FORFAITING. A useful tool in Trade Finance

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2 1. What is Forfaiting? 2. Which instruments are eligible for forfaiting? 3. Why does the Exporter like the forfaiting tool? 4. What is the advantage for the Importer? 5. Any advantage for the Importers house bank? 6. Factoring versus Forfaiting 7. Suppliers Credits versus Buyers Credits 8. Which Documents do we usually require under an a-forfait-transaction? 9. Example of a typical Transaction 10. How does a discount calculation look like? 11. What are the usual terms involved in a forfait deal? 12. How can such a deal be structured in the best possible way? 13. Which other instruments can NLB InterFinanz AG offer? 14. Sample Documentation for: - promnote - Letter of Guarantee - Letter of Credit

3 1 WHAT IS FORFAITING? Forfaiting is a "without recourse or "non-recourse purchase of receivables from Exporters which arise in context of a trade related transactions and provide an exporter access to a lump sum of cash shortly after delivery thereby reducing its assets and liabilities. In other words the "Forfaiter or purchaser of an abstract claim takes on all risks which are associated with the payment, such as: - Political Risk (moratorium etc.) - Transfer Risk - Commercial Risk - Currency Risk - Interest Rate Risk - Responsibility of Collection at Maturity As only abstract payment claims are eligible for a forfait transaction, any objections and defenses related to the underlying transaction have to be settled directly between the Exporter and the Importer and are explicitly excluded from the a forfait deal.

4 2 WHICH INSTRUMENTS ARE ELIGIBLE FOR FORFAITING? Every instrument which in itself constitutes an irrevocable and unconditional payment claim (i.e. are abstract), such as: - Promissory Notes - Bills of Exchange - Deferred Payment Letters of Credit - Stand By Letters of Credit - Irrevocable and Unconditional Payment Guarantees In principle Book Receivables can also be forfaited if they are accompanied by a Bank Guarantee or if the obligor is willing to issue a confirmation in favour of the Forfaiter stating that: - the payment claims are legally valid, - no third party rights to the claims exist, - neither counterclaims nor rights to set-off will be exercised, - he irrevocably and unconditionally warrants to pay at maturity in effective currency without deduction of any taxes, levies, duties, charges of whatever nature, - objections and defenses arising from the underlying transaction will be lodged directly between Exporter and Importer.

5 3 WHY DOES AN EXPORTER LIKE THE FORFAITING TOOL? Neither Export Credit Agency (hereinafter: ECA) nor insurance cover is needed and consequently the administrative workload involved in an insurance covered deal is saved. No losses arising from partial insurance cover/retainer. It does not burden his credit limits. Forfaiting cost can be built into the commercial contract. Origin of goods is irrelevant (which is not the case with ECA cover). 100% of the contract value can be financed (which is not the case with ECA cover). Exporter gets 100% of the receivables off his books and thus eliminates all the risks mentioned under point 1. Often the forfaiting market offers longer tenors than ECAs. Forfaiting is most of the time quicker and more flexible than ECA-covered buyers credits. No time consuming applications are required (as for ECA cover). An exporter does not need to have an account/relationship with the Forfaiter (like in buyers credit scenario). For convenience purposes an exporter can settle the documentary part of the deal through his house bank and does not have to go through the Forfaiter.

6 4 WHAT IS THE ADVANTAGE FOR AN IMPORTER? He can buy goods on appropriate (according to the lifetime of the underlying asset) credit terms. He can obtain credit in a variety of hard currencies in accordance with a) his own hard currency earnings or b) his assessment of interest rate or currency fluctuation. The time consuming application and decision periods of ECA or insurance companies are saved.

7 5 ANY ADVANTAGE FOR THE IMPORTERS HOUSE BANK? They can for example advise the l/c through a bank of their own choice. In cases where usually the Exporter asks for a confirmed l/c, they save the request for confirmation and consequently neither burden their limits with the advising bank nor do they have to supply any collaterals to the advising bank. They can offer to their client/importer financing of his trade flows on competitive terms. Often importer s house bank does not even have sufficient lines or adequate maturities for these lines with the exporters bank.

8 6 FACTORING VERSUS FORFAITING A frequently asked question is, what is the difference between factoring and forfaiting. Factoring is the revolving sale of all or at least a majority of a company s receivables to a factoring company. The acceptable tenor of the receivables is usually maximum 180 days. A few factoring companies accept also tenors of up to 360 days. There are two essential conditions to factoring: 1. the company that sells its receivables has to pass a credit review. 2. insurance cover for the commercial risk of the receivables has to be obtained. Usually book receivables are acceptable. The factoring company pays out a certain percentage of the claims i.e. for example 80% and keeps 20% as default reserve. Forfaiting is the single sale/purchase of a single transaction. The deal itself has to be documented and assigned properly. The maximum forfaitable tenor depends on the possibilities of the Forfaiters in the market i.e. their available country and banklimits. Technically any tenors from 180 days up to 5-7 years are feasible. There are no credit reviews of the Exporter required.

9 7 SUPPLIERS CREDITS VERSUS BUYERS CREDITS If the suppliers credit is sold on a without recourse basis i.e. forfaited it s less of administrative work for the Exporter and his house bank then a buyers credit, as a buyers credit requires a loan agreement; often an ECA cover is needed on top and a risk premium for the takeover of the retainer through the Exporters house bank has to be agreed. The supplier has to pay the premium to the ECA and has over the full length of the financing period certain responsibilities towards the ECA and his house bank. In the scenario of a forfait transaction, the supplier has to get simultaneously, at the time of contract conclusion with the Importer, a written commitment from the Forfaiter. His obligation is then to ship within the agreed time span and present proper documentation as agreed. Once the Exporter has - shipped his goods according to contractual stipulations with the Importer, and - presented a full set of documents according to the forfaiting agreement, and - assigned his payment instruments to the Forfaiter he will receive the discounted proceeds.

10 8 WHICH DOCUMENTS DO WE USUALLY REQUIRE UNDER AN A-FORFAIT-TRANSACTION? - conformed copy of the underlying invoice(s) - conformed copy of the underlying sales contract (financial section) - conformed copy of the transport document - plus: a) In case of promissory notes or bills of exchange: - notes endorsed in our favour "without recourse b) In case of a Bank Guarantee: - Letter of assignment issued by the Exporter assigning the underlying payment claims towards the Importer and the guaranteeing bank in our favour. - Notification of the assignments issued by the Exporter addressed to the Importer and the guaranteeing bank - Letter of acknowledgement issued from the Importer and the guaranteeing bank acknowledging ourselves as new bona-fideholder. c) In case of an L/C: - Letter of assignment issued from the Exporter assigning the claims arising from the l/c in our favour. - Notification of the assignments issued by the Exporter addressed to the advising and the guaranteeing bank. - Letter of acknowledgement issued from the advising bank acknowledging us as new beneficiary to the l/c (case by case) - Letter of acknowledgement issued from the opening bank confirming to us that they will effect payment under the l/c at maturity in our favour and according to our instructions.

11 9 EXAMPLE OF A TYPICAL TRANSACTION 1. Prior to its negotiations with the Importer, it is recommendable that the Exporter gets in touch with the Forfaiter and asks for the pricing for financing the relative risk over the requested payment term, in order to get the financing cost properly calculated and built into the contract value. 2. Upon signing of the sales contract, the Exporter should ask the Forfaiter for a firm written commitment which is from a security point of view comparable to a confirmed l/c. This written commitment contains the conditions precedent to the without recourse purchase and fixes the financing cost involved. 3. By now the Exporter should receive the contractually stipulated security from the Importer/his house bank in exchange for granting a suppliers credit. After its receipt the Exporter can start the production of the goods.

12 9 EXAMPLE OF A TYPICAL TRANSACTION 4. When goods are ready for shipment the Exporter has to present the documents to the Importer (through l/c; documentary collection etc.) in accordance with the underlying instrument. 5. A conformed (i.e. a copy of the original that contains the words "true copy and is duly signed on each page) copy of documents required under the forfait contract has to be send to the Forfaiter together with a set of assignment and notification letters (see point 8/documentary requirements). 6. After receipt of the acknowledgement of the assignments from the relevant counterparties involved the Forfaiter will discount the receivables and disburse funds without recourse in favour of the Exporter. 7. Now the legal relationship exists between Forfaiter and Obligor/Importers House bank. At maturity, the Forfaiter will collect the funds under the relevant payment instrument and is duly entitled to receive payment.

13 10 HOW DOES A DISCOUNT CALCULATION LOOK LIKE? If the Exporter approaches the Forfaiter prior to his sale negotiations with the Importer, a buyers interest rate calculation can be prepared. The Forfaiter will then - on the basis of the actually prevailing refinancing rates and the current risk margin for the underlying risk - make a discount calculation that contains the value of the goods plus the cost for discounting of the deal on a without recourse basis. In the above example the Exporter will on the assumption that he receives the written commitment on and discounting takes place value have to increase the sale price by ,87 in order to receive for a granted financing period of 5 years and 10 halfyearly repayments net proceeds that equal his principal i.e. his original sale price/value of goods less cost for commitment and discounting.

14 11 WHAT ARE THE USUAL TERMS INVOLVED IN A FORFAIT DEAL? Matching Libor: Average Libor: Risk Margin: Days of Grace: Commitment Fee: Straight Discount: Discount to yield: Method of compounding: Simple discount to yield: refinancing cost calculated on the basis of the cost of refinancing for every maturity/instalment. refinancing cost, calculated on the basis of the cost for the average lifetime of the transaction. applied cost for the underlying risk days additionally calculated on the original maturity as assumed period for late receipt of funds. Risk margin usually calculated from the date of the written commitment until disbursement of funds. interest rate for in advance calculation of interest (opposite of yield) comparable in terms of capital with present value. interest rate for post calculation of interest (opposite of straight discount) comparable in terms of capital with future value. e.g. annually, semi-annually, quarterly, monthly Indicates how interest upon interest is calculated. Usually the compounding method matches the tenor of the underlying instalments. no compound method is applied.

15 12 HOW CAN SUCH A DEAL BE STRUCTURED IN THE BEST POSSIBLE WAY? Usually Exporters who are aware of the forfaiting tool approach their house banks and ask for possibilities of forfaiting. If the house bank has no own limits and work together with NLB InterFinanz AG they will ask us for a commitment and sell the deal to us. It is also possible that the Importers house bank informs the Importer of our possibilities so that the Importer can advise his Exporter to get in touch with us parallel to the sale negotiations. Than we can advise the Exporter directly of the cost involved in a deal and help him to structure the deal tailor made according to the needs of the parties involved.

16 13 WHICH OTHER INSTRUMENTS CAN NLB INTERFINANZ AG OFFER? Commercial/Political Risk Guarantee Sometimes the Exporter does not mind having the risk on its own books, due to cheap inhouse refinancing. However he is not able to assess the commercial/political risk of the export deal or his in-house regulations do not permit to incur certain political/commercial risks. In this case NLB InterFinanz AG is prepared to give an irrevocable counterguarantee for the commercial and/or political risk. Silent confirmation A silent confirmation for a sight letter of credit or a deferred payment l/c is the irrevocable undertaking to pay at maturity of the l/c in case the opening bank does not effect payment. It is usually asked for when the l/c does not bear a request for confirmation, however the exporter would like to have additional comfort. Down payment financing If an export is financed through an ECA-covered buyers credit then a down payment is required as precondition for the ECA cover. In this case we are prepared to make the financing of the down payment. Usually we will ask for a deferred payment l/c as instrument which is payable against single presentation of the down payment guarantee. Pre-export financing Subject to the underlying transaction and the counterparties involved it is often structured on the basis of a stand by l/c.

17 14 SAMPLE DOCUMENTATION FOR Promissory Notes How does a valid promnote look like? Name and Stamp of the avalizing Bank Date and City of Issuance Maturity Date Beneficiary of the Note Currency and Amount in Words Currency and Amount in Figures Authorized Signatures Name and Address of Obligor Name of Bank and full Address Stamp and Signature of Obligor Valid Endorsement: Pay to the order of: NLB Interfinanz AG, Zurich Without Recourse Stamp of the Exporter/Seller of the note Authorized, valid and binding signatures on behalf of the Seller of the note

18 14 SAMPLE DOCUMENTATION FOR Specimen Promissory Note Free Draft Place and Date of Issue Currency and Amount in Figures On Maturity Date against this Promissory Note we promise to pay to Name of Beneficiary (i.e., Supplier) or their order As there is no formrequirement to a prom note, it can be freely drafted. the sum of Amount in Words effective payment to be made in Currency in words (e.g., United States Dollars), without deduction for and free of any taxes, impost, levies or duties present or future of any nature. This Promissory Note is payable at Name and Address of Bank for Presentation FOR VALUE RECEIVED For and on behalf of Name of Maker Authorised Signatory/ies Per Aval for account of Name of Maker for and on behalf of Name of Guarantor/ Guaranteeing Bank Authorised Signatory/ies Prior to discount the Promissory Note should be endorsed on the reverse: PAY TO THE ORDER OF name of purchaser of the promissory note (e.g. NLB InterFinanz AG) Without Recourse Name of Beneficiary Authorised Signatory/ies

19 14 SAMPLE DOCUMENTATION FOR Letter of Guarantee /1 To be issued on the Letterhead of the Bank Name and full address of the exporter place date Payment Guarantee No.... We have been informed that you have concluded a contract no.. dated. with...(name and full address of the importer)..., hereinafter called "the importer" for the supply of...(name of goods)... at a total price of... Payment terms: XY % Down payment XY in 10 equal half yearly instalments as follows: Amount EURO Maturities

20 14 SAMPLE DOCUMENTATION FOR Letter of Guarantee / 2 For the proper and due fulfilment of the above payment obligations a bank guarantee has to be furnished according to the contractual stipulations.. In consideration of the aforesaid, we...(name and full address of the guaranteeing bank)..., irrespective of the validity and the legal effects of the above mentioned contract and waiving all rights of objection and defence arising therefrom, hereby irrevocably and unconditionally undertake to pay any amount up to EURO...(amount in figures)... (in words: EURO xxxxhundredandxxxxxxxxthousandxxxxxhundredandxxxx-only) upon receipt of your written request for payment stating that the importer has not fulfilled his payment obligations at maturity. Such request shall be conclusive evidence of non-payment by the importer of the amount requested. Our payments under this guarantee will be made in effective EURO without deduction for and free of any taxes, imposts, levies, duties, charges, set-offs or withholdings present or future of any nature. For the purpose of identification, your demand has either to be presented through the intermediary of your bankers confirming that the signatures thereon are binding upon yourselves. This guarantee shall be automatically reduced by the amounts duly paid or by our payments made under this letter of guarantee. This guarantee is effective as of today and shall expire, even if this document is not returned, on...(30 days after the last maturity)... at the latest, unless your written demand for payment accompanied by the requested statement in accordance with the above mentioned conditions has reached us in...(seat of the bank)... by the end of that day. We confirm that this guarantee is our legally binding obligation and that all necessary governmental and central bank consents and approvals have been obtained and complied with in order to enable us to remit effective Euro/US$ under this guarantee when requested. The issuance of this guarantee is permitted according to the laws of. the country of issuance (Bosnia, Macedonia etc.)... This guarantee including all rights, privileges and benefits deriving therefrom is freely transferable and may be assigned in full or in part without any limitation, fees or charges upon prior written notice to us. This guarantee is governed by the laws of Germany/Austria/Switzerland/UK. We hereby submit to the jurisdiction of the courts of., however this shall not prejudice your rights in any other jurisdiction where proceedings may be commenced against us. Yours faithfully,...(name of issuing bank)... (authorised signature) (name) (authorised signature) (name)

21 14 SAMPLE DOCUMENTATION FOR Letter of Credit There are only 2 conditions to a Letter of credit: the form has to be irrevocable UCP 500 Revision 1993 has to apply.