Growth may be harder to find these days, says Carlo Diana, but, for countless UK companies, the US remains a huge and natural expansion arena. And it’s clear that our transatlantic traders have greater need than ever for expert and flexible funding.
It’s surely time to revisit George Bernard Shaw’s provocative definition of England and America as “two countries separated by a common language”. In today’s uniquely challenging transatlantic trading environment, the UK and US seem to me now to be more like two partners distinguished by shared goals. History has created important positives in this partnership. Corporates on both sides of ‘the pond’ have long benefited – and still do – from their affinities of language and their similarities of business culture.
Growth may be harder to find these days, but the central truth is that, for countless UK companies, the US remains a huge and natural expansion arena. Outside the Eurozone itself, the US is the UK’s largest single export market, and a highly significant source of trade for UK importers.
And, although Britain’s self-exclusion from the Eurozone itself has tended to strengthen Germany’s competitive counter-claim to ‘favoured nation’ status, it remains the case that this country still pulls considerable weight with US corporations seeking convenient trading and investment bridgeheads into continental Europe.
For UK banks, these are the traditional strengths that continue to inform the striking demand we’re all seeing for trade support from major corporates which have expanded their activities by opening new subsidiaries, launching new divisions or making acquisitions in the US. It’s a demand – not just for formal funding, but also for expert advice – that’s measurable across virtually all major sectors, but with a particularly sharp focus, according to the government agency UK Trade & Investment, on about a dozen key specialist activities.
There’s no question, of course, that the trading environment has rarely been more challenging. At the macro-economic level, recovery prospects in our largest single export market remain stubbornly clouded. The growth in job creation has slowed and the key economic indicators still look weak. The main external concern in the US comes from the headwinds generated by the euro area crisis itself and its subsequent impact on household and business confidence across the Atlantic. It will take time to assess the real impact of the European Central Bank’s ‘unlimited’ bond-buying initiative, designed as it is to draw a line under the long-running uncertainty about the very survival of the euro.
The principal US domestic worry is about the proximity of the so-called ‘fiscal cliff’ of the Federal budget deficit and its potential for slowing growth even further. And, inevitably, the political decision-making track will be strewn with uncertainties until we know the outcome of November’s presidential election – and the policy clarifications that must emerge from the play-in period for whichever team wins.
President Obama’s re-election programme includes the promise to create one million new manufacturing jobs by the end of 2016, 600,000 jobs in the energy sector, to double exports by the end of 2014 and to set a course for reducing the US deficit by more than $4tr over the next decade. Republican challenger Mitt Romney has vowed to create 12 million American jobs over the next four years and ‘turn around’ an economy currently saddled with an 8.3% unemployment rate. But, in reality, both parties’ showpiece political conventions have offered few bankable hints of how either contender will translate electioneering rhetoric into economic reality.
More hopefully, Federal Reserve Chairman, Ben Bernanke announced in September that it is to buy “additional agency mortgage-backed securities at a pace of $40bn per month” to boost the economy, and says it could increase the size of its purchases if the signs don’t improve. And the Fed’s £170bn ‘Operation Twist’ programme to reduce long-term borrowing costs for firms and households will continue for the rest of the year. Against this testing economic background, it’s clear that our own transatlantic corporate traders have greater need than ever for expert funding that’s flexible enough to fit their own circumstances.[[[PAGE]]]
In particular, international corporates now rightly seek the most appropriate forms of finance to help optimise use of working capital as part of their supply chain. Banks are working very closely with UK Export Finance, the export credit agency, which last year provided £2.32bn to support the growth of UK exporters. Specific support instruments provided by UK banks include:
Supplier finance: this secures early payment of invoices and provides access to invaluable working capital.
Pre-shipment finance: with a confirmed order from a quality buyer backed by a documentary credit, it provides the working capital companies need to produce and ship the goods, take on new contracts and grow their business.
Post-shipment finance: once goods have been shipped to a customer, this advance payment cuts the wait for that customer to pay.
Import finance: this short-term finance is linked to a company’s trading cycle so that it can pay suppliers promptly while allowing time to re-sell the stock or undertake any capital expenditure required.
Bond support: Banks recognise that many corporates require support for their larger contracts by the issuance of performance guarantees or bonds. A typical contract may involve the issuance of a number of different types of bonds with banks able to advise on technical and practical issues.
These efforts are supported by the government’s Export Credits Guarantee Department (ECGD) Bond Support scheme introduced last year which involve ECGD taking a risk sharing position with the largest transactions - typically, this guarantees 50% of the value of the bond and up to 80% for advance payment and progress payment bonds.
Export working capital: This scheme aims to assist UK exporters to grow by gaining access to working capital finance (both pre- and post-shipment). It’s intended to help businesses that win new contracts overseas, in particular those of a higher value than usual.
In spite of some discouraging macro numbers, the core truth is that UK companies are successfully sharpening their game to exploit the still considerable US trading opportunities even in this daunting climate. New business is being carved out by adventurous and innovative corporate enterprises. Their key question is whether their banks are still alongside them with the funding, the local know-how and the expert risk-mitigation advice they need. For our world-class multinationals, it’s invariably not the credit evaluation itself that’s tricky for banks, it’s the balance-sheet strength these ambitious corporates need to support their often very large funding requirements.
And the truth is that – certainly compared to their continental counterparts – UK banks are now better capitalised and more strongly positioned to support those UK corporates currently hunting and finding trade opportunities in the US.
