top-tier Russian companies, competition both between banks and between products has intensified this year,” she said. “When you factor in the export credit margin and the premium rate charged by ECAs, it can be a fine line between that product and other products available in the financial markets.” She noted the importance of deals into the financial sector.

Azerbaijan and the oil effect

The long-term oil price shift on Azerbaijan’s finances last month opened the way for ABN Amro to sign two export credit deals to state entities – a $180 million road construction deal and an aircraft financing.

The road deal will finance the reconstruction of the highway from Baku, the Azeri capital, to the Russian border. It comprises a ten-year covered buyer credit from EGAP, the Czech ECA, and a five-year commercial loan from ABN Amro. The arranger and agent is the state-owned Czech Export Bank. The borrower is the republic of Azerbaijan, represented in talks by transport minister Ziia Mamedov.

Boryana Radeva of ABN’s cross border structured finance team told Trade Finance: “Azerbaijan, like Kazakhstan, has benefited from strong oil prices. There are several prospects for export finance being discussed in the oil and gas sector, but the government is also focusing very strongly on non-commodity sectors.

“The northern road is important for Azerbaijan’s transport infrastructure development, and is an ideal example of the type of project that can benefit from ECA-backed structures.”

ABN’s second Azeri mandate is to arrange financing for four Airbus A319 aircraft being purchased by the state-owned Hava Yollary (Azerbaijan Airlines). Two of the planes, one in corporate jet configuration, were delivered last month, one more will be delivered by the end of the year and the final one in 2006. The deal comprises a series of 12-year loans, guaranteed by the Azeri government and supported on the producer’s side by Coface (France), the Export Credit Guarantee Department (ECGD) (UK) and Hermes (Germany).

RZB, which is concentrating on the market for small ECA-backed deals into the CIS, has completed three transactions in to Azerbaijan this year, financing the export of industrial equipment to two food processing enterprises and one industrial manufacturer. The transactions, worth up to €5 million each, are guaranteed on the importer’s side by Russian banks.

High oil prices and robust state finances also form the backdrop to the market for export credits to Kazakhstan. ABN’s $122 million deal for the state-owned rail company (see below) is a good example. Another is a €60 million deal, backed by Hermes, to finance the sale of gas compressor station equipment by MAN of Germany to Kaztransgaz, the state-owned gas transit company, for which HSBC and Citigroup are the lenders.

Lipton at HSBC said: “This is the first export finance deal for this company. It builds on a buyer credit supplied by HSBC and BNP Paribas in 2002 for [the state-owned oil producer] Kazmunaigaz for the modernisation of the Atyrau refinery.”

While high oil prices feed in to the economic changes that help export financiers make headway in central Asia, and indeed in Russian industry, in the oil and gas sector itself they have had an opposite effect: the major producers have such gigantic cash piles that export financiers struggle to compete with other products.

An export financier at a medium-sized European bank said: “The companies are awash with cash. We are up against not only larger banks who can work on tighter margins, but also other products.” Pat Brockie at Citigroup’s export finance department in London says the oil companies may be making a mistake by ignoring ECA-backed deals during the good times. “The export credit agencies still offer the most competitive financing on cost and tenor, and this is too easily overlooked by some borrowers. They have decided that they are prepared to pay a premium for unsecured financing. Ideally, though they should keep in mind the agencies, who will remain good supporters in both good and bad times.”

Possibilities for export finance may arise from projects to develop new oil and gas fields, and transport infrastructure. The Russian government has recently expressed concern about how few of these are moving ahead, and arguments continue over the tax and investment regimes needed to encourage them. The sponsors of one of the largest projects, the Sakhalin II oil and gas development, are in talks with the EBRD, and Japanese, European and American ECAs, on the financing of imported goods and services. Jeffrey Miller, senior vice president and head of export finance at US Eximbank, confirmed that an application for support is now being processed; a spokesperson for the ECGD of the UK said that,the agency, together with other financial institutions, it is “currently considering whether to give support” to Sakhalin.

Apart from this, only small ECA deals have been reported from the oil sector: US Eximbank reports for the financial years 2002-04 include an $8.5 million five-year transaction, supported jointly by US Eximbank and SACE, for the provision of gas pipe corrosion-resistant coating equipment from CRC-Evans Pipeline of the USA to an unnamed Russian customer; two deals by American Express for Ural-Sib bank, worth $4.6 million and $3 million, to provide seismic equipment to Region-Leasing for leasing to oilfield service companies in the Bashkortostan region; and a $3.6 million deal by First International Bank to support the sale of a crude oil distillation unit to Avangard Leasing of Moscow for leasing to Yakutgazprom, a Gazprom subsidiary.

The transport sector

As oil wealth feeds back into infrastructure development, the vast railway systems of the former Soviet Union become attractive candidates for export financing. ABN has pointed the way forward with its $122 million, eight-year loan, guaranteed by US Eximbank, to Kazakhstan Temir Zholi (KTZ), the state-owned railway company, for the purchase of equipment from General Electric.

The financing, completed in November last year, supports the delivery of 200 kits to refurbish KTZ’s model TE-10 locomotives, extending their life by 15-20 years. It follows a similar, but smaller deal, for purchase of $32.4 million worth of modernisation kits by KTZ, completed in December 2003 (see Trade Finance March 2004, p28) – which broke new ground as the first Kazakh ECA deal without a sovereign guarantee.

Ingrid Cijsouw, senior vice president (cross border structured finance) at ABN, told Trade Finance: “KTZ is extremely profitable – one of the few railway companies in the world that are. It has been a leader in railway restructuring. We are pleased that we have again completed this second deal backed by US Eximbank without a sovereign guarantee.”

Miller at US Eximbank said: “We took a leap here in doing without a central government guarantee. It will be difficult, particularly in rail where there are not that many credit-worthy private entities, but we want to move into Russia and other CIS markets on the back of the Kazakh deal.”

US Eximbank chairman Philip Merrill had noted at the signing ceremony that the deal is “the largest for Eksimbank with any railway company anywhere”. KTZ vice president Zhannat Satubaldina said that in 2004 KTZ had carried about 200 million tonnes of freight, or 80% of the country’s total freight business.

While KTZ is a good credit now, Russian Railways is a source of potential for the future on a much greater scale. It is the largest railways company in the world, and its reform has only just begun: it was transformed from a ministry to a 100% state-owned joint-stock company last year. With $23 billion of annual revenues and an operating profit of $2.4 billion, it already has western bankers’ mouths watering.

Russian Railways has two investment-level ratings (BBB from Fitch and Baa3 from Moody’s) and made its entrance into the syndicate bank loan market in August, when it mandated Barclays Capital, Dresdner Kleinwort Wasserstein, HSBC and RZB as lead arrangers for a $600 million loan, with two equal tranches of three and five years.

Export financiers are keeping a close eye on Russian Railways’ extensive capital investment programme. One potential target is the joint venture, established in June by Siemens and Transmashholding, the privately-owned Russian rail engineer, to build high-speed and ultra-high-speed trains in Russia. This project is expected to use about 30% foreign content.

Shipping is another sector invigorated by the oil boom, and demand for tankers and other commodity-related vessels is strong. The gigantic Shtokman gas project in the Arctic sea, for which Gazprom last month short-listed several western oil majors as potential partner-operators, has generated business in the shape of an ING financing for the delivery of two icebreakers from the Havyard shipyard in Norway.

The ships will be delivered to Sevmorneftegaz, a transport company owned jointly by Gazprom and the Russian state-owned oil producer Rosneft, for use in the construction stage of the Shtokman field. Idar Fuglseth, finance director at Havyard, told Trade Finance that the deal, covering $100 million for the two vessels, has a 95% guarantee from the Norwegian export credit insurance agency GIEK. “The first vessel will be delivered in February 2006, the second in September. They will operate out of Murmansk and serve the construction platform now being built by Sevmash at Severodvinsk shipyard. We are very pleased to have made this first delivery for the project.”

Last month ABN and Woori bank signed a $115 million, 14-year deal, backed by KEIC, the South Korean ECA, to finance the delivery of five vessels to a Russian offtaker (see Trade Finance July/August 2005, p17). And in May this year the Vladivostok-based Far Eastern Shipping Company (Fesco) took delivery of an ice-breaking support vessel from Aker Finnyards shipyard in Helsinki. Finnvera, the Finnish ECA, participated in the post-delivery financing of the vessel by guaranteeing a $60 million buyer credit arranged by ING Bank.

The volume of aircraft deals is also likely to grow in these economic conditions. Aeroflot, Russia’s national carrier, is talking to commercial banks and the three European ECAs that work with Airbus about a 12-13 year deal under which it plans to buy eight more Airbus airplanes, building on a similar deal signed in 2003. The interest rates on the new transaction, though, are considered “simply too low” by some bankers.


The telecoms sector, which spearheaded the rapid expansion of export credit volumes into Russia in 2004, has come back for more ECA finance this year, but on a smaller scale. Bankers believe that the volume will decline over the medium term – firstly, because the largest companies have completed their initial investment programmes, and, secondly, because they have access to unsecured bank loans and capital markets funding. All three major telecoms players (MTS, Vimpelcom and Megafon) have eurobond programmes and unsecured bank finance, and Vimpelcom has a US listing.

This year’s largest export finance programme is for MTS. Negotiations are at an advanced stage on three linked deals:

* A $125-$150 million financing of supplies for Siemens, backed by Hermes, for which MTS has mandated ING, HSBC and Commerzbank as lead arrangers;
* A similar credit, of $110-$140 million, for supplies from Alcatel Germany, with ING, HSBC and Baylaba as lead arrangers;
* A $110-$140 million financing of supplies from Ericsson of Sweden, with cover from EKN.

A fourth MTS deal was completed in July: a $23.8 million, nine-year loan from Barclays, guaranteed by the ECGD under its buyer credit facility – the first time the UK agency had taken clean balance-sheet risk on a Russian corporate. An ECGD spokesperson said: “We agreed a nine-year term for the first contract. However MTS is free to seek different terms for successive contracts, provided they are within OECD Consensus guidelines.”

Vimpelcom is in talks with bankers about its needs this year. In June Megafon, the third largest Russian telecoms operator, took a $321.5 million, six-year deal for the purchase of Nokia equipment, syndicated by ING and Citigroup, and guaranteed by Finnvera, alongside a $220 million three-year unsecured revolving credit (see Trade Finance July/August 2005, p21).

Steven Fisher, managing director and emerging market corporate bank head (Russia and CIS) for Citigroup, said the Megafon deal demonstrated two trends: First, “lenders are increasingly interested in, and disposed towards, combined product deals: this one was twinned and executed simultaneously. Most financial institutions happily participated pro-rata in both financings, although the deal size was large enough to allow some lenders to focus on the piece they liked best.” Second, “that lenders can be comfortable with more risk when there is a strong borrower, a good story, and a clear rationale for the transaction. The Finnvera transaction had only 70% comprehensive cover.”

A $7.85 million buyer credit by JBIC of Japan and Sumitomo Mitsui Banking Corporation to Rostelecom, the state-controlled long-distance telecoms provider, was announced in July. The deal, which finances the importation of optical transmission and other equipment manufactured by Sumitomo, marked an important move by JBIC away from state guarantees. This was “a shift from the past policy”, a JBIC statement said. “JBIC intends to take corporate risks in financing Russian corporations to support Japanese firms’ exports to Russia.”

There are also export finance deals going to telecoms operators beyond Russia: ING has signed one with UMC, the Ukrainian telecoms operator part-owned by MTS. Citigroup has signed a deal with a GSM operator in Kazakhstan, with cover from the ECGD of the UK. And Sinosure has reportedly provided a $150 million credit for Alcatel Shanghai Bell to provide equipment and programmes to BeST, the Belarussian state-owned telecoms company. The Belarussian ambassador to China, Anatoly Kharlap, was reported saying that contracts for the deal are now being drawn up; BeST declined to comment.

Manufacturing and agriculture

A measure of the changes in Russia’s manufacturing sector is that export finance is now going not only to producers of raw materials and capital goods, but increasingly to consumer goods industries. Elisabeth Sutter-Becska, head of the export finance department at RZB, which has concentrated on this end of the market, says: “Russia’s primary infrastructure has come a long way, and now consumer goods industries require financing. We are working on a number of deals, for small sums under €10 million, for the food processing sector. We started on this path with the OeKB, and are also now working with Sace and Coface.”

Among medium-sized borrowers, the pulp and paper sector is significant: two of the largest companies have signed deals this year. The largest transaction is for Ilim Pulp, Russia’s no.1 paper and pulp producer: Finnvera of Finland issued a buyer credit guarantee for HSH Nordbank AG for a €40 million export credit frame agreement, at Libor + 1.19%, with a one-year drawdown period and a five-year repayment term, under which several Finnish exporters supply capital goods to the company.

The exporters include Timberjack/John Deere, a leading supplier of harvesters, who will supply process equipment to modernise a pulp line at Ilim Pulp’s Ust-Ilimsk pulp mill and increase output there by 15% to 630,000 tonnes of bleached pulp per year. Antritz and Metso Paper are among the other companies supplying equipment under the deal.

Mondi Business Paper of Syktyvkar, another of Russia’s largest producers, has signed two deals with ABN Amro. A Finnvera-backed €11.5 million seven-year deal, signed in June, will finance pulp plant modernisation; an EKN-backed $8.2 million six-year deal, signed, in July, will finance the purchase of harvesters and forwarders.

In the steel sector, ABN has this year arranged two deals for Magnitogorsk steelworks, one of Russia’s longest-standing export credit customers: a €39.3 million six-and-a-half year deal, signed in March with Finnvera backing, for the purchase of overhead electric cranes, and a €24.9 million six-and-a-half year deal backed by OeKB of Austria, signed in July, for the purchase of cooling units at the works’ sinter plants.

Banks and ECAs believe that, for export finance, the agricultural sector in both Russia and Ukraine has great potential. Miller at US Eximbank told Trade Finance: “There is a tremendous need for agricultural equipment in Russia. There is a great deal of domestic equipment available, but importers can provide better technology: US Eximbank is active there, and we are not the only ones. We are finding banks that have relationships with farmers, and are discussing with them structures using leasing and other risk-sharing arrangements. It’s hard to find credit-worthy entities in the sector, so the key here will be to get comfortable with the structures.”

Looking ahead: competition with Asia

Russia and the CIS are fast becoming battlegrounds between European and American export financiers on one side and the Chinese and Japanese on the other. When Chinese president Hu Jintao visited Moscow in July, the Chinese ECA Sinosure signed cooperation agreements with two state-owned banks: Sberbank, Russia’s largest bank, and Vneshekonombank, which oversees Roseximbank, Russia’s as-yet-embryonic ECA, and carries out transactions linked to sovereign debt.

But the Far Eastern ECAs are not limiting themselves to state-sponsored institutions or state-guaranteed deals – as JBIC’s Rostelecom transaction showed. A senior Moscow-based executive at an American bank said: “The Chinese and Japanese are moving away from state guarantees and taking corporate risk. They are the competitors to watch.” US Eximbank’s Miller acknowledged: “We face stiff competition from Far Eastern exporters. The Chinese, in particular, are working very hard to place railway locomotives and other products for the rail sector into Russia.”

Eastern and western ECAs are also racing each other to do business in Ukraine. In April US Eximbank signed a framework agreement with Ukreksimbank, the state-owned import export bank, under which a credit guarantee facility of up to $50 million, with Ukreksimbank as guarantor, will be available to Ukrainian importers of US goods and services. This was followed in July by the signing of a memorandum of understanding on a $50 million bank-to-bank loan from JBIC to Ukreksimbank.

In the mid term, the market will continue to expand geographically and sector-wise, and to move away from state-guaranteed deals to commercial transactions.

This article first appeared in Trade Finance magazine, October 2005.
Posted October 2005; © 2005 Simon Pirani

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