Jurisdiction - Australia
Reports and Analysis
Australia – Export Credit Agencies In The Natural Resources Industry – Recent Experiences And Trends.

10 November, 2012

 

Legal News & Analysis – Asia Pacific – Australia – Energy & Project Finance

 

In brief
 
  • Proponents of large-scale natural resource projects frequently require financing support.
  • In recent years, with commercial lending in decline, export credit agencies have increasingly become involved in Australian natural resource projects.
  • ECA involvement in these projects can be highly beneficial because of the longer tenor loans, alternative risk appetites and lower costs involved compared to commercial lending.
  • In the longer term, ECAs are likely to continue to play a vital role in the ongoing development and expansion of the Australian natural resources industry.
 
Natural resource projects are inherently capital intensive, frequently having multi-billion dollar budgets. With the possible exception of the large mining houses, most new projects require some level of debt financing. The terms and availability of such financing determine whether or not those projects are able to proceed to commercial development. 
 
In recent years it has become more expensive and harder to access traditional debt financing markets. In particular, a number of European banks and financial institutions who traditionally arranged and participated in the financing of large-scale natural resources projects have withdrawn from the Australian market as a consequence of the global financial crisis. This withdrawal has been compounded by fragility in the Eurozone, new capital and liquidity requirements which will apply to banks under the Basel III regulatory regime and, in some cases, domestic economic issues. 
 
The combination of the timing of the Australian resources boom and the contraction of the global banking sector has resulted in export credit agencies (“ECAs”) securing an increasingly important role in the Australian natural resources sector. In this article we review this trend, highlight the benefits of obtaining ECA finance, discuss some recent examples and contemplate the future role for ECAs in the Australian natural resources industry.
 
What are ECAs?
 
ECAs are public finance institutions that provide government-supported loans. They act as an intermediary between national governments and project proponents to promote export transactions from, or national interest objectives of, the country of the ECA. The financing can take the form of direct lending or credit insurance and guarantees or both, depending on the mandate the ECA has been given by its government. Agencies may be government-sponsored, private, or a combination of both. Examples of ECAs include Australia’s Export Finance and Insurance Corporation (EFIC), Japan Bank for International Cooperation (JBIC), Export-Import Bank of Korea (KEXIM), the United Kingdom’s Export Credit Guarantee Department (ECGD) and the Export-Import Bank of the United States (US EXIM).
 
Why get ECAs involved?
 
ECA involvement in natural resource projects is beneficial to project proponents for a number of reasons including:
 
  • diversifying the funding sources for project proponents;
  • favourable pricing;
  • longer tenor loans;
  • the de-risking of projects because ECAs can take on risk that commercial lenders are unwilling to accept, such as political risk; and
  • the catalytic impact on funding from commercial sources leveraging off the ECA support.
 
Arguably however, the most attractive feature of ECA involvement for project proponents is the level of funding that they have available in the present climate when other funding sources are restricted. This is particularly the case for Asian ECAs and multilateral agencies who have not been impacted to the same extent as European institutions by the global financial crisis and its ongoing influence on market sentiment.
 
Reciprocal benefits
 
Importantly, resource projects such as large-scale LNG projects, are particularly attractive to ECAs as they match their lending criteria and appetite for longer tenor loans. In addition, the capacity to secure longterm energy supplies through offtake arrangements is a particularly strong incentive for ECAs from countries such as Japan and K orea, who need to secure energy supplies to support their domestic manufacturing sectors. Furthermore, securing large-scale manufacturing or procurement roles for domestic companies as a condition of their financial support provides important economic stimulus for the ECAs’ economies. 
 
Recent trends and examples
 
ECAs have, in recent times, increased cooperation between themselves
with a view to harmonising individual lending requirements whilst capitalising on their considerable experience supporting project finance both independently and collectively. In addition, perhaps due to the reduced number of commercial banks in the market, ECAs have developed new products and expanded their range of financial services to include, for example, Islamic finance, credit derivative products and financial advisory services.
 
The Australian ECA experience
 
Recent examples of ECA involvement in Australian resources projects include:
 
  • Australia’s EFIC providing a guarantee to cover part of the bank loans for the Wiggins Island Coal Export Terminal in Gladstone as well as a $250 million direct loan to the Santos led Gladstone LNG project as part of a total $16 billion financing package;
  • the US EXIM, the Export-Import Bank of China (China EXIM), and a syndicate of Australian and international commercial banks providing an $8.5 billion project finance facility for the Australia Pacific LNG project in Gladstone; and
  • JBIC’s US$1 billion loan to Woodside Energy for the Pluto LNG Project in Western Australia.
 
US EXIM is also currently negotiating with Hancock Prospecting in relation to the Roy Hill Project in Western Australia. It is estimated that US EXIM’s investment in Australia alone will be approximately $US5billion in 2012 (Spooner, R 2012, ”Roy Hill in financing talks with US export credit agency” Sydney Morning Herald, 14 August 2012).
 
Challenges
 
ECAs have historically generally complemented rather than competed with financing banks and other commercial lenders. If, or when, commercial lending returns to pre-GFC levels, some ECAs may find it difficult to find the balance between this pre- GFC role and the pivotal financing role that they play in today’s market.
 
Future ECA involvement may also be impacted by political and economic issues related to perceptions about foreign investment from overseas, particularly those associated with foreign governments, and the offshoring of construction and procurement oppor tunities to overseas competitors.
 
Given the infancy of many of the projects that ECAs have invested in to date, it will be difficult for ECAs to measure the effectiveness and success of their involvement for some time. This uncertainty may limit further investment until such time as these initial projects have reached commercial production and results have been demonstrated. Similarly, as the larger mining projects requiring ECA involvement are still in the planning phase, the ECA appetite for, and participation in those projects is largely untested.
 
Environmental and social standards and compliance issues will have some impact on ECA involvement, although this may be a greater factor in the Asia Pacific region than in Australia. For example, ECAs generally impose rigorous environmental standards on project sponsors and whilst supporting the International Finance Corporation’s Performance Standards and the Equator Principles to manage environmental and social risks some ECAs apply more stringent environmental standards (Herz, S et al 2008, “The International Finance Corporation’s Performance Standards and the Equator Principles: Respecting Human Rights and Remedying Violations?”, BankTrack, Oxfam Australia).
 
Given the strength and efficacy of the Australian regulatory environment these additional requirements may not pose significant issues now but there remains scope for greater requirements to be placed on Australian projects in the future. This last issue is discussed in more detail in the complementary article in this edition entitled “Developing resources projects as the world watches – International scrutiny of social and environmental impacts” on page 12.
 
What role will ECAs have in Australia’s future resource development?
 
In the context of continuing constraints on bank lending and global credit tightening, the ongoing involvement of ECAs in financing Australian (and indeed global) resource projects is likely to continue. It remains to be seen what role they will play when commercial credit markets return to pre-GFC levels. However, it is reasonable to conclude that ECAs will have an ongoing, if not expanding, role.

 

 

For further information, please contact:

 

Tony Denholder, Partner, Ashurst

tony.denholder@ashurst.com

 

Richard Brockett, Ashurst

richard.brockett@ashurst.com

 

Libby McCarthy, Ashurst

libby.mccarthy@ashurst.com

 

Ashurst Energy & Project Finance Practice Profile in Australia

 

Homegrown Energy & Project Finance Law Firms in Australia

 

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