Shop talk: SERVing up a more proactive ECA
Swiss ECA SERV has pulled off some major innovations in the bond markets - from guaranteeing a rouble bond refinancing to the Sergipe local currency bond deal earlier this year. And CEO Peter Gisler has plans for an even more proactive agency.
Switzerland’s ECA, SERV, has been supporting Swiss exporters since 2007 when it replaced the Export Credit Guarantee (ERG) which was established in 1934. In recent years, SERV has grown significantly in terms of its regional reach, covered volumes, and product offerings, and the Swiss ECA currently provides support to around 400 exporting companies. But, while the Swiss government has a triple-A sovereign rating, Switzerland is still a high cost country which poses serious challenges for exporters and export finance.
Historically, SERV is best known for its sovereign and corporate deals rather than project finance. However, the Swiss ECA has been building its credentials in the project space – notable deals include Alba, Kpone, Carrington, Tambak Lorok and most recently Sergipe – and is expected to close a $1 billion co-financing with EDC in 2019 for the Java 3 gas-fired IPP in Indonesia.
The ECA is also genuinely innovative in its approach to financing. In 2016, SERV provided a guarantee for a rolling stock loan into Russia that was later refinanced in the rouble capital market using the same guarantee.
And the $1.74 billion financing SERV supported in April this year for the Centrais Eletricas de Sergipe (CELSE) LNG-to-power project also marked firsts for the involvement of an ECA in capital markets financings. Wrapping project bonds has long been identified as a natural next step in the evolution of ECAs – but the Sergipe deal, by combining local currency ECA-enhanced debt with local currency debt from DFIs, almost went out of its way to set a benchmark in complexity.
TXF talks to Peter Gisler, CEO at SERV, about the ECA’s new growth markets, SME initiatives, and why product innovation and discovery is so important to SERV’s mission statement.
TXF: What are SERV’s most active regions and sectors?
Peter Gisler (PE): The most important regions for us are Eastern Europe, central Asia, Turkey and the Middle East. But we’re now also seeing more business in Southeast Asia, and with a couple of additional major projects in the pipeline there, we are going to have much more traction in that region than we have had before. Indonesia’s power utility, PLN, is a prime example of an important buyer using new SERV insured export credits. In Bangladesh and Vietnam we are also seeing many power projects. So yes, Southeast Asia has become a very important region for SERV. Then we are also seeing some major transactions in South America as well, especially in Brazil and Argentina.
When it comes to the main export sectors – traditionally I mean – in Switzerland there is the railway rolling stock sector, which is very important, and we have some strong exporters in this industry that we work with regularly. Another important industry is power and electrical engineering. With the arrival of General Electric in Switzerland, taking over Alstom and US-EXIM’s reduced capacity, SERV became one of GE’s preferred ECAs. This has ultimately resulted in more transactions for us.
TXF: Can you update us on SERV’s latest product suites and innovations?
PE: There are many advantages of Switzerland as a business location – a highly relevant one for SERV is for example the AAA sovereign credit rating. Backed by the implicit guarantee of the Swiss government and its outstanding rating, SERV can offer very attractive credit risk mitigation for banks’ export finance portfolios – especially Swiss banks.
However, Switzerland is also a high cost country, which is a huge challenge for exporters and export finance – innovation is key to overcoming this. It is therefore an important part of SERV’s culture. We always strive to find innovative ways of using our toolkit to make projects feasible and their financing cost effective. This is evidenced by the application of SERV’s refinancing guarantee to cover the refinancing by Russian institutional investors of an export credit for the export of Swiss rail rolling stock to Russia for instance. A more recent example would be a ground-breaking way of applying ECA-cover to local currency project bonds for a power plant in Brazil.
TXF: What current challenges do you see in the market at the moment, other than the regulatory headwinds?
PE: I think for us the big challenge is that, in the past, SERV’s role was mostly passive. To be a bit provocative – SERV was sitting back and waiting for an exporter or bank to come forward with a fully structured and financed project that only required the SERV-stamp. This has completely changed.
Nowadays, we are involved much earlier in a transaction than we used to be in the past and we are much more active in shaping and structuring a deal. We are still in the process of reforming ourselves to be more competitive in this environment, which is indeed a challenge. This development requires different skills, knowledge and mind-sets from our staff to cope with the demand for a deeper understanding of ever more complex transactions and for being much more involved at fairly early stages of the projects.
At the same time, many ECAs have to tackle another major challenge – how to deal efficiently and effectively with SMEs? We have a clear mandate at SERV to support SMEs and this is very important to us. But it is no secret that SME transactions generally require a high consultation and education effort while offering little in terms of premium income. Supporting SMEs in a professional and efficient way is a challenge. At SERV, we are focusing on simplifying our processes and our products, and of course – where possible – standardisation and automation.
TXF: How close is SERV to offering a one-stop-shop for Swiss exports, like BPI France?
PE: There is still a long way to go for us, but of course a one-stop-shop is also something we want to achieve ultimately. However, I think France has a different political culture and it is unlikely that all the services BPI France offers will ever be offered under one government sponsored roof in Switzerland. However, today’s world offers excellent alternatives in the form of digital platforms where the whole ecosystem of exporters, logistics providers, financial institutions and other funding sources, insurers, government agencies and regulators (and so on) can be brought together to offer users a far more integrated and efficient experience than a single government institution ever could.
Many ECAs talk about educating SMEs, but there is often little reality behind the rhetoric. What is SERV doing to raise awareness of your SME-related products?
SERV has been very active in that respect, but we certainly haven’t yet achieved a 100% awareness level throughout Switzerland. So we still have room for improvement. But I think our numbers show that we have been quite successful nonetheless. Our customer base consists of about 350-400 exporting companies, and two thirds of them are SMEs with 250 employees or less.
TXF: How are you recycling loans or fundraising? Are you tapping the bond market? What do you do?
PE: We are a pure cover ECA with a very comfortable amount of equity. It’s basically the accumulated premium surplus of SERV and its predecessor ERG. Currently this stands at CHF2.77 billion – most of it fully invested with the Swiss treasury – giving us ample capacity to take on exposure without tapping the bond market or other sources of funding.
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