New SACE: Listening pays

Oliver Gordon

Features Editor

10 April 2018

Since the CDP-SACE-SIMEST restructuring in 2012, SACE has transformed from tired state relic into one of the world’s leading providers of export credit cover. It has the funding, it has the products – but most of all it has local knowledge from its listening posts in key Italian export markets.

SACE topped the TXF Export Finance ECA league table for covered volumes in 2017. The result was

a surprise – but perhaps it should not have been. “SACE positioned themselves years ago with a wider global footprint via the creation of their overseas offices – this no doubt has manifested in the higher volumes they are undertaking,” notes Gabriel Buck, managing director at export finance consultancy GKB Ventures.

Last year SACE provided $14.5 billion of cover across 35 deals, more than double the $6.5 billion provided by JBIC in second place (although in terms of direct loans, the Italian ECA was vastly outgunned by JBIC). In fact, SACE ended up providing 18.6% of entire ECA market cover in 2017.

And looking back over the past five annual TXF Export Finance reports, SACE’s upward trajectory is easy to discern. In 2016 the ECA came third behind its Japanese and Korean counterparts, with $8.85 billion of cover; the year before it also came third, but with a lesser $7.5 billion; in 2014 it didn’t even make the top the top 10; and in 2013 it came sixth, with a mere $2.8 billion.

Guto Davies, GE Capital’s global ECA leader, says: “SACE has followed Italian exporters into their global markets, and has been active with big tickets in the infrastructure, power and oil and gas sectors. It has also been successful in responding to market dynamics and project needs by attracting international companies into Italy that aggregate procurement from Italian companies for large infrastructure projects.”

Those big tickets came thick and fast over 2017. At the beginning of the year, state-owned Egyptian Electricity Holding Company (EEHC) tapped SACE cover for a $470 million loan to finance the CCGT conversions of the Assiut and West Damietta power plants.

In June SACE covered a $700 million portion of the $4.88 billion ECA backed financing for the Coral FLNG project in Mozambique. In the same month, the agency guaranteed a $625 million tranche of Kuwait National Petroleum Company’s $6.25 billion Clean Fuels project financing.

In September SACE covered CDP’s $300 million loan to Milan-based industrial group Salini Impregilo for the construction of the first phase of the Meydan One Mall in Dubai. And later that month, the ECA guaranteed a $210 million loan to National Grid North America to fund an electricity transmission project.

In October SACE covered a €979.59 million ($1.14 billion) loan for shipbuilder Carnival to finance two new cruise vessels; and the following month, guaranteed a €100 million loan to the Istanbul Metropolitan Municipality help finance the company’s €2.75 billion infrastructure investment plan in the Turkish capital.

Finally, in December the ECA committed €125 million to support 40 Italian subcontracts for the construction of a new power station awarded to the GE and Gama Power consortium by Bahrain's Alba.

Booming markets and the CDP revival. It is fair to say that SACE’s stars aligned in 2017, with its core markets and sectors having prosperous years. Ralph Lerch, chair of the European Banking Federation's export credit working group, says: “[SACE] has good momentum because its key sectors – shipping and petrochemicals – are benefiting from the relative recovery of oil and gas. The Italians are also bene􀁹ting because their key markets in Eastern Europe and the Middle East have been recovering over the last 12 to 18 months.”

Cruise ship support played a major role in SACE’s boosted figures. The sector had another record year for ECA-supported volume, breaking the $18 billion ceiling. That was up around $3 billion on the previous high of 2014 when volume just tipped $15 billion, and up nearly $5 billion on 2016. The 40%-plus increase in volume in 2017 reflected strong new orders from cruise lines; billion-dollar deals financed for Carnival, Royal Caribbean and Disney. “Because of shipbuilders like Fincantieri, a few orders in this sector really moves the dial for SACE,” observes Buck.

SACE also benefited from the Middle East remaining the most active region in 2017, with a 25.7% ($21.8 billion) share of all ECA-backed volume. With many GCC states hit by ratings downgrades and facing budget deficits for the first time in their recent history, state-owned borrowers across the region continued to turn to ECAs in a bid to get the best debt pricing available.

Nonetheless, much of the Italian ECA’s recent success has been self-made. The transformation started with the restructuring of Italy’s 165-year-old, €410 billion sovereign wealth fund, Cassa Depositi e Prestiti (CDP). In 2012 former Prime Minister Mario Monti sanctioned CDP’s €10 billion takeover of three government agencies – including SACE – to the reduce the country’s $2.2 trillion public debt.

Monti’s successor, Matteo Renzi, took up the baton by bringing in former Goldman Sachs Europe chairman, Claudio Costamagna, and former chief executive of BNP Paribas Italy, Fabio Gallia, to lead CDP’s revolution. The pair set about creating a single Eximbank-style outit for the country’s exports, blending CDP lending capacity with the export credit guarantees and insurance of SACE and Simest.

In late-2016 the government announced that Simest had transferred 76% of its shares to SACE under a CDP plan to earmark €63 billion to support Italian exporters between 2016 and 2020, establishing the new Italian Hub for Export and Internationalisation. The integration of SACE and Simest created a one-stop shop for Italian exporters, with the product suite including credit insurance, foreign investment protection, financial guarantees, factoring, bonds to win competitive contracts, protection against construction risks, equity investment, low-interest loans and export credit. Says Lerch: “SACE is now bene􀁹ting from the merger with CDP. Looking back, everybody thought funding was one of SACE’s weaknesses. The CDP merger aimed to 􀁹x that. But the change doesn’t happen overnight; it needed testing, introducing, accepting.

“This has now happened and is proving a clever move. Bpifrance has tried to do something similar but the 􀁹rst year results have been below expectations – it takes some years to become fully functional.”

Frontline change

Internally, one of the most effective changes that SACE has implemented has been to dramatically increase its footprint and marketing overseas. The ECA has gradually put teams in place across the globe, effectively acting as a feed for Italian exporters. The organisation now has 14 offices in Italy and 10 abroad.

Buck says: “SACE’s overseas offices have been acting as the eyes and ears for Italian companies. They provide Italian companies insights into particular markets whilst at the same time enabling SACE to sell the benefits of SACE-backed facilities to the buyers. It’s marketing in country, not marketing in Italy – it’s blindingly obvious as a marketing strategy, but not all ECAs do it. This overseas positioning has been a slow burn, but it’s now paying o􀁶. – SACE will know about local opportunities way before other ECAs.”

The ECA has also been savvy in attracting funding at the best possible terms. In 2015, it made a splash in the FIG bond market when it priced a €500 million perpetual non-call 10-year subordinated bond at 25bp lower than forecasts, despite shaky secondary markets.

It was SACE’s debut perpetual, and the agency’s quasi-SSA/quasi corporate nature meant the bond had no direct comparables. But that didn’t scare o􀁶 investors. The lead managers – Barclays, Citi, Deutsche Bank, HSBC and UniCredit – had set initial price thoughts of 4.125% but later put out guidance of 3.75%-4.125% and eventually managed to price the bond at the tight end.

“The cost of funding between countries has narrowed recently and it doesn’t really play as big a role anymore,” comments Lerch. “As long as the situation is stable and the central banks are doing a lot in order to offer support for funding and liquidity, particularly long term, via their quantitative easing, the cost of funding will not be a limiting factor anymore.

“Of course, things could change once the central banks slow down and spreads go up. That could again increase the gap between AAA rated countries and the others.”

Product innovation

On the product side, SACE has introduced a number of innovations – particularly geared towards SMEs. In Italy, only 14,500 out of 75,000 small and midcap companies export over 25% of their sales. According to SACE’s own findings, this translates into 60,000 SMEs with around €20 million-€50 million in sales that could better penetrate foreign markets.

The Italian Export and Internationalization Hub was established to do just that: to accompany more Italian companies into foreign markets, and to encourage a more informed risk culture and competitive drive for Italian companies that already export. SACE estimates that increased support to small and midcap companies could generate an additional €140 billion in Italian exports in 2018 – a third more than the current level.

In its 2016-2020 business plan, SACE re-engineered a number of products, including export and credit insurance, protection of foreign investments, financial guarantees, factoring, bonds, equity investments and low-interest loans. The agency has also looked to introduce more flexible and integrated solutions to the core industries of the ‘Made in Italy’ brand, such as the agri-food and wine sectors, aiming to provide instruments that sustain the entire product life-cycle, from production to sale – such as offering protection for inventories. Similarly, the ECA has looked to digitalise products used by SMEs and upgrade remote contact channels, both on and offline, to boost accessibility.

Education has been another key priority for the new Hub. Italian companies are still under-insured compared to those in other countries; often viewing insurance as a cost rather than an indicator of competitiveness. According to SACE’s estimates, the ratio of GDP to volumes insured by companies in Italy is about a third of other European countries.

The Hub has introduced a number of advisory services aimed at providing companies with managerial support and consulting on export growth strategies. It identities business opportunities in high potential countries and proposes business-matching meetings as well as the appropriate financial and insurance solutions. “The availability of SACE’s management and local representatives to meet with clients demonstrates and reinforces its support to Italian exporters,” says Davies.

In order to promote enhanced risk cultures among Italian companies, the Hub has been working with banks and financial institutions to ensure that companies that insure their receivables against the risk of default receive a higher credit rating when seeking financing.

 “The Italians offer more flexible solutions than other ECAs like Euler Hermes,” says Lerch. “Their cover for equity loans is particularly innovative. They have also introduced some quite clever products for

SMEs, which are very quick and easy.” Credit is also due to the country’s exporters for taking full advantage of SACE’s new product suite. Lerch explains that they were more affected than other European exporters in the financial crisis, and consequently had to learn to operate without too much ECA support.

“They learnt how to survive,” he says. “And when SACE started bringing in more innovative products, the exporters knew how to exploit their maximum potential.” Pace of change looks set to continue as a state institution, SACE always faces a degree of uncertainty whenever a general election nears; not least the election that took place earlier this month, in which populist parties from either end of political spectrum – League and The Five Star Movement – swept the boards in what will eventually result in a hung parliament. Lerch, however, is not overly concerned for SACE. “You never know what will happen on the political side, but for now I don’t think the latest elections will affect the economy and industry too much.” In fact Lerch is con􀁹dent the agency’s hot streak will continue, on account of an exciting new recruit and the promise of a burgeoning new market.

In February SACE announced the hire of Dario Liguti as its new chief underwriting and business innovation officer. Liguti, former global head of institutional finance at GE Capital, succeeds Alessandra Ricci, who was appointed CEO of Simest last October. “The move shows SACE is willing to acquire top people. This indicates it will continue to up its offering in the coming years,” says Lerch.

SACE will also be kept busy by the emergence of Iran as an export market. UN sanctions were lifted on the country in 2016 and the market has yet get into full swing. But when it does, Italian exporters can expect to be front of the queue. In April 2016, shortly after Iran’s trade embargo was lifted, the country signed a €4 billion agreement with CDP and SACE to open credit lines for infrastructure, oil and gas, and transport projects. And in January, the two countries signed a €5 billion framework credit agreement to catalyse further Italian investment. Says Lerch: “Historically, Italian exporters have been quite strong in Iran and it’s a market that hasn’t really arrived in the ECA industry so far. But it is expected to, and the Italians will bene􀁹t from that relationship going forward.”

 

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