Introducing Asia to structured finance

Global Finance, May 1998 by Steiner, Jeffrey J

Asia's financial crisis has created unforeseen challenges for foreign companies that export to Asian manufacturers. Until last fall most Asian industrial companies relied on government-directed bank loans for short- and mediumterm funding. That financing model no longer works. To enable our Asian customers to continue buying from us, we now find ourselves acting not only as their suppliers but also as their financiers.

The need, however, is for much more complicated solutions than traditional supplier financing schemes, such as providing the customer with an additional 90 or 120 days to pay his bill. What the customers in some Asian countries require is medium-term financing of up to five years, which can provide them with a breathing period, allowing them to grow and pay back their loans later. In such cases, we are helping Asian clients learn to use structured finance.

At Fairchild we have been concerned primarily with Indonesia, where we sell aircraft parts, and Korea, where we sell semiconductor processing equipment. In both countries there is a lack of understanding of longer-term structured financing. Some Asian companies are familiar with rudimentary securitization. Korea's conglomerates have long sold some of their accounts receivable to their US subsidiaries, which then issue commercial paper securitized by the receivables. Though interest rates appear low, the true costs of this form of short-term financing are only now being recognized-chiefly because the receivables are no longer available for more sophisticated collateralization. Fairchild is exploring several other avenues. In some cases we may become a subordinated lender by taking a subordinated tranche of the commercial paper being issued. But because the marketability of such tranches is limited, terms are restrictive and difficult to negotiate.

Another approach is to combine seller financing with bank financing and bring in an export-import agency to guarantee the credits. As the supplier, we then finance our customer's initial deposit, a prerequisite for the ex-im agency's guarantees. Political risk, however, has now become a factor in parts of Asia. So we are considering shifting some export production to countries whose exportimport agencies have a higher tolerance for political risk. In Indonesia we have become involved in barter transactions: To help airlines pay for parts (such as engines) that we sell them, we take their excess inventory of other parts (landing gears, say) on consignment. In some cases we also allow down payments to stretch over a number of years.

In the semiconductor industry, where investment commitments can reach billions of dollars, it's not enough to resolve the financing for purchases of our equipment; the financing of the overall project may still be in jeopardy. One solution is for several suppliers to band together and devise a project finance structure that can be approved by one of the international organizations.

We find customers are generally receptive to our proposals, but most of the creativity must come from us, since they lack experience. The learning curve for structured finance in Asia is long and steep.

Jeffrey J. Steiner is chairman and chief executive of two companies: The Fairchild Corporation, a supplier of aerospace components, and Banner Aerospace, which makes aircraft engines and rotables.