Cross-Border Lending Issues From the eyes of a US trade banker

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1 Cross-Border Lending Issues From the eyes of a US trade banker Andrew Moy, Senior Vice President Wells Fargo HSBC Trade Bank USMBA 2007 San Antonio Wells Fargo HSBC Trade Bank, N.A. Mexican Banking Industry Overview Relatively stable and well capitalized Foreign investment in banking permitted 12/98 Following extensive privatization and consolidation, ~90% of total banking assets are held by 6 banks of which 5 are foreign BBVA Bancomer- $51B Banamex (Citigroup)- $44B Banco Santander Serfin- $35B HSBC Bank Mexico- $24B Banorte- $17B Scotiabank- $11B 2

2 No man s credit is as good as his money. Edgar Watson Howe 3 US Lender Common Banking Requests Working capital financing: Support US exports into Mexico Increasing trend of Asian imports into Mexico Drives need for letter of credit to secure purchases Finance local distribution business. Inventory stored in Mexico and accounts receivable invoiced/ collected locally. Finance acquisition of Real Estate Discount receivables due from MX account debtors 4

3 US Lender Issues Sales through affiliates Common practice for US exporter to sell through a MXdomiciled affiliate Tax advantages- end customer avoids paying VAT at border US exporter can deliver product to its customer s doorstep Local MX business name enhances marketability with MX customer base Invoices billed and collected in MX- presenting challenges for US lenders. US lenders prefer AR invoiced and collected out of US to ensure collateral perfection per UCC filing. 5 US Lender Issues Uncertainty of tested Creditor rights in Mexico While evolution of lenders collateral rights have allowed perfection of trading assets (via Non-Possessory Pledge and/or Hipoteca Industrial, combined with satisfactory opinion from Mexican counsel), untested law still gives US banks reason to pause when lending against MX domiciled trading assets. Length of collection process? Mexican courts treatment of foreign creditor s rights? Banks more willing to lend against Mexican assets for wellcapitalized companies having long track record of doing business in Mexico. 6

4 US Lender Issues Longer payment terms Typical payment terms range from days. Ties up working capital if cannot finance Lenders prefer to underwrite quicker turning assets. 7 Solutions for Exporters to Mexico Ex-Im Bank credit programs Working Capital Guarantee Program 90% Ex-Im guarantee, expanded availability on trading assets Medium term Supplier or Buyer Credits- Loans to finance the sale of US made capital goods and services. Supplier Credit Program- bank purchases note from exporter on a full or limited recourse basis. Buyer Credit Program- bank lends directly to foreign buyer Short term Buyer Credits- Loans directly to Mexican buyers to finance purchase of US made raw materials and supplies 98% risk mitigation for agricultural products 8

5 Solutions for Exporters to Mexico Private Insurance Credit insure AR s to allow eligibility in borrowing base financing. Bank is loss payee. Lenders can obtain up to 90% risk mitigation of loan exposure amount by financing specific trade cycles. Bank is insured party and retains 10% risk Viable solution for non-us sourced exports. 9 Solutions for Exporters to Mexico Avalization of MX trade drafts or pagares by MX banks. US banks can purchase avalized drafts on non-recourse basis to accelerate cash flow for exporter. Trade finance companies Trade finance solutions (export of US equipment) by taking nonrisk mitigated exposures at a higher premium. OPIC (Overseas Private Investment Corp) Financing Program Supports long-term investment projects in developing countries by US companies. 10

6 OPIC (Overseas Private Investment Corporation) Who is OPIC? Term financing for overseas projects in emerging markets OPIC open to 150 countries and areas excluding China Sample Projects: modernization/expansion of existing business, new investments, etc - Average loan size of $2-15MM with 2-7 year tenors - US Sponsor must have at min. 25% interest in foreign entity - Borrower can be foreign sub, US company who down streams to sub, or both (dependent on legal issues in host country and/or tax implications - 70% OPIC guarantee. 11 OPIC (Overseas Private Investment Corporation) OPIC s four criteria must be met before funding Runaway Plants: no US factory closures US Economic Impact: no job loss/adverse impact on trade Host Country Effects: positive social, economic, environmental development Workers Rights: no violation of workers rights 12

7 Back to the Panel 13

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