By Jonathan Lynn
GENEVA (Reuters) - Business is booming in the trade finance market as exporters and importers return to a tried and tested form of credit amid the chaos of the financial crisis, bankers in the sector say.
Demand for trade finance -- a traditional form of banking dating back to the Middle Ages -- is so strong that some houses say they are turning away business for lack of capacity.
But if volumes are up, so is the price, with deals currently offered at 300 basis points over interbank refinancing rates, three times or more the going rate a year ago.
And that is now making it hard for developing countries to finance their exports, with Brazil sounding the alarm. Some bankers also fear the high prices could eventually see new business dry up.
"This has been a phenomenal year for trade finance," said John MacNamara, Managing Director, Structured Commodity Trade Finance, for Deutsche Bank in Amsterdam.
"They've been going on apace, if anything with far better quality counterparties, if only because they couldn't go to other sources," he told Reuters.
For instance in 2007 Deutsche acted as agent on $2 billion of pre-export finance and borrowing base deals. So far this year the figure is $16 billion.
And some of those deals are very big. Deutsche has recently been involved in several over $1 billion, including three with large Russian corporate in the metals and oil sectors that were bigger than $3 billion.
SIMPLE AND TRANSPARENT
Trade finance is the easiest, cheapest and most collateralized form of credit, industry experts say.
In recent years customers were lured away by investment banks and corporate finance departments offering sophisticated products, but now they are flooding back attracted by the simplicity and transparency of trade finance.
International trade amounts to about $14 trillion, World Trade Organization figures show, and 90 percent of these transactions involve credit.
Trade finance takes various forms. An importer's bank can issue a letter of credit to an exporter, which it pays when it receives documents confirming the goods have been shipped.
In another variant an exporter sells its receivables -- or future payments from an importer -- at a discount to a trade house known as a forfaiter.
There is also a secondary market in trade finance instruments but activity there is subdued in the general nervousness around the crisis, bankers say.
Around 60 percent of trade finance is handled by private lenders, ranging from niche boutiques to major banks. These are typically short-term transactions of less than a year, but increasingly these players are lending for five years or more.
Export credit agencies, who concentrate on this longer-term business and are often state-run, handle about 30 percent, and the rest is handled by regional development banks.
"In difficult times, trade finance shows itself to be a tried and tested method of financing," said Kimberly Wiehl, secretary-general of the Berne Union, which groups state and private-sector export credit and investment insurance agencies.
"The trend has been a steady increase in demand, not a huge increase given all the turmoil in September," she told Reuters.
Short-term commitments by Berne Union members rose to $1.02 trillion at the end of June from $901.8 billion at the end of December and $787.9 billion in June 2007, she said.
But against that 29 percent rise over the year, claims for deals that defaulted totaled only $530 million in the first half of this year against $1.0 billion in all of 2007, typical for this stage of the export credit cycle.
WARNING SIGNS
Trade experts say it is still too early to say how the financial turmoil will play out on underlying trade flows. So far these numbers suggest that exporters and importers can get credit when they need it and can meet their liabilities.
This contrasts with the 1997/98 Asia financial crisis, when there was a total interruption of financial transactions for a while in some countries, including trade finance.
"In the Asian crisis for some weeks ships couldn't leave the ports. We're not seeing anything like that," said one expert.
But there are warning signs. On Monday Brazil's government announced it would use its foreign reserves to increase credit lines for exporters who have been finding it increasingly difficult to get finance for trade.
"They were becoming expensive, but many exporters weren't able to find finance at any price," said Paolo Estivallet de Mesquita, a senior diplomat at Brazil's WTO mission.
"There's liquidity access for traditional cross-border transactions," said Sal Chiappinelli, general secretary of the International Forfaiting Association.
Chiappinelli's own firm, SFC Swiss Forfaiting Co Ltd, which is backed by private equity investors, has seen business grow by 150 percent this year, including deals with Russia and Belarus.
"We deal with reality. We don't sell dreams in our activity," Chiappinelli told Reuters. "It's very transparent. We know who we give money to. We know who the borrower is."
Forfaiting finances about 2 percent of world trade.
HIGHER PRICES
But as Brazilian exporters have discovered, the price of finance has gone up. In recent weeks the price they paid has gone up from 4.5 percent to 15 percent -- and for some has disappeared altogether. By this summer deals generally were paying 125-180 basis points over the Libor interbank dollar rate, against 50 basis points a year earlier, said one banker. In the last two weeks everything has been over 200 basis points, he added.
But he said he had recently turned down a deal for a big Russian steelmaker paying a spread of 300 basis points.
"It wasn't their creditworthiness, we just don't have the capacity," he said.
But it's not all good news for players in trade finance. They may be having a banner year, but the crisis means that bank managements are cutting back bonus payments.
And some worry the good times are about to stop.
"Trade financing in which international banks play an important role may gradually slow unless or until the current difficulties are overcome," said one trade finance expert who asked not to be identified.
(Editing by David Cowell)
