“Financing Tools to Help You Increase Exports and Avoid Pitfalls”

Lansing, Michigan

Bill Richeson, SVP Global Trade & Supply Chain Solutions International Division National City Bank

March 24, 2009

Agenda

            Global Trade Overview Trade Concepts, Payment Procedures and Risks Pricing Terms Foreign Exchange Payment Methods Letters of Credit A Fundamental Reality Using the Letter of Credit as a Financing Tool Documentary Collections Export Credit Insurance & Other Financing Options Examples and “War” Stories Questions & Answers

Global Trade Overview

Classification of Countries

Industrialized Countries

30 Countries

Emerging Countries

200 Countries

Definitional Differences

Industrialized Countries

   Mature Economies Convertible Currencies Stable Political Systems   Higher Per Capita Standard of Living Low Perceived Political and Economic Risks   Looking for Expanded Markets Provider of Investment Capital

Emerging Countries

   Newer Economic Systems Non-convertible Currencies Political Uncertainties   Lower Per Capita Standard of Living High Perceived Political and Economic Risk  Capital Shortage - Reliance on Foreign Investments

General Patterns of Trade



Industrialized Countries

  Market Determines Exchange Rates Invoice in Local Currencies  Open Account Terms Prevalent Inter-company Shipment  General Feeling of Low Risk  Insurance is Nice to Have  Buyer Creditworthiness is Key – Buyer Credit Limits – Payment Terms Relaxed

Emerging Countries

 Fixed Exchange Rates    Invoice in Dollars Letters of Credit or Collections Direct Sales to Buyer  External Credit Guarantee  Insurance Prevents Baldness  Country Creditworthiness is Key – Country Limits – Payment Terms Tight

Trade Concepts, Payment Procedures and Risks



General Trade Concepts: Starting Right!

Know your customer  Know their country  Know their “credit” bank  Understand the Trade Cycle  Understand Terminology  Understand Transaction Risks  Understand Ground Rules  Work with your bank

Terminology

  Transaction Parties – Seller – Exporter – Shipper – Beneficiary (Bene) – Buyer – Importer – Account Party – Applicant – Issuing Bank – Opening Bank – Advising – Confirming Bank – Negotiating – Paying – Reimbursing Bank Supporting Parties – Carrier – Freight Forwarder – Customs House Broker – Insurer – Attorney

Risk Awareness

 Credit Risk  Performance Risk  Country Risk  Currency Risk  Transportation Risk  Regulatory Risk  Transaction Structure Risk  Fraud

Identify & Understand the Risks

Risk Evaluation

Sources of Information:   Your bank – Bank credit reference Export Import Bank – Country Limitation Schedule  Credit Agencies (D&B, Veritas, etc.)  Internet  U.S. Dept. of Commerce  Trade references

Measure the Risks

Pricing/Shipping Terms

  Known as

Incoterms 2000

– Published by: ICC Publishing Corporation 156 Fifth Avenue New York, New York 10010 (212) 206-1150 Website: http://www.iccwbo.org

A set of international rules, initially formulated in 1936 by the International Chamber of Commerce (ICC) to define & interpret a standard set of pricing/shipping terms for international trade.

Know the Rules

   

International Chamber of Commerce (ICC)

Uniform Customs & Practices (UCP) Pub. 600 – Rules that govern letters of credit – Often referred to as the “silent” terms to the letter of credit because they are incorporated into the letter of credit by reference.

Uniform Rules for Collections (URC) Pub. 522 – Rules that govern documentary collections ICC Publication 525 (Rules for Reimbursements) ISP 98 Rules for Standby Letters of Credit

Know the Rules

Export Regulations

    Shippers Export Declaration (SED) – Government required document stating the type of export license used to determine if the merchandise is authorized for shipment. (Required for all exports with a value greater than $2,500) RESOURCE: Bureau of Export Administration – U.S. Dept. of Commerce. ( www.bxa.doc.gov

) Office of Foreign Asset Control (OFAC) – Anti-boycott language prohibitions – Blocked Countries/Specially Designated Individuals RESOURCE: Office of Foreign Asset Control ( www.treas.gov/ofac )

Know the Rules

Logistics

 Talk to your freight forwarder to understand: – Costs – Transportation Connections – Packaging Requirements – Risks of using certain carriers/forwarders – Differences in documentation – Loss potential (regardless of Insurance or Incoterms)

Know Whom to Ask

Role of the Freight Forwarder

   Pre-Shipment – Packaging – Freight quotes – Import documentation requirements – Export documentation Shipment – Transportation – Document handling – Insurance Post-Shipment – Tracking – Arrival handling

Pricing Terms

Incoterms 2000

    Departure Group – Ex Works = Warehouse/Factory Main Carriage Unpaid Group – FCA = Free Carrier – FAS = Free Along Side Vessel – FOB = Free On Board Vessel Main Carriage Paid Group – CFR/CPT = Cost & Freight to arrival port – CIF/CIP = Cost, Insurance & Freight to arrival Port Arrival Group – DAF = Delivered at Frontier – DES = Delivered Ex Ship – DEQ = Delivered Ex Quay – DDU = Delivered Duty Unpaid – DDP = Delivered Duty Paid

Foreign Exchange

  There is foreign exchange risk to someone in every international transaction – even those payable in U.S. dollars Four Basic Risks - Fluctuation risk - Transaction risk – cash flow risk - Economic risk – operating risk vs. competitors - Translation risk – accounting risk You must quantify and manage this risk Banks have tools and expertise to help you mitigate these risks

Foreign Exchange

    Common Uses of Foreign Exchange Transactions – used to make or receive payments in another currency Precautionary hedges – to protect against unexpected changes in exchange rates Speculative positions – to profit from expected changes in exchange rates Foreign investments – to buy and sell foreign assets

Payment Methods

There is a mismatch between Buyer and Seller Goals

When do you want to get paid?

When do buyers want to pay?

Now!

Later!

Payment Methods: 4 Methods

Lowest Risk Highest Risk Buyer

(Importer)

Perspective

• Open Account • Documentary Collection • Letter of Credit • Cash In Advance

Seller

(Exporter) • Cash In Advance • Letter of Credit • Documentary Collection • Open Account

Perspective Best Cash Flow Worst Cash Flow Buyer & Seller have Reversed Priorities!

Choice of Methods

(What Determines?)

  Buyer-Seller Relationship Buyer’s credit standing  Competition  Uniqueness of the product (custom made?)  Country conditions (political, economic)  Cash flow considerations  Transaction costs  Other

Payment Methods: 4 Methods • Cash in Advance • Letter of Credit • Documentary Collection • Open Account

Terms Favor

Seller

Terms Favor

Buyer

Risk Evaluation and Mitigation

   High Risk – Cash-in-Advance or Confirmed LC Moderate Risk – Advised or Confirmed LC Low Risk – Documentary Collection (at sight)   Very Low Risk: Documentary Collection (Time) or, Open Account (possibly with Credit Insurance) Lowest Risk – Open Account on extended terms

Make Decisions to Mitigate the Risks Consider ALL risks, not just credit risks

Cash In Advance

  Buyer Pays – Wire Transfer – Check – Draft – Credit Card Seller Ships – No risk for seller except order cancellation – Foreign Import Regulations may prohibit – Hard sell to buyer – Consider the type of payment (Wire Transfer Best) – Requires little to no credit understanding of the buyer – KYC (Important)

Open Account

       Seller Ships Buyer Pays – Wire Transfer – Check – Draft – Credit Card Ship it and hope you get paid Foreign import regulations may prohibit Full Country & Buyer Credit Risk Consider payment type (wire transfer best) Requires extensive knowledge of the buyer (underwriting, trade references, excellent reputation)

Letters of Credit

A versatile tool for closing the gap that exists between buyers and sellers.

Letters of Credit



Definition

: - An undertaking issued by a bank for the account of the applicant (buyer) to pay to the beneficiary (seller) the value of the letter of credit, provided that the terms and conditions evidenced by documents presented, are complied with In other words: A letter of credit substitutes a bank’s creditworthiness, which is generally well known or easily ascertainable for that of its customer, which may not be as well known

Letters of Credit

 Two Common Types – Documentary / Commercial • Active payment instrument • Active financing tool – Standby • Passive payment instrument • Passive financing tool – Performance – Financial – Trade-Related

Independence Principle

Buyer has an obligation to the Issuing Bank to pay upon claim for payment Importer (Buyer) Exporter and Importer have a sales contract between them which supports the underlying transaction

Separate Contracts

Issuing Bank Advising/ Confirming bank Exporter (Seller) Issuing Bank has the obligation to the Exporter to pay if he has complied with all the terms and conditions in the L/C

Sight LC Transaction Flow

Buyer

(Applicant)

Seller

(Beneficiary)

1 2 Application Issuing Bank Sales Contract Importer (Buyer) Advising/ Confirming bank 4 Exporter (Seller) LC Advised Foreign BANK (Issuing Bank) 3 LC Issued (Advising Bank)

Buyer

Sight LC Transaction Flow

Seller (Applicant) 5 Shipment Buyer pays BEFORE receipt of goods $ 8 8 $ 6 Documents Foreign BANK 8 $ Payment Claim 7

Buyer

Time LC Transaction Flow

Seller (Applicant) 5 Shipment Payment At Maturity $ 8 Foreign BANK 6 Documents 8 $ Payment Documents 6 7 Acceptance 8 $ 6 Documents

Advised Letters of Credit

Beneficiary:  Bears credit risk of the issuing bank  Bears full country risk of the transaction  Responsible for ensuring compliance with Pro Forma Advising Bank:  Responsibility limited to authentication  Has no payment obligation  Advocate for beneficiary

Role of the Advising Bank

 Verify the authenticity of the Letter of Credit, thereby protecting the beneficiary from fraud  Advocate for the beneficiary – No conflict of interest  Other benefits of using your bank – Commitment to Customer Service – Relationship Pricing – Consistency in Processing

If you want more protection the next step is to consider having the letter of credit confirmed

Confirmed Letters of Credit

  Eliminates issuing bank country and commercial risk If the issuing bank’s letter of credit is confirmed, the confirming bank substitutes its own creditworthiness for that of the issuing bank’s and takes on all duties and responsibilities of an issuing bank  Must be requested by issuing bank to confirm credit  If the issuing bank is not deemed creditworthy, or if there are country risk issues a bank may refuse to add confirmation

Confirmed Letters of Credit

 Confirmation eliminates: – Commercial credit risk of issuing bank – Country risk of issuing bank  Confirmed credit means payment obligation moves to the confirming bank and its country However:  Confirmation is location specific – Verify country of confirming bank  Confirmation by branch or subsidiary of issuing bank – May shift country risk – May not shift commercial

Payment Method: Letter of Credit

Set it up right!

1.

2.

3.

4.

Irrevocable Issue Date, Expiry Date & Location Issuing Bank/Advising Bank Importer/Exporter 5.

6.

Value & Currency Description of Goods/Services 7.

8.

9.

10.

Required Documents Payment Terms Incoterms Port-To-Port Info 11.

UCP 600 12.

13.

LC Fees - Who Pays?

Latest Ship Date 14.

Presentation Date 15.

16.

Partial Shipments (Y/N) Transshipments (Y/N) 17.

18.

Paying Bank Drawee Bank 19.

Reimbursing Bank 20.

Confirming Bank

20 Points of Negotiation in Structuring your LC

Documents often requested

         Draft Transportation documents Commercial Invoice Insurance Policy or Certificate Packing List Invoice / Consular Invoice / Customs Invoice Certificate of Origin Weight Certificate Inspection Certificate

Your Freight Forwarder Can Provide Guidance On Which Documents Are Required – By Country

A Fundamental Reality…

When dealing with letters of credit, the only things that count are the documents

Reducing Cost and Accelerating Payment

  Set up the LC correctly – negotiating all points Check with your bank on S.W.I.F.T arrangements prior to LC opening   Avoid discrepancies – Use LC template – Get copy of LC application before issuance Have the LC confirmed/payable at National City Bank  In some cases, discount  Consult with National City

Letter of Credit Fees

 Standard Fees: – Advising fee – Negotiation (Examination) – Courier  Optional Fees: – Confirmation – Acceptance – Discount – Transfer – Assignment of proceeds – Steamship guarantee or air release

Letter of Credit Fees

 Fees to Avoid: – Amendment Fees – Discrepancy Fees – Reimbursing bank fees – Copy Fees  Ancillary Fees: – Faxes – Communication charges – Special processing

What to do When the LC Arrives

 Read the letter of credit very carefully  Ensure you can comply with the terms (all 20+ points)   Send copy of LC to freight forwarder Ask about anything you don’t understand  If incorrect, reject the LC immediately  If necessary, request the buyer amend the Letter of Credit

The Letter of Credit as a Financing Tool

 The protections afforded both parties in a letter of credit transaction provide each additional benefits as well  One of these is the ability to use the credit already evidenced by the letter of credit itself to lower Trade Cycle cash flow financing costs for both Buyer and Seller

Documentary Collections

 Disguised open account transactions  Less secure than letters of credit  More secure than open account  Benefits – Don’t encumber buyer’s line of credit – Very inexpensive – Effective if properly structured • Use of correct Incoterms • Role of banks and freight forwarders

Buyer

Sight Collection (D/P)

Seller 1

Buy/Sell Agreement Shipment

2 4

Documents

$ 4 Foreign BANK 4 $ 3

Documents

4 $ 2

Documents

Buyer pays BEFORE receipt of goods

Buyer

Time Collection (D/A)

Seller 1

Buy/Sell Agreement Shipment

2 5

Documents

$ 6

Payment at Maturity

5

Acceptance

6 $ Foreign BANK 3

Documents

6 $ 2

Documents

Buyer pays AFTER receipt of goods

Documentary Collection

Transaction Flow

 Seller ships  Seller presents documents to National City  National City sends documents to a correspondent  Correspondent bank releases documents against: – Payment (if Documents against Payment – D/P) – Acceptance (if Documents against Acceptance – D/A) –

Note: D/A terms represent more risk to the seller.

 Correspondent wires funds to National City  National City pays seller

Payment Method Variations

 CIA Variation – 50% in advance, balance with order – 100% upon shipment  LC Variation – Transfer – Assignment – Financing  Open Account Variation – Insured – Performance guaranty (Standby LC)

Export Credit Insurance & Financing Options

  

Financing Options for U.S.

Banks:

Exporters

– Letters of Credit – Documentary Collections – Avals Other Private Sources: – Accounts receivable financing – Factoring – Forfaiting – Credit Insurance – Countertrade Government: – Eximbank – CCC / TDA / USAID – OPIC

Trade Finance Products

 Export working capital loans – Loans to provide working capital during production cycle  Foreign receivable financing – Loans and financial structures to finance export sales  Financial Institution Buyer Credit Facilities – Short-term loans extended to foreign buyers for the purchase of US goods  Medium term export sales finance – Term loans up to five years in length to foreign buyers

Eximbank Programs

  Pre-Shipment - Working capital guarantee Post-Shipment - Short Term * Small business insurance policies * Single sale and portfolio policies * Buyer policy * Bank insurance policy - Medium Term * Small business policies * Single sale * Guarantees * Loans * Project finance

Working Capital Guarantee

   Needed for:

- Pre-shipment financing

To be used when: - There is a lack of collateral to acquire traditional bank financing - Lender is unwilling to increase line of credit - Company needs working capital to finance exports - Banks will not lend against foreign A/R - Company needs to increase availability - Exporter wants to improve cash flow Benefits: - Helps pay for raw materials - Increases borrowing base (WIP included) - Higher advance rates and lower collateral requirements - Is relatively inexpensive - Provides local bank with a 90% guarantee

Examples and “War” Stories

 Cattle Triangle  Poultry Equipment to Asia  Cotton, Corn Germ  Logs, Lumber, Veneer   Meat “Know your Incoterms!”  Understand bills of lading and consignee  Be careful with acceptance certificate requirement

Contact Information

 Bill Richeson Senior Vice President Global Trade & Supply Chain Solutions National City Bank Phone: (616)771-8849 e-mail: [email protected]

Global Client Care Center: 800-622-4685