World Trade - September 2008 - (Page 32) COVER STORY risk became an elevated and serious priority, and quite a few lenders pulled back sharply from trade finance. Meanwhile, today’s weak dollar and competitive U.S. exports have created a more buoyant prospect, with a more benign risk profile even with the credit crunch. Keith Leggett, senior economist with the American Bankers Association, notes that trade contrasts sharply with housing, automotive, and other currently shakier sectors. “Trade finance is easier to engage, while a lot of private equity is moving into the field, a sign of acceptable risk,” he says. And, a lot of banks enjoy the risk enhancement of the Export-Import Bank. Moreover, most trade transactions involve tangible products like oil or grain, with short, say six-month, payment maturities and self-liquidating structures, says JPMorgan’s Bruce Proctor. That manageable risk is now attracting potential new investors, including investment funds, hedge funds, insurance companies, and private capital, he remarked. Then too, the mountains of electronic information now streaming through global databases and Internet platforms have squeezed much of the risk out of buyer and seller performance in trade activities. The admonition to “know your customer” is a lot easier to achieve. An important segment of the information now is being furnished by three large European-based credit insurers— Atradius, Euler Hermes, and Coface—that have built a sizable U.S. presence. Each has a database covering some 40-50 million firms that American exporters and importers can use as a tool of insurance coverage, or by itself. Meanwhile, the other segment, the Internet platforms, developed and maintained by large banks and independent information technology services (such as TradeCard and TradeBeam), which has enhanced visibility substantially across the supply chain, continues to squeeze a lot of risk out of the trade world. And, while risk has been reduced, trade finance has been hugely enhanced by an inflow of capital and an expansion in the number and variety of institutions that deliver credit and take risk. In the banking arena, a recent and significant example was the late-2007 purchase of Miami-based Total Bank, a 30-year-old community lender, by Spain’s Grupo 32 WORLD TRADE SEPTEMBER 2008 Popular Espanol (assets: $190 billion). The revamped Miami institution decided in early 2008 to move into trade finance and international banking, in April it created a brand-new group headed by Miami trade finance veteran Emy Ruiz. The ranks of finance companies hit a watershed in 2003 when half a dozen set up shop to specialize in Export-Import Bank medium-term equipment deals, thus filling a gap that followed the withdrawal of some banks from that market niche. Most were launched by exbankers, trade finance veterans, among them: Brett Silvers (who established WorldBusiness Capital), Gustavo Rosas (created New Continent Finance), and Peter Swain and George Wood (opened Chancery Export Finance). Most work closely with the Private Export Funding Corporation in New York, an Ex-Im strategic partner, which provides a secondary market, buying the trade finance obligations these groups have created. In credit insurance, as many as eleven global underwriting groups now serve U.S. exporters and importers (World Trade, April 2008). With home bases in the U.S., Europe, Australia, and Bermuda (plus Lloyd’s of London), they have brought a huge expansion in risktaking capacity, alternative underwriting styles, and dissemination of product knowledge. Meanwhile, the emergence of private equity groups and institutional investors means that trade finance has “arrived.” Trade obligations are now seen as an attractive, strong performing “asset class,” says Fritz vom Scheidt, a principal at Toronto-based Tricon Group, which has managed several trade finance funds. In New York, Finacity Corporation is financing $15 billion a year in short-term trade receivables, with twothirds of its revenues from outside the U.S. Principal partners-investors include ABN Amro Bank, Bank of America, and Euler Hermes ACI (credit insurance). And New York-based Rosemount Global Trade Finance Fund, whose backers include Merrill Lynch and Massachusetts Mutual Life, invests in, trades and syndicates trade debt from borrowers in key emerging markets. Finally, IT groups that provide the electronic platforms to support trade finance have also been a magnet for deep pockets. Warburg Pincus, a private equity group, has invested in both TradeCard (New York) and GT Nexus (California). Orbian Corp. (Connecticut) is owned by hedge fund Ritchie Capital and venture capitalist Benchmark Capital. TradeBeam (California) boasts partial backing from private equity firm Carlyle Group. Here, then, is the bottom line: trade finance enjoys a preferred underlying risk profile, while its managers have become increasingly sophisticated and their jobs made easier by advanced IT. And, the capacity to lend and cope with risk has seen dramatic expansion in banking, finance companies, insurers, and deep pocket investors. If that terrifying global meltdown ever comes to pass, when the dominoes start to fall, trade finance looks likely to be among the last ivory pieces standing. WT Contributing Editor Richard Barovick, widely regarded as one of the leading journalists in the field of trade finance, operates out of Washington, D. C.
For optimal viewing of this digital publication, please enable JavaScript and then refresh the page. If you would like to try to load the digital publication without using Flash Player detection, please click here.