Export Transactions

Finance and Risk

Table of Contents
Export Finance Export Finance Methods Pre-Export Export Finance Methods Post-Export Structured Commodity Finance Export Risk
Forms of Export Risk Export Risk Mitigation

Export Finance and U.S. Agencies Select Internet-based Export Finance Solutions

Export Finance
Key Attributes
Bridges the gap between purchase orders and payment
Unless payment is made prior to delivery, the Exporter bears the full weight of financing working capital and trade finance If payment is made at the time the order is placed, the Importer bears the weight of financing Should the Exporter or the Importer finance the transaction?
Decision Points Ability to secure financing Trading relationship Type of product

Raw materials and consumer goods are typically financed on a cash basis or with short-term credits of up to 180 days
Pre-Export Finance

Long-lived capital goods and development projects are typically financed on medium (~5 years) or long-term bases
Post-Export Finance

Export Finance Pre-Export

Pre-Export Finance: provision of funds to cover the period between signing of purchase orders and payment (short-term, working capital)
Pre-export finance typically covers:
Cost of inland transport to port Purchase of raw materials for processing Cost of processing Storage costs

Illustrative procedure (commodities)

Exporter provides title to or pledges products to bank
Products that have yet to be produced Products that have been produced (warehouse receipt)

Bank provides credit facility Payment

Trader takes delivery Bank receives payment directly from buyer Escrow account Evidence account

Methods of Pre-Export Finance

Advance Payment
Importer pays in advance; exporter provides bank guarantee

Finance working capital:

Factoring
Bank/financial intermediary purchases accounts receivable Exporter receives accounts receivable purchase price minus a discount Bank/financial intermediary collects on accounts receivable

Forfaiting
Exporter sells medium-term receivables for cash on a non-recourse basis Importers obligations usually represented by letter of credit, bill of exchange or promissory note, backed by a bank guarantee

Purchase Order finance

Financial intermediary advances funds against purchase orders executed by credit worthy buyers Exporter initially receives some percentage of full purchase order amount; discounted remainder advanced after POs become A/R

Methods of Pre-Export Finance

Open Account
Exporter ships goods without any guarantee of payment, thereby financing importer Risk of transaction dependent on relationship/importer integrity

Documentary letter of credit (see UCC Art. 5 and UCP 500)

Used for over 150 years, accounts for approximately 60% of commodity trade Letter from bank, addressed to exporter, in which bank promises to pay or accept drafts if exporter conforms 100% to conditions within the letter
Three parties:
Issuer: the issuing bank Account party (importer) Beneficiary (exporter)

Three agreements
Trade contract between importer and exporter Documentary credit between bank and exporter Reimbursement agreement between bank and importer

Methods of Pre-Export Finance

Documentary Letter of credit
Types of Letters of credit
Revocable/Irrevocable
A revocable letter of credit can be cancelled or amended by the issuing bank; the bank does not need the exporter/beneficiarys consent

Confirmed/Unconfirmed
Issuing bank forwards letter of credit to exporters bank Exporters bank promises to pay exporter (confirms l/c) In an unconfirmed transaction, the advising bank acts as the issuing banks agent and bears no obligation to exporter

Back-to-back
Typically used by brokers, the letter of credit allows the beneficiary to assign its rights in one letter of credit to the issuer of a second letter of credit Both letters of credit must require identical documents

Transferable
The original beneficiary can transfer the letter of credit to third parties

Methods of Pre-Export Finance

Documentary Letter of credit
Types of Letters of credit
Revolving
Typically used in construction contracts Allows beneficiary to draw on the letter of credit, up to a certain amount, usually without presentation of documents The account party replenishes the account

Red clause letter of credit

Exporter can use to obtain pre-shipment finance by providing either (i) a statement of purpose or (ii) an undertaking to provide specified documents Issuing bank provides exporter with a percentage of the L/C amount Advising bank guarantees reimbursement

Green clause letter of credit

Similar to red clause letters of credit, but pre-shipment finance is contingent upon the production of warehouse receipts

Methods of Pre-Export Finance

Documentary Letter of credit
Letter of credit Settlement
Sight payment (sight draft)
Exporter presents documents and receives payment

Deferred payment (dated draft)

Exporter presents documents and receives payment at some specified future time

Acceptance (time draft)

Exporter (i) presents documents and (ii) draws a usance draft Bank accepts bill of exchange for payment on a future date

Negotiation
Exporter may choose a bank and negotiate the payment of a sight or usance draft Bank will either: Advance payment with recourse to the exporter Advance payment less a fee (discount) Pay exporter when issuing bank provides payment

Export Finance Post-Export

Post-Export Finance (medium/long-term)
Post-Export finance typically covers:
Account receivables Equipment Other fixed assets

Methods of Post-Export Finance

Revolving line of credit Term loan Finance accounts receivable

Methods of Post-Export Finance

Finance account receivables
Typically used in two instances
Undercapitalized company with permanent financing need Temporary insufficient cashflow

Banks provide loan secured by:

Assignment of receivables Assignment of commodity inventory

Loan
Made on a revolving basis against a pool of receivables

Borrower
Responsible for collecting from customers Responsible for 100% loan repayment despite inability to collect from customers

Structured Commodity (Export) Finance

Selling points
Provides the ability to isolate the funding of commodities from other financial and economic risks (contract performance, foreign exchange and political risks) Low default rate, even in times of stress

Typical Products
Export receivables-backed financing Inventory financing (warehouse receipt financing) Prepayments Asset-backed securities

Agricultural Finance
Trade-related paper and discount (refinancing) windows increase liquidity
U.S. Federal Reserve
Foreign trade-related credits accepted Discount windows provide low financing alternatives

Structured Commodity (Export) Finance

Pre-Export Warehouse Receipt Finance
Basic underlying conditions
Entering into transaction
Reliable warehouse Sound legal basis for warehouse receipts Ability to obtain export license Ability to protect value of goods Insurance Hedging

Default and ability to Liquidate

Ability to obtain possession Clear bankruptcy laws; speedy transfer of commodities Ability to export Foreigners able to hold export licenses Low risk of government intervention Affordable sovereign risk insurance

Structured Commodity (Export) Finance

Pre-Export Warehouse Receipt Finance
Traditional form
Bank takes control of goods in either a warehouse or tank facility; if borrower defaults, bank seizes goods

Repurchase agreements
Bank purchases goods and executes a re-sale contract; the resale price reflects the cost of funds from original purchase to re-sale

Warehouse receipts and law

Legal Bases
Bailment Pledge

Obtaining a Security Interest

Receive legal title to the collateral (mortgaging) Registration of security interest with central depository (pledge) Take possession of the collateral (pledge)

Export Finance Forms of Risk

Four main Forms of Export Finance Risk
Commercial risk
The risk that either party will not fulfill its obligations

Transportation risk
The risk that goods become damaged or destroyed during transport

Exchange risk
The risk that currency fluctuations will affect the value of the transaction

Political risk
The risk that government policy changes, wars, embargoes, etc., will prevent the conclusion or affect the value of the transaction

Export Finance Risk Mitigation

Direct Credit
Export Credit Agencies support exports through the provision of direct credits to either the importer or the exporter
Importer: a buyer credit is provided to the importer to purchase goods Exporter: makes a deferred payment sale; insurance is used to protect the seller or bank

Guarantees
Bid bond (tender guarantee): protects against exporters unrealistic bid or failure to execute the contract after winning the bid Performance bond: guarantees exporters performance after a contract is signed Advance payment guarantee (letter of indemnity): in the case where an importer advances funds, guarantees a refund if exporter does not perform Standby letter of credit: issuing bank promises to pay exporter on behalf of importer

Export Finance Risk Mitigation

Insurance
Transportation insurance
Covers goods during transport; degree of coverage varies

Credit Insurance
Protects against buyer insolvency or protracted defaults and/or political risks

Seller non-compliance (credit insurance)

Covers advance payment risk

Foreign exchange risk insurance

Provides a hedge against foreign exchange risk

Export Finance Risk Mitigation

Export Finance - Instruments used to Hedge Price Risk
Stabilization programs and funds Timing of purchase/sale Fixed price long-term contracts Forward contracts
Primarily trade-related Can help in obtaining export financing

Futures or options
Futures contracts can be used to obtain export financing

Use of OTC markets

Primarily trade-related

Swaps
Often used to secure loan repayment

Commodity-linked loans bonds

Primarily used to obtain financing

Export Finance and U.S. Agencies

U.S. Government Export Finance Assistance
U.S. Small Exporters
SBA Export Express loan program SBA International Trade Loan program

Working Capital Loans

SBA Export Working Capital Program Ex-Im Bank Working Capital Guarantee Program

Foreign Buyer Credit

Ex-Im Bank loan guarantee Ex-Im Bank Export Credit Insurance program Ex-Im Bank Medium and Long-term fixed-rate loans

Export Finance and U.S. Agencies

U.S. Government Export Finance Assistance
Export Finance Matchmaker
For more information on the EFM, visit the Export Finance Matchmaker webpage at http://www.trade.gov/efm or contact the Office of Finance at (202) 482-3277.

Credit Checks
Department of Commerce International Company Profile (ICP)

Other
Private Export Funding Company (PEFCO)
For more information, visit the PEFCO website at http://www.pefco.com or call (212) 916-0300

New York State Export Working Capital Program

Internet-based Export Finance Solutions

Bolero
www.bolero.net Founded by SWIFT, and the Through Transport Club (TT Club). Apax Partners and Baring Private Equity Partners invested capital in 2000 Customers: primarily corporate importers and exporters Integrates trade activity of the importers/exporters with freight forwarders and logistics services providers and banks and other providers of export finance

Internet-based Export Finance Solutions

Certegy
www.certegy.com NYSE listed (CEY) Certegy Inc. provides credit, debit and merchant card processing, e-banking, check risk management and check cashing services to over 6,000 financial institutions, 117,000 retailers and 100 million consumers worldwide

TradeCard
www.tradecard.com Connects trading partners and routes and stores their trade documentation electronically, from purchase orders (P.O.s) to commercial invoices Provides automated supply chain finance, credit protection and export finance