Insight. New SERV frame conditions offer Swiss exporters more room for maneuver

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1 UBS Trade & Export Finance Winter 2015/2016 edition Insight Contents The new SERV guidelines The working capital loan multiple uses epimedical (Switzerland) AG: global growth path thanks to top-quality products and the right financing solution UBS your partner for export finance New SERV frame conditions offer Swiss exporters more room for maneuver Changes to the SERV guidelines will come into effect on January 1, 2016, ensuring that Swiss companies will continue to receive effective support for their export-related activities. In particular, the SERV reforms provide additional support to small and medium-size companies. Continued on page 2

2 2 Edition 2 / 2015 Insight Continuation The 2014 SERV Act and amendments to the SERV Ordinance finalized this year will come into effect on January 1, In the following pages, we will explain the key features of these changes and the implications for Swiss exporters. Working capital insurance and counter guarantee cover incorporated in the SERV product catalog As temporary measures against the financial and economic crisis, in 2009 working capital insurance and counter guarantees were added to SERV s product catalog. Both products have proved effective in practice and provide excellent support of the export economy in difficult times. Due to strong product demand as well as the lingering weak economic situation, the new SERV Act removes the temporary status of these products. As from January 2016, working capital insurance and counter guarantees constitute integral parts of the SERV product range. Changes of cover ratios and optional granting of additional insurance coverage Supplier s credits are especially popular for small and medium-sized companies, whose transactions usually have a delivery value significantly below CHF 10 million. In order to prevent discrimination against these companies and their smaller transactions, a coverage up to 95% will still be possible. In this case the residual risk for the insurant remains 5%. The cover ratios for working capital insurance and counter garantees will be decreased. In justified cases it will be possible to apply for additional insurance coverage. Acquiring additional insurance coverage is free of charge for exporters: there are no additional insurance premiums. For example for working capital loans the exporter can justify the increase in the cover ratio when the lending bank demands additional securities for the residual risk portion. The current standard SERV cover ratio is 95%; the 5% residual risk is absorbed by the policyholder. The counter guarantee currently covers 100% without any residual risk. The new cover ratios are effective as from January 1, 2016 (see table). New SERV cover ratios Supplier credit insurance Working capital insurance Counter guarantee cover up until now cover residual risk new, from cover residual risk additional acquisition possible up to 95% 5% 95% 5% 95% 5% 80% 20% 95% 100% 0 90% 10% 100%

3 Edition 2 / 2015 Insight 3 Residual risk portion as working capital loan security If the exporter cannot provide sufficient collateral to the lending bank for the residual risk portion of a working capital loan, it is now possible that the lending bank can limit the disbursed loan amount to the insured part of the loan and secure the residual risk portion. This new regulation is best illustrated with an example (see box on the right). Swiss value creation more room for maneuver The internationalization of Swiss companies value chains is constantly progressing. In order to stay competitive, many Swiss companies cannot avoid shifting significant portions of their value chain abroad or obtaining the necessary raw materials as well as semi-finished and finished goods required for their production from foreign suppliers. The currency appreciations of the Swiss franc in 2011 and 2015 have strengthened this trend. To satisfy the insurance needs of Swiss exporters in an increasingly international context, two new regulations will become effective in 2016 to promote increased flexibility of the Swiss value creation concept. The basic regulation specifying that export deliveries must contain at least 50% Swiss origin, will basically remain unchanged. Example: working capital loan XY AG in Switzerland needs a CHF 1,000,000 working capital loan from its bank to prefinance an export transaction. The bank cannot guarantee this financing without collateral. That s why the Swiss Export Risk Insurance s (SERV) working capital insurance is at the disposal of the lending bank. The bank applies for and receives insurance coverage for the working capital loan from SERV. The cover ratio is 95%. In this case, the financing bank is covered for CHF 950,000 by SERV in the event that the exporter cannot repay the loan. The CHF 50,000 residual risk portion remains uncovered for the bank. In the case the exporter cannot provide sufficient collateral and the bank cannot bear this risk, with the new procedure the bank would structure as follows: The bank only disburses CHF 950,000 to the exporter. The CHF 50,000 are withheld on a blocked account (in the exporter s name). This solution is advantageous for both the Swiss exporter and the lending bank. The export transaction is 95% prefinanced by the bank and the exporter does not have to provide additional collateral. Therefore, the bank can structure a tailor-made working capital loan even for a higher risk export transaction given that the bank cannot absorb the residual risk. The exporter repays the working capital loan out of the proceeds of the export transaction. The internationalization of Swiss companies value chains is constantly progressing. However, SERV introduces the following innovations: Swiss value-added calculations will use the actual SERV-covered amount as a base. Previously, the calculation was based on the entire order value. For example, uncovered advance and interim payments as well as the 5% residual risk portions will no longer be considered in the calculation of the share of Swiss origin. As the SERV-insured amount is always lower than the order value, the new method significantly reduces the minimum amount of Swiss origin respectively Swiss value-added required to qualify for SERV coverage. SERV will have more discretion regarding application of rules for insurance qualification based on Swiss origin. This will allow SERV considerably more flexibility in the allocation of insurance coverage and enable it to authorize coverage in exceptional circumstances. The discretionary rules are based on predefined assessment criteria. They will replace the current clause for exceptions, which already permits to a certain extent insurance coverage for export transactions with less than 50% Swiss origin.

4 4 Edition 2 / 2015 Insight Criteria for insuring transactions with low Swiss value-added SERV comments that the new list of assessment criteria is not conclusive. SERV needs to be able to react to ever changing economic developments which Swiss exporters must withstand in the future. Therefore in individual cases SERV will have considerably more room for maneuver to determine Swiss origin. Origin of a transaction s core service elements as a determining factor Determining success factors include the core technology as a key component of an export transaction or other know-how intensive aspects like engineering, planning, design and related services. Of course, research and development (R&D) also belong to these considerations. When the value of the development and provision of such services are sourced in Switzerland, they may be included as Swiss value-added and therefore can provide sufficient grounds to meet the Swiss origin criteria and qualify a transaction for SERV insurance coverage. Extent of Swiss origin as a share of an exporter s overall turnover within a given period If the total percentage of a company s export transactions within a certain period exceeds SERV s minimum Swiss origin requirements for example within a calendar year then a single export transaction with a lower Swiss origin can qualify for cover SERV coverage approval. Introduction of new products or opening of new markets with export transactions The export of new products and opening of new markets abroad are considered particularly worthy of support. The same is true for new technologies which are, for example, particularly environmentally friendly, or specific projects that have a positive environmental impact in the importing country. These factors may also be taken into account by SERV in cases of comparatively low Swiss origin. Generally it should be noted that the SERV investigates each project individually and makes case-by-case decisions whether or not to provide cover. The importing country and project risks are also relevant factors for consideration. The lower these risks, the more likely that projects even with comparatively low Swiss origin will qualify for SERV cover. Conclusion: With the SERV s new guidelines, Swiss companies will continue to receive reliable support for their export transactions. The new rules will increase the SERV s room for maneuver regarding coverage decisions. Above all, the broader scope of criteria for Swiss origin qualification allows for individual case-by-case consideration. SERV should be able to insure even more export transactions in the future. Particularly small and medium-sized companies, but also young companies who are just beginning to export will obtain increased access to SERV s service and product catalog. As UBS targets servicing export-orientated companies, we welcome the SERV s new guidelines and the related expansion of discretion in the cover decision process. We are optimistic about continuation of efforts to provide the Swiss export economy with the necessary liquidity. In close collaboration with the SERV we offer Swiss exporters a broad range of export financing options and insurance solutions across their entire value chains. Further information about and links: to the new SERV guidelines to UBS Trade & Export Finance

5 Edition 2 / 2015 Insight 5 The working capital loan multiple uses Working capital loans can offer optimal financing solutions in different business situations. There are many different versions. We are pleased to describe some typical applications and structures below. Late start-ups and newly founded companies Companies in the late start-up phase and newly founded companies are part of the classic target group for SERV-covered working capital loans. For these companies, prefinancing an export project often is a big challenge. As the company was only recently founded, usually it hasn t built up sufficient reserves and available capital is mostly invested in the building of the company or in product development. When this sort of company wins its first large international order, it is faced with the question of where to obtain suitable funding. Often the financing bank cannot provide blank credit due to the company s lack of experience and inadequate annual financial statements. In addition, the exporter is usually not in a position to provide additional securities which the bank could use to extend a loan. In this situation the SERV working capital insurance offers the necessary security for the lending bank and makes it possible for the bank to grant the exporter a project-related loan.

6 6 Edition 2 / 2015 Insight Large projects A similar situation is when an exporter is faced with an extraordinarily large project. Especially with export-related projects, a single request can significantly stretch the scope of the exporter s usual business capacity, or even exceed it. This often applies to an inadequate financial situation as an enormous challenge for the exporter. Within this constellation, a tailor-made loan with SERV insurance coverage can provide a suitable solution to enable and secure the prefinancing of the project. Companies in difficult financial situations or with reported net losses The past few years have been very demanding for the Swiss export industry. Many companies have had to fight for survival despite having been in business for many years. Deteriorating annual results and reported free cash flows usually required by banks as a guide for debt sustainability are insufficient for granting cash flow-based blank loans. Since the bank s risk assessment is mostly based on the annual financial statements, there is little to no scope for extending new loans. In this case, SERV provides the opportunity to apply for insurance cover to secure a working capital loan. Thanks to such insurance, the international project can be prefinanced. The exporter can avoid further utilization of a full or overdrawn bank limit when the individual international project is financed with a SERV-covered working capital loan. Optimization of credit limit utilization Even when the exporter has already exceeded its credit limit with its domicile bank, a SERV-covered working capital loan can provide additional breathing room. The exporter can avoid further utilization of a full or overdrawn bank limit when the individual international project is financed with a SERV-covered working capital loan. Any available limit can be used for other purposes and the exporter does not need to seek additional funds. Further, as per SERV s risk assessment and premium level a SERV-covered working capital Important prerequisites loan can be more price attractive than increasing or extending the exporter s bank limits. Revolving working capital loans Some export transactions do not consist of a single delivery contract with one or two pro rata payments, but have many deliveries and partial payments over a long time frame i.e. structuring may be needed for blanket orders as well as single orders. Blanket orders may be placed over several years. In this case the exporter s bank will apply for a SERV-secured credit limit for the entire duration of the blanket order project. The working Export nature of the project A working capital loan covered by SERV must always be in connection with an export transaction. The use of funds is strictly limited to the underlying export nature of the project. Within the project context, the exporter can pay direct costs (subcontractors, costs of materials, etc), as well as indirect costs (staff, processing costs) from the disbursements of the working capital loan. The prerequisite is that the costs must be related to the export transaction in some way. Underlying transaction SERV-insured A further SERV prerequisite for granting coverage to the lending bank is that the underlying transaction is also insured with SERV. This could for example be attained by applying for additional manufacturing risk insurance. Manufacturing risk insurance secures the exporter for effectively incurred costs for all phases of the manufacturing process until delivery. Cover combinations In many cases it is possible to combine a working capital loan with other insurance policies or financing instruments. Frequent constellations include combination of a working capital loan with payments under a documentary credit or supplier s credit.

7 Edition 2 / 2015 Insight 7 As subcontractors indirectly contribute to Swiss exports, they also may enjoy the opportunity to qualify for SERV working capital loan cover. capital loan credit can be used flexibly within the context of the entire project. Different disbursements and repayments take place according to the effective cash flow. Disbursements go to the exporter, who uses the liquidity to finance the completion of his deliveries; payments are remitted from the foreign buyer to the exporter. The working capital loan is used for further delivery tranches alternating with the buyer s partial payments according to the rhythm of the project s development. The revolving nature of the loan must be explicitly proposed to and approved by SERV. Working capital loans for subcontractors There are many Swiss companies who do not conduct business abroad but whose goods or services are part of another product that will be exported. As such subcontractors indirectly contribute to Swiss exports, they also may enjoy the opportunity to qualify for SERV working capital loan cover. If a particular subcontractor requires a working capital loan for goods or services in connection with a customer s direct export transaction, a SERV request can generally be filed. Subcontractors can therefore finance their projects via a working capital loan without being directly involved in the export to the foreign buyer. UBS played a pioneering role in developing these types of transactions and in early 2015 was one of the first banks to file an application for a working capital insurance benefiting the subcontractor. The application was approved, the project was processed and the subcontractor received a tailor-made loan for prefinancing his deliveries to the effective exporter. Working capital loans through UBS UBS supports exports for various Swiss industrial sectors. We advise many companies ranging from machine tool and turnkey plant construction as well as the classic metal and electromechanical industries. Exports of medical and environmental technology or the watch industry also benefit from SERV-covered working capital loans granted by UBS. A further significant portion of inquiries involves engineering services and infrastructure project planning. Often exports from the classic machine tool, metal or electromechanical industries are involved. Working capital loan amounts may vary from about CHF 75,000 to CHF 15 million. UBS offers working capital loans in Swiss francs, euros and US dollars. Further information You can find information relating to export finance solutions at UBS under: Factsheets: Export finance with SERV cover SERV-covered working capital loan

8 8 Edition 2 / 2015 Insight epimedical (Switzerland) AG: global growth through top quality production and the right financing solution epimedical (Switzerland) AG, founded in 2010, produces high-quality medical implants and surgical instruments for traumatology and orthopedics. The company focuses on implants (plates and screws) for large bones as well as the necessary surgical instruments. epimedical s product range offers a well-rounded portfolio to surgeons treating the most common bone breaks. The high-quality nature of implants, screws and instruments are paramount for success. This strategy pays off: The company delivers its high-quality top-of-the-range products with the Swiss label to customers around the world. High-tech products of highest quality epimedical s implants undergo various steps in the production process: Starting with the raw materials (specifically titanium alloy), from CNC milling machine tools to special surface treatment and sterile packaging of the products, epimedical must uphold strict quality standards. Uniform manufacturing processes are combined with diverse engineering and planning steps which are developed with the assistance of expert specialists and surgeons. For us, UBS is clearly the leader of the Swiss banking industry, particularly for financing external trade. Lorenzo Zoccoletti, Chairman of the Board of Directors of epimedical (Switzerland) AG Certain quality standards must not only be met for the uniform production process, but also apply to the smallest subprocesses as well as the requirement that all subcontractors fulfill certified guidelines. Likewise, the finished products must be certified to be released for sale. The path from initial design to finished product ready for sale is quite lengthy.

9 Edition 2 / 2015 Insight 9 We rely on experienced specialists at UBS as well as at the SERV, who have provided us with excellent support for all matters regarding financing of the project. Lorenzo Zoccoletti, Chairman of the Board of Directors of epimedical (Switzerland) AG The ideal combination of trade and export finance instruments had two advantages: with the SERV-covered working capital loan, epimedical managed to arrange a loan and with the discounted deferred payment documentary credit simultaneously access liquidity whilst addressing the buyer s request for a year-long deferred payment. Worldwide markets The expensive market entry has been worthwhile. Demand for epimedical s products is increasing and some projects have already been successfully implemented. epimedical has had a particularly strong response in the Middle East, Latin American and Asian markets. The company is therefore now focusing on these regions. A network of local distributors is being developed and established. Over 90% of the company s turnover is generated abroad. Value creation and jobs in Switzerland epimedical contributes to Swiss competitive strength by sourcing research and development in Switzerland. Six employees are currently situated in Switzerland. Generating further jobs in Switzerland is being considered as certain subcontractors also produce for the Swiss market. The right mix of financing and securing instruments In summer 2014 epimedical succeeded in winning a large order from Turkey. In order to undertake significantly increased production without weakening liquidity, the company applied for a working capital loan from UBS. As the volume of the order was considerably more extensive than previous transactions, the ideal solution was to apply for SERV working capital insurance. The working capital loan was duly covered by SERV. The payments from Turkey were secured and processed by means of a documentary credit with 360 days deferred payment. In order to provide immediate payment after each delivery to the exporter, UBS confirmed the documentary credit and discounted the proceeds for the exporter. The SERV working capital loan was accordingly repaid through the exporter s receipt of payments pro rata delivery under the discounted confirmed documentary credit. The possibility of offering the buyer a deferred payment by means of a documentary credit proved to be a strong sales incentive in epimedical s negotiations with the buyer. Although granting the buyer s request meant extending a deferred payment, the exporter nevertheless secured the necessary liquidity to realize the transaction. UBS and SERV strong partners for export finance solutions epimedical felt well advised in all stages of the project from financing in the production phase with the working capital loan through the negotiation of sales contract and ultimately delivering to Turkey. Consultation with product specialists was well appreciated and the processing of the working capital loan and the documentary credit were realized to epimedical s full satisfaction. For epimedical it is essential to have access to experts regarding financing issues who take the time to assess the circumstances at hand and provide support to address the buyer s demands. epimedical appreciates the personal collaboration with both UBS and SERV. Vincenzo Carrieri, CEO and Lorenzo Zoccoletti, Chairman of epimedical (Switzerland) AG Quality without compromise is essential for the satisfaction of our customers: all production phases and subcontractors must meet stringent requirements. Our emphasis on quality with our system of customer and surgeon-focused products, is our key to success. Vincenzo Carrieri, CEO epimedical (Switzerland) AG

10 10 Edition 2 / 2015 Insight UBS your partner for export financing As one of Switzerland s most experienced banks, UBS has recognized the potential of SERV s new insurance products and set up the necessary resources to guarantee an effective and customer-oriented support and administration for customer projects, even when the projects are complex. Our offer includes Comprehensive advice for exporters Applications and processing with SERV Preparation of project-related loan agreements Establishment and monitoring of credit limits Trade & Export Finance solutions along your entire value chain Our advisory services are concentrated on your financing requirements. Often UBS is involved from the commencement of contract negotiations between the exporter and importer. Production of export goods can be financed. The exporter can cover production costs this way and pay its subcontractors. The continued transformation process (for example adapting the machines to the buyer s parameters) can be financed with a working capital loan. Further financing with instruments securing payments at the end of the value chain respectively on the sales side of projects can often be integrated in a combined package: Documentary credits and/or Classic export financing such as supplier s credits and buyer s credits. Additional solutions for foreign trade According to your project s requirements, our specialists for Trade & Export Finance and other expert solution units (for example Foreign Currency or Cash Management specialists) are at your disposal. Our objective is to provide support to exporters from their planning to production and sales phases of their product s value chains. The response of our customers reveals that they highly value our comprehensive advisory approach. SMEs, just like large multinational corporations are in good hands with UBS. We approach every project and every customer with the goal of providing best service resulting in optimal advice and financing for your projects. Comprehensive expertise and advisory from A to Z My colleagues and I are a team of proven specialists with many years of experience in export finance. Please do not hesitate to contact us. Together we will find suitable financing and optimal instruments securing payments for your projects. Leon Rüb Structured Export Finance UBS Switzerland AG Tel leon.rueb@ubs.com The information and opinions in this publication are for informational purpose only and are not intended as an offer to buy or solicitation of an offer. Please note that UBS reserves the right to alter its services, products or prices at any time without prior notice. These changes will then be communicated to the client in the appropriate manner. Certain products and services are subject to legal restrictions and cannot be offered worldwide on an unrestricted basis. Before making a decision, you should obtain relevant professional advice. Reproduction in whole or in part is prohibited without prior permission of UBS. UBS The key symbol and UBS are among the registered and unregistered trademarks of UBS. All rights reserved.