In the go-go year before the crisis, only a few companies would seek to turn to government agencies for financing. These included large industrial companies and companies in emerging markets where the political risks precluded them from the international capital markets. Think airlines and turbine makers. But since the crisis, agency finance has had a remarkable renaissance.
Agency finance can take many forms. Its can be direct trade insurance or guarantees by bodies such as US Export Import Bank (US Ex-Im), or Export Credit Guarantee Department in the UK. It can develop into longer project financing for infrastructure deals, especially in emerging markets by bodies such as the World Bank or European Bank for Reconstruction and Development.
Time was when the private sector was so risk hungry that some questioned whether there was a need for these agencies, as every industrial company and emerging market conglomerate could have easy access to capital in the public markets. But the crisis has reinforced agencies' utility once again. And even with the nascent economic recovery, it looks as if agencies aren't going away anytime soon.
For instance, the US Ex-Im authorized a record $9.9 billion in loans, guarantees and insurance during the first quarter of fiscal year 2010 (October 1 -December 31, 2009) - more than three times the $3.28 billion authorized in the same period of fiscal 2009. According to the agency, this supported $12.4 billion of export and 91,000 US jobs.
Bankers say that agency finance is now an essential part of companies' financial planning, especially when they are trying to match their needs with what is available. The key aspect is that agencies have liquidity when others do not. But in the past they have also been hidebound and sclerotic, with the bureaucracy outweighing the financial benefit. This however seems to have changed, again as a result of the crisis, with agencies now taking the lead in reaching out to potential clients in new and innovative ways.
Just last week US Ex-Im announced that it was teaming up with Google to help small to medium-size enterprises in the US find export markets overseas, through the internet. Export Development Canada (EDC) of Canada is another agency that is very flexible when it comes to working with potential clients. Last year it undertook a financing for Swedish company Ericsson, to finance the creation of a research centre in Canada. Such a deal would have been impossible pre-crisis as Ericsson was not a Canadian company. Now national interest outweighs national origin as a financing criterion for EDCThe new approach demands that CFOs consider agency finance as both a part of their overall financing mix and a way of enhancing existing arrangements.