The possibility of the European banking system’s crash landing has cast a pall over the prospects of exporters generating major growth. However, within this grim landscape of prevailing risk is a golden opportunity to secure better rates for trade finance.
Banks, finance companies, trade credit insurers, and the Export Credit Office are all ready to do more business due to the relative flat growth seen in the market.
For an exporter who has not traditionally gone down the route of getting trade credit insurance cover because of the cost to business, now is a good time to shop around for good rates.
For those exporting to China who have never thought of offering settlement in China’s renminbi (RMB) for buyers, now is also a good time to start looking at offering RMB prices to gain a point of difference.
Petfood company K9 Natural Food’s chief executive officer Calvin Smith is of the view that private trade credit insurers are more eager to do business at the moment. It wasn’t the case at the height of the global financial crisis about two years ago. Still he is very glad the company started using short-term trade credit insurance provided by the NZ Export Credit Office (NZECO) about two years ago.
“The facility was instrumental in introducing our products into the US market,” Smith says.
The company, which has seen dramatic growth after its US breakthrough, currently exports to the US, Japan, Hong Kong
K9 Natural Food had a big order for the US market but the buyer wanted 60-day credit terms which K9 could not afford to offer without stifling the company’s cashflow. Its bank, Bank of New Zealand, introduced the concept of using the NZECO to the company.
The NZECO was able to provide a short-term trade credit cover that covered 80 percent of the credit offered to the US buyer. Private insurers declined to provide cover because K9’s total insurable turnover was insufficient.
The NZECO stepped in to provide short-term trade credit insurance on the US buyer, and K9 accessed trade finance from their bank. Over the following two years, NZECO has insured additional buyers in Canada, the UK and the US.
In 2011, as a result of 800 percent growth, K9 became the fifth-fastest growing business in the Deloitte New Zealand’s Fast 50 and the fastest growing manufacturer in the country.
The NZECO was able to help with the underwriting of significant parts of this export growth.
Carmen Moana, manager at NZECO, says a private insurer has since stepped in to pick up the NZECO portfolio of buyers, given the increase of K9’s insurable sales.
“We consider this to be an excellent demonstration of NZECO’s short-term trade credit product – enabling an SME exporter to rapidly grow to a scale that makes it attractive for the private insurers.”
Smith, meanwhile, says the company would not have been able to offer the credit terms to the US buyer without the NZECO’s cover. Recently, he says, trade credit insurers have come back into the market and are more willing to provider cover.
“Once you have access to the NZECO’s [cover], the cost of your financing will be at least 20 percent cheaper. The government is a good credit risk. Banks are fine with offering trade finance credit once you have insurance cover,” Smith says.
During periods of volatility in financial markets, especially during the financial crisis of 2009, trade credit insurance cover dried up in the New Zealand market as traditional insurers were unable to take on any more new risk exposures. Some withdrew completely from some sectors of the economy and the cost
of premiums ballooned.
Michael Kayes, trade credit manager at QBE Insurance, notes that premiums for trade credit insurance are now very competitive.
“There has never been a better time to be considering a trade credit insurance policy. Prices are cheaper compared to 18 or 24 months ago. Insurers have capacity to provide cover for certain sectors and are willing to underwrite new business,” he says.
What are your risks?
Exporters continuing to seek new markets or new customers also have to remember that managing risk should be a top priority.
Gary Cross, head of global trade and receivables finance for HSBC New Zealand, says one of the main takeaways for exporters trading under current economic conditions is to “remain focused on your risk situation”.
“This is because if you are not aware of the implications of the risk on your business –what’s happening in Greece and Europe will be touching so many parts of New Zealand business.
“Understand your exposure to the buyer’s ability to pay, the country risks, your buyer’s exposure to the industry risks,” he says, adding that the exporter should also ask, “what will happen when this transaction goes wrong?”
One of the risks exporters can ‘protect’ themselves against is getting their banks to provide underwriting for an institution’s credit risks, Cross says. This is especially important if the buyer’s bank is a bank with a low rating by international rating agencies.
While this underwriting is another cost to doing business, Cross says the value-add for this is peace of mind for the exporter. “The cost depends on the banks involved, and the countries (where these banks are located). It can be surprisingly cheap, talk to your banks; they should be able to give you an indicative cost. This is good for a situation when you have a global market which is declining. It is another added tool to de-risk your transactions.”
Early conversations, the unknowns
Always have conversations early, Cross adds. Keep your bank aware of your order books. Let the banks know where and when your demand is down; or if you have had to cut prices. All these facts are critical information to help mitigate your business’ risks.
One big unknown for exporters, not only in New Zealand but around the world, is how Greece’s debt crisis will be resolved and how a collapse of the Greek banking system will reverberate across Europe and subsequently around the world.
There are already signs of demand tapering. Commodities prices – tracked by the ANZ Commodity Price Index – fell to their 18-month low in April this year. Commodity prices fell 4.5 percent from March, the largest single fall in the index since February 2009.
Barry Squires, head of international business for Westpac NZ, says against a backdrop of falling commodity prices as well as falling foreign exchange rates, the first thing exporters should be doing is looking to ensure they have sufficiently covered their working capital needs to allow for cost of funds and any potential shortfall.
While trade credit insurers are willing to do business, the finance industry is still cautious and the cost of credit may go up. Squires is of the view that with all the nervousness in the market, the cost of credit is going to be more expensive.
“Talk to your advisers, your bank, your customers. Understand what your risks are, find out what’s happening to your customers’ business,” Squire advises.
Simon Thompson, chief executive officer at Lock Finance, is also of the view that New Zealand businesses should stay highly tuned to their cashflow health. Small and medium-sized enterprises (SMEs) need robust cashflow and there is opportunity for those with good ‘orders’ to gain finance for their payment needs.
For those with healthy receivables, leveraging on these receivables can be a good way to keep cashflow healthy, he says.
To convince finance companies to provide funding based on accounts receivables, it is vital for SMEs to focus on maintaining good systems – particularly in paperwork and documentation, Thompson adds.
The attraction of dual pricing
While demand is flat in Europe, there is hope that China – the world’s second largest economy after the US – will help to absorb some of the slack. New Zealand exporters can provide a point of difference by offering to settle trades in RMB.
A Chinese trading partner who has limited access to foreign currency and wants to limit exposures to currency fluctuations may be attracted to Kiwi exporters with dual pricing, Gary Cross says. Another advantage is the ability for exporters to use RMB pricing as a natural hedge for foreign exchange fluctuations.
Since China began the gradual internationalisation of its RMB in 2009, New Zealand exporters haven’t been fully active in the uptake of settling trades in RMB. According to a HSBC survey, between 2013 and 2015, over US$2 trillion, or about half of China’s total trade flows with emerging markets, is expected to be settled in RMB.
“Transactions that are happening in RMB (in New Zealand) are very gradual,” Cross says, adding that part of this is dependent on the nature of the transaction and the type of products dealt with.
RMB settlement makes perfect sense if the buyer is also the end-user of the product and sells in RMB. However, if the buyer is selling in US dollars, there is less benefit for the party to use RMB pricing, Cross adds.
Performance guarantees, vendor financing cover
Besides trade credit guarantees, the NZECO also sells a range of ‘facilities’ to help exporters cover for the eventual risk of non-payment or non-performance.
Carmen Moana says the NZECO has been seeing a steady increase in the provision of performance bonds. “We see the potential opportunity out there (for increased demand) with the possibility of European banks withdrawing from Asia.”
A recent example of how the NZECO can help provide longer-term cover is seen in the Robotic Technologies Ltd (RTL) case.
RTL is a joint venture between Scott Technology and Silver Fern Farms. RTL designs and manufacturers automated meat processing equipment and had a prospective Australian buyer in the meat processing industry that wanted to utilise equipment finance to purchase RTL’s robotic processing system.
To advance the sale, RTL offered the Australian buyer a five-year vendor financing deal.
Under this arrangement, the Australian buyer paid an advance deposit and then waited for receipt and acceptance of RTL’s equipment before making the first of its repayments, the rest to be repaid
over five years.
According to Moana, this arrangement was funded by RTL’s New Zealand bank, and underwritten by the NZECO. The benefit to the Australian buyer was that it received a line of credit for equipment finance, while preserving its own banking funding lines, with repayments beginning once the equipment was operational and generating revenue.
A key benefit to RTL was that it advanced a sale that may otherwise have continued to be postponed.
The NZECO is well capitalised, Moana says, and ready with sufficient capacity to meet any increased demand from exporters should there be a surge in the near future.
Since its launch in 2007, the NZECO has provided cover valued at $1.41 billion through export credit guarantees, general bond guarantees, US contract bond guarantees, short-term trade credit guarantees and working capital guarantees.
The first quarter of 2012 has, however, seen a slowdown in demand for guarantees from the NZECO. It’s running at only about 60 percent of the level of exports supported for the same period last year, according to Moana, and the majority of the support was for underwriting shorter-term payments to overseas buyers.
Moana says the government has improved upon the original mandate for NZECO to support exporters domiciled overseas as well as to support trade with China. NZECO can now issue its guarantees in RMB. Another review of the NZECO’s mandate is not due until 2013/2014.
If exporting to China now is a good time to start looking at offering RMB prices to gain a point of difference.
Consider taking out a trade credit insurance policy. Prices are cheaper compared to 18 or 24 months ago.
Understand your exposure to the buyer’s ability to pay, the country risks and your buyer’s exposure to the industry risks.
Ensure you’ve sufficiently covered your working capital needs to allow for cost of funds and any potential shortfall.