ICC hails consistent low risk of trade finance deals

Transactions are 80% less likely to default than Moody’s average for typical investment deals, according to a wide-ranging study

Trade finance has a proven track record as a relatively more reliable and secure form of corporate funding than most other methods, a new report from the International Chamber of Commerce has revealed.

In a sweeping survey of the market – analysing 13 million transactions made between 2007 and 2014, with a total exposure of $7.6 trillion – the ICC found that, on average, default rates for trade finance deals reached just one fifth of comparable Moody’s defaults.

According to the ICC’s data, the typical Moody’s default rate during the study period stood at 0.11%. By contrast, exposure-weighted defaults for export letters of credit (LCs) were at 0.02%.

The transaction-default rate for export LCs was as low as 0.01%. Meanwhile, defaults for short-term trade finance loans for import/export – which were the highest across any of the products the study explored – stood at 0.06%.

Some 23 banks supplied the underlying data for the ICC’s findings, which were published in December in the latest edition of its Trade Register – the first to be made available to the public, rather than subscribers.

One defining characteristic of trade finance deals that the Register highlighted was a relatively short maturity: most of the products it examined had an average ‘tenor’ – or lifespan – shorter than 170 days, except for performance guarantees, which tend to have longer tenors.

Default events, the report noted, largely hinged upon the outcome of other, preceding events – or the lack thereof – in the course of processing a transaction. In the context of LCs, one such event could be the presentation and acceptance of shipping documents that influence loss-given default.

As far as guarantees are concerned, the issue may be a non-performance or non-payment problem that is at odds with the requirements outlined in the guarantee’s original terms.

Medium- to long-term trade finance deals were also cited as low risk, with default rates less than 50% of those for comparable Moody's corporate-credit portfolios. The Export Credit Agency (ECA) coverage that backs medium- to long-term products, the report noted, contributes significantly to that low risk level.

Alexander R Malaket – deputy head of the ICC Banking Commission Executive Committee – said: “The 2015 Trade Register clearly demonstrates the low risk nature of trade finance.

“What’s more, [it] also highlights the strong recovery rates – with the median result for short-term and medium- to long-term (through the support of ECAs) trade finance included in the Register close to 100% recovery for all products.”

Days after the ICC’s publication emerged, World Bank Group body the International Finance Corporation (IFC) announced that it had agreed to provide $10m of trade finance to Vietnam’s TienPhong Commercial Joint Stock Bank (TPBank), to boost the prospects of the nation’s SMEs.

TPBank CEO Nguyen Hung said that being a part of the IFC’s Global Trade Finance Programme would “make it easier for us and our clients to complete international transactions”.

Download the full 2015 ICC Trade Register Report here.

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