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Thursday, 20 February 2020

Boosting confidence – Export Development Canada

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Export Development Canada (EDC) has received attention in recent months as it has revamped its business model. By Alison Healey.

To view the digital edition of this report please click here.

Observers say that EDC now looks more like a large commercial bank and this may soon lead to significant lead arranger mandates. The move may be necessary to boost the confidence of other lenders and could mean the difference between getting financing for some projects with unique risks and failing to get financing.

The structured and project finance team at EDC has seen more demand for its services recently and expects that uptick to continue, based on the loss of banks in project finance and Basel III restrictions. Changes to EDC’s business have revolved around Canadian pension funds increasing their number of acquisitions globally. The goal for the project finance group is to capitalise on that momentum and make the pension funds more comfortable with emerging markets. EDC is particularly focused on emerging market deals, where European banks once provided a great deal of financing.

EDC focuses on three sectors in project finance: infrastructure, energy, and mining. The group expects to close C$3bn in deals this year, likely to be split fairly evenly across the three sectors. The even split has evolved over recent years. Infrastructure has become a much bigger part of the business as Canadians have made a name for themselves in P3 deals at home and have taken that expertise to other parts of the world.

Al Hamdani, vice-president and head of structured and project finance, leads a team of about 18 professionals, all based in the Ottawa office. The team underwrites all EDC’s global transactions. Hamdani joined EDC in 1999 and since then has worked exclusively with the structured and project finance team.

Last year, the project finance team closed more than C$2bn in financings and made C$5bn in commitments. The commitments not classified as financing commitments are those that back bids for projects in situations in which a winning bidder has not yet been selected. The group also provides financial advisory services to select developers/sponsors.

EDC, as a corporation, has 14 international offices that use more general representatives but no actual project finance professionals overseas. In the hiring process, however, EDC has insisted on project finance transactional experience and at times has deployed a member of the project finance team to act as a representative in a specific offices when needed. Hamdani points to the diverse cultural make-up of his project finance team as a major asset and valued tool for international negotiations on projects.

In delivering its project finance and risk insurance services, the project group draws on EDC’s broader resources, including dedicated country and economic specialists with detailed country, political risk and commodity knowledge, in-house environmental expertise, and in-house technical expertise, with its own group of engineers that can take on technical adviser mandates for projects.

A corporate strategy was devised last year to do more in India. Hamdani is leading a core initiative to increase EDC’s project financing presence in the country, with a goal of creating new opportunities for Canada’s exporters and investors in this market. EDC believes that many aspects of the investment environment in India, including the English-based legal system, could make the country extremely attractive to Western investors and that opportunities abound for involvement in major power and infrastructure initiatives. EDC plans to spend a considerable amount of time understanding impediments to investment in India and finding solutions for investors.

EDC has played a major role in many of the defining deals of the past decade in project finance. One of the recently completed transactions was Etileno XXI, the largest petrochemical project in the Americas, which completed its US$3.2bn project financing in January after 10 years of discussions and more than nine months of intense negotiations. The US$4.5bn overall project is the largest private-sector investment ever made in Mexico and the largest Brazilian investment in Mexico. EDC contributed US$300m to the deal.

EDC also participated in a deal for Minera Frisco, a mining company, which closed its US$1.1bn, five-year loan in December 2012 after seeing 11 banks and institutions sign up to the syndication to finance the US$750m acquisition of AuRico Gold de Mexico.

Current transactions include Sadara, a scheme to raise US$12.5bn in project finance for the US$20bn chemical venture planned for the Saudi port of Jubail on the Arabian Gulf. The project is sponsored by Aramco and Dow Chemical Company.

Oyu Tolgoi is another deal in progress. Rio Tinto has sent out the RFP to a large group of banks on the US$4bn project financing for the copper/gold mine and is seeking US$2bn to US$2.5bn from multilaterals, including the IFC, the EBRD, US Ex-Im, EDC and Australia’s EFIC, plus US$1.5bn to US$2bn from commercial banks in 12-year loans.

EDC is Canada’s export credit agency, providing different types of financing products to help Canadian exporters and investors expand their international business. EDC’s knowledge and partnerships are used by nearly 7,000 Canadian companies and their global customers in up to 200 markets worldwide each year.

Unlike most export credit agencies that rely on governmental annual appropriations, EDC is financially self-sufficient and operates much like a commercial institution. The agency collects interest on its loans and premiums on its insurance products. EDC has a treasury department that sells bonds and raises money in global capital markets.

EDC provides insurance and financial services and bonding products to Canadian exporters and investors and their international buyers. The agency also supports Canadian direct investment abroad and investment into Canada. Much of its business is done in partnership with other financial institutions and through collaboration with the government of Canada. The ultimate goal for EDC is to support and develop Canada’s export trade by helping Canadian companies respond to international business opportunities. The Crown corporation operates at arm’s length from the government.

In addition to its financial self-sufficiency, the ECA is set apart from the others by its flexible support model; that is, EDC will support investors in and affiliates of Canadian companies, not only the companies themselves.

EDC uses a pull strategy to create trade, creating co-operative relationships with foreign buyers based on the expectation that those firms will do ongoing business with Canadian companies. This is apparent in renewables deals, in which a Canadian solar panel manufacturer is involved, or in P3 deals that include a Canadian firm as part of the private consortium.

Since it was established in 1995, the project finance team has closed more than 250 transactions, with EDC’s total financing support exceeding US$17bn.

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