International Forfaiting Association

Writing a series of monthly articles on behalf of this trade finance banking trade association. Also writing static copy and news for the Association's website.

Turkey: Forfaiting market saviour?

Filed in: , trade finance, banks, forfaiting, trade, bank, turkey

Amid the gloom that has shrouded the forfaiting market for much of the time since September 2008, Turkey has consistently proved to be a source of optimism and deals.

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Turkey: Forfaiting market saviour?

Amid the gloom that has shrouded the forfaiting market for much of the time since September 2008, Turkey has consistently proved to be a source of optimism and deals, writes Richard Willsher

The main drivers for the country’s popularity have been its economic fundamentals. In short it is a classic emerging market. This year it is expected to achieve GDP growth of 6.5%. Although inflation is stubbornly pegged at a little above this level, the country is sucking in foreign direct investment at the rate of $20bn annually.

A recent report by The Economist noted that Turkey is now the world’s biggest exporter of cement, the second-largest exporter of jewellery and is “Europe’s leading maker of televisions and DVD players, and its third-biggest maker of motor vehicles.” While it exports mostly to European countries, it is rapidly expanding export markets throughout the Middle East, Russia and Central Asia.

In October 2010, Moody’s revised Turkey’s sovereign Ba2 local and foreign currency government bond ratings from ‘stable’ to ‘positive’. In November, the rating agency issued a credit opinion that concluded: “The Turkish economy has experienced a V-shaped recovery after the 2009 recession and is currently the fastest-growing economy in the OECD.”

Furthermore, and of particular interest to the western banking and forfaiting community, Moody’s added on 22 November an improved ‘stable’ outlook for the Turkish banking system, stating, “Turkish banks have shown resilience during the recent global financial crisis, as evidenced by their balance-sheet strength, which has been supported by appropriate loan-loss provisioning, a solid capital base, and recurrent earnings generation. Financial sector reforms that were enacted following the 2000-2001 financial crisis set the foundations for the stability of the banking system today.”

Perfect match
Pretty glowing stuff. And it is easy to appreciate that in order to achieve its export led economic growth, the country’s manufacturers have needed to import capital goods, particularly production machinery, as well as raw materials such as minerals that it cannot produce itself. Moreover, Turkey imports substantial quantities of oil to power its vibrant economy. All of these lend themselves to import financing on credit terms that can typically be provided by the forfaiting market.

“Turkish banks are quite used to the forfaiting product,” says IFA board member Sema Zeyneloglu of Rabobank. “They have been involved on the primary side of market for many years and are accustomed to use alternative forms of forfaiting to provide their clients with funding. In addition, many of those banks have their secondary market operations outside Turkey, so they are also familiar with how that side of the market operates. Meanwhile, the volume of trade finance in Turkey has held up well even in the crisis. It may have decreased somewhat, but deals continued to be done.”

Deferred payment letters of credit (LCs) probably account for the largest value and deal volume, in particular big ticket Middle East oil import LCs and those relating to steel and scrap metal. Inevitably these are short term, varying from 30 days to one year in duration.

However Muzaffer Aksoy of ABC International Bank in Istanbul notes that his bank is financing imports of capital goods with tenors of up to 36 months at present. He expects that terms are likely to push out to five years before too long, with traditional ‘10 x 6’ promissory note structures being used.

Capital-goods imports typically originate from Germany, Italy and Switzerland and bankers and brokers in those countries confirm that Turkey has been a main source of new trade business over a number of years. In terms of guarantors or issuers of notes, the government-owned banks, such as Halk and Vakifbank, and the private banks Akbank, Isbank, YKB, Garanti are popular.

Risk and pricing
As yet, the market is very limited for the corporate risk, but Akbank’s Istanbul-based Vice President for financial institutions, Altug Ülker, confirms that some Italian exporters have accepted short-term notes issued by strong corporate names without the support of a bank guarantee. These are, however, likely to be sold back to Turkish banks in the secondary market, it ought to be said.

One very large feature of the primary and secondary market in Turkish risk is bank fund raisings via syndicated loans. Some argue that this sort of financial transaction is not ‘real’ or ‘pure’ forfaiting. Nonetheless, it represents an elephant in forfaiting’s parlour that can’t be ignored.

And, in many ways, trade in syndicated loans conditions the pricing of trade deals and vice versa. Altug Ülker notes that lately, following the Irish crisis, Turkish pricing has increased as holders of Turkish bank loans aim to sell before their year-end. However, he expects pricing to tighten in the new year.

All agree that the outlook for Turkish paper is quite buoyant for the foreseeable future. Zeyneloglu is confident that Turkey will remain a mainstay of the forfaiting market. “It is one of the traditional markets from which I would expect to see a continued, regular flow of business. The banking system is quite sophisticated and Turkish banks are very well known in the international banking environment and there are always buyers that are happy to buy Turkish bank risk.”

ABCIB’s Muzaffer Aksoy expects pricing to come down as more banks become buyers of paper, a view shared by Akbank’s Altug Ülker, especially as the country’s sovereign credit rating continues to strengthen.

In summary, with uncertainty over the Irish crisis and widespread fear of contagion from the sovereign debt crisis in Europe, markets may not yet be ready to branch out to embrace more exotic country risk, longer credit terms and tighter pricing.

But in credit terms as well as geographically, Turkey sits between Europe, the Middle East and the CIS countries. For this reason, it is well placed to continue supporting the forfaiting market with both trade deals and syndicated loans for some time to come.

Modernising the IFA

Filed in: , trade finance, forfaiting, ifa, bank lending, banking

In his day job Paolo Provera is General Manager of ABC International Bank in Milan and sits on the bank’s management committee. As IFA Chairman he is leading the association into a challenging future.

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Modernising IFA – interview with IFA chairman Paolo Provera
Richard Willsher

In his day job Paolo Provera is General Manager of ABC International Bank in Milan and sits on the bank’s management committee. As IFA Chairman he is leading the association towards a challenging future.

Richard Willsher IFA is now 10 years old and you have been associated with it during much of that time. Could you explain how its role and character has changed during the past decade?

Paolo Provera     I first became a member in 1999 with my previous employer. Since then I have been chairman of the Southern European Regional Committee, then when I joined the Board in 2005, I acted as Head of Regions, then Treasurer and now Chairman of IFA itself. During that time IFA has been through a great deal of change, reflecting change in the forfaiting market but also in the wider trade finance and banking sector. We’ve always changed with the times and are now facing new challenges.

Richard Willsher What are those challenges?

Paolo Provera At the same time as I became Chairman at last year’s Annual Conference, four new members joined IFA’s board. It was important that we guaranteed the policies and direction set by the previous board and carried on their good work.

As a trade association we do not want to grow, as other associations do, by allowing non-trade finance members to join IFA. We recognise however that over the last 10 years forfaiting as a discrete activity has diversified and, thanks to the initiatives taken by IFA, forfaiting has become more familiar to all the trade financiers. Now many, and probably most of our members are involved in wider trade finance business of which forfaiting techniques play an integral and important role.

Consequently, while retaining our brand and identity, we will be announcing at this year’s conference an expanded role for IFA together with a new message to support our familiar logo. The main thrust of this is that IFA will recognise more fully its place in the broader, global trade finance community rather than be limited to forfaiting only. One example of how the IFA’s role has evolved is the way it dealt with the Kazakhstan banking crisis. The involvement of Sean Edwards, for example, demonstrates that IFA is not only about forfaiting.

Richard Willsher Is IFA’s proposed co-operation with BAFT-IFSA part of this strategy?

Paolo Provera BAFT-IFSA is the global financial services association formed by the merger of the Bankers’ Association for Finance and Trade (BAFT) and the International Financial Services Association (IFSA). The co-operation that we hope to establish with them would be, hopefully, a big step forward for us, as we move from strength to strength. We will also be fortunate enough to have Donna Alexander, Chief Executive Officer BAFT-IFSA, speaking at the IFA Annual Conference in Berlin in September, when members will be able to learn more about the organisation and its position on trade finance including forfaiting.

Richard Willsher In setting the agenda for this year’s Conference you’ve taken a different tack than in previous years. What was behind this?

Paolo Provera Bearing in mind the crisis which we’ve all been through and which is still very fresh in our memories, the board wanted to make this Conference one that would address some of the practical issues that confront forfaiters and trade financiers in their day-to-day working lives.

So, for example, for the first time there will be a presentation giving valuable tips on how to formulate a credit application. For many attending the conference, especially after the crisis, making an application to gain credit committee approval for a new transaction can be a daunting and perhaps disappointing experience. Therefore this presentation will therefore address an issue of direct, practical relevance to the way we do our jobs.

Another of the presentations will deal with issues of funding and pricing transactions. Again, the crisis has radically affected the funding environment in a way that none of us have experienced before or even imagined prior to the collapse of Lehman Brothers in September 2008. And yet, without funding, transactions can’t happen.

Indeed one of the main reasons that clients come to banks to do trade finance transactions is to obtain funding. The other principal reason is to gain coverage for their trade finance risks and our ability to help with this is dependant on the pricing we can obtain. So funding and pricing are both critical factors in members’ ability to get deals done.

A third presentation and the following panel discussion will deal with export credit agency (ECA) coverage versus that offered by the private insurance market. This will also include case studies on both ECA and private market deals. Again this addresses the practical issue of risk coverage and is another example of the practical approach we are taking in setting the agenda for this year’s Conference.

Richard Willsher Finally, looking to the future of forfaiting in the context of the wider picture of financing global trade, how optimistic are you about IFA’s role and future?

Paolo Provera As I’ve said before IFA has to move with the times and that is what we are doing. Our possible co-operation with BAFT-IFSA and also our work with the International Chamber of Commerce on preparing the new Forfaiting Rules make our future an exciting one as we ensure our relevance to the global trade finance community. So we are committed to ensuring we remain worthwhile to our members as well as true to our origins.

Cash is definitely still king

Filed in: , trade finance, forfaiting, trade, forfaiting guidelines, cash

Some argue that forfaiting is a treasury product with trade finance added on to provide a margin. Rough, ready and perhaps cynical as this definition may sound, funding has proved more crucial to forfaiters over the past six months than probably ever before.

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A discussion of the importance of funding in the forfaiting market in the wake of the 2008 / 9 financial crisis.

Training with purpose

Filed in: , trade finance, forfaiting, trade, ifa, risk, international forfaiting association, forfaiting guidelines, risk management, training

As forfaiting becomes more widespread and the rules become more formal, training becomes more important.

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The article discusses the importance of training in the rapidly changing global forfaiting market.